Austria is renowned worldwide for its rich musical and artistic traditions, while the capital city of Vienna is prized for its architectural beauty. In addition to these magnificent cultural highlights, Austria also enjoys status as the 12th wealthiest country in the world, with a robust economy fueled largely by tourism, agriculture, trade, and industry. These factors have come together to make Austria an appealing destination for countless US expatriates.
While American expats living in Austria may get to reap the benefits of a dynamic national history and a high standard of living, they are still required to report worldwide income to the Internal Revenue Service (IRS). The IRS is well-known for aggressively pursuing and penalizing non-compliant taxpayers regardless of which country they call home, and Austria is no exception to this rule.
If you have expatriated to Austria and have any doubts, questions, or concerns about your US tax liabilities and reporting requirements, it is absolutely critical that you consult with an experienced CPA like Ted Kleinman. Ted has over three decades of experience helping international taxpayers strategically and effectively resolve their tax disputes, minimize their liabilities, and negotiate with the IRS.
To speak confidentially with Ted, call US Tax Help right away at this link – get in touch.
Who Does the IRS Consider a Covered Expatriate?
In short, covered expatriate status is generally undesirable as this designation can lead to unfavorable tax consequences. For example, if a covered expatriate makes a gift or bequest to a US citizen, meaning money or property (such as an inheritance), the person receiving the gift or bequest is typically subject to a devastating 40% tax liability.
Because of the significant ramifications, it is important for expatriates to determine whether they are considered covered expatriates based on IRS standards. The IRS designates you as a covered expatriate if you expatriated from the US to Austria on or after June 16, 2008, and you meet even one of the following criteria:
- Your average annual net income tax, during the five years before your expatriation, surpassed the following totals by year:
- 2012 — $151,000
- 2013 — $155,000
- 2014 — $157,000
- 2015 — $160,000
- Your net worth met or surpassed $2 million on the day you expatriated to Austria.
- You were unable to certify tax compliance with the IRS, dating back five years prior to your expatriation, via Form 8854 (Initial and Annual Expatriation Statement).
It is a common and dangerous misconception that only the very wealthy can be covered expatriates. Regardless of an individual’s financial background, any taxpayer may find themselves contending with covered expatriate status arising from non-compliance issues such as failure to file or failure to pay tax.
Ted Kleinman will help you understand how covered expatriate status impacts you and your loved ones’ tax liabilities, and can guide you through the general reporting requirements for US citizens and residents abroad.
Who Has to File an FBAR?
Failure to pay and/or file an income tax return is not the only compliance issue which can place taxpayers into legal and financial jeopardy. There are also significant civil and criminal consequences to failure to file an FBAR.
FBAR, which stands for Report of Foreign Bank and Financial Accounts, was designed to discourage and crack down on the concealment of funds and assets with foreign banks and foreign financial institutions (FFIs). Note that FBAR is not to be confused with FATCA, or the Foreign Account Tax Compliance Act, which strives toward the same objective by requiring that certain taxpayers file Form 8938 (Statement of Specified Foreign Financial Assets).
While their ultimate goals are similar, Form 8938 is not a substitute for FBAR, which must be filed electronically via the BSA E-Filing System using FinCEN Report 114. FinCEN Report 114 replaces the previous form, TD F 90-22.1.
But who must file an FBAR? FBAR filing requirements apply to individuals who had “financial interest in or signature authority over at least one financial account located outside of the United States” (in this case, Austria), provided the aggregate value of the account surpassed $10,000 at any point during the year. Incidentally, non-willful failure to file an FBAR can result in a $10,000 civil penalty. Willful failure carries a $100,000 penalty.
Why Participate in the Streamlined Offshore Procedure?
Put simply, the civil and criminal penalties for many tax violations are absolutely devastating. Unfortunately, the civil penalties, while harsh, tend to pale in comparison to the criminal consequences.
Tax evasion, for example, carries a potential $250,000 fine as well as a maximum prison term of five years. The criminal penalties for failure to file an FBAR are even more severe: a fine of up to $500,000, in addition to a maximum prison term of 10 years. Even comparatively “minor” tax crimes, such as failure to file a tax return, can lead to one year in prison and $100,000 in fines.
This is precisely where the Streamlined Foreign Offshore Procedure, enters the picture. While use of the term “amnesty program” is somewhat questionable, as participants may still be subject to certain penalties and must pay the tax due plus interest, it is objectively true that the Streamlined Offshore Procedure carries a major benefit which far outweighs the risks of continued non-compliance: a significantly decreased likelihood that you will be targeted for criminal investigation and prosecution. The IRS encourages taxpayers to make a voluntary disclosure “because it enables them to become compliant, avoid substantial civil penalties, and generally eliminate the risk of criminal prosecution for all issues relating to tax noncompliance and failing to file FBARs.”
