Individuals who are U.S. citizens or residents, regardless of their location, are subject to U.S. taxation on their worldwide income. However, U.S. expatriates commonly referred to as Expat’s (U.S. citizens and Lawful Permanent Resident or Green Card Holders, who reside outside the U.S.) and U.S. foreign nationals (Foreign Nationals who reside inside the U.S.) face unique taxation challenges due to their status. In this piece, we will explore these challenges and the various tax issues they present.
U.S. Expatriate Taxation
U.S. Expatriates must continue to pay U.S. income taxes on their worldwide income, even if they live abroad/ outside the U.S. The U.S. has Income tax treaties (ITT) with many countries that can help reduce double taxation, but U.S. expatriates must be mindful of the Savings Clauses or Limitation on Benefit clauses that seek to nullify any Article therein making the ITT moot. However, U.S. expatriates still must file U.S. income tax returns and report their foreign and U.S. or worldwide income.
U.S. Expatriates may be eligible for certain tax benefits, such as the Foreign Earned Income Exclusion (FEIE) found on Form 2555- Foreign Earned Income- as found in Internal Revenue Code (IRC) Sec 911, which allows certain individuals who meet certain requirements- the Tax Home Test and either the Bonfide Resident Test or Physical Presence Test- to exclude up to $120,000 for 2023 of foreign earned income from their U.S. taxable income, and the U.S. Foreign Tax Credit found on Form 1116- Foreign Tax Credit- as found in IRC Sec 901. The FEIE can be used alone, or in hybrid with the FTC or the FTC can also be used alone.
Additionally, U.S. expatriates must be aware of the Foreign Account Tax Compliance Act (FATCA), which requires foreign financial institutions to report certain information about U.S. account holders to the IRS and U.S. individual taxpayers to report Specified Foreign Financial Assets on Form 8938- Statement of Specified Foreign Financial Assets-, failure to comply with FATCA can result in significant penalties.
U.S. Expatriates U.S. Citizens and US Legal Permanent Residents found to be Long Term Residents (LTR’s) may also be subject to an exit tax if they choose to renounce their U.S. status. The exit tax applies to individuals who have a net worth of over $2 million or have an average annual net income tax liability averaging more than $190,000 for 2023 for the five years preceding the year of expatriation. The exit tax can be significant and requires careful planning.
U.S. Foreign National Taxation
U.S. foreign nationals, (or non-U.S. citizens or non-Legal Permanent Residents or Green Card Holders) who reside in the U.S., are also subject to U.S. taxation on their worldwide income in most cases, subject to their meeting the Substantial Presence Test (SPT) found in IRC Sec 7701(b)(3) essentially a quantitative counting test highly dependent on their US visa type. The U.S. IRC does not distinguish between U.S. citizens and non-citizens when it comes to income taxation.
Foreign nationals may also be subject to estate and gift tax if they have assets located in the U.S. or if they make gifts to U.S. persons. The estate and gift tax exemption for foreign nationals is only $60,000, significantly lower than the exemption for U.S. citizens and residents. This can make estate planning for foreign nationals who have assets in the U.S. complex and requires careful consideration.
International U.S. Individual Income Taxation Issues
International U.S. individual income taxation issues arise when an individual has income from sources in multiple countries. The U.S. has income tax treaties with many countries that can help reduce double taxation but navigating these treaties can be complex. Additionally, individuals must be aware of the foreign tax credit, which allows taxpayers to reduce their U.S. tax liability by the amount of foreign taxes paid on their foreign income. The foreign tax credit is subject to certain limitations and phase-outs of both income and tax when used in conjunction with the FEIE and requires careful planning to maximize its benefits.
U.S. Expatriates and U.S. foreign nationals face unique taxation challenges that require careful planning and consideration. Understanding the U.S. IRC and income tax treaties with other countries is essential for minimizing tax liability and avoiding penalties. Working with a qualified tax professional Certified Public Account (CPA) who specializes in international taxation can help individuals navigate these challenges and ensure compliance with U.S. tax laws.
A licensed Certified Public Accountant (CPA) with expertise in U.S. expatriate and U.S. foreign national taxation and international U.S. individual income taxation issues can provide valuable services to clients who are living or working abroad, or who have foreign financial interests.
