Navigating U.S. taxes as an American expat living abroad can be confusing, but it’s crucial to understand your obligations. 

The United States taxes its citizens and resident aliens on worldwide income, no matter where they live. 

This article outlines the U.S. tax system for expats covering key terms, filing requirements, common mistakes, deadlines, and practical tips to stay compliant and avoid penalties.

Overview Of The U.S. Tax System For Expats

Unlike many countries, the U.S. follows a citizenship-based taxation model. 

This means if you are a U.S. citizen or a resident alien (more on this term below), you must file U.S. tax returns and potentially pay U.S. taxes even while living abroad. 

In other words, your obligation to the IRS doesn’t end when you move overseas. You are generally required to report all income from all sources worldwide on your U.S. tax return.

To prevent double taxation (being taxed by both the U.S. and your country of residence on the same income), the tax code provides relief in the form of credits and exclusions. 

Two key provisions are the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC). 

The FEIE allows qualifying expats to exclude a certain amount of foreign earned income from U.S. tax – for example, up to $126,500 of foreign salary in tax year 2024. The Foreign Tax Credit, on the other hand, lets you offset U.S. tax with taxes paid to a foreign country. These benefits recognize that expats often pay taxes abroad, but you only get them by filing a U.S. return. Even if you owe nothing to the IRS after using exclusions or credits, you still must file to claim these benefits and meet your legal requirements.

Key Tax Terms Expats Should Know

Understanding a few basic tax terms will help make sense of your U.S. filing obligations:

• Tax Return – A tax return is the annual form or set of forms you file with the IRS to report your income, deductions, credits, and calculate any tax owed or refund due. For individual expats, this usually means filing Form 1040 (the U.S. Individual Income Tax Return) each year. In simple terms, it’s your annual report to the IRS on your finances. Even if you live abroad, if your income is above the filing threshold for your status, you need to submit a tax return to remain compliant.

• FBAR (Foreign Bank Account Report) – The FBAR is a separate reporting requirement for foreign financial accounts. If you are a U.S. person (citizen or resident) and the total value of your foreign bank accounts exceeds $10,000 at any time during the year, you must file an FBAR (officially FinCEN Form 114). This is not a tax form per se (no tax is calculated on it), but an informational report to the U.S. Treasury. The FBAR is filed online through the Treasury’s FinCEN system, not with your tax return. Even accounts that produce no income must be reported if the aggregate balance hit the $10k mark. Failing to file an FBAR when required can result in severe penalties, so it’s a crucial obligation for expats with foreign accounts.

• Resident Alien – In tax terms, a resident alien is a non-U.S. citizen who is treated as a U.S. resident for tax purposes. This generally means someone who either has a green card (Lawful Permanent Resident status) or meets the IRS substantial presence test (based on days spent in the U.S.). A resident alien’s U.S. tax responsibilities are essentially the same as those of a U.S. citizen: they must report and potentially pay U.S. tax on their worldwide income. For example, a foreign national working in the U.S. on a long-term assignment may become a resident alien and be subject to U.S. taxes on global income just like an American expat would be.

• Non-Resident Alien (NRA) – A non-resident alien is a non-U.S. citizen who does not meet the green card or substantial presence test for U.S. tax residency. NRAs are generally taxed only on their U.S.-source income (for instance, income from working in the U.S. or investment income from U.S. assets). They do not have to report worldwide income. For expats, this term comes up if, say, you’re an American married to a non-U.S. citizen – your foreign spouse is considered a non-resident alien for U.S. tax purposes (unless they choose to be treated as a resident alien by election). It’s important to know the difference, because U.S. tax rules and filing status options differ depending on whether a spouse is a resident alien or NRA.

Who Must File And What To Report As An Expat

Filing Requirements

All U.S. citizens or resident aliens must file a U.S. income tax return if their income is above certain minimum thresholds, which vary by filing status and age. These thresholds are usually equivalent to the standard deduction (for example, around $14,600 for a single filer under 65 in the 2023 tax year). 

In many cases, expats meet these filing minimums. In fact, if you’re married to a foreign spouse and file separately, you may have to file if you earned just $5 or more in income. The point is, don’t assume you’re off the hook just because your income is below the Foreign Earned Income Exclusion amount or because you owe no tax. Expats still need to file annual returns if their gross income exceeds the normal filing threshold for their situation.

Worldwide Income

When filing, you must report all forms of income from everywhere: salary from a foreign employer, freelance or business income, investment earnings, pensions, rental income, etc. The IRS expects expats to report worldwide income every year—not just U.S. source income. 

If you’ve paid taxes to a foreign government on that income, you can typically claim a Foreign Tax Credit to offset U.S. tax, and if you qualify, you can use the Foreign Earned Income Exclusion to exclude foreign wage or self-employment income up to the limit. But these benefits must be claimed on a filed return; they’re not automatic. 

Failing to report an income source – even if by accident – is a common mistake that can raise an IRS red flag, especially now that under FATCA (Foreign Account Tax Compliance Act), foreign banks report financial info of U.S. account holders to the IRS. In short, the IRS has ways to know about your foreign income, so it’s best to be transparent and report everything truthfully.

Foreign Assets And Accounts

In addition to your tax return, expats need to be aware of separate reporting requirements for foreign assets.

• FBAR – As explained, if your combined foreign account balances exceed $10,000 at any point in the year, you must file an FBAR. This includes not just bank accounts, but also foreign investment accounts, certain retirement accounts, or even accounts where you have signature authority but no ownership (for example, if you can sign on a parent’s or employer’s foreign account). The FBAR is an annual online filing due April 15 (it’s automatically extended to October 15 each year). It’s important to file the FBAR on time – there’s no tax to pay on it, but penalties for missing it can be steep.

• FATCA Form 8938 – Under FATCA, certain expats may also need to file Form 8938 (Statement of Specified Foreign Financial Assets) with their tax return. 

This form overlaps with the FBAR in some ways but has different thresholds and covers a broader range of foreign assets. 

For instance, Form 8938 requires reporting foreign financial assets (bank accounts, investment accounts, foreign stocks or bonds, foreign mutual funds, etc.) if their total value exceeds a higher threshold – for example, a married couple filing jointly and living abroad would file Form 8938 only if their foreign assets exceed $400,000 on the last day of the year or $600,000 at any time during the year (lower thresholds apply for single filers or those living in the U.S.).

The exact threshold varies by filing status and whether you reside abroad or in the U.S.. Not every expat will meet these limits, but if you do, Form 8938 is required in addition to the FBAR. Like the FBAR, failing to report assets on Form 8938 when required can lead to penalties.

In summary, most expats need to report their worldwide income on Form 1040, and if they have foreign accounts or assets, be mindful of FBAR and FATCA Form 8938 requirements. It’s wise to keep records of your foreign income (pay slips, bank statements, etc.) and the highest balances of your accounts so you can report accurately. Remember: reporting does not always mean owing tax, but not reporting can lead to big problems.

Deadlines, Extensions, And Avoiding Penalties

Tax Return Deadlines

The standard deadline for filing a U.S. individual tax return is April 15 of each year (for the prior calendar year’s income).

The good news for expats is that if you are living abroad on April 15, the IRS gives you an automatic 2-month filing extension to June 15 . 

You don’t have to file any form to get this automatic extension, but it’s a good idea to attach a statement to your return noting you were abroad and eligible for the automatic extension.

If June 15 still isn’t enough time, you can request a further extension to October 15 by filing Form 4868 before June 15 . 

