U.S. Social Security, Medicare, and Self-Employment Taxes for Expats

What do American Expats needs to know about U.S. Social Security, Medicare, and Self-Employment Taxes while they are living abroad?

The way Americans living abroad must pay these taxes depends on their employment situation

  • If you are working as an expat of a U.S. corporation, that employer will normally withhold Social Security and Medicare taxes on your W-2 earnings. In certain counties with which the U.S. has established a Social Security Totalization Treaty, American expats can participate in that country’s social insurance system, and not have U.S. Social Security and Medicare taxes withheld from your paycheck.
  • If you work for a foreign employer under the laws of a foreign jurisdiction, you are not required to pay U.S. Social Security tax.U.S. Social Security, Medicare, and Self-Employment Taxes. There may be benefits under the foreign tax credit that can help alleviate the tax burden that you face.

 

Self-Employment Tax for American Expats

If you are self-employed, (an independent contractor who would normally receive a 1099) you are obligated to pay, in addition to your income tax, a U.S. Self-Employment tax that is both employer and employee’s share of Social Security and Medicare taxes. This is the law no matter if you are working abroad or working in the United States. It is best to check with IRS guidelines to determine if you are self-employed while living as an expat.

When you file your annual tax return, you must file a Schedule C (which can also be used to deduct business expenses) and pay U.S. Self-Employment Tax on your net earnings by filing a Schedule S-E. Currently, the Self-Employment Tax rate is 15.3% of net Schedule C income (expense deductions) before any foreign income exclusion and the taxable net self-employment rate is not reduced by the previously mentioned foreign tax credits. Net earnings are income after expenses are deducted and include the income earned both in a foreign country and in the United States.

 

Other Self-Employment Issues for American Expats

An American Expat that is self-employed should also consider investigating the local country filing requirements are significant tax might be owed to the local jurisdiction or where the income is earned. You’re likely required to pay estimated taxes every quarter if you’re self-employed. Estimated tax may be used as reference for paying your self-employment tax.

ITIN for Immigrants

What information do immigrants need to know about getting an ITIN?

If you earned income in the United States as a resident, citizen or visitor, you must file a tax return. If you can not obtain a Social Security number, you will need a Personal Identification Number (ITIN) to file your taxes and get important loans.

 

What is an ITIN (IRS Individual Taxpayer Identification)?

  • The ITIN is an identification number for individuals who can not obtain a Social Security number to file taxes and receive a refund for income retained by the IRS (IRS).
  • People who can not get a Social Security number can get an ITIN despite their immigration status or country of origin. .
  • By law, you can not have an ITIN and SSN .
  • The ITIN is a nine-digit number that always begins with the number 9 and has a 7 or 8 in the fourth place (for example 9XX-7X-XXXX).

 

Who needs an ITIN?

  • You, your husband / wife or any dependents who can not get a Social Security number must apply for an ITIN to be included in a tax return.
  • If you have dependents living in Mexico or Canada and sends more than 50 percent of the money they need for your expenses, you can apply for an ITIN for each of them and include them on your tax return. This can increase the reimbursement you receive or reduce the amount of tax you owe.

 

Can I use an ITIN to bank accounts and loans?

  • Some banks, credit unions and financial institutions accept the ITIN to open savings accounts or checking accounts that pay interest. You can also apply for loans to purchase a car or a home with ITIN
  • The ITIN does not authorize work and should not be used to apply for job

 

How I can apply for an ITIN?

  • Need the Form W-7 , your tax return and an additional form of identification (see list below) to apply for an ITIN.
  • Mail the form and your tax return to the address that is included in the instructions for Form W-7.
  • You will receive a letter in the mail with your ITIN between 6 and 8 weeks after submitting your application (you will not receive a card with your ITIN).

 

What documents do you need to apply for an ITIN?

