Americans Retiring Abroad

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1 U.S. EXPAT TAX GUIDE FOR Americans Retiring Abroad The most important tax tips to save money with credits, exclusions, and deductions available to Americans retiring abroad Let LOCUS file your taxes this year, so you can focus on other things that matter PH:

2 ABOUT US Greetings! On behalf of the entire Locus family, I d like to welcome you to our expat tax service. As the Head of the Expat Tax Services at Locus, I urge all my team members to take your unique tax situation as a personal responsibility. Let us handle your taxes, so you can relax now. John Chung Locus Tax is an online tax services provider with a sole focus on understanding your unique tax circumstances. Our mission doesn t just end there however. We unload complex tax filing burdens from our clients. Our clients receive all tax benefits and satisfy compliance and reporting requirements while focusing on other things that matter the most to them. Our specialty lies in expat tax compliance and consultation for individual clients and business entities alike. Through 20 years of experience, our CPAs, Attorneys, and other tax professionals have understood and provided personalized tax preparation to give our expat clients the peace of mind. Let us file your taxes and put you at easewe will get to work now. 2

3 CONTENTS APPENDIX Who Must File and Type of Income Foreign Earned Income Exclusion Foreign Housing Exclusion Foreign Tax Credits Other Considerations FATCA and FBAR Retirement Abroad United States Tax Treaties

4 4 Chapter 1 Who Must File And Type Of Income Who must file The U.S. government requires all U.S. citizens and permanent residents (i.e. Green Card holders) to report their worldwide income, whether living in the United States. or abroad. A U.S. citizen or resident alien living or traveling outside the United States generally is required to file income tax returns, estate tax returns, and gift tax returns and pay estimated tax in the same way as those residing in the United States. The income, filing status, and age generally determine whether a taxpayer must file a return. Generally, a taxpayer must file a return if the gross income from worldwide sources is at least the amount shown for filing status in the Filing Requirements table below. Filing Status Under or older Single $ 10,150 $ 11,700 Head of Household $ 13,050 $ 14,600 Qualifying Widow(er) $ 16,350 $ 17,550 Married Filing Jointly $ 20,300 $ 22,700 Married Filing Separately $ 3,950 $ 3,950 Married U.S. citizens or resident aliens may either file a joint return or separate returns using the applicable married filing jointly or married filing separately tax rates. A joint return is generally advantageous compared to a separate filing because the effective tax rates for those married, filing separately are higher than both the married filing jointly and single tax rates. For self-employed individuals, even if the net earnings from self-employment are $400 or more, they must file a return even if the gross income is below the amount listed for the filing status in the table shown earlier. Even if an individual does not have a filing obligation based on the thresholds set forth by the IRS annually, he or she may consider filing a return in order to receive a refund due, or even to start the clock on the statute of limitations, among other items.

5 5 If a taxpayer files on a calendar year basis, the due date for filing the return is April 15 of the following year. On a fiscal year basis (a year ending on the last day of any month except December), the due date is 3 months and 15 days after the close of the fiscal year. In general, the tax shown on the return should be paid by the due date of the return, without regard to any extension of time for filing the return. When the due date for doing any act for tax purposes filing a return, paying taxes, etc. falls on a Saturday, Sunday, or legal holiday, the due date is delayed until the next business day. Significant penalties may be imposed for failure to file a tax return or to pay tax on time. Most of these penalties are based on the balance of tax due, and they range from 0.5 to 5 percent per month, up to a maximum of 25 percent of the tax payable with the return. Extensions One can get an extension of time to file the return. If a taxpayer pays the tax due after the regular due date, interest will be charged from the regular due date until the date the tax is paid. Even if an extension is allowed, the taxpayer will have to pay interest on any tax not paid by the regular due date of the return. Automatic 6-month extension. If a taxpayer is not able to file the return by the due date, he or she generally can get an automatic 6- month extension of time to file (but not of time to pay). To get this automatic extension, he or she must file a paper Form 4868 or use IRS e-file (electronic filing). Types of income 1. The entire gross amount income received; including all wages and tips, interest and dividend income, rental income, certain retirement distributions, tax refunds, business income, capital gains, and so forth. 2. Allowances refer to those expenses paid to the individual by the employer. Some examples of allowances are: housing allowance, car allowance, education allowance, tax preparation allowance, and hardship allowance, among others. Whether it is reported on W-2 or not. 3. Employer paid pension amounts for employees also need to be included in income. 4. Property in foreign jurisdictions to gain rental income. Related expenses including depreciation should be calculated and reported. 5. Gains from the sale of a property. Automatic 2-month extension. An automatic 2-month extension to file the return and pay federal income tax is available if the taxpayer is a U.S. citizen or resident alien, and on the regular due date of the return: For someone living outside the United States and Puerto Rico and the taxpayer s main place of business or post of duty is outside the United States and Puerto Rico, or Military or naval service men and women on duty outside the United States and Puerto Rico.