In special cases (and with a proper request), expats can even get an extension to December. 

However, be careful: an extension to file is not an extension to pay any tax due. 

If you end up owing U.S. tax for the year, interest starts accruing from April 15 onward, even if you filed for an extension. 

To avoid interest and penalties, it’s best to pay an estimated amount by April 15 if you suspect you’ll owe anything, or as soon as possible.

FBAR Deadline

The FBAR follows a similar schedule – it’s due April 15 as well, but FinCEN grants an automatic extension to October 15 every year. You don’t need to file any form for that FBAR extension; it’s automatic if you miss the April deadline. Essentially, October 15 is the final due date for the FBAR. Mark your calendar and don’t forget this separate filing.

Avoiding Penalties

Missing deadlines or failing to file required forms can result in penalties. 

For the tax return itself, the failure-to-file penalty can be harsh (typically 5% of the unpaid tax per month late, up to 25%), and a failure-to-pay penalty (0.5% of unpaid tax per month) may apply if you don’t pay on time. Even if you can’t pay right away, always file your return (or an extension) on time to minimize penalties. 

The IRS will usually work with you on payment plans, but not filing is seen as more serious. If you owe $0 but file late, you won’t have a failure-to-pay penalty, but a late filing can still trigger a monetary penalty if you were required to file. In short, meet your deadlines – and if you can’t, get the automatic extensions available to expats and pay what you can by April 15.

For the FBAR and other information returns (like Form 8938, or forms for foreign trusts or corporations if those apply), penalties can reach into the tens of thousands of dollars, even if no tax was due, because these are primarily about reporting compliance. 

The FBAR, for example, can carry a civil penalty of up to $10,000 for non-wilful violations, and much more if the violation is found to be wilful. 

The IRS has increasingly enforced these rules, so don’t treat them lightly. 

The safest course is to file all required forms on time and fully disclose what’s required. If you realize you’ve missed something (like forgetting an FBAR in a prior year), consider seeking advice on how to correct it – the IRS has amnesty programs (such as the Streamlined Filing Compliance Procedures) to help expats catch up on late filings penalty-free if the lapses were non-wilful.

Common Tax Mistakes And Risks For Expats

Even well-intentioned expats can slip up on U.S. tax obligations. 

Here are some common mistakes and compliance risks to watch out for:

• Assuming You Don’t Need To File – A pervasive myth is that if you live abroad or your income is under the FEIE limit, you don’t have to file a U.S. return. In reality, all U.S. citizens or residents with income over the filing threshold must file annual returns, regardless of where they live. 

Thousands of expats fail to file each year, often simply because they aren’t aware they need to. Not filing is one of the biggest red flags to the IRS and can lead to problems down the line. Remember, you may not owe tax due to exclusions/credits, but you still need to file to claim those and inform the IRS of your income.

• Reporting Only U.S. Income – Some expats do file U.S. taxes but omit their foreign income, mistakenly thinking that income earned abroad isn’t taxable or doesn’t need to be reported. This is incorrect – as mentioned, the U.S. taxes worldwide income. 

If you earned money overseas (salary, business income, interest, etc.), it must be included on your U.S. return, even if it will be excluded or offset by a credit. Failing to report foreign income can not only negate your eligibility for things like the FEIE, but it also looks like you’re trying to hide money. 

With FATCA in effect since 2010, the IRS often receives information on your foreign accounts and earnings from foreign banks. In short, they likely already know about that overseas salary or bank interest, so don’t leave it off your return.

• Forgetting To File FBAR/8938 – Another frequent mistake is neglecting the FBAR or Form 8938 reporting. 

These forms can be easy to overlook because they don’t involve paying tax, and expats may not even realize they exist until after they’ve missed a deadline. Not reporting a foreign account or asset when required is a serious compliance issue. 

An expat might think, “It’s just a savings account in my country of residence – why would the U.S. care?” But the law is the law: if the thresholds are met, you must file the FBAR and/or Form 8938. 

The IRS and Treasury have cracked down on offshore account reporting in the past decade, issuing hefty penalties to some who wilfully hid assets. Most expats who miss these forms do so by accident, but it’s an expensive accident to make. Always check each year if your accounts crossed the $10k FBAR limit or if your assets require Form 8938, and err on the side of reporting if unsure.

• Missing Deadlines Or Extensions – Life abroad can be busy, and it’s easy for tax deadlines to sneak up on you – especially with different filing dates than the local taxes in your country. Many expats file late or not at all simply due to poor deadline management. 

Missing the April 15 (or June 15 automatic expat extension) deadline without filing an extension can lead to late-filing penalties that add up. Likewise, forgetting the FBAR by October 15 could draw unwanted attention. The risk here is not just fines, but also the stress of knowing you’re behind on compliance. 

Mark your calendar with U.S. tax dates, use reminders, and if needed, get professional help to ensure you meet all deadlines. It’s far easier to file on time than to explain to the IRS later why you didn’t.

• Not Using Available Tax Benefits (Or Using Them Incorrectly) – Expats have access to special tax provisions like the FEIE, Foreign Housing Exclusion, and Foreign Tax Credit. 

A common mistake is not taking advantage of these, which can lead to overpaying U.S. taxes. 

For example, if you paid foreign income taxes, you should claim the Foreign Tax Credit to reduce your U.S. tax bill – otherwise you’re paying tax twice. 

On the flip side, some expats misunderstand these rules and claim something they shouldn’t, or double-dip (for instance, excluding income with FEIE and also claiming a credit on the same income, which isn’t allowed). 

Claiming large exclusions or credits you aren’t eligible for can raise a red flag in the IRS system. 

Always ensure you meet the criteria (like the 330-day presence test for the FEIE ) and fill out the required forms (Form 2555 for the FEIE, Form 1116 for the Foreign Tax Credit) accurately. If done right, these provisions are completely legal and beneficial. 

If done wrong, they can trigger an audit or additional taxes. When in doubt, consult a tax professional to get these right.

• Overlooking Filing Status Options – Expats who are married might not realize how their choice of filing status can affect their taxes and obligations. 

For instance, if you’re married to a non-U.S. citizen (non-resident alien), you generally cannot file jointly unless you make a special election to treat your spouse as a U.S. resident for tax purposes. 

If you don’t make that election, you’ll file as Married Filing Separately – which, as noted, can mean a very low income threshold (often effectively $5) for having to file a return. 

Some expats miss out on beneficial options, like electing to file jointly with a foreign spouse (which can allow a higher standard deduction, but also means your spouse’s income is subject to U.S. tax – a complex decision). 

Make sure you understand your filing status choices and their consequences. Likewise, if you have dependent children abroad, look into claiming the Child Tax Credit or Foreign Tax Credit for any foreign taxes paid on their behalf. Misunderstanding filing status and dependency rules can be a pitfall.

• Assuming The IRS Won’t Notice – In years past, some expats took the approach of “out of sight, out of mind” regarding U.S. taxes. 

This is increasingly risky. 

Not only does FATCA enable the IRS to receive data on Americans abroad, but there’s evidence that Americans overseas are more likely to be audited than domestic taxpayers. 

The IRS knows expat taxes can be complex, and they use automated systems to flag irregularities (like unreported foreign accounts or large exclusions). 

It’s a mistake to assume you can fly under the radar indefinitely. 

If you haven’t been filing because you were unaware of the requirements, the IRS offers programs (like the Streamlined Procedure) to come clean without facing penalties. 

