Over the past few weeks, I’ve been inundated with questions regarding the U.S. income tax. I’ve been fortunate enough to pick up a couple of new clients along the way (that’s always a good thing!) but find that the questions have a much broader scope and application.
The questions have sprung from discussions with other U.S. expats. Some have discovered that they are still required to file income tax returns with the Internal Revenue Service (IRS). Others found out that a portion of their income was excluded from U.S. taxes. While each case was unique and different, every discussion included providing answers to similar questions.
Here, then, are questions and answers that will help U.S. expats determine their U.S. tax responsibilities.
Do I have to file?
Q: I am an American living in the Philippines, and all of my income is from non-U.S. sources. Do I have to file a U.S. income tax return?
A: Maybe (each case is unique). The United States is one of a very few countries that mandate its citizens, resident aliens, and others who have U.S.-sourced income to file an U.S. income tax return if they have income above certain threshold levels. These threshold levels depend on:
- The taxpayer’s filing status (Single, Married Filing Jointly, Married Filing Separately, Head of Household, etc.), and
- The number of exemptions (self, spouse, dependent, etc.) a taxpayer can legally claim.
The filing status determines the taxpayer’s standard deduction. This amount is added to the total amount allowed for the taxpayer’s exemptions.
Example: For tax year 2011, a taxpayer whose filing status is “Single” and only claims him/herself as an exemption has a threshold of $9,500. This means that if this taxpayer’s income exceeds $9,500, then he/she must file an income tax return. The threshold is calculated by adding together the “Single” taxpayer’s standard deduction of $5,800 and the exemption for him/herself of $3,700. If this taxpayer’s income does not exceed $9,500, then he/she is not required to file an income tax return.
Note: In some cases it is advisable to file an income tax return even if the filing threshold is not met. E.g., taxpayers with federal income taxes withheld by their employer (or other source of income) would want to file a return in order to receive a refund of the taxes withheld.
The standard deduction and exemption amount differ from year to year, too. So, the threshold level changes annually.
How can I file from overseas?
Q: I am a dual citizen of the Philippines and the U.S.A. and live in the Philippines. How do I file my U.S. income tax return?
A: Just like you filed in the U.S.A. – either via the mail (or certain courier services) or via electronic filing. A reminder for those who are able to prepare their own tax return on the paper forms: insure you mail your tax forms with sufficient time to reach the IRS. For those who are technically oriented and/or computer savvy, tax preparation software makes filing easier. Much of this software includes a means for electronically filing. If you feel uncertain or overwhelmed by the idea of preparing your own returns, then there are services available (such as my own at Keating & Chillingsworth, Ltd.) to help prepare and file your tax returns.
From a personal point of view, I always suggest – at least for the first year you are outside of the U.S.A. and have to file your income tax return – that you trust a professional to prepare and file your tax return for you. The professional may be the tax service provider you employed while still in the U.S.A. or a new one you’ve hired for your first year abroad. The professional should be able to discuss your current situation with you and tell you of exclusions, tax credits, and other tax benefits that are available to you.
I haven’t filed for a couple of years – am I in trouble?
Q: I am a retired U.S. citizen living in the Philippines. I have a pension for income, but I haven’t filed an U.S. income tax return for a couple of years. Am I in trouble?
A: Just a little, but your situation is not unique. Many U.S. expats learn of their tax obligations after a few years have passed. The IRS realizes this and doesn’t chase you down right away. You are “on their radar scope,” however as others may have filed income reports that identify you as a recipient of income (e.g., a pension filing Forms 1099-R with the IRS and providing a copy to the pension beneficiary). The best plan of action is “get current” – that is to say, file the missing returns as soon as you can. There may be a penalty for late filing (and interest due on any late tax payments and/or penalties). This penalty is calculated as a percentage of any tax due, so if you file a delinquent return and do not have any tax due, then your penalty would be $0. The upper limit of the penalty is 25% of any tax due.
