Taxes- Ex-Pats Beware

When the new immigration law and the new tax laws suddenly sprang up here in Costa Rica, so did a lump of fear travel from my stomach up my esophagus and land in the back of my throat. Time to get my paperwork in order on both sides on the fence. Tourist may look at some of us ex-pats and envy living the good life, trading in our suits and dress shoes for board shorts and flip flops, sippin’ margaritas and mojitos on the beach in between the swells and breaks. But playing by the C.R. and U.S. tax rules can be a fulltime job and something that all of us deal with (or at least think about.) Death and taxes – the only two things that you can never get away from, according to the saying. Just ask poor ol’ Charley Rangle and he’ll tell you the same.

So, I found this great website that discredits many myths and confirms some of the uncertainties that I bet many of you have. Remember, this is U.S. tax law that I am discussing here, so Europeans will have to consult their consulates office and inform me later for a follow-up.

The following excerpt says it all.

“As a U.S. expatriate residing in abroad, you still must file a US Income Tax Return each year on your worldwide income!  The stories you hear from the fellow American  expatriate sitting next to you at the bar that once you leave the U.S., you no longer owe any taxes or have to file tax returns , are about as true as most bar room tales.  It’s against the law to give up your U.S. citizenship in order to avoid U.S. taxes!  Therefore, if you aren’t filing your U.S. tax return, the statute of limitations on tax collections will not run out and your tax return obligation (and perhaps the taxes you owe) only grows greater as each year passes.”

A surprising fact is that if you fail to file that return for any tax year (whether a return is required or not), the statute of limitations on tax assessments for that year will never run out. However, if you do file your tax return each tax year while living abroad, the statute of limitations in most situations for IRS audits will expire three years after you file those returns.

So, what did I learn?  Well, here is the quick and dirty according to Don D. Nelson, Attorney, Certified Public Accountant and Editor of taxmeless.com where I found this information.

1. If you have your full time residence abroad for a full calendar year (confirm through a bonafide residence test) or do not return to the US more than 35 days in a consecutive 12 month period (physical present test), you can exclude up to $91,500 of earned income from U.S. Income Taxation for 2010.  Married couples may enjoy an additional exclusion, however, these exclusions can only be claimed on a filed tax return and is not automatic.
2. You may also claim an additional  exclusion from your U.S. taxes in excess of the $91,500, if  the rent, utilities, etc. you pay on your residence abroad and other living expenses exceed a standard amount (which is currently approx $13,300 per year) established by the IRS. This exclusion only comes into play when your earnings are in excess of the $91,500 foreign income exclusion.
3. If you are a bonafide employee of your foreign employer (which can mean your own foreign corporation) and have foreign social security and other payroll taxes withheld from your wages, you do not have to worry about paying any social security taxes to the U.S.
4. However, if you are self employed, and no foreign social security is being withheld from your earnings  (in other words  an independent contractor) you must file a Schedule C with your U.S. tax return and pay U.S. self employment tax (social security taxes by the self employed) on your net earnings (after deducting your expenses).
5. If you own more than a 10% ownership interest in a foreign corporation you are required to file a special form with the IRS reporting that interest.
6. Additionally, a special form must be filed with the U.S. Treasury  if you have ownership or signature authority over a foreign bank account which at anytime during the year has a balance of more than $10,000 US or more.
7. Do not assume just because you moved out of the U.S. that your previous state of residence has no claim on taxing your income. Many states make it very difficult to give up your “tax domicile” in the state and require that you file state income tax returns (and pay the tax) even if you do not move back until  many years later.
8. It can easily be determined if returns are owed for past years by ordering a transcript from the IRS.  This can be done by a tax professional without triggering any inquiry from the IRS concerning the taxpayer.
9. If one of the reasons that you are living abroad is because you owe taxes or back taxes, the IRS and state taxing agencies may offer programs which will allow you to settle the balance owed for pennies on the dollar.