But if you wilfully ignore your obligations and the IRS catches up, the outcome could be much worse – including potential fines or even loss of your passport in extreme tax delinquency cases. The bottom line: take compliance seriously, because the IRS certainly does.

By being aware of these common pitfalls, you can take steps to avoid them. Most mistakes are avoidable with a bit of knowledge and careful record-keeping.

Examples Of Expat Tax Scenarios

Every expat’s situation is a little different. 

Let’s look at a few example scenarios to see how U.S. tax rules apply in practice:

Single Filer Living Abroad

Scenario: Jane is a single U.S. citizen living and working in Australia. She earns the equivalent of $80,000 per year from an Australian employer and pays Australian income taxes on that salary. 

She also has an Australian bank account that at one point held $15,000 in savings.

How U.S. Taxes Apply: Jane must file a U.S. tax return because her income ($80k) is well above the filing threshold (even if it were below, since it’s above about $13k she’d still need to file). On her U.S. return, she will report her $80k salary as income. 

To avoid double taxation, she has options: she could use the Foreign Earned Income Exclusion (FEIE) to exclude $80k (which is under the limit of around $126,500 for the year) from U.S. taxation, or she could claim a Foreign Tax Credit for the Australian taxes she paid. 

She’ll choose the method that benefits her most (often, if the foreign tax rate is higher than U.S., the tax credit works well; if the foreign tax is lower, FEIE might save more). Either way, by using these provisions, she will likely owe little to no U.S. tax – but she still files the return to report everything and claim the exclusion or credit. 

Additionally, because her Australian bank account exceeded $10,000, she needs to file an FBAR by October 15 to report that account . 

If the total value of all her foreign financial assets is below the Form 8938 threshold (which for a single filer abroad is $200k at year-end), she wouldn’t need to file Form 8938. In Jane’s case, only the bank account of $15k is relevant and that is below $200k, so no Form 8938, just the FBAR. By filing these, Jane stays compliant and avoids penalties.

Key Takeaway: Even if you’re a single expat who owes nothing to the IRS due to foreign exclusions/credits, you must file a return and required asset reports. This keeps you in good standing and ensures you legally claim the tax benefits available.

Married To A U.S. Citizen (Both Spouses Abroad)

Scenario: John and Alice are a married couple, both U.S. citizens, living in Australia. 

John works for an Australian company and earned $100,000; Alice is self-employed and earned $50,000. They have two kids (U.S. citizen dependents) and joint foreign bank accounts that peaked at $25,000 during the year.

How U.S. Taxes Apply: John and Alice can choose to file their U.S. taxes as Married Filing Jointly, which generally offers a higher standard deduction and other benefits. 

They will report John’s $100k and Alice’s $50k, plus any other income (if Alice’s self-employment generated any business profit, that counts too). 

Since both are abroad all year, they likely qualify for the FEIE. 

They could each exclude their foreign earned income: John could use the FEIE on his $100k and Alice on her $50k (each spouse can exclude up to the limit, around $126,500 each, so all their earned income can be excluded). 

They would file Form 2555 for each spouse to claim the exclusion. 

Alternatively, if Australia’s income tax on those earnings is higher, they might choose to use the Foreign Tax Credit instead (filing Form 1116) to offset U.S. tax with Australian tax paid. 

They’ll also get to claim their children as dependents and possibly the Child Tax Credit, just as if they lived in the U.S. (note: the refundable Additional Child Tax Credit is available to expats only if they have earned income above a certain amount and taxes paid – this gets a bit detailed, but the key is they follow mostly the same rules).

Because they have foreign bank accounts exceeding $10k combined, they must file an FBAR reporting those accounts. 

Since they file jointly, they can submit one FBAR listing both as joint owners of the accounts. 

They should also check the threshold for Form 8938: for a joint return by a couple abroad, the threshold is $400,000 at year end (or $600k at any time). Their $25k in accounts is way below that, so no Form 8938 needed.

Key Takeaway: Married American expats can file jointly and effectively double the amount of foreign income they can shield via the FEIE (each can claim it) – in this case excluding all $150k of income – but they must file to claim these benefits. They also need to report foreign accounts. Being married doesn’t reduce the FBAR or FATCA reporting duties: those still apply jointly if thresholds are met. By coordinating their filing, John and Alice can minimize U.S. tax (likely to $0 after exclusions/credits) while staying fully compliant.

Working Remotely From Overseas (Digital Nomad)

Scenario: Sara is a U.S. citizen who spent the year moving between several countries in Asia and Latin America, working remotely as a freelance graphic designer. 

She has no fixed employer – she does gig work for clients worldwide, earning about $70,000 over the year. 

She didn’t establish tax residency in any one foreign country (she was traveling), and she did not pay taxes to any foreign government on that income. 

She kept her money in a U.S. bank account and a digital wallet, with only a small foreign bank account in Thailand where she briefly stayed (balance never above $5,000).

How U.S. Taxes Apply: Sara is still fully responsible for U.S. taxes on her freelance income. 

In fact, because she didn’t pay any foreign income tax, the Foreign Tax Credit isn’t applicable (there’s no foreign tax to credit). 

However, she can use the Foreign Earned Income Exclusion if she meets one of the qualifying tests. 

Since she’s a digital nomad, the likely test is the Physical Presence Test – she must show she was outside the U.S. for at least 330 days in a 12-month period that overlaps with the tax year. 

If she meets that (which, if she only had brief visits back to the U.S., she will), she can exclude up to $126,500 of her freelance income. 

Her $70k falls under that cap, so by filing Form 2555 with her 1040, she could exclude it and owe no U.S. income tax on it. 

But importantly, because she’s self-employed, U.S. self-employment tax (Social Security/Medicare) may still apply on that $70k even if income tax is excluded. 

Unless she falls under a Totalization Agreement (agreements the U.S. has with some countries to coordinate Social Security taxes), Sara is supposed to pay self-employment tax to the U.S. (approximately 15.3% of her net self-employment income). 

Some expats overlook this – but the FEIE does not waive Social Security tax. 

If she had instead been paying into a foreign country’s social system and that country had a treaty with the U.S., she might be exempt from U.S. self-employment tax. 

It gets technical, but she should be aware of this aspect. 

From an income tax perspective though, Sara can likely eliminate U.S. income tax via the FEIE.

Since Sara’s foreign bank account never exceeded $10k, she does not need to file an FBAR in this scenario. 

And her foreign financial assets are minimal, so no Form 8938 either. Her main task is to file her U.S. tax return reporting the $70k and then excluding it with FEIE. 

If she doesn’t file, the IRS doesn’t know she qualifies for the exclusion – they might assume she owes tax on $70k and could flag her for not filing. 

By filing and using the FEIE, she stays on the right side of the law and avoids a surprise IRS notice.

Key Takeaway: Even “digital nomads” and remote workers with no fixed address abroad must file U.S. taxes. In some ways, they need to be extra careful: without a foreign tax home, the Physical Presence Test is their ticket to the FEIE. Planning travel to ensure 330+ days abroad is crucial. Also, remember U.S. self-employment tax can still bite. Always evaluate both income tax and social tax obligations when working for yourself abroad.

Practical Tips For Staying Compliant And Avoiding IRS Scrutiny

Filing U.S. taxes from abroad doesn’t have to be a nightmare. 

Here are some practical tips to ensure compliance and keep the IRS happy while you enjoy life overseas:

• Stay Organized And Keep Good Records – Maintain a file (digital or physical) with all relevant documents each year. 

