Accountant for U.S. Expats with American Pensions
Dealing with the demands of the Internal Revenue Service as an expat can be troublesome for even experienced taxpayers, especially when passive income is involved. Expats who receive pension payments from a U.S.-based plan have to follow convoluted withholding and reporting guidelines to stay in compliance with the law; these guidelines are in addition to a variety of other requirements and financial obligations imposed by the IRS.
Trying to jump through all these hoops on your own can lead to costly mistakes, but an international tax specialist like those at U.S. Tax Help can make a difference. The knowledgeable accountants at U.S. Tax Help are led by Ted Kleinman, a CPA with decades of experience helping expats to better secure their financial future through tax planning and preparation. Learn more about how the experts at U.S. Tax Help can assist you in your dealings with the IRS by visiting us online or calling (541) 362-9127 today.
Paying Taxes as an American Expatriate
As you can probably imagine, paying your taxes while living in another country can be a complicated process. Many expats labor under the mistaken belief that leaving the country exempts you from your tax obligations, but this is not the case; if anything, moving abroad only compounds the difficulty of the tax filing process.
Not only do expats have to file a tax return with the IRS using Form 1040, but there are a host of credits, exclusions, exemptions, and deductions for which a taxpayer may qualify. The foreign earned income exclusion is a prime example of this; taxpayers who live in another country and earn a wage may be able to shield over $100,000 of their income from the IRS through this exclusion. However, to take advantage of it, you must pass either the bona fide residence test or the physical presence test:
- Bona fide residence test: You must be a bona fide resident of a foreign country for a period of at least one tax year. Determinations of residency are made by the IRS on a case-by-case basis.
- Physical presence test: You must be physically present in a foreign country (or countries) for at least 330 full days over a period of one year, regardless of when the period begins. The days do not need to be consecutive.
If either of these apply, you can likely file Form 2555, Foreign Earned Income, and exclude much of your income from taxes. Things like the foreign tax credit and foreign housing deduction can further reduce your financial obligations to the U.S. government.
Unfortunately, not every aspect of paying taxes from overseas is advantageous. Anyone with financial assets in another country – such as, say, a bank account – may have to report it to the IRS through a specific procedure. For example, the Report of Foreign Bank and Financial Accounts, better known as the FBAR, requires that you submit Financial Crimes Enforcement Network (FinCEN) Form 114 if you have an interest in, or authority over, one or more bank accounts totaling over $10,000 at any point during the year.
How American Pensions are Taxed as an Expat
As complex as the requirements are for expats filing an income tax return, adding pensions to the mix can make the process even more puzzling. The taxation of pension plans can vary depending on whether your plan is qualified or unqualified under IRS guidelines; qualified plans will likely be taxed according to the so-called “Simplified Method,” while unqualified plans or those beginning before November 18, 1996, will use the “General Rule.” The exact implications of those guidelines are too complex to cover here, but the professionals at U.S. Tax Help can further explain their workings.
Another important point to remember is that, regardless of whether you qualify, you cannot apply the foreign earned income exclusion – or almost any other expat-centric deduction or exemption, for that matter – to your pension payments, as they are considered to be neither “foreign” or “earned.” However, if you live in another country and your pension is taxed by that nation’s government, you may be eligible for the Foreign Tax Credit. In essence, this credit grants some relief for expats who might otherwise be taxed twice on the same income; in this case, you may be able to use the taxes you paid on your pension to lower your obligation to the IRS.
Tax treaties are another complicating factor in the pension taxation process. The U.S. maintains a number of different tax treaties with the various governments of the world, each of which effectively modifies the tax filing process for expats living in that country. Many of these treaties include provisions that reduce or prevent taxation on American pension plans, though there are some exemptions to this as well.
International Tax Experts Available to Answer All Your Questions
Taking on the IRS’s many filing requirements by yourself can be troublesome for even a humble domestic taxpayer; those living abroad face even greater challenges as April 15 approaches. If you are an expat with an American pension and you are unsure about how to account for it as part of the tax filing process, the professionals at U.S. Tax Help can assist you. With decades of experience and a specialization in international tax preparation and planning, the accountants at U.S. Tax Help are uniquely qualified to solve your tax problems. Schedule your first consultation today by visiting us online or calling (541) 362-9127.