6 6 Chapter 2 Foreign Earned Income Exclusion Qualifying U.S. citizens and residents working outside the United States are permitted to exclude a portion of their foreign earned income under Internal Revenue Code (I.R.C.) section 911. This section provides a general exclusion limited to a specified amount, another exclusion measured by foreign housing costs, and, for self-employed persons, a foreign housing cost deduction. The general exclusion of foreign earned income is $100,800for the year To qualify for the foreign earned income and housing cost exclusions, an individual must have foreign earned income, his or her tax home must be in a foreign country, and he or she must meet either of two tests: Bona fide residence test or Physical presence test. Bona fide residence test It requires the individual to be a bona fide resident of a foreign country for an uninterrupted period that includes a full tax year. Physical presence test It requires the individual to be present in a foreign country at least 330 full days during a period of 12 consecutive months. Bona fide residence is determined based on a subjective review of individual facts and circumstances, including the nature of the international assignment and the length of stay in the foreign country. Bona fide residence is not the same as domicile, which is normally the individual s permanent home to which he or she eventually plans to return. Generally, an employer can establish that an assignee is a bona fide resident of a foreign country if the move includes the assignee s family and if they intend to make the foreign country their home. Factors that might indicate that an assignee is a bona fide resident include: The nature of any conditions or limitations concerning the employment agreement, as well as the type and term of the visa or residence permit. Once residence is established, the individual must be a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire U.S. taxable year (normally the calendar year) to meet this test. An individual may move from one foreign country to another, or make temporary visits to the U.S. or elsewhere, without interfering with this test period, so long as he or she does not interrupt the qualifying period with an interval of U.S. residence. Acquisition of a home or long-term lease in the foreign country; Intent to become involved in the social life and culture of the foreign country; and

7 7 Ryan, a U.S. citizen, moves to London, England and establishes bona fide residence there on August 1, Assuming the other requirements are met, he will qualify as a bona fide resident after December 31, 2010 (when he has been a resident of the United Kingdom for a full calendar year). As a result, he will qualify for the foreign earned income exclusion for all of 2010 and a prorated part of 2009, commencing with his date of arrival. His maximum exclusion (before taking into consideration the exclusion for housing costs) for 2009 would be $38,313 (153 days * $250.41). Physical presence test requires that an assignee be physically present in a foreign country or countries for 330 full days during any consecutive 12-month period and that the assignee s tax home be in a foreign country or countries throughout the 330 full days of presence. This test is purely objective and requires counting only the qualifying days. No intention as to residence or any other factors need be considered. Any period of 12 consecutive months may be used to determine eligibility under the physical presence test. The months need not be full calendar months, as long as they are consecutive. Travel over international waters does not constitute presence in a foreign country for purposes of the test. However, if the travel is between two foreign points, the period of foreign physical presence is not interrupted if the travel over international waters or in the United States is for less than 24 hours. Tip: A taxpayer who qualifies under both the bona fide residence test and the physical presence test may use whichever test allows the taxpayer the larger exclusion. The qualifying period in such case may begin before a foreign tax home is established, but the exclusion can be used only against foreign earned income, which by definition can be earned only while a foreign tax home exists. Julie, a U.S. citizen, begins her international assignment in Kazakhstan on March 1, She does not return to the U.S. for any reason after beginning her assignment. Her 330th day abroad is therefore January 24, Julie s qualifying period for 2009 applying the physical presence test, then, is the earliest possible 12-month period that contains 330 days abroad. Such a period begins on January 25, Her qualifying period contains 341 days, resulting in a pro-rated exclusion of $85,390 (341 days * $250.41).