This includes W-2s or 1099s from U.S. payers, but also foreign pay slips, records of foreign taxes paid, bank statements showing year-end balances (for FBAR/FATCA), and any other proof of income or deductions. 

Good records make it much easier to file accurately and defend your figures in case of any questions. 

For example, if you claim the Foreign Housing Exclusion, keep receipts of rent and utilities.

If you claim the Physical Presence Test, keep travel logs or passport stamps as evidence of your days abroad. 

Having documentation ensures you can substantiate your claims and avoid trouble if audited.

• Mind Your Dates And Plan Ahead – As mentioned, mark your calendar with the key deadlines: April 15 (tax payment due), June 15 (expat return due if not extending), October 15 (extended return due and FBAR final due). 

If you know you’ll need more time, file Form 4868 by June 15 to push to October. Set reminders a month before to gather documents or reach out to a tax preparer. 

If you’re expecting a refund, filing earlier is better; if you think you owe, at least calculate and pay by April to stop interest. 

Also, if you move frequently, consider setting up a U.S. mailing address (like a family member’s or a mail forwarding service) or ensure you update your address with the IRS, so any correspondence reaches you. Missing an IRS letter because it went to an old address can escalate an issue unnecessarily.

• Don’t Skip Reporting Requirements – Make It A Checklist Item Every Year: “Do I need to file an FBAR? Form 8938? Any other forms?”. 

If you had any non-U.S. financial accounts, total their max balances to see if you cross $10k – if yes, do the FBAR. If you owned shares in a foreign corporation, or a foreign mutual fund, or you’re the beneficiary of a foreign trust, research the forms (Form 5471 for foreign corps, Form 8621 for PFICs like foreign mutual funds, Form 3520 for trusts/gifts, etc.). 

These can be complex, but they’re important. When in doubt, consult a tax professional versed in expat issues; they can identify which extra forms apply to you. It’s much better to file an informational form that might not end up being needed than to ignore it and face a penalty. Compliance is key – the more transparent you are with the IRS, the less likely they’ll have reason to scrutinize you.

• Use Direct Deposit And Online Tools – If you expect a refund, set up direct deposit to a U.S. bank account (it’s faster and more secure, and yes, you can receive a refund while abroad). Create an account on the IRS website to access your tax transcripts and notices electronically. 

This can be helpful to track your filing history or any communications. 

The IRS also has an Interactive Tax Assistant and many online FAQs that can clarify common questions for expats. And remember, you can electronically file (e-file) your return from abroad – you don’t have to mail paper forms across the ocean. E-filing is typically faster and reduces errors.

• Leverage Tax Treaties And Professional Advice If Needed – The U.S. has tax treaties with many countries that can affect how certain income is taxed (for example, a treaty might exempt certain pension income, or clarify residency in dual-resident situations). 

• Voluntary Compliance And Amnesty – If you realize you’ve missed filings in past years, don’t panic. The IRS offers pathways to get back on track. The most common for expats is the Streamlined Filing Compliance Procedures, which is essentially an amnesty program for those who failed to file or report foreign assets due to non-wilful neglect. It generally requires you to file the last 3 years of tax returns and 6 years of FBARs, and the IRS will forgive the penalties. 

Taking advantage of this can wipe the slate clean. 

What you shouldn’t do is continue ignoring the issue or attempt a “quiet disclosure” (just sending in old forms without noting you’re in a program) – that can backfire. 

Show good faith by coming forward under the proper procedures. 

The IRS is usually much harsher on those who wilfully evade taxes than those who genuinely didn’t know and then corrected their mistakes.

• Be Truthful And Thorough – This may sound obvious, but always be honest on your tax forms. 

Overstating deductions, underreporting income, or hiding accounts isn’t worth the risk. 

The IRS has become quite sophisticated in detecting discrepancies. With data sharing between countries (FATCA) and improved technology, trying to outsmart the system could lead to an audit or investigation. 

Most expats who file properly and pay what’s due (or legitimately owe nothing) will not hear from the IRS aside from maybe a refund check or a confirmation. Those who cut corners, however, might invite extra scrutiny. It’s simply not worth it. 

If you make an honest mistake, that’s one thing – the IRS can be understanding – but if you intentionally omit things, the penalties can be severe if discovered. Play it safe by filing complete and accurate returns.

By following these tips and staying informed about your responsibilities, you can significantly reduce the likelihood of IRS problems. Being an expat is exciting and comes with many life changes; by handling your U.S. taxes diligently, you’ll have one less thing to worry about.

Final Thoughts

U.S. tax obligations don’t disappear when you move abroad, but with knowledge and preparation, they become just another manageable aspect of expat life. 

To recap, always remember that U.S. persons abroad must report their worldwide income and often their foreign accounts. 

Take advantage of provisions like the FEIE and Foreign Tax Credit to avoid double taxation – these exist to help you, but you must file to use them . 

Keep an eye on deadlines (utilize that automatic expat extension to June 15, but pay by April if you owe) and don’t ignore additional forms like the FBAR. 

Common mistakes like not filing or failing to report something can lead to penalties or audits, especially since the IRS has increased its focus on international compliance. 

The good news is, if you stay compliant and informed, you can avoid penalties and IRS scrutiny while fulfilling your civic duties as an American abroad.

Retirement savings, especially when managing finances across international borders, can be complex. If you live in Australia, but hold plans in the USA, you need to understand the tax implications of having 401(k) and IRA plans. 

USA Tax Implications Of A 401(k) Or IRA Plan

401(k) and IRA plans are tax-advantaged retirement accounts that are available to US taxpayers. Contributions made to these accounts are typically tax-deductible, and earnings within the account grow tax-deferred until withdrawal. However, withdrawals from these accounts are usually subject to taxation in the USA. You should obtain tax advice from a qualified US tax advisor before accessing any benefits.

Australian Tax Implications Of A 401(k) Or IRA Plan

Australian tax residents (who are not temporary residents) are subject to tax on their worldwide income.

US retirement accounts like 401(k) and IRA plans are usually treated as foreign trusts by the Australian Taxation Office (ATO).

Therefore distributions from these vehicles will usually be taxable in Australia, except for amounts that can be said to represent contributions. This means that any taxable withdrawals from these accounts are treated as assessable income and taxed at the individual’s marginal tax rate. As foreign income, you would also be able to claim a Foreign Income Tax Offset (FITO) to reduce double taxation.

Roth 401(k) and Roth IRA plans are comprised of contributions made with after-tax dollars. This means that for Australian tax residents, withdrawals from these plans are generally tax-free.

Managing Funds While Living In Australia

For individuals residing in Australia who wish to access their US retirement funds, there are several options to consider:

1. Funds in the USA: Australian tax residents can choose to leave their 401(k) or IRA funds in the USA subject to complying with relevant US requirements. 
2. Withdrawal: Depending on the circumstances, individuals may opt to withdraw funds from their US retirement accounts. Careful consideration should be given to the tax implications of such actions, as they may trigger tax liabilities in both countries.

Our tax advisors and accountants are able to work with our clients, and their financial planners and wealth managers to clarify the taxation consequences, which would usually be an important element of the decisions that may be ultimately made.

Planning

Understanding the tax implications of 401(k) and IRA plans for Australian tax residents living in the USA is essential for effective retirement planning. While these accounts offer valuable tax benefits in the USA, they also come with potential tax liabilities in Australia. 

By navigating the complexities of dual tax systems and seeking professional advice, individuals can make informed decisions to optimise their retirement savings – while ensuring compliance with both US and Australian tax laws.

