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5 Tips for Filing Taxes Overseas

Geoff Williams

If you live in another country, you may miss your family and friends and your favorite restaurant. But there's probably one thing you wish you could miss -- filing your taxes.

Alas, no such luck. Even if you're living and working somewhere other than the U.S., you still have to file your taxes with the Internal Revenue Service. The good news is that filing your taxes in another country isn't all that different of an experience from when you were living in the U.S. Still, there are some quirks that you'll want to be aware of, if you want to take advantage of the tax breaks you're entitled to, and if you don't want to run afoul of the law. So if you're filing taxes north, south, east or west of the good old USA, or you plan on moving to a new country soon, these are some tips you'll want to take note of.

[See: 9 Red Flags That Could Trigger a Tax Audit.]

Your April 15 deadline is different. Sort of. While your American counterparts are sweating and stressing over the April 15 deadline, you have until June 15 to file, says Hugo Lesser, who is based out of Salta, Argentina and is the director of communications at Bright!Tax, which provides tax services to American expats in over 150 countries.

But it's really not quite the break you probably hoped for, unless you're confident you're due a refund and don't need to work on your taxes to see how things are going to shake out.

"Any tax is still due on April 15," Lesser says. But returns where you're owed a refund aren't due until June 15.

Don't forget about the foreign earned income exclusion. You won't forget if you have someone preparing your taxes, and most expats find out about this sooner or later. If you live and work in another country, you're probably eligible for the foreign earned income exclusion.

"[This] means up to $101,300 of your earned income, from your salary or independent contracting -- not passive income like rental income -- is excluded from taxation," says Vincenzo Villamena, a certified public accountant based out of New York City who runs Onlinetaxman.com, a tax service for American expats.

"This is true regardless of the origin of the work, it can be from a U.S. company into your U.S. bank account, but as long as you are physically working outside of the U.S. during this period, you qualify for this tax break," Villamena adds.

[See: Answers to 7 Burning Tax Questions.]

In some cases, though, you may end up deciding to use the foreign tax credit instead, Lesser says. That gives the American taxpayer a $1 U.S. tax credit for every dollar of tax paid abroad.

"The foreign tax credit is often a better option for expats living and working in a country with higher income tax rates than the U.S., as excess tax credits can be carried forward for future use," Lesser says.

You may need to be aware of the FATCA and FBAR. FATCA stands for Foreign Account Tax Compliant Act, and FBAR is the Report of Foreign Bank and Financial Accounts.

"Americans who have a minimum total of $10,000 in foreign bank or investment accounts at any time during a tax year are required to file an FBAR," Lesser says. "FATCA, meanwhile, requires Americans with assets abroad, not including property, worth over $200,000 per person to report them on Form 8938 with their federal return."

Of course, if you have these types of assets, you probably are at the point in your financial life where you're paying a tax advisor to be aware of this.

You may need to file a state return. Sounds crazy, doesn't it? You're certainly still an American, but you may not see yourself as, say, a Californian or a Texan anymore, especially if you've lived in a lot of states. But it doesn't matter that you're in Armenia or Argentina and not Arkansas or Arizona, you may need to still file state taxes.

"Even if you haven't lived in that state for years, some states might still consider you a resident and require that you file a tax return. For example, if you still have a valid driver's license in that state or still own or rent property in that state, then you may still be considered a resident," says Josh Zimmelman, owner of Westwood Tax & Consulting, a New York City-based accounting firm.

He adds that you may need to take specific steps to "leave" and prove you no longer have a tax domicile in that state, steps like setting up full-time permanent residency in the country you're currently living in.

All of that said, "If you still receive income from a rental or business in that state, you still need to pay taxes in that state even if you're no longer a resident," Zimmelman adds.

[See: A Checklist for Last-Minute Tax Filing.]

If you have been living abroad and haven't been filing your taxes, you should start again. Lesser says that the penalties for not filing or not filing correctly can be steep, but there's an amnesty program called the IRS Streamlined Filing Compliance Procedures that allows expats to catch up on their filing to resolve potential fines.

He also points out that around 200,000 foreign banks and other financial firms report their American account holders to the IRS, and so it isn't as if the IRS isn't aware of what you're doing or not doing. They haven't been bugging you about your taxes perhaps, but a future audit could be living on borrowed time.

"We strongly recommend expats who haven't been filing consult an expat tax specialist and take steps to become compliant before the IRS contacts them," Lesser says.

You can leave the country, but you can't leave behind your responsibility to do your taxes. At least, not without paying a steep price.

"Unless an American renounces their citizenship, they still have tax filing obligations," Zimmelman says.

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