  • Original passport (or a certified or notarized copy of passport), 
  • Two of the following documents, which are in effect (including at least one photo ID and an identification of the country of origin):
    • National identification card (with photo, name, current address, date of birth and expiration date)
    • Birth certificate (original or notarized copy)
    • Driver’s license in the United States
    • Driver’s license from their country of origin
    • Identification credential status (U.S.)
    • Credential voting record of their country of origin
    • Military Identification Card U.S.
    • Military identification card from their country of origin
    • Visa
    • Identification card with photo issued by USCIS (Citizenship and Immigration Services)
    • Medical records (dependents under 15 years only)
    • Academic records (only for dependents and / or students under 19 years)

 

How do I declare my income if I have an ITIN?

If you are reporting the wages you have earned, you must include the social security number listed on the W-2 or 1099 forms you received the income section fill in your tax return. The person who has the ITIN will receive credit for the income declared. 

 

Tips for Filing Taxes as an American Abroad

There are many special rules that expats must consider when filing their income taxes with the IRS. If you are a U.S. citizen or resident, you must report income from all sources within and outside the United States.

 

Tips for Filing Taxes as an American Abroad

The rules for filing tax returns are generally the same if you are living in the United States or abroad. Here are seven tips from the IRS that U.S. taxpayers with income from abroad should know:

 

American Expat Tax Tips

  1. Declare Worldwide Income . The law requires U.S. citizens and resident aliens to report any income from abroad. This includes income from trusts and bank accounts and securities abroad. New laws such as FATCA will ensure that the IRS can find out if taxpayers are hiding information about foreign bank accounts. This even applies to expats who are working jobs and living abroad.
  2. Present Tax Forms Required. Expat might need to file Schedule B, Interest and Ordinary Dividends, with your tax return in the United States. You will also need to submit the Form 8938 , Statement of Foreign Financial Assets specifics. In some cases, you need to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts.
  3. Consider an Automatic Extension.  If you are living abroad and can not file your return by the deadline of April 15, you may qualify for an automatic extension of two months. Then you have until June 16, 2014 to file your tax return in the United States. This extension also applies to those serving in the armed forces outside the United States. You must attach a statement to your tax explaining the reason why you qualify for the extension declaration.
  4. Check Income Exclusion Foreign Coming. If you live and work abroad, could claim the exclusion of foreign earned income foreign earned income exclusion . If you qualify, you pay taxes up to $ 97.600 in their wages and other income from abroad in 2013. See Form 2555 , Foreign Earned Income, or Form 2555-EZ , Foreign Earned Income Exclusion, for details.
  5. Do not Ignore the credits and deductions. You could take a credit or deduction for taxes paid to a foreign country. These benefits can reduce the amount of taxes you must pay if both countries will charge you taxes on the same income.
  6. Get Tax Help Outside the U.S. The IRS has offices in Frankfurt, London, Paris and Beijing. IRS staff in these offices can help with tax filing issues and answer your tax questions.

Last year I filed Form 1040 instead of Form 1040NR, now what?

What is a 1040NR?

I’m a foreigner who earned income on a J-1 visa that spanned over 2012 and 2013. Last year, as I had a US address, I filed a 1040 with TurboTax. However, now that I’m back home (in a foreign country), there were issues filing electronically with TurboTax again and TurboTax staff pointed out that as I was considered a non-resident alien the whole time (days spent on a J-1 do not count towards the substantial presence test), I should file Form 1040NR instead and TurboTax can’t do that.

 

Last year I filed Form 1040 instead of Form 1040NR, now what?

So that’s cool for this year, but what about last year? It took a while (I don’t remember the exact terminology but they sent me a letter saying my form was being investigated or something) but the IRS did end up sending me a return without complaining.

I should mention that I’m in the process of finding a CPA (which is kind of hard when you don’t live in the US), would it be only to help me do this year’s 1040NR, and that of course I’ll be asking him the same thing. However, for the time being, I’d like to have an idea of how big of a deal it is.

 

How to fill out 1040NR?

Technically you should have filed a Form 1040NR for 2012, as the Form 1040 is only for full-year U.S. residents and citizens. There will likely be a difference in the income tax liability because there are certain deductions that are allowed on the Form 1040 that are not allowed on the Form 1040NR (the most important being the standard deduction).

