Creating a business entity is dead easy. But it’s important to remember that what takes a few minutes to create can take months of work and thousands of dollars to unwind.
Tax filing status in the US is often contradictory, and definitely less than intuitive. Avoid assumptions about how you are going to file, and file truthfully.
You might not live where you think, at least as far as the IRS is concerned. Don’t blow off the IRS because you don’t think you have ties to the US.
The US saves tax benefits for its own retirement plans, but often there aren’t any similar benefits when it comes to foreign retirement plans. This makes clients upset, understandably, because they are being taxed in the US on income that often isn’t taxable in their home country.
US tax compliance rules are always changing. Some of these changes are helpful, but many are not. Just because a tax benefit existed before, doesn’t mean it will remain available, but new laws can bring new benefits.
Foreign corporations are a big tax trap in the US, but planning is possible. Always report your foreign corporations, because there are IRS huge penalties if you don’t, but also expect that you will lose most of the corporate benefits you get from other countries.
Accounts that have to be reported as foreign trusts on Form 3520 and 3520A are penalty machines for the IRS. Abandon any ideas about fairness, logic, or reason, when it comes to foreign grantor trusts.
One of the more difficult US international tax rules has to do with foreign investments, specifically investment funds; what the IRS calls ‘passive foreign investment companies’ or ‘PFICs’. Watch your holdings carefully if you hold foreign securities, since investment funds are very common, and let your tax advisor know as soon as possible if you think you own these PFICs.
Foreign tax credits are a very important benefit if you are a US taxpayer with foreign income. But not every type of tax in the US can be reduced or eliminated by a foreign tax credit, only income taxes and only on foreign income.
Just because your home country has higher rates than the US in general doesn’t mean the foreign tax rates you actually pay on your foreign tax returns are higher. If you accept tax benefits in your home country, you have to be prepared to accept a drawback on your US tax returns.
One of the most common questions that clients have is ‘why do I owe US tax’? There are a lot of steps to computing the US taxes you owe, and you can’t assume all steps are exactly the same as the country where you live.
Don’t count on itemizing deductions on your US tax return if you are an expat or living outside the US. Just because you itemized deductions or took the standard deduction before, it doesn’t mean that you are going to do the same thing every year.
Here’s a quick primer on itemized deductions, and the limitations that apply. Don’t worry about itemizing deductions and keeping all your medical receipts, unless the US tax laws change again.
Sometimes we have to ask for information you wouldn’t normally expect to provide. We are motivated to make the process of preparing your US tax returns as smooth as possible, while reducing risk along the way.
The client relationship for us is one of trust, but it has to run both ways. We sometimes assist clients who are tempted to do something we call ‘trickle-truthing’, where the client decides what information we need, and what is relevant, when we request tax information and records. Please remember that we are not your adversary, so please don’t shoot the messenger or hold back important information.
When it comes to reporting your various accounts on forms like the FBAR, 8938, and 3520, don’t assume that just because an account is small, that the IRS isn’t interested in it. Be aware of your small accounts, and please share the details with us.
Risk of audits or penalties from the IRS unfortunately aren’t based on normal ideas of right and wrong. Clients will often say “I haven’t done anything wrong”. Our recommendation is to remain open and be realistic about IRS risks we identify.
Clients are sometime confused by the forms on their final US tax return. Keep in mind that your exit year is not a normal year, so prepare yourself that the returns may look a little different.
When you have self-employment in a foreign country, you could be required to pay self-employment taxes in the US. Take the additional step of obtaining a Certificate of Coverage. If you need to know if your home country is eligible, just ask.