8 8 Chapter 3 Foreign Housing Exclusion Foreign tax home To qualify for the foreign earned income or housing cost exclusion, the individual s tax home must be in a foreign country throughout his or her period of residence or physical presence. However, an individual shall not be considered as having a tax home in a foreign country for any period during which his or her abode is in the United States. The term tax home generally means the location a taxpayer s regular or principal place of business. The Internal Revenue Service (IRS) has issued a ruling (Rev. Rul ) which establishes guidelines for determining whether a work assignment away from the taxpayer s regular place of employment is temporary (so that his or her tax home is maintained) or is indefinite (so that the old tax home is relinquished). Under these guidelines, a taxpayer with an expected or actual assignment exceeding one year in a single location will be considered to have relinquished his or her old tax home. If the taxpayer realistically expects the employment away from home to last for one year or less, the employment is considered temporary. Three factors for determining the taxpayer s place of abode Whether the individual s family accompanied him or her to the new location; Whether the individual was duplicating living expenses by maintaining his or her prior home; and Whether there was a preponderance of business contacts in the new location. It is imperative for individuals to document factors that indicate their intention to establish a tax home in the foreign country at the time of their relocation. The IRS may not consider temporary assignments abroad as grounds for establishing a tax home, even though the physical presence test may be met. However, individuals satisfying the bona fide residence test should be able to establish the foreign country as their tax home.

9 9 Foreign earned income and foreign housing cost exclusions Once an individual establishes a foreign tax home and qualifies under either the bona fide residence or physical presence tests, he or she is allowed to elect either or both of the annual foreign exclusions: the foreign earned income exclusion and the housing cost amount exclusion. As illustrated in the previous examples, the foreign earned income exclusion is computed on a daily basis for each qualifying day during either the bona fide residence period or the 12-month physical presence period. If less than the maximum available exclusion is used in a particular year, the remaining portion may be used against income that is attributable to services performed in that year (such as a bonus or tax equalization payment) but which is received in the following year. In addition to the foreign earned income exclusion, qualified individuals may elect to exclude additional income called the housing cost amount to the extent that it is attributable to employer-provided amounts. If it is not attributable to employer-provided amounts (i.e., if it relates to self-employment), a housing deduction must be claimed instead. The foreign housing costs of an employee are always deemed to be provided by the employer, either in the form of direct reimbursements or through salary. Thus, employees may utilize the housing exclusion, while self-employed individuals must instead claim the housing deduction. Tip: Be sure to check the base excludible amount before moving to a new place The excludible housing cost amount is the individual s actual foreign housing expenses that exceed a base amount equal to 16 percent of the maximum foreign earned income exclusion, or $16,128 for 2015 ($15,872 for 2014). Foreign housing costs that exceed the base amount are excludible but limited to 30 percent of the maximum foreign earned income exclusion, or $30,240 in 2015 ($29,760 in 2014). The maximum housing cost exclusion for 2014, then, is $13,888 ($29,760 maximum less $15,872 base); the maximum housing cost exclusion for 2015 is $14,112. (In a partial year abroad, these percentage limitations are computed on a daily basis based on the number of qualifying days.) However, in certain prescribed high-cost locations, the housing cost limitation is increased. Only specific locations on a list issued annually by the U.S. Treasury are afforded this special treatment. Emma earns $100,000 in 2009, all of which qualifies as foreign earned income. Her foreign housing expenses total $30,000, resulting in a maximum housing exclusion of $12,796 (the lesser of $27,420 or actual foreign housing expenses, less the base housing amount of $14,624). As the housing exclusion is claimed first, the remaining $87,204 (foreign earned income of $100,000, less the housing exclusion of $12,796) is available for exclusion in 2009 using the foreign earned income exclusion. Therefore, she will have an unused 2009 general exclusion of $4,196 (the $91,400 maximum exclusion for 2009 less $87,204) available for use against future income related to 2009, provided the income is received by December 31, In 2009, the individual will be able to exclude her entire earnings of $100,000, comprising a housing cost exclusion of $12,796 and a foreign earned income exclusion of $87,204.

