US citizens and resident aliens are taxed on their worldwide income.

Your tax filing obligations follow you wherever you are. The good news: there are several tax rules to avoid double taxation and to lower tax liabilities. Taxpayers should keep track of their worldwide financial transactions. There are now 7 categories of income with the application of the Tax Cuts and Jobs Act. A separate Form 1116 is required for each category.

Many financial transactions that you do have tax consequences. The institutions that you transact with, national and foreign, are required to report the transactions to the Internal Revenue Service. The US Government has several conventions and agreements with foreign governments and institutions to combat tax evasion and money laundering. Among others, FATCA – Foreign Account Tax Compliance Act, FBAR – Foreign Bank Account Report, IGA- Intergovernmental Agreements, OECD- Organization for Economic Co-operation and Development; the newly formed (2018) J5- Joint Chiefs of Global Tax Enforcement. Penalties are often imposed for non compliance because the application of the tax code is coercive.

Example of transactions with tax filing or reporting implications:

  • As US citizens, resident aliens, or expats (leaving overseas), the US tax law requires you to pay tax on your worldwide income whether the income is passive income, like investment in real estate or active income, earned income from a foreign country.
  • If you have signature authority, ownership interest in foreign accounts in total of $10,000 or more, you must report it.
  • If you have income from a foreign country, live in a foreign country, or did transactions in a foreign country you must keep record of the tax paid to the foreign country because you could claim the foreign earned income tax credit, the housing tax credit, or the foreign income exclusion. You must also keep records of your housing expenses because the records are needed to compute your housing credit and the allowable amount varies by country.

If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude your foreign earnings from income up to an amount that is adjusted annually for inflation ($107,600 for 2020, and $108,700 for 2021). In addition, you can exclude or deduct certain foreign housing amounts. You may also be entitled to exclude from income the value of meals and lodging provided to you by your employer on their premises and for their convenience.”

  • When you exclude foreign housing costs or foreign earned income, you cannot take a foreign tax credit for taxes you paid in connection with the income that you exclude.
  • If the US has a tax treaty or convention with the foreign country, you could take advantage of the treaty or convention provisions. The tax rates are lower compared to non treaty or convention countries. The rates vary and depend on the nature of transactions.
  • If you sold real estate property in a foreign country or received rental income, it is very important to take the currency conversion rates into account because you have to report the income or payments in US dollars.
  • If you lived in your property in a foreign country for a least 2 of the last 5 years and you sold it at a gain, you could exclude $250,000 of the capital gain, if you are single, and $500, 000, if married filing jointly. There is no exclusion for rental properties and thus any amount of capital gain is taxable. Taxes and expenses in connection with the rental properties are deducted as business expenses.

Taxpayers’ reporting obligations could be very unique. Taxation of individuals with foreign transactions or living in foreign countries are complicated. You are advised to consult a qualified tax professional for your specific case before and after making financial decisions with tax implications.

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