Penalty or not, it’s best to “get current” and continue to file your income tax returns. If you want, I can help you as I’ve helped others. Let me know – I’ll be glad to discuss it with you.
Great article, Paul, thanks.
Something folks should consider that is not the necessarily ‘tax law’, but could be an important consideration. Perhaps a US tax filer is legally not required to file in a given year.
If s/he doesn’t file, in the future the lack of a return could pose a problem .. say the person went back to the US and applied for a mortgage or (something many. many jobs these days now require) a US government security clearance.
Agencies other than the IRS often do a cursory check on tax filing status. It may be perfectly legal under the tax code to have missing years, but it can be a big red flag to background investigators. They may, however unfairly, take the lack of a return as an indication you have something to hide.
Much better to have a return on file, in my view, even if there legally is no tax due, no refund coming, etc. After all, you can file, online for free, so I’d suggest filing even if you might legally not be required by the current IRS rules.
Thanks, Dave – Yes, it’s always better to file – even if you don’t have to – because you never know who wants to see your last three years worth of returns.
I have clients who are trying to file support documents for a loved one’s visa and the first thing the immigration section asks for is the last three tax returns. Of course, there is a work-around for this if the person was not required to file those tax returns, but even that causes more grief than it’s worth.
IMHO: It’s always better to file your income tax returns. 😉
You can always get copies to prove your income from other sources without filing
HI Lenny – That depends on what endeavor you are doing and whether the asker of information is flexible enough to accept other sources. I guess it’s all in the art of negotiation. 😉
Paul – you mention “The United States is one of a very few countries that mandate its citizens, resident aliens, and others who have U.S.-sourced income to file an U.S. income tax return if they have income above certain threshold levels. ”
I thought the US required US citizens/greencard holders to file a tax return irregardless of whether the income was US or non US sourced. You mention that US sourced income is required to file. In what instances would non-US sourced be required to file, which is what I thought the Question was referring to?
Don
Hi Don – That is a difficult sentence to write and to parse. I should have broken it out this way:
“The United States is one of a very few countries that mandate:
– its citizens,
– resident aliens, and
– others who have U.S.-sourced income
to file an U.S. income tax return if they have income above certain threshold levels.”
Either that or using “non-resident aliens” instead of the word “others.”
Citizens and resident aliens (“green card” holders) have to report all income – both U.S.-sourced and non-U.S.-sourced. Non-resident aliens have to report only their U.S.-sourced income.
Hope this clears up that difficult sentence. I knew in the back of my head that it might be a problem! Thanks for picking it out for further explanation. 😉
I was told by H & R Block ….you do not have to file any income tax forms… if you recieve less than so much money each year, I am in that category …as I recieve only S/S
Hi Lenny – Yes, if you’re income is below the threshold level for your filing status, you are not required to file an income tax return. You are fortunate in that respect. 😉
Now, if you had signed up for voluntary income tax withholding from your S/S, you’d want to file an income tax return so that you can get that withholding refunded to you.
I hope everybody is out of Stock Markets, globally.
A MAJOR CORRECTION IS ON THE WAY!
HI Bob – That would be like a self-fulfilling prophesy, wouldn’t it? If there’s a rush to get out, there would definitely be a drop in stock values. Besides, if everybody was out, there’d be no market! 😉
I was talking mostly to folks who visit here.
However, most don’t realise it but we are all in the stock market in some way.
By the way, I am a retired professional trader.
These days I trade just for fun, that’s how I know what’s coming… and I am worried!
That’s why, for the first time in my life (I am 65) I’ll go to Church this Saturday 22nd of December.
I’ll even try to pray.
No jokes!
Hi Bob – Yes, a lot of us are in the stock market indirectly (IRAs, 401(k)s, annuities, etc.). Hopefully the fiduciaries will see to it that there aren’t too many losses.
