Taxing Times

Recently, a seemingly casual posting in the AAUK Facebook group triggered an impassioned and emotional discussion. The topic? Not casting procedures or the value of union membership or even the polarizing state of politics in the U.S. or UK; no, the subject was one that strikes terror in the heart of every American working abroad  - U.S. tax policy. An American member asked whether it mattered that he hadn’t filed tax in ten years. Then the deluge of replies came in.

As ever when this subject raises its ugly head, the Canadians among us can sit back and chortle smugly, safe in the knowledge that their country’s administration makes few demands on its citizens living abroad. For the rest of us, it’s worth revisiting the ins and outs of what our duties as expats Americans are since a fear faced, is a fear conquered.

Like it or not, fair or not, all American citizens – and, by the way, anyone who has ever worked in the USA, citizen or not (so some of you Canadians might not be so smug after all) – must file U.S. taxes every year. It doesn’t matter if you’ve lived abroad for 30 years. Or you left when you were two. Or you don’t think you earned much last year. Or you are a dual national. It varies depending on your circumstances, but if you earned over $10,350 (roughly £8000 at current exchange rates) the IRS insists you file, and the penalties for not doing so are getting harsher.

As of this year, renewal of your U.S. passport is now tied to your tax returns. As part of the renewal process, along with your photo, forms, and fee, you are required to submit your Social Security number, in order that the government can check to see whether you have been filing, and whether you owe any back taxes. If you haven’t been filing, or if you owe taxes, your passport may not be renewed until everything is in order.

The irony is, for the vast majority of us, we will owe nothing to the IRS since we already file and pay taxes over here in the UK. If your earnings are below the Foreign Earned Income Exclusion, which for 2016 was $101,300 (approximately £78,000 at current exchange rates) then you still need to file, but won’t owe anything. Be careful, though; this is on earned income only, and excludes pensions, interest, dividends, and capital gains. Ask a qualified accountant for more detailed information on this.

That’s the tax side of it. Then there’s the “wealth” side of things, otherwise known as the money that you have. (Again, Canadians, you can keep having a nap.) There are now two separate reporting requirements, FBAR and FATCA, which Americans must file for “foreign” bank accounts – foreign, that is, from the U.S. point of view, meaning any account held in any bank that is not on U.S. territory. In other words, if you are based in another country as we are, that pretty much covers most, if not all, of our bank accounts. And the IRS wants to know about them. Everything about them. Who you bank with, what their address is, what your account numbers are, and crucially, what was the most amount of money in that account during the calendar year – in U.S. dollars. This is supposedly all in the name of cracking down on money laundering.

Looking at the FBAR first: This stands for Foreign Bank Account Report, and needs to be filed if the sum total of your holdings in all your accounts exceeded $10,000 at any point in a calendar year (approx. £7700 at current exchange rates.) By accounts, they mean everything – current, savings, ISA, bonds, and so on, even if you hold the account jointly with a non-American citizen, and even if you just have signatory power over it.

The form to file is the 114, and it must be filed electronically with the U.S. Department of the Treasury, in theory by April 15, but in practice you get an automatic extension to October 15 if you live abroad. Do note that this is separate from your taxes, and doesn’t really have anything to do with them.

In addition to this – Canadians, stop sniggering, Americans, stop weeping – there is FATCA, or the Foreign Account Tax Compliance Act. This needs to be filed with your taxes as Form 8938 if your foreign assets exceed $200,000 on the last day of the tax year, or $300,000 at any point during the tax year (approximately £154,000 and £230,800 respectively.) While this might seem less pressing for some, the fact is that it is imperative to get your reporting correct, as under FATCA, all of our banks are now reporting on our accounts directly to the IRS. You may recall receiving a letter from your bank within the past year or so asking about your nationality status, and possibly even your social security number – this is why. So much for data protection.

The good news is, there is help out there. If you haven’t filed for years, you are generally just required to file for the last three years to get back up-to-date, and the FBAR form, while tedious, isn’t difficult. In all likelihood, you won’t owe a penny. Whatever you do, though, don’t ignore this and hope it will all just go away. The U.S. government is very hot on assets abroad, and the penalties if you don’t comply and file are ruinous. It is well worth the expense to get a good UK-based accountant who deals with U.S. taxes, just for protection and peace of mind.

As performers, we run our own small businesses; and, as with any business, it is down to us to keep on top of administrative tasks such as these. Bottom line, if you are an American citizen based in the UK, don’t ignore U.S. legislation. It is your responsibility to file your taxes and the FBAR, whether or not you think it’s fair. On the plus side, because of this, we get rights that many others nationalities living abroad don’t – the right to vote, for instance, which Brits living abroad are denied after 15 years... something many of them discovered, to their great dismay, during the EU referendum.

For more information, see https://www.americansabroad.org/us-taxes-abroad-for-dummies-update/