When I moved to the states a number of years ago, I left a good chunk of savings back home (Australia). The primary reasons for this were that I wasn’t sure for how long I would be living in the US and more importantly, I was getting a much better rate of return on my savings account back home. When it came to tax time, I simply declared my dividend and interest earnings less any Australian taxes paid on my US return, and filed my taxes. The whole thing was relatively uncomplicated and painless.
Fast forward a few years and the the process has become much more involved as the IRS goes after foreign income and overseas bank accounts. Here’s what the IRS is now requiring for people that need to file a US tax return.
1. World-wide income Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. U.S. citizens and resident aliens residing overseas or those serving in the military outside the U.S. have until June 15, 2012 to file their federal income tax return. To use this automatic two-month extension beyond the regular April 17, 2012 deadline, taxpayers must attach a statement to their return explaining which of the two situations above qualifies them for the extension.
2. Which forms to use? In most cases, affected taxpayers need to fill out and attach Schedule B, Interest and Ordinary Dividends, to their tax return. Certain taxpayers may also have to fill out and attach to their tax return the new Form 8938, Statement of Foreign Financial Assets. Some taxpayers may also have to file Form TD F 90-22.1 with the Treasury Department by June 30, 2012.
3. Many Americans who live and work abroad qualify for the foreign earned income exclusion. If you qualify for tax year 2011, this exclusion enables you to exempt up to $92,900 of wages and other foreign earned income from U.S. tax.
4. You may be able to take either a credit or a deduction for income taxes paid to a foreign country r a U.S. possession. This benefit is designed to lessen the tax burden that results when both the U.S. and another country tax income from that country.
5. U.S. citizens and resident aliens living abroad with adjusted gross income of $57,000 or less can use approved tax software to prepare their returns and then electronically file them for free.
6. If you live outside the U.S., the IRS has full-time permanent staff in four U.S. embassies and consulates to help with filing your taxes. A list is available on the IRS Website – irs.gov – in the Contact Your Local Office Section, under International. These offices have tax forms and publications that can help you with filing issues and answer your questions about notices and bills.
So pay attention to your foreign income tax filing requirements, or face some pretty stiff IRS penalties. While you can use tax software to help figure your foreign taxes, consider hiring an accountant if you are reporting more than $10,000 in foreign income or have a complicated return.