Frequently Asked Questions

1Q. Do I have to file a federal tax return even if I pay income taxes in my country of residence?

If you meet the minimum income threshold that applies to all taxpayers – domestic and overseas – (described here by the IRS, generally, for most taxpayers, $10,300 gross annual income (converted to USD) if filing single, and $20,600 if married filing jointly) then you must file a federal income tax return regardless of your filing status in your country of residence. If you are self-employed (e.g. sole proprietor, general partner in a partnership), then the filing threshold is much lower, at USD 400. The good news is, while you have to calculate the US tax you would owe on your overseas income in the same way as if it were US source income, there are two powerful tools to reduce your liability and avoid double taxation. These are the Foreign Earned Income Exclusion and the Foreign Tax Credit both of which are described below. Additionally, there are information return requirements that are not dependent on your income. Often, even people with zero income are required to file these, and penalized heavily for non-compliance. Commonly required informational returns include Foreign Bank Account Reports (FinCen 114), Statement of Specified Foreign Financial Assets (Form 8938), Foreign Partnership Returns (Form 8865), and Foreign Corporation Returns (Form 5471). Elgin Road can assist with all of these forms for most US taxpayers.

2Q. What is earned income?

The IRS defines earned income, generally, as all the income and wages one gets from working. This includes, wages, salaries, tips, and self-employment income (typically from a partnership or sole proprietorship). Broadly speaking, if you control a foreign corporation, a fair wage paid to yourself is considered earned income, while dividend distributions are not. This varies depending on whether capital is considered a material income producing factor in your business or not. Dividends, alimony or child support, interest income, and rental income, are not considered to be earned income.

3Q. What is “unearned” income?

Simply put, all income that is not considered by the IRS to be “earned”, as described above, is defined as “unearned income”. Typically, this includes rental income, interest and dividend income, income as a limited partner, and pension income. One of the main reasons this distinction is important is because unearned income does not benefit from the foreign earned income exclusion described below.

4Q. What is the foreign earned income exclusion (FEIE)?

Subject to certain conditions, many US citizens who live and work overseas are able to use the FEIE to exclude, from their taxable income, up to $101,300 (number revised every year) of their earned income annually. Regardless of filing status, the exclusion is calculated separately for each individual. So for example, if your job pays you a salary of $201,300, and your spouse’s job pays him $10,000 annually – you can exclude $101,300 under the FEIE and your spouse can exclude $10,000. You cannot club your exclusion amounts together and exclude all your income even though it is below $202,600 which is the sum of your individual maximum exclusions. Note that the exclusion applies to earned income only e.g. wages or self-employment earnings, and not to unearned income e.g. rental income, dividends, interest received etc… In addition to the foreign earned income exclusion, many expatriates are eligible for foreign housing deduction/exclusion, under which housing costs above a certain base amount are excluded/deducted from taxable income. Also note, in the case of those who are self-employed, that using the exclusion does not exempt you from paying self-employment tax on the excluded income (discussed in detail below).

5Q. Do I have to pay Social Security and Medicare?

It depends. In general, you owe SS and medicare payments only if you work for an American employer (which includes companies organized/incorporated in the US, certain affiliates of US companies, and partnerships that are at least 2/3 owned by US persons). So, if you are working for a foreign employer overseas, you will generally not be liable for social security. If you are self-employed then, subject to the provisions of totalization agreements discussed below, instead of social security and medi-care contributions, you will pay self-employment taxes (explained below) Additionally, some countries, listed in the hyperlink at the end of this answer, have social security totalization agreements with the United States which ensure that each individual avoids dual coverage and dual contributions. Each totalization agreement is different, and needs to be examined in light of each individuals’ unique circumstances. totalization-agreements

6Q. Do I have to file a tax return if all my income can be excluded under the FEIE?
Sadly, yes. If your gross income meets the threshold described in the first answer in this section, you have to file a return even if you will be able to exclude all your income under the FEIE. The exclusion is an election, that must be made on a correctly filed tax return in order to be valid.
7Q. What are foreign tax credits?
If you earn income in country X and pay taxes to country X on that income, then you can usually claim the amount you paid as a credit on your US tax return. The idea behind this is that you should not be taxed twice on the same income. There are a number of rules to ensure that foreign tax credits related to passive income or general income are applied only to offset US taxes on passive income and general income respectively. Note that you cannot claim a foreign tax credit on income which you have already excluded using FEIE (described above). This, combined with the fact that excess tax credits can be carried forward to future years,(especially useful for expats in high tax jurisdiction) can often make the decision of whether to use the foreign earned income exclusion, the foreign tax credit, or both, a complex one. Of course, Elgin Road can help.
8Q. When is my federal return due?

