This post is a follow-up to our previous blog post – How to Do Your Own Taxes – about the forms you need to file when living abroad. That post outlined the typical forms that working expats need to file when they have a simple return, for example, if you are an employee at a foreign company.
However, many expats have more complicated tax situations. Maybe you own a business, maybe you own foreign stocks, bonds, rental properties, or other investments. Maybe you are a high income earner, have stock options as part of your employment benefits, or maybe you have income streams in multiple countries.
When you start getting into other types of income besides just simple employment income, there are additional forms that you need to fill out when you file your tax return. Some of these forms can be complicated, and mistakes in filing can lead to hefty fines from the IRS.
For this reason, we recommend that people with more complicated tax situations hire professional tax preparers.
At BNC Tax, we are experts in U.S. taxes for American citizens who live abroad. With 18 years in the business, we’ve seen it all. We have clients who own businesses and other investments in foreign countries, and we help them navigate the U.S. tax filing requirements while optimizing foreign tax credits and other deductions for which they may be eligible. We save our clients money and headaches by ensuring that their taxes are filed properly.
Although we do recommend hiring professional help if you have a more complicated tax situation, we also believe that all taxpayers should educate themselves about the IRS requirements, so you can understand what your tax preparer is doing on your behalf. In the spirit of education, we share here some of the common forms that taxpayers who have foreign sole-proprietorship businesses or other foreign investments might need to file. This is not meant to be a complete list of foreign forms. Foreign corporations, partnerships, disregarded entities, trusts, and certain investments will have additional filing requirements.
This is the main form that all taxpayers must fill out. This includes your name, address, social security number, and a summary of your income, deductions, refund or payment due. You will use the subsequent forms to fill out the information on the 1040.
Remember to use the IRS yearly average currency exchange rate to convert your foreign income to U.S. dollars on your 1040.
Schedules 1 through 3 are required to report information calculated on subsequent forms.
Schedule A is used to report itemized deductions. If you aren’t using the Standard Deduction but rather, you are itemizing your deductions, this is the form you’ll need to use.
Schedule B is used to report interest, dividends, and foreign bank accounts. If you have any of these, you’ll need to fill out Schedule B. The box to indicate foreign bank accounts is a checkbox at the bottom. Be sure not to miss this box. If you do have foreign bank accounts or financial accounts, you might also need to file form FINCEN114, also known as the FBAR, with the U.S. Department of the Treasury. Read more about this form below.
Schedule C is used to report self-employment income or business income. If you are self-employed or own a business, you’ll need to fill out Schedule C.
Schedule D is where you report capital gains from stock or asset sales. If you’ve sold stocks or other assets at a profit in the past year, you may need to fill out Schedule D.
Schedule E is for rental property, royalties, or income from partnerships and S Corps. If you have these types of income, you’ll need to fill out Schedule E.
Form 1116 is for the foreign tax credit. To learn about the difference between the foreign tax credit and the foreign earned income exclusion (FEIE) and why you would want to claim one or the other, please read our blog on this topic. At BNC Tax, we prefer to use the foreign tax credit for our clients if possible (we discuss the reasons why in our blog), but we specialize in optimizing between the two options, depending on which is better for your personal circumstances.
Form 2555 is used to claim the foreign earned income exclusion (FEIE). The FEIE is available to Americans living abroad who earn less than an income cap specified by the IRS ($108,700 USD for individuals in 2021). There are several reasons why you might decide to claim this exclusion, or not to claim it. In order to claim this exclusion you need to have earned income (income from working at a job or from self-employment), and you need to meet specific qualifications such as the Physical Presence Test or the Bona Fide Residence Test. Also, once you claim the FEIE, you are in that system for 5 years. So you need to think carefully about what your next 5 years are going to look like, and whether you want to continue claiming the FEIE for 5 years. Read our blog post to learn more about the foreign earned income exclusion.
You’ll want to optimize between the foreign earned income exclusion and foreign tax credits, so it’s a good idea to try preparing your return with and without the FEIE to see which benefits you more. Just remember, if you elect the FEIE you will be in that program for 5 years, so think about what the next 5 years of your life will look like, and whether you are likely to continue choosing the FEIE. For example, if you have children or want to have a new child, you will not be eligible for the child tax credit if you are in the FEIE system.
Form 6251 is for alternative minimum tax. If you have alternative minimum tax you shouldn’t do your own tax return. This is for people who get ISO’s – stock incentives or stock options – if you get these through your employer, you may have to pay alternative minimum tax, and you really should hire a tax professional to help you with this form.
Form 8995 is where you report your qualified business income deduction. This form is used along with Schedule C for people who are self-employed, to get a 20% deduction on their business income. There are certain qualifications. This form is only for business owners who file a Schedule C.
Form 8959 is for additional Medicare tax (for high-income earners) only if you’re an employee and a high income earner, you’ll need to pay additional Medicare tax.
Form 8960 is for net investment income tax (for high-income earners) if you have investment income – stocks, dividends or interest, and if your income is above the filing threshold.
Form 8833 is used for claiming a tax treaty position. This is often required for pensioners living abroad. The United States has tax treaties with several countries. These treaties govern how income is taxed in each country, the United States and your foreign country of residence. You don’t always need this form; this form is only used if you want to specifically outline that you are claiming a tax treaty position on the tax return.
Form FINCEN114 is for reporting foreign bank accounts. This form is required for anyone who has an aggregate total of $10,000 U.S. dollars as a sum total of the highest balances in each of your foreign financial accounts at any time during the year. You need to report the highest balance at any point in the year of every foreign financial account that you have. When you convert your foreign income to U.S. dollars on form FINCEN114, you need to use a different exchange rate than you use for the rest of your tax return. Use the Department of the Treasury exchange rate from the last day of the year. You can find this on the Department of the Treasury website. Form FINCEN114 is filed with the U.S. Department of the Treasury, not the IRS. You can learn more about form FINCEN114 by reading our blog on this topic.
Professional Tax Preparation Services for Expats
BNC Tax is here to help with your expat tax return. Our international team supports American citizens living in 25 countries. With 18 years in the business, we have filed over 6,000 tax returns for our clients. We are experts in the specific tax issues that Americans abroad face.
Our services include personal tax preparation, business tax preparation, FINCEN reporting (FBAR), individual and corporate accounting services and consulting, Streamline filing, FACTA reporting, and more.
We have a secure online portal where you can upload your documents. We work remotely with all of our clients!
If you are located in the Netherlands or Mexico, you may schedule an in-person meeting at our offices in Amsterdam or Puerto Vallarta.