Ep 64: Your Top 5 Cross‑Border FAQs, Demystified
Listen & Subscribe
We tackle the complexities of cross-border taxes for American expats. We address the top five frequently asked questions expats have about their tax obligations while living abroad.
We start by emphasizing the need to file U.S. taxes even when residing overseas, noting that U.S. citizens are taxed based on citizenship rather than residency.
They also highlight the importance of reporting foreign bank accounts and the potential penalties for non-compliance with IRS regulations.
We also discuss filing jointly with a non-resident alien spouse, the implications of owning rental properties both in the U.S. and abroad, and the process of setting up a business entity in a foreign country.
Key Takeaways
You must file U.S. taxes even if living abroad.
Foreign bank accounts must be reported to avoid penalties.
Filing jointly with a non-resident spouse can have tax implications.
Rental income from abroad needs to be reported on U.S. tax returns.
Setting up a business abroad requires understanding local laws and U.S. tax obligations.
Chapters
00:00 Introduction to Cross-Border Taxes
01:18 Filing Requirements for Expats
03:55 Reporting Foreign Bank Accounts
05:41 Filing Jointly with a Non-Resident Spouse
10:17 Handling Rental Properties
14:02 Setting Up a Business Abroad
Episode Links and Resources
The IM Café Finance/ Tax Roastery (Store) is Live!
Grab “The Comprehensive Checklist for Foreign Nationals on Work Visas Leaving the U.S.”
Currently on sale, to celebrate our 50th episode!
If you'd like to work with us on your finances or taxes, check out the process
-
Jane Mepham, CFP (00:00)
Hey, wait a minute. Do I really need to report my foreign accounts even overseas? Can I start a business abroad without triggering an IRS audit on extra filings? If you got those questions, this episode is for you.
Are you an American living abroad? In other words, an expat? Do you wonder if you're doing everything right with filing your US taxes? Again, you are not alone.
Cross border taxes are one of the most complex and confusing parts of expat life. And we find that these questions keep coming up year after year. So in today's episode, Manasa and I have picked the top five questions for cross border taxes, and we're going to break them down for you and go through them.
Manasa Nadig, EA (00:52)
But before we do, let's pause here for a second because we have a request for you. We request that you give us a five-star rating on Spotify or Apple. And this really helps us get out there to people who want to listen about cross-border taxes. So go out there, give us a five-star rating on Spotify and Apple.
and we would truly appreciate it. yeah. Jumping into these top five questions that we get all the time from our expat clients, the first one is, do you have to file and or pay taxes if you live abroad? The answer to that question is yes.
Jane Mepham, CFP (01:21)
Awesome.
Manasa Nadig, EA (01:41)
you do have to file your federal and possibly state tax returns every year by the due date. And this is because the United States is only one of two countries where taxes are based on citizenship and not residency. So all your US source income and foreign income, including, but not limited to, interest,
dividends, rental income, business income, all of these need to be reported on your U.S. Form 1040. So if you're paying taxes in the country where you're residing, you may be able to claim a credit for the taxes paid, or you can also take advantage of something called a foreign earned income exclusion, also known as the FEIE.
And we have talked about the FEIE in other episodes and we will link that in our show notes. When you file taxes and you live abroad, your taxes are due on June 15th and not April 15th. You can file an extension though and get four more months and then your taxes will be due on October 15th.
But do remember that you do have to file because you can be penalized if you do not file your returns or you cannot claim the foreign earned income exclusion if you're not filing returns. You do need to file a return in order to claim these. And that will also help mitigate double taxation if that were to be the case. And another thing to remember is if you do not file or pay taxes,
then the statute of limitations just does not close. So those years for which you have not filed remain open.
Jane Mepham, CFP (03:31)
Okay, as you file your taxes, the second question that comes up is, what about all my foreign bank accounts and financial accounts? I have this bank account I opened in whatever country it is. What am I supposed to do with them as far as taxes are concerned?
So these two acronyms we talk about all the time and we actually have in one of our last episodes we talked about them and we're going to include it in the show note. This is the F BAR F B A R and F A T C A F BAR and FATCA.
These two statutes dictate thresholds for which you have to file informational forms. The FBA threshold is 10,000 in aggregate balances, basically means all your accounts overseas. Whereas the FATCA threshold depends on your filing status. And again, we'll include something in the show notes that just gives you what all the thresholds are for this.
The key thing to be aware of is because as Manasa has talked about US being citizenship based taxation, you need to be very transparent and you need to report everything. And what I do want to say here is that penalties for non-compliance can be very high. And this is one of those cases where we say, please, please, please find a tax professional to work with you. Because if you're out of compliance, there's a possibility
They might be able to help you come into compliance, but you gotta raise your hand and say, help me fix this.
