Many if not most American expats are unaware that they are required to file a U.S. federal income tax return every year if their income is over the minimum threshold, regardless of where they live in the world - and the procedure can be rather daunting. Filing - or not filing - returns pretty much guarantees a few sleepless nights. What’s more, the U.S. tax code changes frequently, making it rather difficult to latch on to a particular method.
Important things to know for American expats and Green Card holders
■ If you are residing in Japan but are a U.S. citizen, then bear in mind that you are eligible to pay taxes in the U.S. if your income from worldwide sources is over a specified amount.
■ The due date for paying your taxes is April 15 with an automatic 2-month extension for those taxpayers who live outside the U.S.
■ Further extension until Oct 15 is granted to file the taxes by filing form 4868 before due date.
■ If you have paid taxes in Japan, then you can take a credit or deduction for the same so that your U.S. taxes are reduced.
■ As a U.S. citizen living in Japan, you can take advantage of certain tax-related benefits such as Foreign Earned Income Exclusion (FEIE) and Foreign Housing Exclusion (FHE).
■ What to prepare: In addition to any other documents needed to prepare your return, your U.S. tax preparer will ask for copies of your Japan income tax withholding statement “kyuyo shotoku gensen choshu hyo” (給与所得源泉徴収票). Actual taxes paid will depend on your salary amount, resident vs non-resident status and other factors. There are also various other Japan based taxes that may affect your U.S. tax filing, which your tax preparer should review when preparing your return.
What is FATCA and why has it got non-resident Americans so worried?
According to the IRS, under the newly introduced Foreign Account Tax Compliance Act (FATCA), U.S. taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS. This reporting will be made on Form 8938, which taxpayers attach to their federal income tax return, starting this tax filing season.
In addition, FATCA will require foreign financial institutions to report directly to the IRS information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest.
While FATCA was likely introduced as a long-term strategy for more capital control and increased reporting requirements and transparency for Americans trying to hide assets overseas, it includes non-resident Americans, who in most cases need to open bank accounts for routine purposes such as receiving salary and paying rent. While actual filing requirements differ somewhat for eligible non-residents (e.g. minimum threshold amounts), the basic procedures bank and personal reporting requirements are the same.
As reporting requirements (and penalties for not filing) are constantly changing, it is important to find a professional tax preparer who will be able to wade through the ever-increasing complexity of tax filing for Americans living abroad.
The author is a CPA at ExpatTax.com.