My wife, for all I admire her for, is American. However she’s unnerved by a sudden discovery that apparently the IRS wants expats to file tax returns too. She’s not done this, like, ever. Last time she worked in the US, she was a student, well over a decade ago.
So I think she’d need to go back, what, four years? She’s earned every penny in the UK, about £32,000/$40,000 roughly, which is taxed in the UK.
So broadly:
would she be taxed on this fairly middling, strictly UK income by the US tax system?
how much trouble is she in, if she’s not filed her taxes for years?
I understand there’s a penalty fee of 5% of what taxes she owes, but if she owes nothing (right?), then they’ll fine her nothing, right?
It’s not as if they’ll arrest her on the next flight over to the US she takes, right?
You need to look at Foreign Earned Income Exclusion. The current exclusion is over $100,000, which suggests she should be OK for owing anything. She still needs to file her returns though.
I’m no tax lawyer, but have heard in seminars here in Cayman that no tax owed means no financial penalty for failure to file.
However there is one limited circumstance where that could present a slight blip. Should you as a couple decide to relocate to the US then the easiest way she could sponsor your immigration (I assume you hold UK citizenship, right?) would involve her submitting copies of her recent tax filing.
For peace of mind it is probably best that she start submitting the filings annually. If income is simply wages then it should take maybe 30 minutes to complete the paperwork she needs.
I’m sure she is familiar with the 1040 standard form. Add Form 2555 for the previously mentioned Foreign Earned Income Exclusion. She can use Form 8965 to show that she was exempt from Obamacare mandate as she resided outside the US.
As an American citizen, your wife is subject to tax reporting worldwide. However, as already stated she may be eligible the foreign income exclusion, providing she meets the requirements. If she meets the requirements, her federal tax liability may be limited, or even non-existent.
As for potential trouble, all I can offer is anecdotal. I lived overseas for years. I regularly filed my federal income tax forms. But under the foreign earned income exclusion, I owed no US federal taxes because my adjusted income was below the trigger threshold. I’ve been back in the US for a while. I still have foreign assets. Under law I am required to account and report those assets. If I fail to do so, or deliberately attempt to minimize those assets, one of the “penalties” I can suffer is a permanent IRS audit. As in forever, until I die. I also risk confiscation of those foreign assets by the IRS.
You need to find a really good tax attorney who specializes in foreign income and foreign assets, and is especially familiar with the tax treaties (if any) between the US and the country you reside. While your wife may have merely been mistaken about filing US federal tax forms because she lives overseas, the risk of a tax penalty is one thing. The greater risk is a permanent tax audit and potential confiscation of assets. The IRS is not really forgiving with overseas income and overseas assets. The “Oopsie, I didn’t know,” won’t cut it.
'Ello. I’m a US citizen residing full-time in Australia, and have been for about ten years.
Yep, she has to file. The above-mentioned Foreign Earned Income Exclusion (Form 2555 or Form 2555-EZ) will need to be attached, and will probably wipe out her income.
She needs to remember that amounts on the tax form need to be in US dollars; I look up the official conversion rate as of the last day of the year and use that.
I file Married Filing Separately, as my wife has no “tax presence” in the US - she’s not a citizen, permanent resident, or anything like that. I just fill in my (converted) income, and on line 21 fill in the amount from Form 2555-EZ as a negative amount, wiping out all of my earned income. As she has no US-specific income, I don’t see any reason to muddy the water with her information.
She did need to get a Taxpayer Identification Number (TIN) so I could fill it in on the appropriate spot. I don’t recall the exact procedure on that, but you can find it on the IRS website.
Now, I’d worked for H&R Block for a few years, so I was fairly comfortable working out all of this on my own. If neither of you have any tax prep experience, I’d also suggest speaking to an expert - in other words, I was a tax preparer; I am not your tax preparer.
Ignorance is not an excuse; but the worst I’d expect is that she has to file forms for all of the past years. The IRS is picky, but not usually vindictive.
At least when I used the foreign income exclusion, one of the requirements was that the return be be filed on time (although you could get an extension and there was an automatic 2 month extension), so that would work only for 2016. There is no such limitation, however, for the foreign tax paid credit and that ought to wipe out any tax owed. Since I have retired, my pension cannot be excluded, but the foreign tax credit has wiped out any tax owed.
I haven’t investigated that; it cost me 2.95AUD to mail in my last set of forms. The forms are available as downloadable PDFs on the irs.gov website - here.
Download what you need, fill them out in Adobe, save and print. I’ll save both the blanks and the filled-in forms, but I’ve got plenty of storage space.
I’ll note that for the first few years I resided in Australia, I had no income and filed no returns. Nobody’s said boo since then.
Overall, my non-professional advice would be to speak to a tax professional soon (to make this year’s filing deadline), but unless she made over about 100,000 USD during any time since she’s moved, she’s unlikely to face any penalties. No longer a professional, not your advisor, etc.
Thank everyone! I forgot to mention something. She wants to get her Right to Remain in the UK at the end of the year. Would this put a barrier on that?
But she does need to file an annual FinCen FBAR declaration of any assets over $10,000 that she owns or has control over outside the USA. She now falls in the magical category of “a US person” (a uniquely American concept), and is subject to US tax law, even if she never sets foot in the USA. Those reported assets are not taxable, and it is unlikely anyone will lever look at them, unless she is audited for some other reason in the future. But the fines can be heavy for merely failing to file FBAR annually. If she has funds in an overseas financial institution, most countries (including Switzerland) have a treaty in which their banks are compelled to report “US person’s” assets to the US Treasury Department.
I’m not sure. I don’t think so, I think just liquid assets that can be denominated in cash value, held in a financial institution. Said institution required to identity any US Persons as clients, and report their holdings to the US Treasury Department.
Increasingly, overseas banks are now refusing to accept depositors who are identifiable as US Persons. Swiss banks are kindly asking US depositors to close their accounts and take their business elsewhere, rather than to comply with US Treasury snooping and record-keeping. I understand that a Swiss bank, if the amount on deposit is in the millions of dollars, will undertake to do the necessary creative accounting to preserve secrecy without undue complications. (No cite, this based on personal account by a friend whose Swiss account has been closed.)
With the heavy disclaimer that I am not a lawyer, accountant, etc…
If the house is her primary residence, then her interest in the asset probably does not count as a reportable asset under FBAR or FATCA regulations. Those regulations generally speak to “accounts” of various sorts.
If she owns a house as a part of rental property that she owns then how that ownership is structured may come into play. If, for example, such ownership is as a part of a corporation or trust in which she holds a significant ownership interest then her financial interest in that corporation/trust (and thus the real estate) probably is subject to mandatory reporting.
Another area of potential liability for reporting for Americans residing abroad is their pension or other retirement investment account. What must be reported and what is exempt is not particularly clear.
Getting advice from a real lawyer and/or accountant is highly recommended, particularly for those Americans with complicated overseas financial lives.
NOTE: YOU DO NOT HAVE TO BE THE OWNER OF THE ACCOUNT.
If your elderly grandmother made you an authorized signer on the account so that you could run errands to the bank for her, it counts. If you are the bookkeeper for a small foreign company and you get to sign paychecks or expense checks (or authorize electronic transfers from the company account at a foreign bank), it counts.
I am a US citizen who is a resident of Panama. Since I can take the Foreign Earned Income Exclusion, I don’t pay income tax. However, I do have to pay payroll taxes (Social Security and Medicare). Since I am self-employed, I pay both the employer’s and employee’s halves, which amounts to 15%. The UK has a Social Security Agreement with the US, however, so OP’s wife may be exempt from this.