“April 15 is lurking around the corner, so if you have yet to file your federal tax return, it’s time to set aside a few hours, gather together your financial records, and flee the country.”
Somewhere between 3 and 6 million U.S. citizens are expatriates overseas. Many more in the United States dream of being expatriates. The allure of a beachfront home or a mountainside chalet in a country where the U.S. dollar goes farther than it does back home is very hard for many to resist. For others, it’s a political statement, and for yet others, it’s an opportunity to invest in emerging markets. Whatever the reason, there are many in the U.S. who wish to live elsewhere. I was stationed in Germany in the late 1990s when I was in the Army; I wholeheartedly understand the draw, and there are tugs on my heartstrings every time I have a good German beer!
If you plan on making the leap and becoming an expatriate, then there are a couple of Internal Revenue Service regulations which may still affect you. The United States is the only industrialized country in the world which taxes its citizens no matter where they live, so unless you plan on renouncing your citizenship when you expatriate (which comes with its own set of tax consequences), you will still have to file a U.S. tax return under the same set of requirements that you would had you lived in the United States.
There are two more aspects of filing with the Internal Revenue Service that you must be aware of. The first is if you have assets in foreign bank accounts which at any point in the previous year totaled $10,000 or more. The Foreign Bank Account Reporting (FBAR) requirement is intended to make sure that you’re not squirreling away money in offshore accounts to fund illegal activities. The second is the Foreign Account Tax Compliance Act (FATCA, not to be confused with FACTA, which relates to credit reporting), which, if you meet certain foreign asset thresholds, will require you to report your overseas assets to ensure tax compliance.
These reporting requirements are no joke.
For many years, people did not report their overseas bank accounts; however, recently the Internal Revenue Service has begun to crack down, particularly after a voluntary reporting amnesty period kicked in. They publish their list of violators in a gleeful report of the guilty. The penalties for non-compliance are pretty harsh, and they can include jail time. The Internal Revenue Service reopened the amnesty program on January 9, 2012, but the ending period for the new overseas voluntary disclosure program (OVDP) is uncertain.
Note: As of July 1, 2014, the penalties for violating these requirements have jumped dramatically. According to the IRS, the penalty is 50% instead of the old 27.5%.
While I am not a lawyer nor an accountant, and if you’re going to have overseas assets or accounts, YOU SHOULD CONSULT YOUR ATTORNEY OR CPA (can I make myself more clear????), it seems as if there are two paths you can take with regards to your assets if you plan on moving overseas and living that idyllic expatriate life.
The first option, and the one that seems the cleanest and easiest to me, is to maintain all of your accounts in the United States. If you earn money, have it deposited in your U.S. banking account. That way, you don’t have to worry about FBAR or FATCA; you only need to file for the Foreign Earned Income Credit if it applies to you. Withdraw the money you need periodically, and make sure that you have an account which doesn’t nail you with foreign ATM fees, such as Charles Schwab.
The second option is to have assets in the place where you live and to file the FBAR and FATCA forms. There are many legitimate reasons for having accounts in the place where you live, particularly if you’re investing or opening a business in the place where you’re expatriating; however, you want to make sure that you are on the right side of the law. CONSULT WITH YOUR ATTORNEY OR CPA and make sure that these advisors are well-versed in similar situations. You do not want to be Marc Rich waiting for a presidential pardon!
Here are some resources you can look at so that you can have an intelligent discussion with your attorney or CPA should you think that you would fall under the reporting requirements of FATCA or FBAR:
- FATCA filing requirements
- More about filing requirements with foreign accounts
- FBAR and FATCA disclosure requirements
- Ten Things to Know About Offshore Bank Accounts
Are you an expatriate who needs financial planning services? Check out our expatriate financial planning service and see if it’s right for you.
Have you ever thought about expatriating? Tell us what you’ve been thinking in the comments below!