Who should file 1040NR?

Although the IRS processed the original 2012 return and issued a refund, that does not mean the return was filed correctly. You should technically file an amended 2012 return such that you file a Form 1040NR instead of a Form 1040. The amended return form is 1040X. In general I would expect there to be a balance due with the amended return, but in some cases there may be no difference if your income was relatively small and you worked in a state that assess a state income tax.

 

J-1 Visa and 1040NR

On a side note: in certain circumstances the employment income you earn on a J-1 VISA may be exempt from U.S. income tax. However, that generally requires you to have been paid out of a non-U.S. payroll and the associated payroll could not have been cross-charged to a U.S. entity. If you received a Form W-2 from your employer reporting your U.S. wages and withholdings then this exception likely does not apply.

Form 4868: Application for Automatic Extension of Time to File U.S. Individual Income Tax Return

Using the Automatic extension to file – Form 4868

If you need additional time to file your return, you can make the Form 4868: Application for Automatic Extension of Time to File U.S. Individual Income Tax Return (Application for Automatic Extension of time to file the statement of federal income tax of individuals in the U.S.). When using Form 4868, the IRS allows you to request an extension to file taxes for an additional 6 months. You will have until October 15 to file your tax return after filing this form. You must request the extension no later than the deadline for submission of the regular tax return on April 15 of the tax year.

Estimated tax liability and Form 4868

Although the extension for the submission of the statement gives you more time to make your return. Filing a tax extension does not give you extra time to pay the taxes you already owe. Therefore, it is essential that you must calculate how much taxes you owe and pay that amount when you file Form 4868 to extend your tax return.

Form 4868: Application for Automatic Extension of Time to File U.S. Individual Income Tax Return

If  you make a payment when you file your Form 4868, include it in the section “Payments” (payments) of your Form 1040 when you file your return. If you do not pay the full amount you owe, the IRS will charge you interest on the unpaid balance until a taxpayer pays the full amount.

Filling out Form 4868

If you do not pay at least 90% of the amount of taxes  you owe you, you could also be subject to a penalty for late payment. The penalty is usually ½ of 1% of the amount owed per month to a maximum of 25%. If you file your Form 4868 no later than the deadline for filing the return (April 15), you will be subject to a late filing penalty after the deadline. The penalty is 5% of the amount due for each month, up to a maximum 25%.

Special rules for expats abroad

Expats living abroad automatically have 2 extra months to file your return and pay the amount due without
request an extension if the following circumstances apply:
  • You are a U.S. citizen or resident alien.
  • You are outside the country of the due date for submission.
 “Out of the country” means any of the following situations:
  • You live outside the U.S. and Puerto Rico or your principal place of business is outside the U.S. and Puerto Rico.
  • You are military personnel.
Most states also allow an extension of the deadline for submission of a tax return. It is essential for finding out each state’s specific requirements for file an automatic extension of pay taxes. Lastly, always remember, that the faster you file your tax return, the faster you will receive a tax refund.

When to use Form 4868?

Form 4868 is a tax extension for individuals reporting their income to the IRS. This includes all taxpayers who file 1040s, contractors who file 1099s, as well as single-member LLCs and Schedule C Sole Proprietors. Filing a tax extension will extend your tax deadline to October 15 for the following income tax returns:

  • Tax Form 1040
  • Tax Form 1040A
  • Tax Form 1040EZ
  • Tax Form 1040NR
  • Tax Form 1040NR-EZ
  • Tax Form 1040-PR
  • Tax Form 1040-SS

 

Submitting Form 4868

It’s important to note that submitting Form 4868 does not extend the time for payment of tax, which is still owed by the original due date of your return (April 15). You will need to give an estimate of your tax due when filing for a tax extension ― and you can pay none, all, or part of your estimated Federal income tax due using Electronic Funds Transfer (EFT) directly from your bank account.

Exit Authorization and Departure Clearance with Tax Laws

If you are a resident or nonresident alien who goes outside the United States generally have to demonstrate compliance with the laws governing income tax in the United States before leaving the country. This can be done by obtaining IRS approval document output certifying compliance with tax obligations, commonly called “exit permit” or “permit boarding”.