One of the key areas where a CPA can help is in navigating the complex tax laws and regulations that apply to U.S. citizens and Legal Permanent Resident or Green Card Holders living and working overseas. For example, although as stated above U.S. citizens and Lawful Permanent Residents or Green Card Holders are still required to file tax returns with the Internal Revenue Service (IRS) regardless of where they live or work, they may also be subject to taxes in the country where they are residing, as well as other tax requirements related to foreign investments or assets.
A CPA with expertise in international taxation can help clients understand their tax obligations, ensure compliance with both U.S. and foreign tax laws, and identify strategies for minimizing their tax liabilities. This might involve reviewing and optimizing the client’s tax filing status, taking advantage of available tax credits and deductions, and structuring investments or assets in a tax-efficient manner.
Another area where a CPA can provide valuable assistance is in helping clients navigate the various reporting requirements related to foreign financial accounts and Specified Foreign Financial Assets. U.S. citizens and Legal Permanent Residents or Green Card Holders, including Foreign Nationals meeting the SPT with foreign accounts or assets above certain thresholds are required to file annual reports with the IRS, on Form 114- Report of Foreign Bank and Financial Accounts- (FBAR) and under the Foreign Account Tax Compliance Act (FATCA) on Form 8938- Statement of Specified Foreign Financial Assets. A CPA can help clients understand these reporting requirements and ensure that they are in compliance with all applicable regulations.
In addition to these services, a CPA with expertise in international taxation can also provide guidance and advice on a wide range of other issues related to living and working abroad. For example, they may help clients understand the tax implications of moving overseas, including how to handle pension and retirement accounts, as well as social security and Medicare benefits. Totalization or Social Security Agreements become super critical in this endeavor. They may also advise clients on the best ways to transfer money internationally, and how to manage currency exchange risks.
Overall, a licensed CPA with expertise in Global Mobility Tax Services- U.S. expatriate and U.S. foreign national taxation and international U.S. individual income taxation issues can provide valuable services to clients who are navigating the complex tax laws and regulations associated with living and working overseas. With their knowledge and experience, they can help clients understand their tax obligations, minimize their income tax liabilities, and ensure compliance with all applicable U.S. income tax sections and regulations.
An excellent example is Marc J. Strohl CPA, a highly accomplished dual national Canadian-American multi-state licensed Certified Public Accountant, who has developed a world renown expertise in Global Mobility Tax Services- U.S. expatriate and U.S. foreign national taxation, with over thirty years of experience in international U.S. Global Mobility- individual income taxation issues. Having previously worked at some of the world’s leading accounting firms, including Deloitte & Touché, LLP, PricewaterhouseCoopers, and Ernst & Young, LLP, Strohl has established himself as the trusted go to authority in his field. In March 2001, he founded Protax Consulting Services, Inc., a Global Mobility Tax Services tax firm that he currently leads as its Principal, known the world over.
Strohl’s extensive knowledge and expertise have earned him a reputation as a sought-after public speaker on Global Mobility Tax / U.S. international individual taxation matters. As an external guest speaker, he regularly provides Continuing Professional Education (CPE) and Continuing Legal Education (CLE) to attorneys and CPAs, and serves as a faculty member at several prestigious institutions, including Lawline, Furthered Education, Strafford Publications, CCH Wolters Kluwer and myCPE. He was also inducted into CPAacademy.org in September 2020 as a leader to accountants and attorneys worldwide.
Strohl’s contribution to the accounting community has been recognized in various publications, including the NYSSCPA’s Trusted Professional, the New York Post, the New York Times, and The Wall Street Journal. He has also been published in the critically acclaimed Thomson Reuters’ twice-monthly newsletter publication Practical International Tax Strategies and Journal of International Taxation. He is a member of the New York State Society of Certified Public Accountants (NYSSCPA), and serves on the NYSSCPA’s International Taxation Committee and Taxation of Individuals Committee.
Marc was also honored and excited to be nominated to the Board of Directors of ProLiteracy. the largest adult literacy and basic education membership non-profit organization in the USA.
