It is important to be aware of tax filing obligations. A US citizen may still have an obligation, even if they have never lived in the USA, or left several years ago, and all income is from ‘foreign’ sources. It is a requirement to file a Form 1040 if income exceeded a certain threshold, regardless of its origin, whether it was already taxed at source, or is going to be taxed by the overseas country where the citizen is resident.

When considering relevant threshold amounts, always remember that the report amounts are in US dollars and any foreign monies received will need to be converted and exchanged. If, historically, a joint return with a spouse was filed, there is a different exclusion that relates to joint income.

Although US citizens living outside the USA have an automatic filing extension until 15 June for filing the US 2017 return, interest and penalties will still occur if the 2017 US tax due is not paid by Tuesday 17 April. A further automatic extension may be applied for to extend filing to 15 October and, if required, another discretionary extension to 15 December, but this is not guaranteed. Should there be a need and failure to request an extension, financial penalties will be incurred.

For US citizens living and working overseas, they may not owe tax to the IRS. This can be due to two main US tax rules: ‘Foreign Earned Income Exclusion’ (FEIE) and the ability to claim Foreign Tax Credits. FEIE allows citizens to exclude $102,100 of foreign earned income from US tax for 2017, and Foreign Tax Credits enable the offsetting of UK tax paid on specific income sources, and potentially capital gains, against US tax on the same amounts.

It is important to always ensure the correct forms relevant to tax affairs are included with the return. Penalties for omitting them could be $10,000 per form, or a proportion of the asset’s value on the form. For expatriates, additional key forms include Form 8938: Statement of Foreign Financial Assets and Form 8621: Information Return by a Shareholder of a Passive Foreign Investment Company, which is required where non US-based collective investments, such as UK unit trusts, are owned, even if held in an ISA.

Finally, don’t forget the 3.8% Net Investment Income Tax (NIIT) which applies when some investment incomes, including capital gains and rental income, exceed certain thresholds and the Alternative Minimum Tax which can result in unexpected US liabilities arising.

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Gillian Everall is Managing Director and Head of Private Client Tax Services for Everfair Tax based in Weybridge. Everfair Tax specialises in UK, US and Expatriate Tax and provides a unique tax advisory and compliance service to help manage personal or international complexities and the changing of family or business circumstances.
Telephone: 01932 428536
Website: www.everfairtax.co.uk
Email: gillian@everfairtax.co.uk