 

There are six categories of persons who are not required to obtain exit permits or boarding.

  • Category 1. A representative of a foreign government having diplomatic passport, members of his family, and servants accompanying them.
  • Category 2. Employees of international organizations and foreign governments (other than those exempt under Category 1) and members of his family.
  • Category 3. Foreign students, industrial trainees, and low cultural exchange visitors, including their spouses and children, who enter the country with a visa F-1, F-2, H-3, H-4, J-1, J -2, or Q.
  • Category 4. Foreign students, including their spouses and children, who enter the country with a visa type M-1 or M-2.
  • Category 5. Certain other aliens who are temporarily in the United States who have not received any taxable income during the tax year up to and including the date of departure or during the previous tax year.
  • Category 6. Foreign residents of Canada or Mexico who travel frequently between those countries and the United States because of their occupation.

 

Exit Authorization and Departure Clearance with Tax Laws

To determine if you are in one of these excluded categories, see Publication 519, U.S. Tax Guide for Aliens (Tax Guide for Foreigners in the United States), in English.

If you do not fit any of the above categories, you must obtain an exit permit or boarding. To obtain permission, file Form 1040-C or Form 2063 (whichever applies) to your local IRS office before leaving the United States.

 

IRS Form 2063

This is a short form requesting certain information but does not include tax calculation. Foreign following that will come out of the country can get their furloughs or shipment on Form 2063.

  • Foreigners, both residents and non-residents, who have had no taxable income for the tax year up to and including the date of departure or during the previous tax year if the period has not expired for filing your income tax for that year.
  • Resident aliens who have received taxable income during the tax year or during the previous year and whose left does not prevent the collection of taxes. However, if the IRS has any information to indicate that foreigners are leaving the country to avoid paying their income tax, they have to file a Form 1040-C.

Foreigners in any of these categories that have not filed a tax return or paid income taxes on any income tax year must file the return and pay the income tax before they can issue them exit permit or boarding on Form 2063.

 

IRS Form 1040-C

If you need to obtain an exit permit or shipment and does not qualify to file Form 2063, you must file Form 1040-C.

Normally, all income received or reasonably expects to receive during the tax year up to and including the date of departure must be reported on Form 1040-C and pay the tax on this. When you pay the tax shown as due on Form 1040-C, and file all returns and pay all tax due from previous years, will receive an exit permit or shipment. However, the IRS may allow you to post a bond as security for the payment in lieu of paying taxes for some years.

 

When and how to apply for an exit permit or boarding

You must obtain an exit permit before boarding or leaving the United States. You must ask permission to leave or shipment no earlier than 30 days before the date of your trip but at least 2 weeks before your departure. To obtain exit permits, visit the Taxpayer Assistance Center (IRS office that taxpayers receive no appointment) closest. If you are married to a foreigner who will leave the country with you, you both have to go to the IRS office. For information on the location of the Taxpayer Assistance Center (IRS office that receive taxpayer-ins) to your nearest, call 800-829-1040 or visit www.irs.gov .

You must bring the following documents and information for the current year that apply to you:

  • A valid passport and alien registration card or visa.
  • Copies of tax on the income of the United States for the last 2 years with proof of payment of balances due.
  • Test all estimated tax payment for the last year and this year.
  • Documents corroboration of business deductions and itemized deductions claimed.
  • Supporting documentation for the dependents claimed.
  • A certification from each employer showing wages paid and the taxes withheld from January 1 to the date of departure. (For this purpose, you can use a stub payroll deduction from your final paycheck of charge, if this is indicated).
  • If you are self-employed, you must bring your profit for the current year to date of departure and loss.
  • Documents showing any gain or loss from the sale of personal-use property and / or property, including capital assets and goods.
  • Documentation for scholarships and research.
  • Documentation indicating entitled to any special benefit from tax treaties.
  • Documents that verify your date of departure from the United States, such as a plane ticket.
  • Documents verifying taxpayer identification number of the United States, such as a social security card or a CP-565 notice showing the number of individual taxpayer identification (ITIN).

