As a US taxpayer, non-compliance with overseas reporting requirements is really not an option. If you wish to avoid highly punitive fines, don’t want to run the risk of having your US passport revoked, and would rather avoid costly accounting practices that could have been avoided then you should work out the best way to make your annual filings. Although as a Japan resident you will no doubt be paying taxes in Japan, you may also have a tax bill in the US (subject to certain thresholds, minus any allowances). Even if you and your advisor and/or accountant, have worked out that you are not owing taxes in the current year, you are still obligated to make a filing to the US.
You may even be eligible for certain exclusions and tax credits whilst residing overseas. For example, the foreign income exclusion, foreign housing deduction and foreign tax credits are all available to reduce your taxable base, and avoid double-taxation of your income. Depending on the clients country of residence it can sometimes be better to only claim the foreign tax credit, while in other scenarios it may be better to claim the foreign income/housing exclusion as well as the foreign tax credit. In this situation the advice of a good tax advisor often pays for itself.
Be careful not to fall into the trap of thinking that your old U.S tax preparer, despite years of faultless service, can continue to seamlessly handle your returns after you move abroad. Even domestically competent preparers will encounter difficulty preparing expat’s overseas returns owing to the complications of income-tax treaties, foreign tax credits, non-US financial accounts and so on.
Tax Returns From Japan
Making tax filings from overseas does not have to be complicated. the IRS have a service called Freefile to assist you with filing. As the name would suggest, based on your level of income, you have access to a range of free tools to assist you. Currently 70% of tax payers (100 million people) are eligible. For those with a gross annual adjust income of less than 62,000 USD (2015) you can download Freefile software which will do the majority of the heavy-lifting for you. For those lucky enough to have an income in excess of 62,000 USD you will not have access to software, but will be able to use the free fill-able forms from the IRS website. The forms can sometimes be frustrating and will not allow certain “unexpected” inputs, e.g. a footnote explaining a figure in a field which only accepts numbers. If you need to write in miscellaneous explanatory information then you may not be able to use the forms and may have to do things the old fashioned way. If you think that things are set to be relatively straight-forward then you should look to get all of your information in order before getting started.
What Do I Need To File A Tax Return From Overseas?
- A copy of last year’s tax return
- Verify your identity by using your 2015 Adjusted Gross Income or your 2015 personal identification number if you created one
- Don’t have your AGI or PIN? If you do not have your 2014 tax return, you may use Get Transcript Online or Get Transcript by Mail to obtain your prior-year AGI.
- Valid Social Security numbers for yourself and your spouse, if applicable
- Valid Social Security numbers for your dependents, if applicable
Income and Receipts
- Social Security benefits
- Unemployment Compensation
- All receipts pertaining to your small business, if applicable
- Income receipts from rental, real estate, royalties, partnerships, S corporation, trusts
- W-2s, showing your annual wages from all of your employers
- Forms 1099-INT, showing interest paid to you throughout the year
- Form 1099-G, showing any refund, credit or offset of state and local taxes
- Forms 1099-DIV and Forms 1099-R, showing dividends and distributions from retirement and other plans paid to you during the year
- Form 1095A, Health Insurance Marketplace Statement
- Form 8962, Premium Tax Credit
- Form 8965, Health Coverage Exemption and ECN
- Verify your identity by using your 2015 Adjusted Gross Income. If you created a 2015 personal identification number, that will work too
Your Contact Information
- To get a notification from the Free File software company that your return was accepted by IRS, you need a valid email address. This is important, especially if you want to chase that tax refund.
Reporting may be burdensome but less so than having to deal with the fines that you will be met with when your non-reporting comes to light. Ordinarily this is 10,000 USD per infraction, with interest accruing on previously owed taxes. The sum of these penalties sometimes add up to eclipse the value of the account or income that required the reporting. There is a painful irony here that will become apparent as the IRS audit you and crawl through your financial life.
Dealing with a specialist offshore tax-filing agent will minimize your stress, indemnify you against costly errors and ensure that everything is handled correctly- not leaving any holes for the IRS to pick at. It is entirely possible to NOT pay a professional to do your filing and do it yourself using the free IRS tools, but considering the potential exclusions, tax-credits and rebates that a professional will routinely look to secure, you really run the risk of being penny-wise and pound-foolish. You should inquire with your financial advisor as to which tax professional they recommend you speak to and proceed with caution if they seem remiss or even worse, entirely unaware of the reporting requirements that you are subject to as a US Taxpayer; in which situation you should make doubly sure that you seek a professional second opinion to ensure that your financial affairs are correctly calibrated to the law.
– IRS.GOV website
– American Citizens Abroad website
– KPMG: INTERNATIONAL EXECUTIVE SERVICES – U.S. Taxation of Americans Abroad, 2011
– The Expat’s Guide to U.S. Taxes Hands-On Help for Americans Overseas by JANE A. BRUNO, J.D.