10 10 Chapter 4 Foreign Tax Credits All or a portion of American employees income on their international assignments may be subject to tax in a foreign jurisdiction as a result of either the individual s residence or presence in the foreign country. Since U.S. citizens and residents are subject to U.S. tax on their worldwide income, the person may be subject to tax both in the foreign country and in the United States. Foreign tax credit is to avoid the possible double taxation of foreign source income with limitations. In addition to the tax credit, U.S. government has tax treaties with many countries. An individual may avoid double taxation by deducting foreign taxes paid as an itemized deduction or electing to claim them as a credit. Generally speaking, the credit option is more beneficial. However, since it is an annual option, the decision should be based on all the facts available and reviewed each year by tax professionals. Eligible foreign taxes eligible for credit Foreign taxes eligible for the foreign tax credit include income taxes, war profits and excess profits taxes, and taxes paid in lieu of any of these. The employee portion of foreign social security taxes is generally considered to be foreign income tax available for the credit. Other foreign taxes, such as real estate taxes, sales taxes, luxury taxes, turnover taxes, value-added taxes, and wealth taxes, are not creditable. Disallowance and Limitation on Credit Carryback and Carryover of Unused Credits Special rules to capital gain income Under section 911 of Internal Revenue Code, foreign income is excludable from gross income. However, the portion of foreign income that has been excluded under Section 911 of IRC is disallowed in applying foreign tax credit due to the denial of double benefit doctrine. The portion of the foreign taxes that is not disallowed can be claimed as a credit, subject to limitations. The amount of credit allowable in a taxable year is limited to the lesser of the actual foreign taxes paid or accrued (after disallowance) or the amount of U.S. tax on foreign source taxable income for the year. Foreign tax credits that exceed the limitation may be carried back one tax year and forward ten tax years. Foreign tax credits carried to a particular taxable year are treated as foreign taxes that are paid or accrued by the taxpayer in that year. While their use is subject to the limitation calculation for that year, foreign tax credits carried to another year are not attributable to foreign earned income excluded in that year. The carried over foreign tax credit; therefore, would not be subject to the disallowance formula in the carryover year. Special rules apply to capital gain income. Capital gains are generally sourced based on the location of the residence of the person realizing the gain. However, gain from a sale of personal property outside the United States by a U.S. citizen or resident alien will not be considered foreign source unless a foreign income tax of at least 10 percent of the gain is actually paid.

11 11 Disallowance of credit allocable to exempt income Otherwise-allowable foreign taxes paid or accrued cannot be claimed as credits or deductions to the extent that the foreign income tax was imposed on foreign source earned income excluded from gross income under section 911. The theory of this statutorily-imposed denial of double benefits rule is that an individual should not be able to both exclude earned income from taxation and claim credit for foreign tax imposed on such income. The computation of the disallowance, or non-creditable tax, is as follows: Amounts excluded under section 911(a) less deductible expenses allocable to such amounts Foreign earned income less deductible expenses allocable to such income X Foreign taxes paid or accrued on foreign earned income The foreign earnings exclusions were made elective so that individuals living in high-tax countries would not be penalized by the foreign tax credit disallowance rules. Individuals living in high-tax countries should consider not electing, or revoking (if previously elected), the foreign earned income and housing cost exclusions to potentially increase foreign tax credits and carryovers or carrybacks of such credits. Limitation on credit The portion of the foreign taxes that is not disallowed can be claimed as a credit, subject to limitations. The amount of credit allowable in a taxable year is limited to the lesser of the actual foreign taxes paid or accrued (after disallowance) or the amount of U.S. tax on foreign source taxable income for the year. The amount of U.S. tax attributable to foreign source taxable income is determined as follows: Foreign taxable income before personal exemptions Total taxable income before personal exemptions X U.S. tax before credits = Maximum allowable foreign tax credit Taxable income in this fraction does not reflect personal exemptions, but it does reflect itemized or standard deductions. Since the limitation is based on a calculated tax on net foreign source income, increasing foreign source income has the effect of increasing the limitation and reducing the U.S. tax assuming sufficient credits are available. Foreign source income includes earnings from services performed abroad, moving expense reimbursements under certain circumstances, and certain other kinds of income arising abroad, including dividends from some foreign corporations, foreign pensions, and annuities.

12 12 Use of excess credits An assignee who was abroad for an extended period may have incurred excess foreign tax credits resulting from international assignments in high tax countries. These excess credits may be used to reduce his or her U.S. tax liability if carried over to a year with foreign source income that was not taxed by a foreign country or that was taxed at a rate lower than the U.S. rate. The receipt of foreign source income within the carryforward period may occur after returning to live in the United States. Some possibilities for this occurring are noted below: Taxable pension and profit-sharing distributions attributable to employer contributions while services are performed abroad. Stock option income attributable to periods of international assignment or business travel. Business trips abroad, either before or after moving to the location of the international assignment. Income would be attributed to the workdays abroad and would be considered foreign source income and possibly not taxed in a foreign country. It is important to note that generating foreign source income while living abroad may not necessarily benefit a taxpayer because the country of residence may tax the income at rates higher than ones in the United States. Local tax rules must always be considered if tax planning is contemplated and if it involves the use of excess foreign tax credits.