Prayer can’t hurt – it’s helped me through some rugged times! 😉
Paul,
As a soon-to-be Filipino(American living there) I have a few questions I was hoping you could answer for my setup BEFORE I come to the Philippines. Answer anything you have an answer for, please. 🙂
1. I retired from the U.S. Government, and will be receiving a pension as well as a medical disability from Social Security. Should I give them my Philippines address or the one I will use in the United States? I would rather they have my Philippines address, but am not sure if this is easier or harder with taxes.
2. I do NOT plan on having any kind of income in the Philippines, but my wife might. She will be a U.S. citizen before we come to the Philippines in the middle of 2013, and am curious about how we would handle this since we file jointly. Maybe filing separately would be better since she would NOT have a U.S. income.
3. I hope you will be in the Philippines during tax season in 2013!! Your knowledge of this subject would be MOST useful when the time comes!!! I HATE doing taxes since being married. It’s become too complicated, and adding a different country to the mix will make it impossible for my simple mind to calculate the taxes. 🙂
Thanks, and have a Merry Christmas!
Hi Scott – I’ll try my best to answer your questions. Some answers may include my personal preference.
1. First off, have all payments direct-deposited into your bank account. It’s quicker and safer – recommend you keep an U.S. bank account for this purpose. As to the address, I recommend you provide them with an U.S. address and have your mail forwarded to you. Paper tax documents (such as an SSA-1099) seem to get lost or misrouted or delayed when addressed to foreign addresses. Too, you might move after a bit. That would make for change of address issues. IMHO, go with the U.S. address.
2. Filing “Married Filing Jointly” is the way you’d want to go. There is a Foreign Earned Income Exclusion that would exclude the first $92,900 (2011 amount – it changes year to year) of income she’d earn in the Philippines. If her earnings are more than that, then there’s a Foreign Tax Credit that can be applied based on any Philippine income tax paid. As an U.S. citizen, your wife will have to file U.S. income tax returns, so IMHO, file your taxes “MFJ” – jointly.
3.I’ll be in the Philippines during tax season in 2013!! I’ll be glad to be “your personal taxman” and help you out. IMHO, hire me! 😀
Have the Merriest of Christmas’ and Happiest & Most Prosperous New Year, Scott!
Hi! Regarding tax for your wife. If she will become a US Citizen by 2013 and might live here in the Philippines. She might be considered as “Resident Alien(RA).” Resident Alien in the Philippines is tax based on their income within Philippines, meaning all income derived here in the Philippines is tax base on their corresponding basis. But you, as soon to be naturalized Filipino, will be considered as “Resident Citizen(RC).” And as a Resident Citizen, you will be tax based on your income within and outside the Philippines, which means all income from all sources will be tax. But as RC, you can take income tax paid to foreign country as an income tax credit against your income tax here in the Philippines.
Hi V – Thanks for the info update.
If Scott’s wife applies and receives dual-citizenship, then she’d be a Resident Citizen(RC), and subject to tax on worldwide income by the Philippines. The tax paid in the Philippines would qualify for “dollar-for-dollar” tax credit against US tax.
An interesting experience – I married my wife in the Philippines in 1972 while working for an American electronics co. as a tech-rep ( for the US Navy) in the PI. I still had to file taxes that year as a single male, because she was a non-resident alien wife. We moved to the US in the following year and then after she had a green card, we could file a joint return.
HI Larry – They’ve changed the rules a little since 1972. Now, an U.S. taxpayer, married to a non-resident alien who does not have an Income Tax Identification Number (ITIN) or a Social Security Number, files as “Married Filing Separately” and inserts the accronym “NRA” (Non-Resident Alien) in the space asking for the spouse’s name.
It certainly helps things out when you can file jointly! 😉
(P.S. Your name sounds familiar for some reason – maybe your tech-rep past is catching up with you! 😆 )
Paul,
Are Pensions and Social Security considered unearned income?
Does the $92K tax exclusion apply to unearned income for
those living overseas?
Thanks in advance
Hi Carlos –
Yes, pensions and Social Security are considered unearned income, as are interest, dividends, and capital gains (among others).
