The migraine for US expats and how to tackle it

It’s around that time again to show the government how much money you’ve made and how much you “owe” them, regardless of where you live.

And money. Lots of money.

And money. Lots of money.

A lot of people who move to another country would not think about how to juggle their finances from a tax perspective until the end of the new year or so. For US citizens, it can be a confusing double-whammy since technically you have to report to Uncle Sam how much you make and report that same amount to the host country (unless their is a tax treaty). If you are used to just sending your paperwork to a tax preparer for your regular state and federal taxes and now your are living abroad, now is the right time to start changing habits. As a former tax preparer, there is a HUGE advantage to learn how to do your taxes versus using a tax preparer service :

1) Decreased chances of someone else stealing your refund, Social Security number and other details. While working with clients who were hard-working adults with families to feed, one out of every 5 was a victim of Social Security theft once their filed taxes were rejected by the IRS.  It was disheartening to see the look of horror, anger and despair from these clients who were counting on their tax refunds to help them with bills and planned purchases for their kids. Explaining to them to contact the SSA to report the identity theft was more depressing because it would force them to take time off work to sort the mess out. What got my head twisted in knots is that most of the clients knew who may have done the deed with remarks such as “oh I got a friend of mine’s college kid to do it for me last year”.

Even if you are super vigilant about your information, if you take your taxes to one of the tax preparation places that have a small booth near the entrance of a Wal-Mart or a mall you may have encountered the following:

a) Not all offices are built for privacy. Some tax preparation offices are set up in open ceiling cubicles. You do know that cashier a few meters away can hear you.

b) Increased chances of exposing your information to outsiders due to lack of proper office security equipment. A good sign would be if you are able to notice a paper shredder or two at the office away from the customers waiting area.  It pays to ask your preparer how long they keep records of your returns. A good tax preparation office would keep the documents no more than a year, keep the data on external hard drives and have proper internet security firewalls in place. If you do not get an acceptable answer, run!

c) You don’t need your own Tax Preparer ID number to file your own taxes. Some places will hire experienced preparers but keep in mind that unless they have their own ID numbers, they have nothing to lose if anything goes wrong with your taxes. If you do have your taxes done with someone you suspect isn’t that good, chances are he/she has her boss check his/her work and then sign your returns with his signature and ID number. And you are STILL responsible for all information on your taxes, regardless of who screws them up.

d) The price is never right. A lot of preparers send your returns through the internet and then charge you up the nose for basically asking you questions about the stuff you should have been doing all year (collecting receipts and other things that help you reduce your tax bill). The money charged for such services would be justified if you owned your own business. But for the average non-business owner, it’s not worth paying one third of your refund to send 5 pages or less to the IRS and your local revenue office. Especially when the tax preparers use software to do the calculations for you.

They will find you and fleece you, one way or the other..

They will find you and fleece you, one way or the other..

Now imagine having to deal with all of this while living abroad. There are a lot of certified or chartered accountants  who specialize in tax preparation for US citizens living abroad. But the scary part is that they charge over $300 USD or more for working and filing both local and US federal taxes. Unless you own a business while living abroad, it pays in the long run to do research on your own on the host country’s tax laws. Things you NEED to find out:

1) Existing tax treaties between the US and the host country. This is something that EVERYONE who is planing to live abroad should look into FIRST. Forget the nice weather or cheap cost of living.  Depending on how much money who bring (or have) you can hit with a huge tax bill if you don’t report your money to the host country’s revenue office.

b) Residency status and when you became a resident in that country. This piece of information can make a huge difference on how much you owe money on your host country’s taxes and how much income and assets you have to report. You can find this information on the host country’s revenue office website or at their government building.

c) Constantly update your knowledge on how to report to Uncle Sam what you own while living abroad. Ever since FACTA was enacted, a lot of banks in different countries are pushing back against the US government’s attempt to turn them into foreign IRS agents.  Some banks have become reluctant to open accounts for US citizens as a result of this nightmare. Even if your host country manages to flip the bird against the enactment, all US citizens have to send paperwork to the Dept of Treasury showing you aren’t hiding anything from them (filing an FBAR if your foreign bank account has more than $10,000 USD worth at any time during the tax year).

Once you do your research, the next step would be if you can tackle on filing your own taxes. Again, keep in mind of your personal financial situation and which country you are currently residing in. Some countries may not accept your self-prepared tax returns unless they are certified by a registered or licensed accountant. If that is the case, then it’s best to shop around for someone who is willing to charge you for their stamp and signature instead of doing all of the work. If you need to have your taxes done by a professional, ask the professional (unless required by law) not to keep your information in the office. Even if you return to their office next year, chances are you will still need to give them last year’s returns for them to start on the new ones.  The reason behind this is that it is harder to prosecute criminals for identity theft when the crime is committed outside of the US.  Even if you are planing to live in the host country for the rest of your life, never turn your guard off.

Because no one gives a crap about your money more than you and Uncle Sam.


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