It can come as a shock to many, to discover that US citizens need to file tax returns whilst living overseas. This is true, and it is something which has gradually become more and more noticeable to US citizens over the last few years.
Whether it be banks asking for US tax residency certificates, or friends and family who are filing, more and more individuals are now becoming compliant with their US obligations.
Any US citizen or Green Card holder based anywhere worldwide, with a total income greater than $12,400 (USD equivalent) for individuals. This threshold varies for married individuals filing jointly/separately.
Even for US citizens who don’t meet this income threshold, even owning a KiwiSaver or Australian Super account can create an obligation to file a tax return.
Your total income includes income from all sources, whether it be wages, interest, self-employment income or investment income. The location where this income was earned also has no bearing on whether a tax return needs to be filed.
It is important to note that the obligation to file a US tax return doesn’t necessarily mean that any tax will need to be paid. An extensive tax treaty exists between the US and Australia/New Zealand, and while some instances do exist where tax is owing, for many of our clients we are able to reduce their tax bill to zero.
So to summarise, if you are a US citizen or Green Card holder, and you have income, then it is likely you need to be filing.
This also covers any US citizen who has never been to the US.
For a more detailed explanation, please see below:
To begin with, US tax residency is linked to citizenship. Tax residency is not usually related to residency in an immigration sense, but rather a determination of which country (or countries) your tax home is. It is important not to confuse this with another IRS rule of a ‘tax home’ which deals with work across multiple states.
For most people worldwide, they are usually only a tax resident of a single country, the country where they reside. However, the US is one of a handful of nations which consider a citizen of the US to be a tax resident regardless of where they live. In this case, you may be a tax resident of two countries (your home country, and the USA).
So, now that we know that as a US citizen, you are a tax resident of the US, then we can determine that a US tax return must be filed if your income falls above certain thresholds.
This means that a tax return must be filed to the US each year in which you have income, covering the calendar year period of the prior year (for example, in 2020 a tax return covering the period 1st January 2020 to 31st December 2018 must be filed).
In the case that you have tax residency in two countries, or income from multiple countries, tax treaties are used to determine which country has the right to tax. This is determined as part of the tax return preparation process, and uses complex understanding of the local tax rules, US tax rules, and the tax treaty in place.
It is essential that any person subject to US taxation (i.e. citizen or Green Card holder) files their required returns. The IRS has extremely strict and punitive penalties for those who do not meet their filing obligations. This is well publicised, and due to FATCA legislation, the avenues for the IRS to track US citizens failing to file are much simpler than they have ever been.
If you’re unsure if you having a filing obligation, or wish to learn more, please call us today.
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Disclaimer: Information on this website is of a general nature and is not intended for use without professional advice.