13 13 Chapter 5 Other Considerations The available tax treaties with other countries can provide U.S. citizens and residents with significant reductions in foreign income taxes. For instance, the treaty can provide the bona fide residence test to claim the foreign earned income exclusions. Social security tax Since the late 1970's, the United States has established a network of bilateral Social Security agreements that coordinate the U.S. Social Security program with the comparable programs of other countries. International Social Security agreements, often called "Tantalization agreements," have two main purposes. First, they eliminate dual Social Security taxation, the situation that occurs when a worker from one country works in another country and is required to pay Social Security taxes to both countries on the same earnings. Nations entered into Tantalization Agreements with the United States: Australia, Austria, Belgium, Canada, Czech Republic, Chile, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Luxembourg, Netherlands, Norway, Poland, Portugal, Slovak Republic, South Korea, Spain, Sweden, Switzerland, and United Kingdom Generally, the tax levied on both employers and employees and pays for the retirement and disability benefits is often called FICA tax. The FICA tax includes the Social Security portion (6.20percent) and Medicare portion (1.45percent) Foreign currency exchange rules Any income and deduction that paid in a foreign currency must be reported in U.S dollars on U.S tax return. Under the special case, a taxpayer can use a yearly average exchange rate. However, the securities transaction in foreign currencies must be converted at the exchange rates in effect on dates of purchase and dates of transaction. To convert from foreign currency to U.S. dollars, divide the foreign currency amount by the applicable yearly average exchange rate. To convert from U.S. dollars to foreign currency, multiply the U.S. dollar amount by the applicable yearly average exchange rate. The yearly average exchange rate is from the IRS website.

14 14 Community property rules Community property provisions and restrictions are complex matters. The community property rules stated that the money earned by both spouse and husband during the marriage is considered to bed share ownership. However, married people can still own separate property. Generally, the community property system has been adopted by nine states: Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington and Wisconsin. The U.S. Territory of Puerto Rico is also a community property jurisdiction. Alaska has also adopted a community property system, but it is optional. Spouses are also considered to share debts. Depending on state law, creditors of spouses may be able to reach all or part of the community property, regardless of how it is titled, to satisfy debts incurred by either spouse. State laws vary greatly on what property can be reached. A preliminary but crucial step in working a federal tax case is determining if the community property laws from one of the nine community property states apply. This requires the existence of a legally valid marriage while domiciled in a community property state. It also requires an analysis of whether property was acquired while spouses were subject to community property laws. The words "residence" and "domicile" do not mean the same thing. A person may have several places of residence, but only one domicile. A temporary place of abode may be a residence, but domicile is based on where the taxpayer intends his or her permanent home to be located. Domicile is the place where a person has his or her true, fixed, permanent home and principal establishment and to which, whenever he is absent, he has the intention of returning. Alternative minimum tax The U.S taxpayer who earns high income may be subject to the alternative minimum tax (AMT). Some wealthy taxpayers are avoiding from paying high taxes, and the Alternative Minimum Tax is catching these wealth taxpayers. In 2015, the Congress made changes on AMT exemption amount. Each year, the AMT exemption amount automatically adjusts with inflation. The 2015 exemption amounts are: Single taxpayers $53,600 Married filing separately $41,700 Married taxpayers filing jointly $83,400 Head of Household $53,600 Congress makes it difficult to get around the Alternative Minimum Tax. In order to avoid this tax, a taxpayer should understand the system of Alternative Minimum Tax, and it is possible to reduce the alternative minimum tax by AMT adjustments. To reduce the alternative minimum tax, the certain itemized deductions could be used such as taxable state, local tax refunds, certain tax-exempt interest, and foreign tax credit.

