Ep 40: What is English for "Top 10 Cross-Border Tax Blunders"?
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We've seen a lot of mistakes made by individuals filing taxes, particularly focusing on immigrants, foreign nationals, and green card holders living overseas.
In today's Shortie, we list these critical mistakes, hoping you'll avoid making them.
They range from ignoring taxes, ignoring immigration status, forgetting to report overseas gifts, including foreign dependents, all the way to completing the backdoor Roth wrong.
We also address those overseas with expired green cards who are ignoring their tax obligations.
If you find yourself in this situation, please contact a tax pro to help you rectify these issues and hopefully avoid what could be a huge tax penalty.
Onto the 10 mistakes.
Episode Links & Resources
Are you Tax-compliant With Your Overseas Assets? - Free Guide - Scroll to the bottom of the page.
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Jane Mepham, CFP® (00:02)
We're back with another Shortie episode where in 10 minutes or less, we take a terminology or a term used in the cross border space and just give you a very high level definition. In today's Shortie we're going to talk about, or rather list out the 10 mistakes we see folks making while they are filing taxes. And this of course applies to immigrants, foreign nationals on work visa or US expats
and green card holders living overseas. Okay, mistake number one, not filing taxes. That's all I'm gonna say.
Manasa Nadig, EA (00:43)
Mistake number two, ignoring your foreign income and thinking that does not affect US taxation. So remember, when you live in the US or if you're a tax resident of the US, you have to file taxes on your worldwide income. And that brings me to the third one, which I'll knock it out of the way, Jane, is kind
Jane Mepham, CFP® (01:08)
Sure.
Manasa Nadig, EA (01:09)
of connected, ignoring your tax
ignoring your worldwide financial assets. So remember, FATCA, F BAR the FATCA threshold is higher, $100,000 if you are married filing jointly and you live in the US, or $50,000 if you live in the US and file single. F BAR is $10,000 of foreign financial assets.
Quick definition also of a PFIC, which is a foreign mutual fund, passive foreign investment corporations. Please don't ignore that. That's also another big mistake people make.
Jane Mepham, CFP® (01:54)
Okay, number four, doing Back door Roth the wrong way and then filing it wrong. The mistake we see
Manasa Nadig, EA (02:03)
Ouch.
Jane Mepham, CFP® (02:04)
here, I know it's where you completely ignore the pro rata rule and we actually have a whole episode on this. And then you end up not filing form 86 0 6 There's a lot of complexities. It's an easy thing to do and it's an easy thing to make a mistake on. So
Don't do the back door Roth wrong. And then number five, just moving on because I see this a lot, is not reporting foreign gifts. So remember, if you get a foreign gift from overseas, from people who were US tax non-resident, there is no taxes on it, but you need to file form 3520
If you receive more than a $100 K or if you receive, I think it's about $19 K this year from a corporation. That's all I'm going to say about it. Moving on.
Manasa Nadig, EA (03:01)
Yes, yes, number 6. And this is kind of a little controversial one because anyway, I'll come to that. You claim your foreign based parents on your taxes, even if they don't qualify. So if your parents are residents of Canada or Mexico, they might qualify, but otherwise they would
have to be US residents for you to be able to claim them as your dependents and they have to pass all of the dependency tests. So know whom you can claim as your dependents. That's what I would like to say here. Yes, Jane.
Jane Mepham, CFP® (03:49)
and pretty interesting. think we might need to talk a little bit more about that in another episode. Anyway, number
Manasa Nadig, EA (03:55)
Yes.
Jane Mepham, CFP® (03:56)
seven, using the wrong status. What I mean by this is what we see a lot of is, for example, a student on F1 visa who's in the country for less than five years should be filing taxes as a U.S. non-resident. But a lot of times we see them filing as a resident.
We've also seen a few cases where somebody should have been filing as a resident and they end up filing as a non-resident. So the bottom line on this is know what your tax residence is, which has nothing to do with your immigration status residence. What's number eight?
Manasa Nadig, EA (04:37)
Yeah,
yeah. And so going on with that same theme here, know the connection between your immigration status and your tax filing, right? So just like Jane said just now, the F1 visa, if you're a student, comes with special rules, there's substantial presence test, and you're not considered to be a tax resident of the US for.
a limited number of years, five, and you do not have to file a regular 1040. You file a 1040-NR. And there are similar sort of advantages, or you may look at it as a disadvantage, but whatever it is, these are the rules. The J-1 visa, or if you're on a G-4 visa, these are connected to
what your immigration status is. So make sure that you're either working with somebody who's aware of how the immigration status affects your tax return, or when you are working with somebody who does these, make sure that they know what your immigration status is. So it's not a DIY or a regular big box firm that can help you.
Yes, Jane.
Jane Mepham, CFP® (06:05)
Okay.
All right. I'm going to go back a little bit to number seven. One more mistake we see about the wrong
Manasa Nadig, EA (06:12)
Yeah.
Jane Mepham, CFP® (06:13)
status is where somebody should be filing married, filing jointly, married, but filing single or single filing or head of household. So those are all the different status you can use besides the residency versus the non-residency. Pick
the correct one. Number
Manasa Nadig, EA (06:37)
Mm-hmm.
Jane Mepham, CFP® (06:38)
nine, failing to pay estimated taxes throughout the year. I'm not going to go into too many details. I'll just leave it at that for now. We're down to number 10.
Manasa Nadig, EA (06:49)
I
know, drum roll please. So number 10 is something that we may probably have to flesh out in a longer episode, but this is a mistake that we see a lot. So you are a green card holder and you live overseas and somehow you have let your green card expire.
So you have not renewed your green card. There is a difference between an expired green card and a surrendered green card. A surrendered green card is when you officially surrender your green card and you are no longer considered a permanent resident of the US. There is a process to that and it needs to be done finally by
going to a U.S. consulate or an embassy and working with an officer there. And an expired green card is basically just not renewing the green card, you know? So by letting a green card expire though, you are still subject to all of the tax rules and compliance that would be if you were still holding on to it.
That's a huge thing that I see a lot. Sometimes this kind of works out to people's advantage because they just suddenly find out that, they can file jointly, you know, speaking about your filing status. So anyway, we'll flesh it out more, because I think we need a whole episode to dig into that. So yes.
Jane Mepham, CFP® (08:39)
Yeah, okay. So in summary, the top 10 mistakes are one, not filing taxes, ignoring foreign income, ignoring worldwide taxation, FATCA FBA thresholds, doing a backdoor Roth the wrong way, not reporting foreign gifts. Number 6, claiming your foreign based parents. Number seven, using the wrong status. Number eight, ignoring the connection between immigration status and taxes.
Number nine, not paying estimated taxes. And finally, being overseas on an expired green card and assuming you're no longer expected to file taxes. I think we've done it. Anything else you want to add or are we good to close it, Manasa?
Manasa Nadig, EA (09:24)
We're good to go, actually. So thanks for listening to another Shortie episode and do let us know if you have something that you want us to talk about. We would love to hear back from you. Our website is theimcafe.com. T-H-E-I-M-C-A-F-E dot com. Thanks. Bye.
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The speakers' views and opinions discussed in this episode should not be considered financial, tax, or legal advice. Consult your advisor for any legal, cross-border tax, and financial advice.