The tax exclusion (named the Foreign Earned Income Exclusion) applies to earned income only. Unearned income is not eligible for the exclusion. 🙁
Hi Sir Paul,
I am Filipina married to American. I doubted if this is related to the topic but I’m optimistic that you can answer my question Sir 🙂 .
Here goes, We bought a property here in Philippines named after US (couple) and my husband asked me if he qualified to include the purchase as tax credit for his return. I have no idea but i want to help.
Thank you in advance. More power to you and LIP!
I have a question about the up and coming obamacare 2014? Like most, I don’t work so, I don’t qualify for the foreign income exclusion credit(I have us investment income only). I am not on ssa,disability, pension. etc. I have no earned income. I have no insurance, I pay cash in philippines if i need care. I also maintain a US mailing address for a lot of reasons. Even If I used a Ph address I still wouldn’t qualify. I’m wondering how you prove that you are living here at least 333 days a year, (physical presence test), so you can opt out of obamacare. Also I am not a resident of the philippines,I am balikbayan status only through wife? Do I get stuck paying Obamacare penalty in 2014? Which could be big for a family of three? Any thoughts or opinions on this would be appreciated!! I love living in the philippines and have no plans to move back to the states.
Is there any low cost assistance for US expats? Everyone assumes any retiree in the Philippines is rich, for example, one site offers “low cost consultation at only $300”. I am in serious difficulties with this. My annuity was just cut by a huge amount, over 1/2. I am on federal disability retirement, but that became taxable income when I turned 60. I cannot make any sense out of tax software. I am paying off my 2011 tax liability. I managed to file last year with no taxes owed, but this year there were a lot of changes in IRS regs apparently and I appear to owe over $1000. I only received $19,000 for the year and am caring for my wife and her grown children and our grandson. I do not know which way to turn.
Hi William – It certainly sounds as if you have more than your hands full this year. I will send you a private e-mail and, hopefully, help alleviate the pressure that confusion and those problems are putting on you.
Not knowing everything that’s going on, I can’t make any firm promises with regard to tax liabilities or refunds.. I can say, however, that I’ll try and make you feel a little more comfortable.
Hello Paul,
I am a retired American citizen living in the Philippines since the year 2002. I have had no income other than a minor amount of bank deposit interest and have not filed a tax return since moving here. I met and married a Philippine citizen in the year 2004. She and I now have three children, all dual citizens – American and Filipino. In July of 2013, I applied for and started receiving Social Security payments. The Social Security payments are direct-deposited to a bank account in the Philippines. I have used my father’s home address in Montana as a residence address in the United States since the year 2002 and had visited him every year during the summer months. In May of 2014, my father passed away. He left me an inheritance consisting of bonds, stocks, and mutual funds. I received no real property from his estate. I have signed the Philippine IGA to comply with FATCA. What are your recommendations?
Hi Thomas – Please send me a private email at [email protected] where we can discuss this while “holding our cards close to our vests”! 😉
Hi! Are you currently in the Philippines? I was wondering if you knew anything about filing back taxes. We moved here from the US a couple years back and we earn in dollars but live in the Philippines. We haven’t filed because we weren’t sure if there was something we needed to file differently that we are unaware of. I wonder if we need to consult with someone before filing or should we just start filing. Any advice would be great! Thanks! Please contact me by email if you can help!
Hi Lily – An email will be on its way shortly. Thanks for inquiring.
I’m in philippines 5 years on an off need tax help various issues can we communicate that KS
Hi JC – I’d be happy to talk with you about your tax situation. It’s easiest to send me an email at [email protected] with a description of your tax concerns, and then we’ll go from there.
Thanks for asking.
Do you prepare U.S.personal tax returns? If so, I would provided the necessary documents and background information so the 2015 return could be prepared. Lawrence D. Garrett-Koronadal, South Catabato, Philippines.
Yes I do, Lawrence, and I’d be most happy to help you with yours. Please contact me at my business email address :
[email protected]
and, if you would, please include a little background info about yourself and your tax situation. We’ll work from there.
Many thanks for considering me (and my firm) as a resource for handling your tax needs.