This article discusses the obligations of United States citizens while living outside the United States.
Certain tax, financial reporting and other obligations imposed on United States citizens apply equally to U.S. citizens outside the country. In this respect, the United States is different from most other countries. It is important for U.S. citizens to adhere to these obligations, both to protect themselves from financial penalties and also ensure that an intention to retain U.S. citizenship is never in doubt.
The following is a non-exhaustive list of some of the issues encountered by U.S. citizens overseas.
You must maintain a valid United States passport. Do not try to enter the United States by presenting yourself as a non-citizen. If you do not have a passport and need to enter the U.S. urgently, obtain a temporary passport from the nearest U.S. Embassy or Consulate.
If male, and aged between 18-25 inclusive, you must register with [Selective Service http://www.sss.gov]. Failure to do so carries the risk of penalties and exclusion from certain U.S. Federal or State benefits and employment.
- You must file a U.S. federal income tax return every year, reporting worldwide income, unless your income falls below the minimum thresholds to do so. Even in that case, it is advisable to file anyway. The IRS have a field office at the U.S. Embassy in London.
- If self-employed, you normally have to pay the Social Security tax on your earnings unless exempted by a Social Security Agreement between your country of residence and the United States.
- You normally don't have to file a state income tax return unless you retain ties with that state or have income sourced in that state. In some states it can be harder to "lose" residence than in others.
- When you die, the U.S. federal estate tax is imposed on your estate. The threshold for this is $5m in 2012 so not a concern for most, although may be lower in 2013. Asset transfers to spouses are only exempt
Tax Information Reporting
- FBAR : If you have signing authority over more than $10,000 in non-U.S. bank accounts at any time during the year, you normally need to file an FBAR report, also known as TDF-90. The deadline to file is June 30 of the following year. FBAR reporting includes any joint accounts, or business accounts you have signing authority over (even if you have no beneficial interest).
- Form 8938 : If your non-U.S. financial assets exceed certain thresholds, you need to attach a form 8938 to your tax return
- If you receive foreign inheritances or transact with a non-U.S. trust, search for form 3520
- If you have a shareholding over 10% in a non-U.S. corporation, then you normally need to file form 5471
Social Security Number
- If you haven't already got a Social Security Number (SSN), you need to obtain one. If you have grown up outside the United States as a U.S. citizen and did not get an SSN when younger, then you will need to present proof of this in order to obtain an SSN as an adult.
Financial Consequences of being a U.S. citizen in another country
As a U.S. citizen living in another country you need to keep in mind that certain transactions may carry adverse U.S. tax consequences even if acceptable under the law of the country you live in.
- Generally speaking, you cannot invest in non-U.S. mutual funds or pooled investments.
- You can in theory but these are then caught by punitive U.S. tax rules known as Passive Foreign Investment Companies (PFIC).
- Direct investments in company stock or real estate is normally ok, you then declare interest, rent and dividends (and capital gains) as normal.
- Investing in U.S. mutual funds removes the adverse U.S. tax issues, but then may cause the same issue in reverse with your taxes in your country of residence.
- Usually, you shouldn't need to pay U.S. tax on most income if you live in a country with tax rates that are higher than U.S. federal tax rates.
- There is the Foreign Earned Income Exclusion, which lets you exempt around US$92k earned income. Search for form 2555. You can also exclude certain housing costs.
- If the Foreign Earned Income Exclusion doesn't apply, you can take credits for foreign tax suffered. This usually offsets U.S. tax
- Be aware that even if income is "tax free" in your country, it may not be tax free as far as the U.S. is concerned. This can include tax-exempt interest, employer pension contributions and also specific categories of income, such as gambling winnings.
- Capital gains often cause problems for U.S. citizens in another country. These reasons include:
- Both purchase and sale price are converted into U.S. dollars. Because of exchange rate movements, it can cause you to have a gain on your U.S. tax return even though you made a loss in your domestic currency. Hence - no credit for foreign tax. Of course, the reverse can just as easily apply.
- The U.S. tax exemption from capital gains on your main residence is not as extensive as it is in other countries.
- If you are selling an asset you received as a gift, then the U.S. may want to know the donor's original cost.
- If your spouse is not a U.S. citizen/resident, you may want to consider filing on the basis of "married filing separately" for your U.S. tax return, although this may cause a higher U.S. tax bill. If you file jointly with your spouse, he or she then becomes part of the U.S. tax system as well.
- You must abide by U.S. regulations concerning travel to Cuba and other nations where restrictions apply. You are not permitted to bypass these regulations by travelling on a foreign passport.
Overall, being a U.S. citizen in another country can complicate your financial life compared to being solely the citizen of that other country. It can also mean additional tax liabilities. For most U.S. citizens, the additional cost and time required to comply with U.S. requirements is worth it as a price of retaining U.S. citizenship. For others, it is not.