15 15 Minimum tax credit The prior year s Minimum Tax Credit allows a taxpayer to get reimbursed for money he or she paid as an Alternative Tax in a prior year. Therefore, one can only claim this credit in a year when he or she doesn t have to pay AMT. In addition, a taxpayer can t use the credit to reduce the AMT liability in the future. Although this credit comes due to the payment of AMT, the minimum tax credit (MTC) can only be used to offset regular tax. Form 8801 will determine whether a taxpayer is entitled to the credit. This form also helps a taxpayer to calculate the amount one can carry over to future years. A minimum tax credit (MTC) may be allowed when taxpayer paid AMT in a year due to deferral adjustment. The deferral items include such as the AMT credit amount to carry over, depreciation, incentive stock options exercise and not sold and unallowed nonconventional source fuel credit. Foreign corporations Owners, officers, and directors U.S Citizen or resident are generally required to file form 5471 related to their ownership in a foreign corporation when their ownership exceeds 10 percent. A person who meets the 10 percent stock ownership requirement needs to file form The stock ownership requirements are a person who has 10 percent or more of the total value of the foreign corporation s stock or 10 percent or more of the total combined voting power of all classes of stock with voting right. This includes a U.S person who had control of a foreign corporation for an uninterrupted period of at least 30 days during the annual accounting period of foreign corporation. The taxpayer who falls into this category also need to file the form 5471 if a taxpayer is a U.S shareholder who owns stock in a foreign corporation that is a CFC for an uninterrupted period of 30 days or more during any tax year of the foreign corporation, and who owned that stock on the last day for that year. In this case, the CFC means a controlled foreign corporation which is a foreign corporation is considered to be a CFC if it is more than 50percent owned by U.S shareholders. Tip: The information required is such as notification of transfers of interest, acquisitions of interests, and nominations as officers or directors. A $10,000 penalty may be imposed if a taxpayer fails to furnish required information.

16 16 State income taxes If a taxpayer is a U.S citizen or resident alien living overseas, he or she may have to file a state tax return. There is the minimum filing requirements depending on which state a taxpayer most recently lived in before moving overseas. Each state has its own set of rules regarding a taxpayer living aboard. Most states allow the foreign earned income exclusion or foreign tax credit. For instance, if a taxpayer moved to overseas and has rental income in that state, the taxpayer has an obligation to pay tax to their state. Depends on which state a taxpayer lived before, the obligations are different. 1. California, New Mexico, South Carolina and Virginia: The taxpayer has the state filing obligation. These states are most difficult to get away from tax obligation. 2. Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming: These states do not collect an individual state income tax; therefore, there is no filing requirement. 3. Tennessee, New Hampshire: Two states have a limited income tax on individuals. Overall since the state income taxes matters are complex; it may be different by individual states and matter of residency. If a taxpayer is subject to state income tax, the foreign earned income exclusion or foreign tax credit might be considered. Expatriation tax The Internal Revenue Service imposes the increased filing requirements on their citizens living overseas. Many of the taxpayers are looking for another way to get away from these requirements. An individual who relinquishes U.S citizenship or ceases to be a long-term resident of U.S. on or after June 17, 2008, may be subject to a special exit tax. Expatriation on or after June 17, 2008 * If you expatriated on or after June 17, 2008, the new IRC 877A expatriation rules apply to you if any of the following statements apply. Any of these rules apply, you are a covered expatriate: The average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than a specified amount that is adjusted for inflation ($147,000 for 2011, $151,000 for 2012, $155,000 for 2013 and $157,000 for 2014). The net worth is $2 million or more on the date of the expatriation or termination of residency. A taxpayer fails to certify on Form 8854 that he or she has complied with all U.S. federal tax obligations for the 5 years preceding the date of the expatriation or termination of residency.

17 17 A citizen will be treated as relinquishing his or her U.S. citizenship on the earliest of four possible dates: (1) the date the individual renounces his or her U.S. nationality before a diplomatic or consular officer of the United States, provided the renunciation is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the U.S. Department of State; (2) the date the individual furnishes to the U.S. Department of State a signed statement of voluntary relinquishment of U.S. nationality, provided the voluntary relinquishment is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the U.S. Department of State; (3) the date the U.S. Department of State issues to the individual a certificate of loss of nationality; or (4) the date a U.S. court cancels a naturalized citizen s certificate of naturalization There will be significant penalty imposed for not filing expatriation form. A $10,000 penalty may be imposed for failure to file Form 8854 when required. IRS is sending notices to expatriates who have not complied with the Form 8854 requirements, including the imposition of the $10,000penalty where appropriate. Estate and gift taxation In general, estate tax is a tax on the right to transfer property at one s death. Gift tax a tax on money or property gifted to another party during one s lifetime. The fair market value of these items is used, not necessarily what the taxpayer paid for them or what their values were when he or she acquired them. The total of all of these items is the "Gross Estate." The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets. Estate tax Generally, the Gross Estate does not include property owned solely by the decedent's spouse or other individuals. Lifetime gifts that are complete (no powers or other control over the gifts are retained) are not included in the Gross Estate (but taxable gifts are used in the computation of the estate tax). Life estates given to the decedent by others in which the decedent has no further control or power at the date of death are not included. The rule applies to U.S. citizens and foreign citizens domiciled in the U.S. However, the law applies differently to foreign citizens who are not domiciled in the U.S. A U.S. citizen or U.S. domiciled foreign individual is subject to estate tax at the fair market value of his or her entire asset. The funeral, administration expense, certain transfer to spouses, casualty losses, and other expenses can be deductible. The marital deduction is also effective on deduction only if the spouse is a U.S. citizen. Gift tax The general gift tax laws state that a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether the donor intends the transfer to be a gift or not. The gift tax applies to the transfer by gift of any property. A taxpayer is making a gift if he or she gives property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If a taxpayer sells something at less than its full value or if he or she makes an interest-free or reduced-interest loan, the taxpayer may be making a gift. The donor is generally responsible for paying the gift tax. U.S. Citizens and U.S. Domiciled Foreign Citizens are required to pay gift tax at fair market value. A donor does not have to pay gift tax up to $14,000 annually to each donee. In lifetime, each donor is allowed to transfer by gift up to $5,430,000 tax free in 2015.