If you have these documents and pay all the tax due, you will receive an exit permit or shipping immediately. For more information, see Publication 519.

Form 2555 Foreign Income Exclusion Expat Tax

How do you qualify for the Foreign Income Exclusion? And do I need to File IRS Form 2555?

For U.S. expats who live abroad, they could be entitled to substantial tax savings because the IRS allows you to exclude a significant portion of your foreign earned income from U.S. taxation on IRS Form 2555. The basic gist of the tax form is that you can use Form 2555 to figure a taxpayers foreign earned income exclusion and also a taxpayer living outside of the countries housing exclusion or deduction. The main rule is that you cannot exclude or deduct more than your foreign earned income for the year. If you meet certain foreign residency requirements, you may be able to exclude up to $99,200 of earned income in 2014 and a portion of your foreign housing expenses from U.S. income tax. Note that this exclusion does not apply to self-employment taxes.

 

Form 2555 Foreign Income Exclusion Expat Tax

If you have your tax home in a foreign country and satisfy the requirements of the physical presence or the bona fide residence test, then you may be eligible to claim the exclusion and will be required to file Form 2555 and  attach it to Form 1040 when you either e-file your tax return or mail it to the IRS.

 

Filing Form 2555 with your Tax Return Information

The main purpose of IRS Form 2555 is for the IRS to evaluate whether you qualify for the foreign earned income exclusion. The form asks questions related to establishing the physical presence and bona fide residence tests. If you qualify, you can use this form to figure your foreign earned income exclusion and your housing exclusion or deduction. You cannot exclude or deduct more than your foreign earned income for the year. You may use Form 2555 and Form 1116 on the same return, but cannot use the same earnings (and taxes paid relating to those earnings) on both forms.

Taxpayers only need to fill out either Part II or Part III, depending on whether a taxpayer qualifies for the foreign earned income exclusion under the physical presence or bona fide residence test. Before filing Form 2555 with the IRS, one should read the IRS publication on the matter to determine if they qualify for the foreign income exclusion. The following example will help determine if a taxpayer will need to file a From 2555.

 

Form 2555 Physical Presence and Bona Fide Resident Tests

The difference between the physical presence and bona fide resident requirements for the foreign exclusion are important to understand. You must meet one of these two tests to qualify for the Foreign Earned Income Exclusion of FEIE

  • Under the physical presence test, a taxpayer must be in the foreign country for a total of 330 days during a consecutive 12-month period.
  • To qualify for the exclusion using the bona fide residence test, the IRS requires you to maintain a residence in the foreign country for an entire calendar year.

Once the correct test is determined, the taxpayer can then focus on either Part II or Part III of the IRS Form 2555.

 

How long living out of country to file Form 2555?

For example, if you plan on living out of the country for more than 330 days out of the year, you can divide the number of days you have worked in the the foreign this year by 365. Then multiply that decimal by $92,900 (Or the amount of the exclusion for the foreign year). Whatever the product is, you may recognize that income as an exclusion for your tax return. Subsequently, when you file your next years tax return, you may divide the number of days in the next year you worked abroad by 365 and multiply that decimal by $95,100 (adjusted for inflation) to find your next exclusion.

 

IRS website and Form 2555

It is always important to check the IRS website and Form 2555 for the most accurate information on the amounts excluded under the Foreign Income Exclusion for expats who are filing american taxes will living abroad.The FEIE is generally advantageous to use when income tax rates in the foreign country are lower than in the U.S. and/or your total earned income is below the exclusion threshold.

 

Current IRS Links for Form 2555

The IRS has comprehensive information pages to help people with expat taxes . Below are links to Form 2555 from the IRS.

tax forms

FATCA Form 8938 Tax Filing Info

American expats living abroad in 2013 will have to file a new form with their taxes in 2013. FATCA is a new law aimed at Americans living abroad and foreign banks to cut down on tax evasion. It essentially will give the IRS a view in Americans foreign bank accounts and provide the IRS much need information for tax enforcement and will prevent tax evasion.