Given the complexities involved, seeking advice from tax professionals with expertise in both US and Australian tax law is highly recommended.

As specialists in International Tax, we can provide tailored guidance based on your individual circumstances. This can help you with your planning for accessing retirement funding in a way that helps you to minimise your tax obligations.

When you live and work solely in one country, tax residency is straightforward. However, if you are living away from your home country or living between multiple countries, then determining tax residency is complicated.

One of the difficulties in determining tax residency is that the laws applied to residency differ in each country. This means you may simultaneously meet the residency requirements in multiple countries within a given tax period. Alternatively, if you live a particularly transitory life, it may be difficult to identify primary residency.

Note that tax residency is different to citizenship or visa residency. This article discusses what you need to know about tax residency.

Why Residency Matters

As each country has their own rules for taxation, it is important to know which country has taxation rights over you as an individual resident. This is why residency is such a foundational concept.

Being a tax resident of multiple countries has potential implications on how your worldwide income is taxed. Generally, your country of residence has primary taxing rights over your income. It also raises double taxation concerns, with competing tax jurisdictions aiming to potentially tax the same income. As countries sometimes tax the same income, a dual tax resident could face significant tax consequences. For this reason, tax treaties between countries exist to help resolve conflicting taxation rights, including determining tax residency.

As this can be a particularly complex issue it is important to ensure that you consult with qualified tax professionals who are familiar with the tax laws of each country. The following information provides a general overview of the potential tax consequences of being a tax resident in multiple countries.

Taxation Rights

Once residency is determined, your country of residence will have the primary taxing rights. Income that is taxable from other sources will be taxed as income earned by a non-resident.

Double Tax Agreements (DTAs) between countries cover a range of factors to help mitigate double taxation issues, including who has primary taxing rights of specific types of income and can include limitations on the taxing rights of the country where the taxpayer is a non-resident.

For countries that tax on a territorial basis, the country of residence might only legislate taxation over income derived from the country of residence, or foreign income that is remitted into the country.

However, countries that tax on a worldwide basis assess all income earned by the individual, regardless of the source of income.

In either case, DTAs, and other tax relief provisions help alleviate the impact of being taxed in multiple countries. This typically means that when you pay foreign tax on foreign sourced income, your country of residence will count this tax towards the tax they assess on this income.

Tax Residency

As each country has its own rules for determining residency, your first step is working out whether you are a resident in each country that you are connected to. To give an example of how this works we consider the tax residency rules of Australia, Singapore, the USA and the UK.

Tax Residency In Australia

How Residency Is Determined

There are a number of tests used to determine residency in Australia, which are essentially designed to determine whether Australia is your home. This means that you are an Australian tax resident if you reside in Australia, or intend to reside in Australia for a significant period of time, and you have a permanent home there.

If you are an Australian permanent resident who is living and working overseas on a temporary basis, you may still be considered a tax resident of  Australia. If you have not established a permanent place of abode outside Australia, then your Australian tax residency will continue. A permanent place of abode is a place where you live and consider your home. This means you may still be considered an Australian tax resident even if you are not physically present in Australia for a given tax year. Individuals who are not Australian citizens may also remain Australian tax residents if they travel overseas for short periods of time, while maintaining their home in Australia.

In an income tax year where you become or cease being a resident you will be considered a part-year tax resident.

Income Taxes as a Resident

Australian tax residents are assessed on worldwide income. This includes all forms of income including capital gains.

Tax Residency In Singapore

How Residency Is Determined

In Singapore you are a tax resident when you are physically present in Singapore for at least 183 days in a calendar year.

Income Taxes as a Resident

Singapore tax residents are typically only required to pay tax on Singapore sourced income, or foreign income that is brought into Singapore. Singapore does not tax capital gains.

Tax Residency In The USA

How Residency Is Determined

In the USA, all US citizens and dual citizens are required to lodge a tax return to declare their worldwide income, regardless of their tax residency.

Non-citizens are tax residents if they hold a Green Card that legally allows permanent residency.

Tax residency is determined by a physical presence test. This test requires physical presence in the USA for at least 31 days in the relevant calendar year, after being present for a specific number of days totalling at least 183 days over the preceding two years.

Income Taxes as a Resident

Both citizens and tax residents of the USA are taxed on their worldwide income. Citizens are taxed on worldwide income even if they no longer reside in the US and do not meet the residency test. There are some foreign earning exclusions for individuals who meet specific requirements.

Tax Residency In The UK

How Residency Is Determined

In the UK you are a tax resident under the Statutory Residence Test. This test considers a range of factors including the number of days you are present in the UK, your connections to the country, and other relevant criteria.

The UK has an automatic overseas test. This means if you spend less than 16 days in the UK (or less than 46 days if you have not been a UK resident for the previous 3 tax years), or you are working abroad full-time and spend less than 91 days in the UK, then you are a non-resident.

There are three automatic resident tests:

1. You are present in the UK for at least 183 days.
2. Your only home is in the UK for at least 91 days in a row, and you visited or stayed for at least 30 days in the tax year.
3.  You worked full time in the UK for any period of 365 days and at least one of those days falls in the tax year you’re checking.

Where you do not meet either automatic test the “sufficient ties test” will determine if you are a resident. This test considers your UK connections, including family, accommodation, work, and physical presence, over a number of years.

Income Taxes as a Resident

UK tax residents are taxed on their worldwide income. However, non-UK sourced income may be exempt from UK taxation in certain circumstances.

Dual Residency

As can be seen from the various residency tests of just these four countries, there is variety in how residency is determined and the tax implications this could lead to. Given the variation in tests, you could easily be considered a resident of multiple countries over a single tax year.

When an individual is a tax resident in multiple countries the next step is to determine if there are tie breaker rules contained in a DTA. These rules provide guidance on determining an individual’s primary place of residence.

Residency Tie Breaker Rules

Most countries adopt the Mutual Agreement Procedure, specifically Article 4 of the OECD Model Tax Convention, to resolve dual residence situations. Accordingly, there is a fairly standard set of tie breaker rules across various DTAs. These tiebreaker rules are outlined as follows:

1. Permanent Home – Where you have a permanent home in one country but not the other, you will be a resident of the country where your home is located.
2. Centre of Vital Interests – The country in which you have closer personal and economic connections will be your country of residence. This may include family and personal ties, social and economic activities such as work and club memberships, and where you keep your main assets.
3. Habitual Above – Where neither of the previous tests assist, the country where you regularly abide or reside in will be your country of residence.
4. Nationality – Where none of the previous tests assist you will be a resident of the country in which you are a national.

In most cases an individual will be able to determine their residence using one of these tie breaker rules.

When it comes to Australia, Singapore, the USA and the UK, most of these countries adopt comprehensive DTAs between one another, in which Article 4 of the OECD Model Tax Convention is essentially utilised. This includes the DTAs between the following countries:

• Australia and Singapore
• Australia and the USA
• Australia and the UK
• Singapore and the UK       
• The UK and the USA

Notably, there is no DTA between Singapore and the USA. This means that dual residents of Singapore and the USA will need to rely on the taxation rules and access to tax relief options in each country in order to avoid double taxation.

Dual Tax Residents

In very rare cases an individual may have sufficient ties to multiple countries in which they are either not a citizen, or in which they hold dual citizenship, leading to a situation whereby they may not be able to effectively use tie breaker residency rules to accurately determine their country of residence. This creates a complex situation wherein no country has clear priority for determining tax residency and a decision regarding residency is subjective.