Manasa Nadig, EA (05:08)
yes. speaking of filing and FBARs and FATCAS and threshold and filing statuses, the third very, very good question that we get from our clients is, hey, my spouse is not a US citizen, but it looks like I might do better if I can file jointly. So.
Can I include them on my US tax return? So here's where it gets really interesting. Your non-resident alien or NRA spouse can be included on your US tax return so that you fall into a different tax bracket for married filing jointly. But a very important thing to remember here is that
when your spouse elects to file jointly with you, even though they may be a non-resident alien, but because now their information is being reported on the US tax return, all of their foreign income and their financial assets abroad also becomes reportable on the tax return to the US Internal Revenue Service.
So if you choose not to be dictated by US tax compliance, or your spouse does not want the burden of having to report everything to the US, then there are other filing statuses available to you. You would need to use something called the married filing separate.
Or if you have dependents who you can claim and those dependents are American citizens, then you can use a head of household status. So these are all planning opportunities which you may have to consider either before you become a US resident or after you become a resident. But this is a plan that you need to make, taking your spouse's income and
foreign assets as well. Remember this though, your spouse cannot be your dependent. So that's something that kind of gets caught up in the crosshairs here. And another thing also important to remember is in order to file jointly, even if they don't live in the US or even otherwise, you will need
what is called an ITIN or an Individual Tax Identification Number to file jointly. So that's a process as well where you have to apply and get that. So can you file jointly with your non-resident alien spouse? Yes. Is it good for you? Maybe. Is it a planning opportunity? Definitely.
Jane Mepham, CFP (07:56)
So.
Actually, before I go to number four on the ITIN, I've seen this question come up a lot where somebody is like, okay, I'm living in XYZ country, I'm married to a US non-citizen. And they ask the question that you just asked. And the one thing they always say is, and I don't know if you want to go into this or address this in a future episode, how do you go about applying for an ITIN when you're outside the country for
your non-US non-residence spouse Is that something you want to address now or do it later?
Manasa Nadig, EA (08:32)
We can look at it really briefly and then we could always do another episode because you know what, there's always something extra to talk about with all of this stuff. It's never ending. Well, we won't go very deep into that rabbit hole. However, yes, you can apply for an ITIN even possibly. Let me just say possibly in the country where your spouse resides.
Jane Mepham, CFP (08:35)
Okay.
Manasa Nadig, EA (08:57)
There may be what are called certified acceptance agents who are available in that country, or they may be able to go to the US consulate and apply for it. In order to get your ITIN, there are some original documents that need to be provided to these agents where you are applying for this. it is kind of, I would say you will have.
people have to think about it because you're sending off your original passports and things like that. So people always prefer to go to somebody where they can sit across the table and get this done. And in that case, you have to look through that. The IRS does have a lot of addresses on their website for certified acceptance agents in many different countries. And you can make appointments to do that.
The one thing though, when you're applying for an ITIN, it's usually a good idea to apply it with your tax return. that's just how far we'll go today with this ITIN application.
Jane Mepham, CFP (09:59)
So yeah, I just had to bring that up because it's interesting. Yeah. Okay.
Manasa Nadig, EA (10:01)
Of course, no, that's a good one. And people would
you know, it's relatable. Yeah.
Jane Mepham, CFP (10:07)
Yeah, okay. It really comes down to it depends, as you said, and there's different ways of doing it. So I'll go to number four. Number four question that we see is, Jane, or hey Manasa, I have rental properties in the US, or I've left the US and I'm renting my primary home. and by the way, in the foreign country where I live now, I've also bought a house and I'm renting it out.
Manasa Nadig, EA (10:13)
Mm-hmm
Mm.
Jane Mepham, CFP (10:34)
What do I do with it? How do I report this? The answer is again, because of the U S being citizenship based taxation, all your rental properties, income and expenses, whether located in the U S or abroad, wherever they are, they need to be reported on your U S tax return, VSK2E, which is typically attached to your form 1040.
The only thing though I do want to call out and I think we wouldn't go into too many details is the depreciation treatment on the US properties and the foreign ones will differ. And I think that's all I'm going to say. Unless, Manasa, you want to add more to that since you complete taxes all the time. Do you want to add anything else to that part? Okay. Thank you. ⁓
Manasa Nadig, EA (11:19)
for sure. ⁓ Yes, yes.