If you’re a US expatriate residing in Austria, or if you are planning on expatriating to Austria in the near future, it is of the utmost importance that you review and resolve your tax liabilities and compliance issues before your tax situation worsens. Keep in mind you will not be permitted to participate in the Stream Offshore Procedure once the IRS has already begun a civil investigation into your activities.
Tax Treaty Between the U.S. and Austria
The US-Austria tax treaty plays a crucial role in shaping the taxation landscape for US expatriates in Austria. Fortunately, our tax CPAs can help U.S. expatriates understand these provisions and optimize their financial situation while residing in Austria.
Taxation of Income
The treaty outlines how different types of income are to be taxed in both countries. It typically addresses income from employment, pensions, business profits, and other sources. For US expatriates in Austria, understanding the specific provisions related to their income is crucial for proper tax compliance. The treaty helps determine which country has the primary right to tax certain types of income.
Prevention of Double Taxation
One of the primary objectives of tax treaties is to prevent the double taxation of income, ensuring that individuals do not pay taxes on the same income in both the United States and Austria. The treaty provides mechanisms to allocate taxing rights between the two countries, specifying which income is taxable in each jurisdiction. This helps avoid financial burdens on US expatriates living in Austria and promotes fairness in the international tax system.
Impact on US Expatriates in Austria
For US expatriates, the tax treaty can influence their overall tax liability. Understanding the provisions related to residency, employment income, and other relevant factors is essential for proper tax planning. The treaty may include provisions regarding tax credits, exemptions, or reduced tax rates for specific types of income earned by US citizens in Austria. Additionally, it may address issues related to social security taxes and pension contributions, providing clarity on the applicable rules.
Other Provisions
Beyond income taxation, the treaty may include provisions related to the exchange of information between tax authorities, dispute resolution mechanisms, and protocols for amending the treaty. These aspects contribute to the overall framework for tax cooperation between the United States and Austria.
Inheritance and Gift Taxes for U.S. Expats in Austria
In Austria, inheritance and gift taxes are regulated by specific laws that outline the taxation of assets passed down through inheritance or gifted during one’s lifetime. Understanding these regulations is crucial for US expatriates and their families, as it can impact their financial planning and the transmission of assets.
Inheritance Tax in Austria
Austria imposes inheritance tax on the transfer of assets following an individual’s death. The tax rates are progressive, meaning they vary depending on the relationship between the deceased and the heir, as well as the value of the inherited assets. Generally, close relatives, such as spouses and children, benefit from lower tax rates compared to more distant relatives or unrelated individuals.
Gift Tax in Austria
Meanwhile, the Gift tax in Austria is applicable to transfers of assets during a person’s lifetime. Similar to inheritance tax, the rates depend on the relationship between the donor and the recipient, with lower rates applying to gifts between close relatives. The value of the gifted assets, including real estate, money, or other property, determines the applicable tax rate.
Estate Planning Considerations
US expatriates should engage in thoughtful estate planning to minimize the potential tax burden on their heirs. This may involve making strategic decisions about the timing and structure of gifts or inheritances, taking advantage of available exemptions, and exploring legal mechanisms to optimize the transfer of assets.
Given the complexity of inheritance and gift tax laws, seeking professional advice from our tax experts is highly recommended for US expatriates in Austria. Our team can provide personalized guidance based on individual circumstances, helping navigate the intricacies of the tax system and ensuring compliance with relevant regulations.
Property Taxes for U.S. Expats Living in Austria
Austria imposes property taxes, known as “Grundsteuer,” which are typically levied at the municipal level. The amount varies depending on factors such as the location and size of the property. US expatriates who own real estate in Austria should be aware of these local property tax obligations, as they contribute to the overall cost of property ownership.
Capital Gains Taxes for U.S. Expats Living in Austria
When US expatriates sell a property in Austria, they may be subject to capital gains taxes on the profit realized from the sale. The tax rate can depend on various factors, including the holding period of the property. If the property has been owned for more than one year, any capital gains may be subject to a reduced tax rate.
Our experts can help expats understand the specific capital gains tax regulations in Austria, thereby ensuring accurate financial planning.
Call Our Office Today for Tax Guidance
Don’t wait until it’s already too late: call US Tax Help right away at this link – get in touch. Ted also provides tax help for US expats in Germany and American expatriates in Switzerland.