Larry's 2016 U.S. Tax Guide 'Supplement' for U.S. Expats, Green Card Holders and Non-Resident Aliens in User Friendly English. Laurence E. 'Larry'

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      *If you are living outside of the U.S., married, filing jointly and your FinCEN114 shows an ‘accumulation’ of over $US400,000 you are liable for also including Form 8938 with your individual income tax return. Yes, this is a duplication of the filing you are making with FinCEN114 – only because there are different computer systems and data bases, here, and they don’t quite talk with one another – why the IRS didn’t bother to outsource this to some shop in India to get it right at the start is beyond me. Anyhow, bitch and moan while duplicating the submission of similar information – there ain’t much you can do about it.

      *If you are liable as of 31 December 2015 for income tax from the foreign country you reside in regardless of whether you’ve paid it, yet, in 2015, you can actually use that amount towards computing and getting a foreign tax credit. Be aware though that you never get dollar for dollar tax credit: the proportion of foreign earned income and foreign housing exclusion to your total income in 2015 is the proportion of the taxes you paid (or are liable for) overseas that are not eligible for dollar-for-dollar tax credit!

      *If you have set up a corporation as your business overseas, you are responsible for filing an annual information return, form 5471 that must be filed, annually, as part of your individual income tax return. In fact, you must file this form if you only own 10 percent of a business - this is part of ‘foreign investments’ that U.S. tax filers are responsible for reporting - and penalties for not filing are simple: it will cost you a flat rate, $US 10,000 that will be assessed by IRS letter if they inquire of you before you file with them. If you earn any income from that corporation, that must be reported, as well, even though it is eligible for foreign earned income exclusion. If you are self-employed and report your annual business income on a 1040 Schedule C while you will still be eligible for foreign earned income exclusion, but you will not be exempt from Social Security obligations even though your work is outside of the U.S. Likewise, if you are a partner in an overseas partnership, then you are responsible for filing Form 8865, the partnership ‘equivalent’ of the corporation Form 5471. Oh, what if you’ve got an under-10 percent ownership in that corporation or partnership but your interest in that business entity is over $U.S. 50,000? Then you have to report it on Form 8938. Alas, our tax system is not user-friendly and sadly, it appears to be getting worse on an annual basis.

      *Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad. Go to the followingT URL: http://www.irs.gov/pub/irs-pdf/p54.pdf. If, perhaps, the IRS took a bit more time to make this 38 page booklet a bit more user-friendly, there would not be need for me to write this book. Alas, while Publication 54 is something you really should all look at, bear in mind that it just might serve as a holistic sleeping pill.

      *How long do I keep my paperwork regarding taxes? That question was posed to me, subsequent to writing most of this essay. Damn, that is a good question! I honestly don’t know what to tell you: what if a couple of years from now you discover you have omitted something important from your prior tax filings and have absolutely no alternative than to go through the Offshore Voluntary Disclosure Program? Well the extortionists who run this program (think I am going too far in saying this? Read the Taxpayer Advocate’s 2015 report to Congress and tell me this in not extortion!) want 8 years of filings. That would mean tax years 2008 and subsequent. If you have good reason for it, then save whatever you wish to save from earlier years but I think you can safely junk most of that earlier-year stuff.

      That’s it - these are the absolute basics.....according to me, at least......now let us get on to some specific details - at least the details I deem important for you to know. Bear in mind that this is ‘one man’s opinion’ and you should rely upon more than just this - even a cursory look at both tax forms and instructions really is becoming necessary.

      First, how to become an expat for tax filing purposes…..

      Scenario # 1: You are moving from the U.S. to some strange, exotic land

      Let us suppose….You are reading this book for the first time, while you are still in the U.S. You are soon to embark on your trip overseas, to work for the first time outside of the U.S. Perhaps you are an experienced veteran of the work force, taking your specialty overseas for an international employer who has just signed you to a multi-year contract. Or perhaps you are a young professional going into the field of law or going to work for an investment banking house or perhaps you are a teacher, going to teach at an international school. Let’s use the latter occupation, teacher, as an example for this scenario because those young bankers or lawyers will not have much time off to put their initial, qualifying year for foreign earned income exclusion in jeopardy. You, the teacher, on the other hand, are more apt to screw yourself up because of a misunderstanding of the time you must be overseas during your first year overseas – a year that begins from the date of your arrival in your new place of residence through the next 365 days. For tax year 2015 – and that means ‘calendar year’ because the IRS operates on a calendar year reporting basis - you are entitled to a maximum of $US100,800 as foreign earned income exclusion. If you are married and your spouse is working overseas, too, then each of you would be entitled to exclude a maximum of $US100,800 from taxable income. You cannot transfer any excess, ‘unused’ exclusion from one spouse to another – if two of you each earn less than $US100,800 and it is all eligible for the exclusion, then you will still have to file a tax return but you will not owe any taxes. If either or both of you have more income than the exclusion + standard or itemized deductions + tax exemptions, you are going, in essence, to be taxed at the maximum rate – and that includes all income not eligible for foreign earned income exclusion.

      Tax benefits for the U.S. expat are necessary. First, the costs of living a comparable life in Hong Kong or Dubai or Singapore are at stratospheric levels compared to, say, the cost of living in Iowa. Mind you, I have absolutely nothing against Iowa - I like the place – I spent time, two summers ago, living in Iowa City while taking writing classes at the University of Iowa (and no, I am not foolhardy to think that there ever can be a ‘tax literature’ genre!)! Yet costs of life are very, very different. The average salary in mid-levels, Hong Kong, where a concentration of international expats reside is over $US 200,000 and even with that salary, life is a struggle because of the highest real estate costs and rentals in the world. Secondly, without those benefits and with the singular distinctive obligation of the U.S. expat – we seem to be the ONLY expats with an annual filing obligation - my British, German, French and Australian friends don’t have to file tax returns - they do not even think about their income, their travels, their tax consequences. Their countries do not tax upon world-wide income, just the income taxed within their territory. Heck, there are no tax consequences for them as there are for us, the U.S. expat or green card holder. If tax laws became too draconian, there would be no Americans overseas to represent U.S. products, services and industry – I like my Australian and New Zealand friends but let’s face it – they simply cannot do as good a job as Americans when it comes to representing America overseas! For the U.S. to compete on an international level, it needs its own citizenry representing the U.S.!

      Tax home

      Your tax home is usually in the vicinity of where you work. It does not necessarily have to be your family home. Your family home might be in California. You maintain that residence and have intentions of returning there, years from now. Yet that family residence is halfway around the world and as you are not living there, it is not necessarily your tax home, anymore. O.K., you arrived from San Francisco to your new home in Hong Kong on 1 August 2015. Through 31 July 2015, your tax and family home was San Francisco. To meet the requirements for excluding either a portion or the total of 5/12 (1 August – 31 December 2014) of your non-U.S. earned income, you must qualify by meeting the physical presence test for 2015.

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