This situation could theoretically lead to an individual being subject to taxes being assessed on their worldwide income in multiple tax jurisdictions. The Mutual Agreement Procedure contained in some DTAs enables a taxpayer to request the competent authority in one country to engage with their counterparts in another country to resolve double taxation.

Managing Dual Tax Residency

In summary, determining residency is an important factor because it determines which tax jurisdiction has primary taxation rights.

DTAs exist to help mitigate the risk of double taxation by providing tie breaker rules in determining residency and placing restrictions or limitations on taxation rights over certain types of income, as well as providing tax relief through the recognition of foreign tax credits.

Where no DTA exists, or where an individual’s residency cannot be determined, other provisions are required to mitigate the impact of double taxation. 

Tax residency can be a very complex area and it is recommended you seek specialist international tax advice for your particular situation. 

Australia does not have an inheritance tax. When a person dies, the estate, or person who inherits the assets does not have to consider any special inheritance tax on the money or assets that are taking ownership of. While a beneficiary may be required to pay taxes from Superannuation death benefit payments, or capital gains on the sale of assets that have been inherited if those assets are sold, there is no specific tax levied on the value of inherited assets. 

However, there are many countries that do have inheritance taxes, including the United Kingdom.  

This means that when an Australian inherits money or assets from abroad, they may find themselves subject to an unfamiliar “inheritance tax”.

What is inheritance tax?

Inheritance taxes are special taxes that are levied on the assets that are received from the estate of a deceased person. As the beneficiary of a deceased estate you are required to pay taxes on the value of the inheritance that you are receiving.

In a similar vein, estate taxes are levied on the value that is paid out of a deceased’s estate. The estate is required to pay these taxes, rather than the beneficiary. This means that the beneficiary receives the net assets after the estate has paid any required.

In some countries these taxes are referred to as “death duty”.

The laws around inheritance taxes vary between tax jurisdictions. There may be different tax rates, different inclusions on what type of assets are taxed and different types of exemptions or limits.

Some countries like the United Kingdom levy inheritance taxes where assets are transferred to trusts and for this reason many British expats should seek inheritance tax advice before establishing a trust in Australia.

When would an Australian resident be required to pay Inheritance taxes?

As an Australian resident you are not subject to inheritance tax, regardless of where the inheritance is coming from. However the deceased estate may be subject to estate taxes prior to paying or transferring your inheritance to you.

In essence this means you, as an individual taxpayer, do not have to be concerned about being assessed for specific inheritance taxes.

What taxes does an Australian need to be aware of when inheriting assets from overseas?

The biggest difference is the added complications that inheriting from overseas may impose, including:

• Potential capital gains tax on exchange rate fluctuations when withdrawing foreign currency
• Estate taxes imposed on the estate that are paid prior to distributing your inheritance
• Foreign taxes imposed on continuing to hold onto any foreign assets or investments

Once you receive the inheritance the assets or money received are yours. This means that their ongoing use and benefit are assessed, where applicable, in your hands, just as any ordinary assets or finances that you earn or invest in yourself, would be. 

If you’re an Australian expat who came home to ride out the pandemic then you may have found yourself in an unusual situation. Thanks to the advantages of technology, moving back to Australia doesn’t necessarily mean changing employment.

Living in Australia while continuing to work for an overseas employer could mean you face a range of complex tax issues. For this reason it is important to seek professional advice for your specific situation so that you can make appropriate plans and preparations.

Below is a brief overview of some of the considerations you will need to cover.

Tax Residency

The first issue is determining your tax residency.

While the standard residency tests still exist, the ATO has advised that individuals who returned to Australia for the pandemic may remain non-residents (continuing to be residents of their overseas home), provided they intend to return to the country they now call home as soon as possible. This means that if you are still actively planning to return to your overseas home as soon as possible you have some reassurance that you remain a non-resident in Australia.

However, your residency status still depends on your activities in Australian as well as your ties to your overseas home. The longer you stay in Australia, the more you settle down, the more difficult it gets to determine residency. Unfortunately the ATO’s guidelines are unclear about when exactly you would be expected to return to your overseas home and how you can clearly show that this is your intention. If your stay in Australia means you no longer qualify as a tax resident overseas then this may also complicate matters.

Since this is a particularly complicated and nuanced issue it is important to get specific tax advice for your situation as soon as possible. Note that your residency status can change if your actions and intentions change as well.

Non-Residents Working for an Overseas Employer

What happens if you have an overseas employer and you continue to be a non-resident while living in Australia? In simple terms this means you will only be required to lodge an Australian tax return for any Australian sourced income.

If your primary source of income is from your overseas employer, it may result in the income being exempt. However, any double tax treaty will require consultation to determine the ultimate taxing rights. Remaining a non-resident is also likely to keep things simpler as your tax issues will continue as if you were still living back in the country in which you are employed, and to which you intend to return.

Residents Working for an Overseas Employer

On the other hand, living in Australia for the duration of the pandemic could mean that you become an Australian tax resident. In this situation you will be required to include all of your income from worldwide sources in your Australian tax return.

This means that despite your primary source of income being derived from an overseas source, you will have to consider Australian taxes on top of the foreign taxes paid. Note that double taxation agreements typically ensure that you don’t pay more than the amount of tax required from the jurisdiction with the higher taxation rate.

Comparison of Tax Impact as a Resident/Non-Resident

For a basic comparison let’s assume the following:

You earn
– AUD $200,000 from your foreign employer
– AUD $5,000 from Australian interest income

As an Australian tax resident you would be required to pay Australian income taxes and medicare levy of $67,017.

To avoid double taxation you would typically get a tax credit for any foreign income tax paid on the foreign employment income. For example, if you paid foreign taxes of $40,000 on your foreign employment income, then you would only have to pay the difference of $27,017 in your Australian return.

Since Australia’s tax rates are amongst the highest in the world it is likely that you would have to pay some Australian tax on top of your foreign tax paid.

If the country you work for has higher overall tax rates than Australia, then you would effectively only have to pay taxes on the Australian sourced interest income. In this scenario this means you would end up paying $2,350 for the Australian interest income (on top of the foreign taxes paid).

On the other hand, if you remain a non-resident for Australian tax purposes then you would only be required to pay income taxes on the employment income at their source country (your country of residence). Since interest income is typically covered by double taxation agreements it is likely you would only have to pay $500 in Australian taxes on the Australian sourced income. (Though you may also have to pay any additional foreign taxes on this income in the country of residence).

Ultimately the exact amount of tax you would pay depends on where you are employed and where you are a resident. However, it is usually advantageous to be classed as a resident in the country from where you are earning your primary income.

Other Implications of Changing Residency

If you continue to remain a non-resident for Australian tax purposes there are no additional tax implications to consider. However, if you do become an Australian resident again then there are a few issues to consider and plan for. This includes capital gains and investment income.

             Capital Gains Considerations

One of the potential disadvantages of changing residency is capital gains. If you resume Australian residency then you will be required to value any foreign assets for capital gains purposes at the date you become a resident. These assets then become subject to Capital Gains Tax either when you sell them, or if you move back overseas and become a non-resident again.

Since some countries don’t have a capital gains tax, or they calculate capital gains taxes differently – returning to Australia as a resident, whether on a permanent basis or for a number of years, may have a significant tax consequence that you hadn’t planned for. 