If you reside in a foreign country, you get a two-month automatic extension to file your federal tax returns. So, instead of April 15th, you can send off your 1040 on the 15th of June without any late filing penalty (be sure to attach an explanation to your return). It is important to note though, that the US has a “Pay As You Go” taxation system, meaning that most people are responsible for paying estimated taxes to the IRS at least quarterly, and clearing up any final payments owed by April 15th, even if the return is legitimately being filed later. Failure to pay appropriate estimated taxes over the course of the year will result in underpayment penalties, and failure to pay any outstanding balance by April 15th will result in late payment penalties, and interest. In practice, this means that most people should make estimated payments throughout the year based on rough estimates of what they are likely to owe.

9Q. Do I have to file a state tax return?

The answer to this question depends on a number of variables and does not have a “one-size-fits all” answer. These variables include: what state in the US you last resided (each states treats this matter differently) and what ties you still have that to state e.g. a house, your dependents residing in the state etc… If you have earned or unearned income in a state then you will most likely have to file a return. Elgin Road can guide you based on your specific circumstances.

10Q. What are self-employment taxes?

Self-employment tax is calculated as 15.3% of your gross self-employment income up to $118,500 of earnings (excluding a small minimum threshold), and 2.9% of the amount by which your self-employment earnings exceed $118,500. You pay self-employment tax if you run your own business, either as a sole proprietor or a general partner. Most contractors are treated as sole proprietors and are therefore also required to pay self-employment tax. What this amounts to is the social security and Medicare contributions you would have had deducted from your paycheck if you were an employee PLUS the amount that your employer would have contributed. Neither foreign tax credits nor the foreign earned income exclusion can be used to offset self-employment tax. There is however, elimination of dual coverage under what are known as Social Security Totalization Agreements, which the US has signed with 24 countries. If you live in one of countries listed at the link below, you may qualify for a reduction in self-employment taxes, or in any contributions made to an overseas government totalization-agreements.

11Q. What are some common situations in which I will owe self-employment taxes while living overseas?

Overseas Americans are often surprised to learn that they owe self-employment taxes. Since the minimum threshold is so low, and neither the foreign earned income exclusion (described above) nor the foreign tax credit can be used to offset self-employment taxes, it can, for example, end up applying to an SAT tutor who earns $2000 in a year functioning as a sole proprietor, or to an online graphic design freelancer whose total income is $3000 a year. Many people find that it is more convenient to organize their overseas business interests as a corporation in order to avoid self-employment taxes. Whether this works for you will depend largely on how corporations are taxed in your country of residence, vs. sole proprietors, and whether or not the United States has a totalization agreement. Elgin Road can help you structure your overseas business in the optimal way from the perspective of self-employment taxes.

12Q. What are some common informational reporting requirements that apply to US expats?

FBAR: The foreign bank account report, now known as FinCen Form 114, requires US persons (including companies registered under the laws of the United States) to report their separately and/or jointly owned bank and other financial accounts (including accounts over which they only have signature authority), such as brokerage accounts, along with maximum balances. The FBAR requirement is triggered if the aggregate value of the US person’s foreign financial accounts exceeded $10,000 at any point during the year. Note that FinCen Form 114 is filed separately from one’s tax returns and can have different deadlines (the deadline is set to change in 2017). Penalties for non-filing are stiff, and can go as high as 50% of the balance on unreported accounts. There are delinquent filing procedures available which result in substantial or complete penalty abatement. Note also that ownership of a foreign bank account of any value, requires the taxpayer to file schedule B and check the box asking whether the person owns an interest in overseas financial accounts. Statement of Specified Foreign Financial Assets: This is IRS form 8938 and is filed with your tax return. Use the link below to determine if you may need to file form 8938. Note that this form includes reporting of ownership of foreign entities as well as financial accounts. The valuation thresholds above which reporting is required are much higher than FBAR, for example, a married expat couple filing jointly would need to file if the value of their foreign assets is greater than $400,000 on the last day of the year or more than $600,000 at any point during the year. Do I need to file form 8938 statement of specified foreign financial assets ? Return of US Persons with Respect to Certain Foreign Partnerships: This is IRS form 8865, and may be required if you have an interest in an overseas partnership. It is submitted as a part of the person’s tax return. The penalty for non-filing can be as high as $10,000 per year, though the IRS does provide delinquent filing options which may result in abatement of most or all of the applicable penalties. Elgin Road can help you determine if this is required, and assist with any filing obligations. Information Return of US Persons with Respect to Certain Foreign Corporations: This is IRS Form 5471 and may be required if you own, control, or are a director of a corporation organized under the laws of a foreign country. It is submitted as a part of the person’s tax return. Elgin Road can help you determine if this is required, and assist with any filing obligations.