 

Information About FATCA Form 8938

However, this law presents a set of new compliance requirements for american expats who live abroad and who might have foreign bank accounts. According to the IRS, U.S. citizens, U.S. individual residents, and a very limited number of nonresident individuals who own certain foreign financial accounts or other offshore assets (specified foreign financial assets) must report those assets.

 

FATCA Form 8938 Tax Filing Info

  • American Taxpayers with a total value of specified foreign financial assets below a certain threshold do not have to file Form 8938 with their tax returns.
  • However, if the total value of their accounts is at or below $50,000 at the end of the tax year, there is no reporting requirement for the year, unless the total value was more than $75,000 at any time during the tax year
  • The threshold is higher for individuals who live outside the United States and certain other requirement.
  • Thresholds are different for married and single taxpayers

These Americans who must file FATCA Form 8938 should begin gathering information about their foreign bank accounts well before any tax return is due. Since the IRS will have foreign banks in compliance by 2015, the IRS will essentially know which taxpayers have not complied with FATCA

 

FATCA Reporting Requirements for Form 8938

The reporting requirement for Form 8938 is separate from the reporting requirement for the FinCEN Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”) (formerly TD F 90-22.1). An individual may have to file both forms and separate penalties may apply for failure to file each form. Again, since the IRS will have bank account details provided by the banks, they will eventually know which Americans have not properly filed the FBAR form.

New FBAR Form 114 for 2014 replaces TD F 90-22.1

New FinCEN Form 114  replaces Report of Foreign Bank and Financial Account (FBAR), Form TD F 90-22.1.

For 2014, there are new FinCEN regulations that revise the rules applicable to taxpayers who must file  FBAR and Form TD F 90-22.1 filings. This is important for taxpayers who submit Reports of Foreign Bank and Financial Accounts (FBARs) jointly with spouses, or wish to submit them via tax preparers. It is absolutely essential to file the FBAR, now FinCen 114, by June 30 or be at risk for steep penalties. With the introduction of FATCA, the IRS has more tools at its disposal to find out who is not properly filing their FBAR forms.

 

FinCEN Form 114 and FBAR

FinCEN released FinCEN Form 114(a), called, Record of Authorization to Electronically File FBARs. This form replaces the archaic form known at TD F 90-22.1.

The regulations state that a copy of this form would be maintained by the filer and the account owner. but not submitted to FinCEN. The form would be made available upon request by FinCEN or the Internal Revenue Service (IRS). FinCEN is also introducing new space on the form for filers that allows them to provide reasons for late filing and an easy place for information related to third-party preparers.

 

New FBAR Form 114 for 2014 replaces TD F 90-22.1

Important Dates for FBAR filing: Effective July 1, 2013, the FBAR must be filed electronically through an e-file system and must be received by on or before June 30th of the year immediately following the calendar year being reported.

Most importantly, this filing date will not be extended. It is absolutely essential to report foreign bank accounts by this date or be at risk of severe penalties.  All references to FBAR Form TD F 90-22.1 will be replaced with a reference to FinCEN Form 114 on Schedule B, Line 7b of Form 1040 for tax year 2013.

 

When is FBAR (FinCen 114) Required?

An FBAR is required by a taxpayer if the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year for which the tax return is being filed.  If you have more than $50,000 in a financial account, a taxpayer will also need to file the FATCA form 8938 during tax year 2013 to further remain in compliance with new international tax laws in addition to the FBAR form.

Penalties for failing to file an FBAR are some of the most severe the IRS has to offer. In addition to potential monetary penalties, there is a great potential for criminal penalties as well. WIth FATCA coming into full effect in the next few years, the IRS will have more tools to see if Americans are holding money in offshore accounts and enforcement efforts will be increased. Taxpayers are advised if they filed FBAR Form TD F 90-22.1 to learn about the new FinCEN Form 114 right away to make sure they are properly disclosing offshore accounts to the IRS for tax purposes.