             Investment Income

Investment income such as rent, interest and dividends, can be taxed very differently in different countries. Your residency status can also change how you are taxed on such income. Any double tax agreement between Australia and the country from which the investment income is derived, will further impact the overall way in which you pay taxes on such income.

This may be as simple as needing to advise banks, property managers, and investors that your country of residence has changed. This way they can withhold the appropriate amount of taxes required to cover the foreign tax obligations. Or it may require more complex considerations such as the requirements of being a Director, laws around owning controlling interests in a foreign company, and even residency status of a foreign company that you manage. 

Understanding your Tax Situation

The pandemic has created a situation where many Australians are either returning home as unintended residents, or are left uncertain as to their tax residency status. Since this can have a dramatic impact on your finances it is important to get professional, expert advice, sooner rather than later. 

The longer you continue to stay in Australia, the more important it is to assess your tax residency status and understand the potential tax implications of this.

Burton’s case [Burton v Commissioner of Taxation [2019] FCAFC 141] has set an interesting precedent for claiming foreign tax credits on capital gains made from the sale of overseas investments in the United States.

In simple terms, if you own a capital asset in the USA, and you are taxed in the US the capital gain, then you may not be able to claim all the US tax paid as credit in Australia.

The reason for this is because the ATO will only allow you to claim the foreign tax offset that relates to the portion of taxable discounted capital gain being declared in your Australian tax return. The Australia-US Double Taxation Agreement will not assist you in this regard.

Since Burton’s application to appeal the decision was denied on 14 February 2020, the position under the law has been clarified in a situation where an Australian taxpayer makes a capital gains on US real estate (or other assets which are considered effectively connected with the USA).

While some articles claim that this case means the ATO is clawing back the 50% discount on Australian residents with foreign held assets, this isn’t strictly true. It’s actually that not all of the US tax paid would be creditable here.

Example – Comparing the net tax effect on an Australian tax resident selling capital assets owned under different tax regimes. 

To understand the situation let’s consider the example of Jack, an Australian taxpayer who sells a long-term capital asset held in the US, NZ and Australia.

The US taxes capital gains in full, however they tax the capital gain at a different tax rate. NZ does not tax capital gains. Including NZ as a comparison makes it clear that the ruling from Burton does not claw back the discounted 50% capital gain.

For our purposes Jack is an Australian tax resident.

Let’s assume:

• For ease of calculations Jack makes a capital gain of $1,000,000 on the sale of each of the following assets.
• Jack’s first $1,000,000 capital gain is on an asset that he held in the US for more than 12 months. While the US taxes capital gains, it applies a concessional tax rate for assets held over 12 months. For ease of calculations we will assume the top concessional rate of 20% applies.
• The second $1,000,000 gain is on an investment that was held in NZ for more than 12 months. NZ does not tax domestic capital gains.
• Finally, Jack also sells $1,000,000 investment in Australia, which he has also held for over 12 months. Accordingly, Jack will only be taxed on 50% of the Australian capital gain. For ease of calculations we will assume the flat top marginal rate and Medicare levy applies, 47%.
• Jack sells all 3 investments in the same financial year for a capital gain of AUD$1,000,000 each.
• For ease of calculations Jack has no capital losses to apply and he is able to apply the 50% CGT discount in full when preparing his Australian tax return. 

		US owned Asset (AUD$)	NZ owned Asset (AUD$)	Australian owned Asset (AUD$)
	Capital Gain	$1,000,000	$1,000,000	$1,000,000
a.	Foreign Taxable gain after applying any discounts for assessing tax on capital gains	$1,000,000	0	–
b.	Foreign tax paid US 20% NZ NA on capital gains	$200,000	0	–
c.	Australian Capital Gain	$1,000,000	$1,000,000	$1,000,000
d.	Portion of capital gain eligible for discount in Australian assessment	$500,000	$500,000	$500,000
e.	Net taxable Australian gain to be taxed (c – d)	$500,000	$500,000	$500,000
f.	Australian tax at $47% (including Medicare levy)	$235,000	$235,000	$235,000
g.	Net foreign tax paid that is eligible to be claimed as an offset against the Australian taxable portion of the capital gain US: b x 50% All others: b	$100,000	0	–
h.	Australian net tax payable (f – g)	$135,000	$235,000	$235,000
	Total foreign & Australian tax (b + h)	$335,000	$235,000	$235,000
	Global Tax Paid	33.5%	23.5%	23.5%

As you can see from this example, Jack ends up paying more tax on the US asset. This is because the US taxes the full gain at a discounted rate. Australia then taxes half of the gain at the Australian tax rate and only allows the 50% portion of the foreign income tax credits to be applied.

Conclusion

The net impact of applying this precedent is that Australian taxpayers will end up paying up to 33.5% income tax on capital gains made on US investments that are held for more than 12 months. This is in contrast to the 23.5% income tax that they will pay on capital gains that are limited to only paying Australian income tax.

CGT Proposals

Details of the plans to impose Capital Gains Tax on gains arising to non-UK residents on the disposal of UK residential property have been published.

The proposals are wider than anticipated and also have unexpected consequences for UK resident second home owners.

CGT will be charged on gains accruing from April 2015 to non-resident individual owners, trusts, companies and partners on disposals of residential property regardless of the value of the property.

CGT will also be levied on gains arising on the disposal of investment properties, in contrast to the Annual Tax on Enveloped Dwelling (ATED) regime introduced in April 2013.

The tax payable by non-corporate sellers will be at the normal CGT rates (18% or 28%) with the benefit of the annual CGT exemption (£11,100 for 2015/16) and, if applicable, principal private residence relief (PPR).

A surprising aspect of these proposals is that both UK and non-UK resident owners of multiple homes may, in future, be denied the ability to elect which of their homes should benefit from PPR.

Instead, only the property which is, as a matter of fact, a taxpayer’s main residence or the property that qualifies as such in accordance with a proposed new fixed rule would be eligible for relief.

The rationale behind this is a concern that, if PPR is available on the sale of a non-resident’s home, the non-resident can simply elect their UK home as their main residence (rather than their non-UK property on which no CGT is payable).

Nevertheless, the proposed extension of this change to UK residents is unexpected.

That said, the Government’s dislike of “flipping” is well known and, to this end, the final period of ownership exemption for PPR has already been reduced from 36 months to 18 months for disposals on or after 6 April 2014.

The new proposals also suggest a new method of collecting CGT.

The detail here is sketchy but the idea is that non-resident sellers would have an option either to pay the tax due themselves or have the tax collected by withholding (carried out by the solicitor acting for the purchaser).

The tax would have to be paid within 30 days of completion, this could be quite onerous for the purchaser’s solicitors and it would further complicate the conveyancing process.

The application of the new CGT charge to disposals by non-resident companies will be more convoluted. Companies paying ATED will pay the related CGT charge on all or part of the gain at the usual rate of 28%.

By contrast, all other non-resident companies will be subject to a tailored CGT charge at a rate to be confirmed.

Enveloped properties

Another unexpected announcement in the recent Budget was the immediate extension of 15% SDLT to corporate purchasers of residential properties worth more than £500,000, (previously £2million).

The scope of ATED will be similarly extended but not with immediate effect. From 1 April 2015 a new band of ATED will apply, with an annual charge of £7,000 on residential properties worth more than £1m but less than £2m.

From 1 April 2016 residential properties worth between £500,000 and £1m will be charged £3,500.

The bands will otherwise remain unchanged and the current reliefs/exemptions (including those for commercially let residential property and development and trading businesses) will continue to apply.

