Tax obligations and reliefs for Accidental Americans
UPDATED 12th MAY 2020
An ‘Accidental American’ is a citizen of a country other than the United States who are in the eyes of the IRS a US citizen also. Many Accidental Americans have never even stepped foot into the country and many more had not known of their dual citizenship until much later in life.
Am I an Accidental American?
There are several instances that might lead someone to be classed as an accidental American.
One of the most common scenarios we get contacted with is when an individual was born to American parents living abroad.
Another reason someone might be classed as a US citizen is if an individual is born in the US while their parents were on holiday.
Another situation could be created from a basic lack of knowledge. For people who choose to become naturalized citizen elsewhere, may believe that this action automatically ends their American citizenship. It doesn’t. Unless they file and obtain a Certificate of Loss of Nationality from the US Department of State, they will possess dual citizenship and remain a US citizen with tax obligations.
TAX OBLIGATIONS AS AN ACCIDENTAL AMERICAN
It is fair to say that often, following the surprise of previously unrealised citizenship, comes the even bigger surprise/shock/horror of the potential tax implications of being an Accidental American.
The IRS requires American citizens living abroad- accidental or not- to report their worldwide income. Accidental Americans will sometimes be required to report their foreign assets also if they exceed the a set threshold.
It is not all doom and gloom, quite often our Accidental Americans will owe no tax at all, they must simply and only declare their income. Dual taxation treaties are in play between the US and many other countries worldwide. The treaties avoid double taxation.
Do you need to file?
For the 2020 tax season (January 1, 2019 to December 31, 2019) you will need to file if your worldwide income is at least the amount shown below. If you have self-employed income (freelance income), the filing threshold is much lower, $400 in profits.
Single - $12,200
Married filing jointly - $24,400
Married filing separately - $5 (yes, only $5)
Head of household - $18,350
If you have never filed before…
. If you do need to file, the IRS has an amnesty, the streamlined filing compliance procedures. If you are living outside the US, the streamlined program you will use is the streamlined foreign offshore procedures.The streamlined filing process has 3 parts: (1) the last 3 overdue tax returns, (2) a disclosure document (form 14653) to explain why you have not been filing - not knowing you needed to file is a valid excuse (the IRS call this non-willful conduct), (3) 6 years of FBARs
WORLDWIDE INCOME
You will need to report worldwide income on your US tax return (form 1040). This includes income even if it has been taxed in your home country.
A common misconception is that if your income is under the foreign earned income exclusion then you don't need to file. That is not true - you can use the foreign exclusion to stop the US tax, but you still need to file the return to claim the exclusion.
Also, be careful with income that is tax free in your home country - it may be that the US does not recognize the tax free status and you will still need to declare that on the US tax return.
STATE TAX RETURNS
If you were born in the USA there are some states, California for example, that do keep a close hold on you and may require you to keep filing state returns for a number of years after you leave.
FOREIGN BANK ACCOUNT REPORT
In addition to the US tax return (form 1040), as a US citizen you also need to make a separate report each year for all your foreign financial accounts.
The foreign bank and financial form (FBAR, also called FinCEN 114) has 3 parts: (1) accounts in your name, (2) joint accounts, (3) accounts where you are a signatory - e.g. business accounts, your children's accounts, accounts where you have power of attorney
Bank and financial accounts include current accounts, savings accounts, investments, bonds and pensions.
The FBAR is filed online using the BSA E Filing system and there is a response within 5 minutes of the FBAR being filed to confirm it has been accepted.
The threshold to file the FBAR is $10,000 - you find the highest balance on each financial account at any time during the tax year, add up all the highest balances for your accounts and if they are $10,000 or more then you need to file for all your accounts (the $10,000 threshold is for all your accounts in total, not per account).
FATCA REPORTING - FORM 8938
While you file an FBAR, there is a similar form in the tax return itself. Form 8938 covers the value of your financial assets - the threshold to file is higher than the FBAR, and there are a few more details to disclose.
Depending on your circumstance there may be several other forms and reports you must file
FILING DEADLINES
When you are living in the US, the filing deadline is April 15, 2020.
As an expat overseas, your filing due date is June 15, 2020 - if you do owe any tax, we suggest paying this by April 15, 2020 to stop any interest being charged.
If you have a refund of US tax, you can have a bank transfer, but the IRS will need a US bank account in your name. Otherwise, the IRS will send out a paper check to your current home address (worldwide).
DECREASING YOUR TAX OWED
FOREIGN TAX CREDIT
If you had income from outside the US and paid tax on that same income, when you complete your US tax return, you can claim a foreign tax credit against any US tax on that foreign income.
The foreign income and tax paid are disclosed on form 1116 - you can then use that form to credit foreign taxes up to the US tax on the same income.
If the foreign tax is more than the US tax, the credit will be restricted - the US will not give you a refund of foreign tax.
If the foreign tax is less than the US tax, you will pay the additional tax, a top up
You need to be a little bit careful with state tax returns - each state has different rules for foreign tax credits. If you are filing a state tax return and you need to report foreign income on that return, you will just need to check the state rules for claiming foreign tax credits.
FOREIGN EARNED INCOME EXCLUSION
If you have foreign earned income and your tax home is outside the US, you may be able to claim the foreign earned income exclusion (FEIE).
Foreign earned income includes - salary, wages, bonus, self employed income, commissions
It does not include - dividends, interest, capital gains, gambling winnings, alimony and pensions (normally rental income unless you can show you provide services as part of renting out your property - even then, only a portion can be used for the exclusion)
For the 2020 tax season, the foreign earned income exclusion is a maximum of $105,900. If you have any excess left over, it does not carry forward to the next year.
Note - if you claim the foreign earned income exclusion, you can't claim the additional child tax credit mentioned below.
FOREIGN HOUSING EXCLUSION AND DEDUCTION
You can claim the foreign housing exclusion or foreign housing deduction in addition to the foreign earned income exclusion.
Foreign housing exclusion - you can claim this with employed income
Foreign housing deduction - you can claim this with self-employed income
Note - if you claim the foreign housing exclusion or deduction, you can't claim the additional child tax credit mentioned below.
CLAIMING CHILDREN - ADDITIONAL CHILD TAX CREDIT
If you claim your child as a dependent on your tax return, you may be able to claim a tax credit or a tax refund.
Conditions to claim the credit:
Your child is 16 or younger on 31 December 2019
They are a US citizen or resident alien and they have a social security number
They lived with you for at least half the tax year
Your earned income needs to be a minimum of $2,500 and a maximum gross income of $200,000 (at which point it starts to decrease )
The tax credit is a maximum of $2,000 per child - if you have no tax, the tax refund is a maximum of $1,400 per child, per year.