Many Americans intentionally look to overseas banking options in order to reduce tax erosion. Even if that is your goal, it is important to remain tax compliant.
Although finding legitimate ways to reduce taxation is a smart strategy, it should all remain legal. However, sometimes it’s tough to know how to be fully compliant. Whether you live overseas, have an offshore bank account, or run an international business, here are some of the top tips in these areas to ensure compliance in all areas of personal and corporate finance.
Do You Live and Work Abroad?
If you’re an American but you live and work overseas, then your tax requirements are largely the same as any other American. Wherever you reside, your income is subject to taxation by the IRS. Every April, you are required to file and pay your income taxes. However, there are some extensions available, and overseas residents are frequently granted a two-month extension upon request.
Now, imagine that you’re an American living overseas and earning an income overseas. Whether you live in Germany or Hong Kong, you might already be paying income tax in your country of residence. That’s good news, because Americans can file for a foreign earned income exclusion (FEIE).
A foreign earned income exclusion is designed to prevent Americans from paying income tax twice – once in the country of residence and once more back in the United States. When you file your income taxes in the United States, be sure to give proof of your paid income taxes in your country of residence.
The first $100,800 of your offshore, already-taxed income won’t be subject to income taxes in the United States. That threshold increases each year, so check when you file your taxes and find out what the current limit is for the FEIE.
Are You Retired and Living Overseas?
If you’re retired and living overseas, any income you receive is still up for taxation by the United States government. As long as you retain your U.S. citizenship, you’ll be liable for income tax paid to the IRS.
However, the income tax you pay as a retiree living overseas is the same as a retiree would pay in the United States. So, heading to an offshore location is tax-neutral, but you may still benefit from living in a place with a lower cost of living than North America.
The foreign earned income exclusion applies to Americans who are retired as well. If you have a pension or another form of passive income, that might be taxed in the nation where you’re residing. Fortunately, that won’t be taxed again, up to the threshold limit, under the foreign earned income exclusion.
Keep in mind that if you live in an overseas destination with a structure specifically for retirees, like Belize’s Qualified Retired Persons Program, you may not have to pay income tax on your retirement benefits within the country of Belize. In that case, you won’t qualify for the foreign earned income exclusion within the United States.
Do You Have an Offshore Bank Account?
There are no issues with Americans choosing to have offshore bank accounts. In fact, many Americans opt to bank offshore to diversify their financial interests, reduce overhead expenses, and protect assets.
A growing number of Americans are concerned about FATCA, or the Foreign Account Tax Compliance Act. Although there is much discussion about FATCA, it won’t have a significant impact on you as the individual account holder.
FATCA is a law that requires international banks to disclose information about international bank account holders and their assets. Fortunately, most of that disclosure becomes the responsibility of the bank, not you. However, you do need to be prepared for a more intensive account application than in decades past.
Once you provide your choice of international bank with details about your identity and residence, they will provide that information to the United States and the IRS. It is worth noting that some international banks opt out of FATCA, which means that Americans can’t legally obtain bank accounts through them. This is a rare occurrence, and most legally established, reputable banks around the world comply with FATCA.
Do You Own Property Internationally?
If you own an offshore property, you’ll likely have to treat it like any other asset. A key difference, however, is if you’re earning money from the offshore property. This is very common, especially if you own a vacation home that you also rent out for a few weeks or months each year. The rental revenue you generate will need to be treated like any other earned income. As such, it also qualifies for the foreign earned income exclusion.
International property can still depreciate, and you can benefit from any depreciation or expenditures allocated for improving the property. As long as it is not your primary residence, any expenses are operating costs and, therefore, are tax deductible in the United States.
An extra bonus you might appreciate is that, in some cases, going to check on your offshore property is classified as a viable business expense. So, heading to your rental home on the beaches of Belize can be tax deductible, if the property is also used for rentals and needs to be checked by the owner periodically.
Benefit from Offshore Assets
Living or banking offshore can provide many financial benefits. It’s important to understand what requirements are necessary to ensure you stay in compliance with any laws and regulations, both in your offshore jurisdiction and your home country of residence and citizenship.
Work only with reputable banks and financial experts who are knowledgeable about what is needed for you to reap the most benefits from offshore investments and assets, while maintaining compliant.
Luigi Wewege is the Senior Vice President of Belize based Caye International Bank, a FinTech School Instructor, and published author of The Digital Banking Revolution. You can follow his posts on trends shaping the financial services industry on Twitter: @luigiwewege