18 18 Chapter 6 FATCA And FBAR FATCA (Foreign Account Tax Compliance Act) U.S. citizens, U.S. individual residents, and a very limited number of nonresident individuals who own certain foreign financial accounts or other offshore assets must report those assets, using form 8938, if the total values of those assets are over $50,000 at the end of the tax year or more than $75,000 at any time during the tax year. Taxpayers who do not have to file an income tax return for the tax year do not have to file Form 8938, regardless of the value of their specified foreign financial assets. A taxpayer may be subject to penalties if he or she fails to file a correct Form 8938 or have an understatement of tax relating to an undisclosed specified foreign financial asset. If a taxpayer is required to file Form 8938 but does not file a complete and correct Form 8938 by the due date (including extensions), he or she may be subject to a penalty of $10,000. If a taxpayer does not file a correct and complete Form 8938 within 90 days after the IRS mails a notice of the failure to file, one may be subject to an additional Tip: Filing Form 8938 does not relieve a taxpayer of the requirement to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), if he or she is otherwise required to file the FBAR, also file the form 8938 by attaching to the annual tax return. penalty of $10,000 for each 30-day period (or part of a period) during which one continues to fail to file Form 8938 after the 90-day period has expired. The maximum additional penalty for a continuing failure to file Form 8938 is $50,000 I am not married and do not live abroad. The total value of my specified foreign financial assets does not exceed $49,000 during the tax year. In this case, the taxpayers does not satisfy the reporting threshold of more than $50,000 on the last day of the tax year or more than $75,000at any time during the tax year. My spouse and I are U.S. citizens but live abroad for the entire tax year and file a joint income tax return. The total value of our combined specified foreign financial assets on any day of the tax year is $150,000. In this case, the taxpayers do not have to file Form A taxpayer does not satisfy the reporting threshold of more than $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year for married individuals who live abroad and file a joint income tax return. My spouse and I live abroad and file separate income tax returns. My spouse is not a specified individual. On the last day of the tax year, my spouse and I jointly own a specified foreign financial asset with a value of $150,000. My spouse has a separate interest in a specified foreign financial asset with a value of $10,000. I have a separate interest in a specified foreign financial asset with a value of $60,000 In this case, the taxpayers have to file Form 8938 but the spouse, who is not a specified individual, does not. The taxpayers have an interest in specified foreign financial assets in the amount of $210,000 on the last day of the tax year. This is the entire value of the asset that they jointly own, $150,000, plus the entire value of the asset that one separately owns, $60,000. The taxpayer satisfy the reporting threshold for a married individual living abroad and filing a separate return of more than $200,000 on the last day of the tax year.

19 19 FBAR(Report of Foreign Bank and Financial Accounts) If a taxpayer has a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, exceeding certain thresholds, one may be required to report the account yearly by electronically filing a Financial Crimes Enforcement Network (FinCEN) 114, Report of Foreign Bank and Financial Accounts (FBAR). U.S. persons are required to file an FBAR if: 1. the U.S. person had a financial interest in or signature authority over at least one financial account located outside of the United States; and 2. the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported. Tip: Remember that there is no extension for filing FBARs unlike FATCA. However, a taxpayer can file delinquent and amend FBARs; one may be subject to a penalty. If a taxpayer has not properly filed FBARs for earlier years, he or she should file the delinquent FBARs and attach a statement explaining why they are filed late. He or she does not need to file FBARs that were due more than six years ago, since the statute of limitations for assessing FBAR penalties is six years from the due date of the FBAR. As discussed below, no penalty will be asserted if IRS determines that the late filings were due to reasonable cause. Keep copies of the record. There is possible penalty for failure to file FBAR. In the absence of reasonable cause; a taxpayer may be subject to either a willful or non-willful civil penalty. Generally, the civil penalty for willfully failing to file an FBAR can be up to the greater of $100,000 or 50 percent of the total balance of the foreign account at the time of the violation. Note that this penalty is applicable only in cases in which there is willful intent to avoid filing. Non-willful violations that the IRS determines are not due to reasonable cause are subject to a penalty of up to $10,000 per violation. There is no penalty in the case of a violation that IRS determines was due to reasonable cause. After May 12, 2015, in most cases, the total penalty amount for all years under examination will be limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination. In such cases, the penalty for each year will be determined by allocating the total penalty amount to all years for which the FBAR violations were willful based upon the ratio of the highest aggregate balance for each year to the total of the highest aggregate balances for all years combined, subject to the maximum penalty limitation in 31 USC 5321(a)(5)(C) for each year

