For American Expats: A U.S. Tax Form Checklist
This article is for general informational purposes only and is not intended as specific legal or tax advice. Please consult your legal or tax advisor for advice relevant to your situation.
At this time of year, many Americans living overseas are collecting the various documents needed to file their 2018 U.S. taxes. This year, in addition to the sometimes obscure U.S. tax forms that U.S. citizens living overseas are required to file, expats need to be aware of a number of changes from the Tax Cuts and Jobs Act (TCJA) enacted at the end of 2017.
For all taxpayers, these changes include new tax rates, an increased standard deduction, and limited itemized deductions. There are also changes specific to expats filers. Below we’ve provided an updated checklist to help you with filing; this list should be used as a starting point only. Please note that U.S. citizens and green card holders cannot "opt out" of filing or paying U.S. federal income tax even if they're legally residents in another country. More detail on expat filing requirements as well as the details of each form can be found on the IRS website: www.irs.gov.
- Revised Form 1040 and Its Six New Schedules. There are no longer separate 1040A and 1040EZ forms, so all filers should use the new, revised 1040 form. Many of the sections formerly included on the 1040 itself have been separated into six new schedules, and filers may need none, some, or all of the new schedules. Before starting with your filing, take a look at the new 1040 Instructions to get an idea of which schedules you will need.
- FinCEN 114—Report of Foreign Bank and Financial Accounts (FBAR). If you own or have authority over one or more foreign financial accounts, including bank accounts, brokerage accounts, mutual funds, unit trusts, or other types of financial accounts, and the aggregate value of all your foreign financial accounts was over USD 10,000 at any time during the year, you're required to report all foreign financial accounts (even if some have zero or negative balance) each year to the U.S. Department of the Treasury. This form must be filed online through the BSA E-Filing System website.
- Schedule B—Interest and Ordinary Dividends. Importantly for expats, besides reporting interest and dividends, you must file Schedule B if you have a foreign bank or financial account or signatory authority over one, or if you received distributions from or were guarantor of a foreign trust. If any of those apply, file the schedule and be sure to check the “Yes” box in Part III 7a—according to the schedule instructions, this is required even if you aren't required to file the FBAR or FinCEN Form 114 outlined above.
- Form 2555—Foreign Earned Income. If you qualify, use this form to exclude foreign earned (salary) income of up to USD 103,900 for 2018, as well as potentially exclude or deduct housing costs. The standard maximum housing expense limitation for 2018 is USD 31,170. After deducting the base housing cost of USD 16,624, the maximum standard housing exclusion for 2018 is USD 14,546. However, greater deductions may be allowed in 2018 if you live in a high-cost city. For example, the maximum housing expense limitations are higher for Bangkok (USD 59,000), Hong Kong (USD 114,300), Singapore (USD 75,900), and Shanghai (USD 57,001).
- Form 1116—Foreign Tax Credit. If you've paid foreign taxes on foreign income (either from your salary or investments) and you haven't otherwise excluded the income from your U.S. taxes, you may be able to take a credit against any U.S. taxes owed by filing this form.
- Form 8938—Statement of Foreign Financial Assets. U.S. expats need to file Form 8938 for tax year 2018 if your filing status is Single, Head of Household, or Married Filing Separately and you had more than USD 200,000 in aggregate specified foreign assets on the last day of the year or USD 300,000 at any time during the year. U.S. expats who file Married Filing Jointly need to file Form 8938 if you have aggregate specified foreign assets of USD 400,000 on the last day of the year or USD 600,000 at any time during the year. Some examples of specified foreign assets include:
- Savings, deposit, checking, and brokerage accounts held with a bank or broker-dealer
- Any interest in a foreign-issued insurance contract or annuity with a cash-surrender value
- Stock or securities issued by a foreign corporation
- A note, bond, or debenture issued by a foreign person
- A partnership interest in a foreign partnership
- An interest in a foreign retirement plan or deferred compensation plan
- Real estate that is owned through a foreign entity, such as a corporation, partnership, trust, or estate
- An option or other derivative instrument with respect to any of these examples or with respect to any currency or commodity that is entered into with a foreign counterparty or issuer
- An interest in a foreign estate
For more information, see Basic Questions and Answers on Form 8938.
- Form 8621—Information Return for Passive Foreign Investment Company (PFIC). Passive foreign investment companies (PFICs) can include foreign-domiciled mutual funds, offshore investment schemes, foreign money market funds, or resident country tax-deferred funds such as Thai Retirement Mutual Funds (RMFs) or Long-Term Equity Funds (LTFs). If you own shares in a PFIC (either directly or indirectly), under updated regulations you're generally now required to file Form 8621 for each PFIC that you own on an annual basis if the aggregate value of all PFICs is greater than USD 25,000 at year's end, or USD 50,000 for joint filers.
