Accountant for U.S. Citizens with Foreign Pensions
U.S. tax laws can leave you scratching your head under the best of circumstances; for expats with foreign pensions, the complexity of filing taxes can reach new heights. Not only do Americans living abroad face the same filing requirements as any other taxpayer, but they are also subject to a bevy of additional reporting guidelines that only become more convoluted when a foreign pension is added to the mix.
For those who want to avoid fines, penalties, and late fees when filing their taxes from a foreign country, the experts at U.S. Tax Help can provide invaluable assistance. With decades of experience in international tax planning and preparation, the accountants at U.S. Tax Help are especially qualified to help expats meet their obligations to the IRS as simply and easily as possible. To learn more about all the services offered at U.S. Tax Help, visit us online or call us at (541) 362-9127 right away.
Paying Taxes as an American Living Abroad
It is not uncommon for Americans living abroad to think that they are free from any obligations to the Internal Revenue Service, but the fact of the matter is that the IRS will still expect an income tax return (at the very least) if you live overseas. A long list of additional forms will likely be required as well, depending on the state of your overseas assets, your living situation, your sources of income, and a number of other factors. Even establishing your country of residence requires passing one of two tests, either the bona fide residence or physical presence test:
- Bonafide residence test: The IRS will look at whether you are a bonafide resident of a foreign country based on the length and purpose of your stay. Cases are determined on an individual basis.
- Physical presence test: This test simply requires that you be physically in a foreign country for 330 full days over a 12-month period.
If you pass one of these tests, you may qualify for a number of beneficial tax provisions, though you will also likely face burdensome reporting requirements as well.
One of the most helpful provisions is the foreign earned income exclusion, which allows an American expat to knock more than $100,000 off their taxable income, provided it qualifies as both “foreign” income and “earned” income – meaning that it comes from active employment of some kind. Additional benefits include the foreign housing deduction and foreign housing exclusion, each of which allows some taxpayers to reduce their tax burden based on payments for housing, though this only applies under certain circumstances.
On the other hand, those living abroad will likely have to submit an FBAR, the abbreviated term for the Report of Foreign Bank and Financial Accounts. This must be filled out and sent electronically to the Financial Crimes Enforcement Network using FinCEN Form 114 if you have an interest in, or authority over, one or more accounts worth a combined $10,000 or more. Those with more extensive assets may have to also comply with the Foreign Account Tax Compliance Act, or FATCA, which has its own form and requirements.
Taxation of Foreign Pensions as an Expat
Any source of foreign income will have to be reported to the IRS, including pension payments made from an overseas account or organization. In fact, the considerations for foreign pensions are among the most complicated an expat may have to deal with; for instance, foreign pensions are considered “unearned” income under IRS rules – meaning that they do not qualify for special treatment under the foreign earned income exclusion – but they may be eligible for the Foreign Tax Credit.
If you are taxed by your country of residence on your pension, you may be able to claim those tax payments as a credit under the Foreign Tax Credit, which shields American taxpayers from being taxed twice on the same income. However, when filing for this credit – which is done through IRS Form 1116 – you may also have to file one or more explanatory statements with the agency. These statements are necessary if, for example, you have foreign income-related expenses, or you elect to use a certain exchange rate.
Another key consideration is the effect of tax treaties. The U.S. maintains tax agreements with a number of countries around the world, any of which can affect how a foreign pension plan is taxed. Properly filing the necessary paperwork related to your pension will require that you know whether the country where you reside has such an agreement with the U.S. and how that agreement might alter the taxation of your pension. Typically, the IRS will tax your foreign pension plan twice (when the funds enter the account and when they are paid out) but this may not be the case if a tax treaty is in place.
Experienced International Tax Experts Available for Consultation
As you can see, parsing out the filing requirements when you are an expat with a foreign pension can be more than a little confusing. Luckily, the accountants at U.S. Tax Help have decades of experience navigating the treacherous waters of the American tax system. Because the professionals at U.S. Tax Help specialize in international tax preparation and planning, they are uniquely positioned to provide the insight you need to ensure total compliance with the IRS. Don’t risk fines, fees, and penalties; schedule a consultation with an accountant from U.S. Tax Help today by visiting us online or calling (541) 362-9127.