13Q. If my wife and I are both US persons, do we both have to file foreign bank account reports?

Generally, yes. There is an exception if the only financial accounts which your spouse has an interest in or signature authority over are accounts owned jointly with you. So, for example, if you and your spouse have 4 joint bank accounts, you both meet the threshold for FBAR filing, and you each have one separately owned account (even if the balance on these particular accounts is 0 dollars), then both of you must file separate FinCen 114 forms.

14Q. I have been living overseas for ten years and have never filed a US tax return –what should I do?

For most people, if the failure to file tax or information returns was non willful, the best solution is to use the IRS’s Streamlined Filing Compliance Procedure. This entails filing 3 years of late tax returns and delinquent informational reports (excluding FBAR), in addition to 6 years of Foreign Bank Account Reports, all as one package. Acceptance into the program typically results in penalties being waived. Elgin Road can help you with submitting returns under the Streamlined Filing Compliance Procedure.

15Q. I have been filing tax returns but have missed out a number of informational returns, what should I do?

In addition to the Streamlined Filing Compliance Procedure, the IRS, in a bid to encourage US expats to catch up with their filing requirements, the IRS offers programs to file delinquent FBARs (typically requiring 6 years of back-filing), and delinquent international information returns (such as those required for those who own a foreign corporation or partnership). Elgin Road is able to help with all of these programs.

16Q. Can I trust you to do the job?

Our team is led by Assad Ahmad, an IRS Enrolled Agent, federally authorized to practice before the IRS. Obtaining this qualification required passing three IRS administered examinations, covering personal and business taxation, and representation practices. Retaining the qualification requires satisfying the IRS with regards to continuing education in the subject of taxation. Prior to starting Elgin Road, he spent a decade working at top-tier global firms (such as McKinsey and Co. and Deutsche Bank) as a management consultant and a derivatives trader. The skills it took for him to succeed in his prior career – meeting short deadlines, paying painstaking attention to detail, performing with the utmost diligence, communicating effectively, and absorbing large amounts of information – are the same skills that you want to see in your tax professional. At this time, all returns are prepared either by, or under the direct supervision, of Assad himself.

17Q. What recourse do I have if I am not happy with your service?

In the first instance, no payment will be made until you are completely satisfied with our service. In the second instance, you should know that both Assad (our CEO) and Nadia (our VP) are US citizens and subject to US law. As an Enrolled Agent, Assad is also subject to regulation by the IRS. As such, in the unlikely case of any dissatisfaction that comes to light after payment is made, you have the same recourse as you would have with any US based tax professional. In addition, as the tax prepares of record, in the unlikely instance of any errors or inaccuracies in your tax affairs, we would be liable for prepare penalties assessed by the IRS.

18Q. How do you keep my information safe?

US law requires us to ensure the security and confidentiality of client records and information. It also imposes criminal penalties on prepares who engage in unauthorized or reckless data disclosure. In keeping with our legal, ethical, and professional obligations, we take the protection of client data very seriously at each step of the process.

  • For data being sent to us we offer encrypted file sharing; to allow customer convenience though, we do allow records to be emailed to us, but encourage password encryption
  • We store data and in-progress returns, both in the cloud, and our own hardware, in encrypted form, requiring multi-factor authentication for access
  • We send returns and information to clients using an encrypted mail service, and, additionally, password protect files where appropriate.