At BNC Tax, we regularly get questions about how living abroad or owning property abroad will affect our clients’ U.S. taxes. Here are some of the most common issues that expats and foreign investors face.
If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside.
You will report your rental income on both your U.S. and foreign tax returns. Expenses may be deductible on the U.S. return; different rules may apply on the foreign return. You may be eligible for a Foreign Tax Credit (FTC) on your U.S. return.
Vacation rentals in Mexico: If you do not have a Mexican Tax ID (RFC) and rent through third-party platforms such as AirBNB and VRBO, they will collect your IVA (sales tax) and submit directly to the Mexican taxing authorities (SAT). If you have an RFC, you will need to file directly with SAT. Consult a Mexican tax accountant for more information.
Foreign Bank Accounts
U.S. citizens are required to report all foreign financial accounts to the IRS. If under $10,000 USD equivalent aggregate value of ALL foreign financial accounts, you report on Schedule B along with interest earned. Any foreign taxes your bank paid to SAT on the interest may be eligible for Foreign Tax Credit (FTC).
If greater than $10,000 USD equivalent aggregate value of ALL foreign financial accounts, you will need to file a Foreign Bank and Financial Report (FBAR) with the U.S. Department of the Treasury.
Foreign Earned Income Exclusion (FEIE)
If you are living and working abroad, you may be eligible to exclude $120,000 of your earned income if you met certain tests. These tests include either the Physical Presence Test OR the Bona Fide Resident Test AND the Tax Home Test. Read our post about the Foreign Earned Income Exclusion (FEIE) to learn more.
Owning a foreign business, such as a foreign corporation or partnership, has complicated tax reporting requirements and severe penalties for failure to report, substantial inaccuracy in reporting, and late filing. These penalties start at $10,000 USD per year. If you own or are considering owning a foreign business, it is critical that you get advice from a U.S. tax preparer competent in this area of U.S. tax law.
If you would like to learn more, please schedule a consultation with us on our Appointments page at https://www.bnctax.com/appointment/