In some cases, your PFIC may provide shareholders with a "PFIC Annual Information Statement." This statement allows you to elect qualified electing fund (QEF) treatment on Form 8621, resulting in U.S. taxation similar to a U.S.-domiciled mutual fund. If your PFIC does not provide this statement, your options are to either elect "mark to market" treatment or otherwise default to the more onerous "excess distribution" rules, which results in the highest amount of U.S. tax owed. PFIC rules and tax calculations are complex—seeking help from a professional tax preparer well-versed in the form is advisable.
- Form 5471—Information Return of U.S. Person with Respect to Certain Foreign Corporations. If you're a shareholder of a controlled foreign corporation (CFC), you must file this form and all related schedules. A foreign company is generally classified as a CFC if you own 10% of the shares or control 10% of the voting rights. American expats who own foreign registered businesses or significant stakes in restaurants, bars, or other companies may need to file this form. Note that the 2018 version of Form 5471 has been amended to include a number of changes caused by the 2017 Tax Cuts and Jobs Act. Everything about Form 5471 is complicated, including the tests for whether you must file the form, as well as the form and its numerous required schedules and footnotes. Penalties for non-filing are high. If you think you may need to file Form 5471, and to make sure that it is completed correctly, it may make sense to seek professional advice.
- New Form 8992 (Draft) U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI). Beyond last year’s Section 965 “Transition Tax" outlined below, the 2017 Tax Cuts and Jobs Act requires U.S. taxpayers who are 10% or greater shareholders of CFCs to pay current year tax on certain types of income from their CFC, regardless of whether the income is distributed or repatriated. The GILTI tax will be calculated using the new Form 8992; however, it is only available in draft form at this time. Changes to the form are expected before it becomes final, potentially including new elections for individual tax filers that may lower the applicable tax rate. Even in its final version, the form and calculation will be complicated. Shareholders of CFCs may wish to consult a qualified tax advisor.
- Section 965—One-Time Transition Tax for Shareholders of Foreign Corporations. The 2017 Tax Cuts and Jobs Act included a one-time “transition tax” for U.S. taxpayers who own 10% or more in a foreign company on the undistributed retained earnings of the company as of 31 December 2017. The tax, or at least an installment of it, was due to be paid in 2018, and additional documentation and statements related to the transition tax were to be included in the 2017 1040 filing. If you missed this, you can avoid penalties by either amending your 2017 return or paying the tax in full by 15 April 2019. Note that the computation of this tax is complicated, and although the IRS has issued guidance, U.S. taxpayers who owe this tax may wish to consult a qualified tax advisor. Some additional resources can be found here:
Questions and Answers About Reporting Related to Section 965 on 2017 Tax Returns
IRC 965 Transition Tax Statement—must be included in 2017 1040 filing
Section 965(h)(1) Election—optional Election to Pay Net Tax Liability Under Section 965 in Installments Under Section 965(h)(1)
- Form 926—Return of a U.S. Transferor of Property to a Foreign Corporation. Generally, you are required to file this form in the year you transfer cash, assets, or property (tangible or intangible) to a foreign corporation. U.S. citizens either just setting up and providing initial capital to a foreign business or injecting fresh capital/new assets to an existing business may need to file this form.
- Form 8865—Information Return of U.S. Persons with Respect to Certain Foreign Partnerships. If you're a partner in a foreign partnership with five or fewer U.S. partners who each own 10% or more interest and in aggregate have more than 50% of the partnership, you may need to file this form to report income and transactions between you and the partnership.
- Form 3520—Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. This form is used to report transactions you may have with foreign trusts, as well as if you receive large gifts from foreign persons (greater than USD 100,000), or corporations or partnerships (greater than USD 16,076 for 2018).
- Form 3520A—Information Return of Foreign Trust with a U.S. Owner. If you own a foreign trust, you need to file this form to provide information about the trust, its U.S. beneficiaries, and anyone who's treated as an owner of any portion of the trust.
- Form 8965—Health Coverage Exemptions. Under the recently enacted Tax Cuts and Jobs Act, taxpayers must continue to report health coverage, qualify for an exemption, or pay the individual shared responsibility payment for tax years 2017 and 2018. Generally U.S. citizens living abroad who qualify to use the Foreign Earned Income Exclusion (FEIE) can receive an exemption, but they must file Form 8965 to request one.
The above list is not intended to be comprehensive, and other forms may be needed depending on your particular situation. Failure to file required forms can result in substantial penalties, even if the omission was not intentional. Please consult your tax advisor for advice relevant to your situation.
This is an updated version of a blog that appeared previously on www.crevelingandcreveling.com.
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About Creveling & Creveling Private Wealth Advisory
Creveling & Creveling is a private wealth advisory firm specializing in helping expatriates living in Thailand and throughout Southeast Asia build and preserve their wealth. The firm is a Registered Investment Adviser with the U.S. SEC and is licensed and regulated by the Thai SEC. Through a unique, integrated consulting approach, Creveling & Creveling is dedicated to helping clients cut through the financial intricacies of expat life, make better decisions with their money, and take the steps necessary to provide a more secure future.
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