Frequently asked questions

Who is required to file a US Federal tax return?

All U.S. citizens and resident aliens are taxed on worldwide income irrespective of where it was earned or received. In fact, a U.S. citizen that has never even been to the United States is still required to report income earned in ones resident country.However, by living outside of the Unites States you get certain exclusions of income and tax benefits depending on tax treaty with country of residence.

When do I need to file my taxes?

The annual tax deadline is April 15th with an automatic extension for U.S. citizens living overseas until June 15th. Taxpayers can also apply for a 6-month extension. While filing deadlines can be pushed off, any tax due is required on April 15th and the IRS will charge interest on any outstanding balance.

The FBAR deadline is officially June 15th however there is an automatic 6-month extension so effectively the FBAR deadline is October 15th.

I heard the U.S. government will pay me to file my tax return. Is that true?

Not really. Filing a tax return is a requirement of being a U.S. citizen and not something you get paid to do. However, there are certain situations where people are eligible for a tax refund based on refundable tax credits. At Cole & Waxman, we specialize in maximizing refunds for our clients whenever possible.

Why do we get a lower refund this year when our income decreased?

Certain refundable credits are income-based, and it is possible that lower income results in lower refunds. It is also possible that your situation unknowingly changed from the previous year, such as a child that was previously eligible for Additional Child Tax Credit turned 17 and is no longer eligible.

Why would I pay money in taxes to the United States if I've never lived there?

This is one of the most difficult ideas for expatriate filers to understand. Being a citizen of any country comes with various benefits and obligations. One of the responsibilities of a U.S. citizen is to report financial earnings and accounts to the IRS. There are many tools such as the foreign earned income exclusion as well as country tax treaties to protect individuals from double taxation, however in certain situations a taxpayer is still left with tax due to the United States.

Why do I owe the U.S. tax on my self-employment income if I already paid taxes to Israel?

If you worked for a U.S. employer, Social Security and Medicare taxes would be withheld automatically from your paycheck. Since you are self-employed, you need to include Schedule SE and pay self-employment taxes of 15.3% when you file your tax return. Since the U.S. and Israel lack a Totalization Agreement, Social Security taxes are due in the US regardless of the tax paid to Israel, as the Foreign Tax Credit and Foreign Earned Income Exclusion only apply to income tax.

Why do I need to pay social security tax if I am already receiving social security benefits?

Self-employment tax applies regardless of your age. If you are self-employed and are already receiving Medicare and Social Security benefits, you will still have to pay the self-employment tax.

What is the foreign earned income exclusion?

If you are a U.S. citizen and you live abroad, you may qualify to exclude foreign earnings from income that would otherwise be exposed to federal income tax. The annual exclusion is adjusted for inflation and is up to $107,600 in 2020. Be very careful when using the foreign earned income exclusion – not all income qualifies for exclusion (such as passive income) and not all tax is avoided (such as social security tax).

Why does the U.S. need to know my travel dates and destinations during the year?

In many cases, we need travel dates when preparing the tax return to determine eligibility for the Foreign Earned Income Exclusion (FEIE). The FEIE allows you to exclude foreign earned income (in 2020, up to  $107,600) that could decrease or eliminate your income tax due. In order to prove that you qualify for the FEIE through either the Bona Fide Residence Test or Physical Presence Test, you need to include certain details such as your travel dates and locations.

Why is my net income listed as zero on the tax return?

You may have been eligible for the foreign earned income exclusion which excludes your income earned abroad. This will reduce your net income on the return to zero.

I have honestly never heard of any of this before and have been living overseas without filing a U.S. tax return for the past 20 years. What should I do?

If you are what the IRS calls a “delinquent filer”, you need to get back on track with filing as quickly as possible. The IRS has various options for taxpayers to get into compliance, such as the Streamlined Filing Compliance Procedures. There are other considerations and options for back-filing, and it should be discussed directly with one of our tax professionals.

This whole thing sounds like a headache and I don't feel like getting started with this. Maybe I'll just wait for the IRS to contact me. What's really the worst that could happen?

Do NOT wait for the IRS to find you, at which point you could face criminal charges for tax evasion (up to 5 years in prison and $250,000 fine), filing a false return (up to 3 years in prison and $250,000 fine) or failure to file an income tax return (up to 1 year in prison and $100,000 fine). You could also have criminal charges for failure to file an FBAR (up to 10 years in prison and $500,000 fine).

My spouse is a U.S. citizen and I was told that maybe I could/should file a U.S. tax return. Is this true?

In some cases, it is beneficial to include a non-U.S. citizen spouse on the tax return. This is accomplished by making a 6013g election to include oneself as U.S. person for income tax filing purposes. You will also likely need to apply for an ITIN to be included in the filing. As an NRA spouse, you can always make timely revocation of the 6013g and no longer be treated as U.S. person for tax filing purposes. Note, the revocation of 6013g is permanent.

Do I need to file an FBAR?

 Any U.S. person who has a financial interest or signature authority over one or more foreign bank account or securities account which had an aggregate value of $10,000 at any time during the year must file an FBAR. This includes individuals, U.S. branches of foreign companies, and U.S. parents of foreign subsidiaries.