20 20 Willfulness situation examples 1 2 Jennifer files the FBAR, but omits one of three foreign bank accounts. She had previously closed the omitted account at the time of filing the FBAR. She explains that the omission was due to unintentional oversight. During the examination, she provides all information requested with respect to the omitted account. The information provided does not disclose anything suspicious about the account, and Jennifer reported all income associated with the account on his tax return. The penalty for a willful violation should not apply absent other evidence that may indicate willfulness. Gabe filed the FBAR in earlier years but failed to file the FBAR in subsequent years when required to do so. When asked, he does not provide a reasonable explanation for failing to file the FBAR. In addition, he may have failed to report income associated with foreign bank accounts for the years that FBARs were not filed. A determination that the violation was willful would likely be appropriate in this case.

21 21 Chapter 7 Retirement Abroad An individual planning on retiring abroad must consider complicated tax obligations. Even if he or she plans on renouncing U.S. citizenship, one can t simply avoid U..S. tax obligations. The IRS is currently agreed to tax treaties with over 42 countries to prevent tax evasions. If a taxpayer plans to retire abroad, and stay compliant with U.S. taxes, one must consider Foreign Earned Income Exclusion, FBAR and FATCA, state tax returns, and Social Security benefits. Any U.S. retirement savings such as 401k, 403b, Traditional IRAs, and any kind of government saving programs will be taxed. However, a taxpayer can avoid double Social Security taxation through U.S. tax treaties with other countries and receive Social Security benefits while living abroad if taxpayers have contributed into the Social Security system. However, the Social Security payments may be subject to tax by earning additional income over and above one s Social Security payment. This payment cannot be included as a deduction under the Foreign Earned Income Exclusion because this is part of U.S. income source. The benefits are 85 percent taxable on the U.S. tax return and may incur tax liability in host country too. Tip: Those living abroad with Social Security benefits can still get the benefits deposited into a U.S bank account. Social Security also can electronically deposit benefits in local bank of many countries and generally paid in local currencies. Most countries have a different set of tax laws regarding pensions, annuities, investment income, and more for foreign residents. A taxpayer is advised to read the tax laws and treaties carefully to figure out their tax obligations abroad. The U.S. government health plan does not cover individuals aged 64 and over if they choose to live abroad. Currently, the Medicare tax is 2.9 percent, and it went up by 0.9 percent in the beginning of This increase however applies only to married taxpayers with wage or self-employment income of $250,000 and single taxpayer with income of $200,000. Only the amount over these thresholds is subject to the additional 0.9 percent tax. U.S. health benefit is among the top priorities for people who want to move to different country after their retirement. Individuals should research the eligibility, cost, and quality of the health benefit before they move overseas.

22 22 Appendix U.S. TAX TREATIES A Armenia Australia Austria Azerbaijan B Bangladesh Barbados Belarus Belgium Bulgaria C Canada China Cyprus Czech Republic D Denmark E Egypt Estonia F Finland France G Georgia Germany Greece H Hungary I Iceland India Indonesia Ireland Israel Italy J Jamaica Japan K Kazakhstan Korea Kyrgyzstan L Latvia Lithuania Luxembourg M Malta Mexico Moldova Morocco N Netherlands New Zealand Norway P Pakistan Philippines Poland Portugal R Romania Russia S Slovak Republic Slovenia South Africa Spain Sri Lanka Sweden Switzerland T Tajikistan Thailand Trinidad Tunisia Turkey Turkmenistan U Ukraine Union of Soviet Socialist Republics (USSR) United Kingdom United States Model Uzbekistan V Venezuela