Are you a US citizen? Did you know you have US tax filing and paying obligations, irrespective of where you now live?
If you are considering relinquishing your US citizenship, think again. There may be adverse US tax consequences of doing so, if not undertaken with appropriate planning.
Taxes and the US citizen
As a US citizen, once your annual income exceeds a threshold amount (being USD $10,300 for a single person aged under 65), you must file a US tax return annually, reporting worldwide income. This applies regardless of whether or not you actually live in the US.
In this respect, various mechanisms in the US tax system operate to limit double taxation for US citizens living overseas. Accordingly for many US citizens the issue is generally one of administration (filing US tax returns) more so than necessarily paying additional taxes to the US Internal Revenue Service (IRS).
Nevertheless the filing obligations are onerous; as soon as you have a foreign bank account holding more than USD $10,000 at any time during the year, you also need to file a Report of Foreign Bank and Financial Accounts. Larger balances in your foreign accounts may also mean more detailed information needs to be reported.
In addition, the Foreign Account Tax Compliance Act (FATCA) was passed in 2009, requiring foreign financial institutions to determine whether their clients are US citizens. The IRS has also negotiated intergovernmental agreements with many foreign revenue authorities, including the Australian Taxation Office, to complement the FATCA regime.
In view of the above, the IRS also offers incentives to US citizens to ‘come in from the cold’. Notably, the incentives generally allow some reduction or abatement of penalties otherwise applicable.
There are currently several publicised programs which have alerted many US citizens to their tax filing and paying obligations. As a consequence many US citizens are considering relinquishing their US citizenship.
When a US citizen ceases to be one, they become an ‘expatriate’ (this is also true for some people who relinquish their green cards). Being an expatriate in itself generally has no meaningful tax consequence, however a subcategory of expatriate, ‘covered expatriate’, entails several adverse consequences.
A person is a covered expatriate if any one of the following tests is met (with limited exceptions applicable to particular persons):
• At the time of expatriation, they are worth more than USD $2 million; or
• Their average US tax liability for the five years preceding the year of expatriation was more than USD $159,000; or
• The person fails to certify that they are fully compliant with their US tax obligations. This means both filing and payment (tax, interest, and penalties). The certification does not need to be made at the time of expatriation. It is due with the tax return for that year (which can be filed as late as 15 December of the following year).
The consequences are penal and it is strongly advisable for you to avoid becoming a covered expatriate, or at least without having a thorough understanding of what this might mean for you.
If you are a US citizen and wish to understand how you may be impacted by the above, please contact our dedicated tax advisory team on (02) 9262 4933. We would be pleased to assist you in navigating these complexities and to partner with you in developing a suitable plan going forward.
This article was written with reference to “Expatriate Games”, by Kevyn Nightingale – first published in Volume 25/Issue 4 of the STEP Journal, dated May 2015.