The ATED related CGT charge will be extended from 6 April 2015 to properties worth more than £1m and will apply to that part of the gain that accrues on or after this date; and to properties worth more than £500,000 from 6 April 2016.

The balance of the gain will be treated as at present and, where the company is non-resident and part of the gain is not ATED related, the latter may also be subject to the proposed new tailored charge from April 2015.

A Mansion Tax?

Press speculation about a mansion tax grows ever more fevered whilst actual proposals remain elusive. That said, both ATED and the new CGT proposals described in this Newsletter illustrate how soft a target property is and house price inflation will surely tempt our politicians further.

Current possibilities, whether from academics or politicians, include: a progressive property tax (on houses but with relatively low values); increasing Council Tax on dwellings worth over £2m, being the latest idea from Danny Alexander; and a far more radical land value tax which would apply to all types of land.

The debate seems likely to intensify between now and May 2015. We are monitoring developments and will publish specific briefings as soon as there is something concrete to report.

Other Budget news

• Pensions: Far reaching reforms were announced to remove the requirement to purchase an annuity from pension funds and to relax the tax charges that apply to the withdrawal of funds. Some transitional measures were introduced on 27 March but the full reform will take effect from April 2015 following consultation.
• Savings: From 1 July 2014, the ISA will become a “new ISA” (NISA) with a limit of £15,000 for 2014/15 and will be able to hold any combination of cash and shares. From the same date both the Junior ISA and child trust fund limit will also rise to £4,000. From 1 June 2014, the premium bonds subscription limit will rise to £40,000; it will rise again to £50,000 in 2015/16.
• The IHT debt rules introduced from April 2013 will be amended so that foreign currency bank accounts will be treated as if they were ‘excluded property’. Therefore a liability (whenever incurred) will be disallowed for IHT purposes if borrowed funds have been deposited in a foreign currency account in a UK bank (either directly or indirectly) in respect of deaths after the date of Royal Assent of Finance Bill 2014.
• IHT Exemptions: The Government will consult on extending the existing IHT exemption for members of the armed forces who die on active service to all emergency service personnel who die in the line of duty.
• CGS: The annual cap on the total tax deductions that can be claimed under the Cultural Gift scheme & Acceptance in Lieu (for donations of pre-eminent objects to the nation) has been increased to £40m with effect from 6 April 2014.
• Accelerated tax payments: As from Royal Assent of the Finance Act 2014 HMRC will be able to require taxpayers who have used a tax avoidance scheme to make an accelerated tax payment where it considers that there is judicial ruling which has defeated the same (or a similar) scheme.

Similarly, taxpayers will be required to pay disputed tax ‘up front’ if they have claimed a tax advantage by the use of arrangements that fail to be disclosed under DOTAS; or where HMRC invokes the GAAR.

• The Government is consulting on some potentially quite alarming proposals to allow HMRC to seize money from bank accounts from anyone who owes more than £1,000 in tax or tax credits, although this will apparently be subject to certain safeguards.
• Charity definition: HMRC is proposing to amend the definition of charity for tax purposes by introducing a new ‘purpose of establishment condition’.

This aims to prevent charities being set up to abuse charity tax reliefs and is not intended to catch genuine charitable organisations.

However one of the proposed tests would deny charitable status for tax purposes if one of the main purposes for which it was established was to secure a tax advantage.

This could potentially impact on private and corporate charitable foundations as it is arguable that one of their main purposes is to obtain a tax advantage such as Gift Aid and other reliefs on donations.

Inheritance tax news

• Revised proposals to divide the nil rate band available to trusts between all trusts created by the same settlor will be published later this year and legislation introduced in Finance Bill 2015.
• The National Audit Office is launching an investigation into the possible misuse of agricultural and business property relief from IHT, as their use has almost doubled in five years.
• The Conservative Party have indicated they would consider raising the IHT nil rate band to £1m, should they be re-elected.

FATCA’s impact on trusts

The UK and US government have reached an agreement to implement a US law, the Foreign Account Tax Compliance Act (FATCA) in the UK. FATCA was designed to combat tax evasion by US residents using foreign accounts and it requires institutions outside the US to pass information to US tax authorities. A surprising range of institutions are affected by FATCA including some private trusts.

Corporate trustees and trusts which delegate the management of investment portfolios will generally need to register with the IRS by 25 October 2014, in the latter case if more than 50% of their income derives from investments.

Alternatively they may be able to enter into an agreement with a third party (e.g. the investment manager) to register on their behalf.

Thereafter they must report any US connections annually to HMRC, who will pass the information on to the IRS.

Other trusts will not need to register but may have annual reporting requirements if they have any US beneficiaries, trustees, protectors or settlors.

All trustees should consider their status and obligations under FATCA as soon as possible. For full details please see our flyer entitled ‘FATCA: What trustees need to know.’

Public register of beneficial owners

It has been clear since last November that companies will be required to make greater disclosure of their beneficial owners, but it had been assumed that trusts would be excluded as David Cameron has argued that they should be treated differently.

However, the European Parliament has recently approved an amendment to the Fourth Money Laundering Directive, which will, if implemented, make information about the individuals behind trusts publicly available for the first time.

Each EU member state would have to keep and make available a public register listing the ultimate beneficial owners of privately owned companies, foundations and trusts. There would be provisions to protect data privacy and to ensure that only the minimum information necessary is on the register.

Whilst it is appreciated that greater transparency may help to prevent criminal activity and tax evasion, many feel that these proposals go beyond what is required to achieve this aim.

Although they do seem rather worrying, they are still at a relatively early stage: final negotiations within the EU on the Directive will not begin until later this year and then each individual Member State has to incorporate the result into domestic law before the provisions take effect.

Further, the UK government has confirmed that it will oppose the mandatory registration requirement for all trusts and will seek to negotiate a compromise.

Same Sex Marriages

Since the Marriage (Same Sex Couples) Act 2013 came into force on 13 March 2014, same sex couples are able to marry in England and Wales. Civil partners should also be able to convert their legal relationship to a same sex marriage later this year, once the mechanism to do this has been introduced.

The intention is that same sex marriages should have virtually identical tax and legal consequences and effects to opposite sex marriages.

Therefore, from 13 March 2014 all legislation using marriage terminology will be read as encompassing both same sex and opposite sex marriage. The default position for interpreting legal instruments will depend upon whether or not that instrument was in existence on 13 March 2014.

Pre-existing private legal instruments will generally be read as referring only to opposite sex marriages; and new instruments from that date will be read as encompassing both opposite and same sex marriages. The position may be reversed by inclusion of specific provisions to the contrary.

Art used in a business

The Court of Appeal has confirmed that a painting used in Castle Howard’s house opening business was a wasting asset which attracted no CGT on its disposal, upholding the Upper Tribunal decision covered in our newsletter last Spring (HMRC v The Executors of Lord Howard of Henderskelfe [2014] EWCA Civ 278).

The painting in question was not owned by the business operator, but informally permitted to be used in the business, and the Court of Appeal has confirmed that the CGT legislation does not limit the exemption to assets owned by the trader.

This is potentially a very useful decision but it may not be relevant to many cases because the CGT exemption does not apply if capital allowances have or could have been claimed on the asset. It is also possible that the law could be changed.

This Publication provides general advice only is should not be relied upon when making decisions. Neither CST nor any other professional in the firm has prepared this with a view to covering any client scenario and this document is not a substitute for professional advice. It has been prepared in conjunction with firm of Boodle Hatfield see www.boodlehatfield.com