So, you know, the this is a very common mistake that people make. And we really kind of need to pause here and look at what those rental properties are. Now, first, if they are residential properties, then the American or the US side
rental properties are depreciated, you know, faster, which is at 27 and a half years. But when they are abroad, they are slower between, you know, something like 30 to 40 years. So it might not make a huge difference in the long run, but depreciation treatments kind of play into a lot of other things like how much, you know, your
income you're declaring and what it all comes about to. So although this is kind of like a paper expense, you know, it still plays a big role in how much tax you might end up paying to the US government. So you have to be mindful of that. One other thing while we are here, Jane, is if a US citizen is living abroad and now this is not just like
one little rental home that they are renting out, but it happens to be a few of them, or maybe even they found a great opportunity and they acquired commercial properties and they are renting these out, then that is considered a qualified trade or business. So once that kind of comes into play, then there is an additional form, 8858.
that they have to file in order to declare all of these rental properties. And of course, of course, of course, there are penalties for not doing these things. So you have to work with somebody here who, or rather a professional who understands what are all the different implications of having rental properties in a foreign country and, or also the US. So.
Again, things going to get complicated when you have rental properties. Let's just put it that way.
Jane Mepham, CFP (13:32)
Yeah, and thank you for jumping into that. Part of it is because you're dealing with this stuff all the time and I ask you all these questions, it just seems easy to let you deal with that. So that's all I'm going to say. Report, report, report everything. Be transparent.
Manasa Nadig, EA (13:44)
Of course.
Absolutely. And on that note, let's get to the fifth top FAQ that we get. Can I set up a business entity in a foreign country? Can I do that with a foreign national? And what do I have to do to report this business entity? I mean, do I even have to report it? So of course, the answer is yes. You can set up an entity in a foreign country.
by yourself in partnership with the foreign national, however you want it to be. Now, this entity can be a partnership or a corporation or what we call an LLC in the US or really a disregarded entity. depending on what the share is in these entities, suppose you invested 5%.
10%, 50%, it's all 100 % you, depending on that. And also depending on the type of entity it is, whether it's a partnership or a corporation or a disregarded entity, there are other, what we call international information forms that need to be filed. And depending on the entity, could be a 5471 or an 8865 or an 8858.
you have to be mindful of what your share is in these entities. And of course, again, goes without saying, non-filing and non-compliance result in high penalties. And you get into litigation with the Internal Revenue Service for years and years, which you don't want. So be mindful of that. And also,
If this entity has a bank account and now because you're co-owner of these and you have signatory authorities on these accounts, these accounts need to go on your F BAR if they cross F BAR thresholds. So I'm thinking if you're running a successful business in Germany, crossing a $10,000 threshold may not be that difficult, right? And so remember, entity, bank account,
F BAR thresholds and yes, also depending on what your share is in these, all of those different forms we just mentioned. So would you like to add anything to that or any other points, Jane?
Jane Mepham, CFP (16:07)
Yeah, actually I
do. One thing I want to call out is obviously this is somebody that's straddling two countries. You're a US citizen. You're living in another country. The way we are answering these questions today and the way we are looking at them, we are looking at them as if we are in the US looking out towards you out there and letting you know what IRS will ask of you. Now,
There's probably a lot of local laws that you need to follow. So one of the things we always advise is in addition to working with the U.S. cross border tax professional and tax advisor, you also want to make sure in that country, especially where you're starting businesses, different entities that you're working with somebody in that country that understands the tax and legal implications and also understands that you are
a U.S. expert. So I think that's really is key that we specify where we are and what else you need to do. And of course we cannot advise you on XYZ country laws and legal implications. So I think that's that's all I want to add, Manasa
Manasa Nadig, EA (17:21)
that's that was awesome, actually, because you know what we are always you and I are talking to people in the other countries and trying to figure out, you know, what the law is over there. For example, like Jane was just talking to somebody ⁓ the other day. And this client has happened to have expatriated to India. But, you know, there were certain.
foreign ⁓ retirement accounts that they needed to now start taking distributions from and the taxation aspect of that would have been different in India. So Jane needed to work with their accountant there and go into great detail so that we could mitigate taxation. that was actually an amazing case study. So maybe sometime we'll go into it, right Jane?
Jane Mepham, CFP (18:08)
I think
we should have been thinking a lot about it because we, you and I and the other people on the other end spent a lot of time on it. And it really goes to show the power of, think, not only networking, but actually working with other cross border professionals. Yeah, let's talk about it. I think we can actually make an episode out of it. Yep.
Manasa Nadig, EA (18:12)
Yeah.
Yes.
Absolutely, absolutely.
So folks, looking forward to more great episodes and case studies and all of that coming up this year in our, you know, lineup. So don't miss out on any of these great episodes coming your way. Go to our website and sign up for our newsletter. We send out like these really great tidbits and you know, we keep you updated with all of the many changes going on with tax law and all that good stuff go to our website theimcafe.comwww.theimcafe.com and sign up for our newsletter thank you so much for listening
SHARE THIS EPISODE
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.