The IRS recently issued a news release (IR News Release 2018-135) with a reminder that U.S. taxpayers living and working outside the U.S. must file (or request an extension of time to file) their 2017 federal income tax return by Friday, June 15th. A taxpayer, including a dual citizen or a resident alien, qualifies for the special June 15th filing deadline if both their tax home and abode are outside the United States and Puerto Rico.
A few highlights of the news release that we would like to reiterate:
Overseas U.S. taxpayers unable to meet the June 15th deadline can ask for, and will automatically receive, more time to file, if their extension request is filed by June 15th. The extension to file will run until Oct. 15, 2018; however, there is no extension of the time to pay tax. Interest, currently at 5% per year, compounded daily, still applies to any tax payment received after the original April 18th due date.
The IRS announced, in another news release last week, that it will waive certain late-payment penalties relating to the section 965 transition tax and provided additional information for individuals subject to the section 965 transition tax regarding the due date for relevant elections. [Section 965 of the Internal Revenue Code, enacted in December 2017, imposes a transition tax on untaxed foreign earnings of foreign corporations owned by U.S. shareholders by deeming those earnings to be repatriated. Foreign earnings held in the form of cash and cash equivalents are taxed at 15.5%, and the remaining earnings are taxed at 8%.]
An income tax filing requirement generally applies even if a taxpayer qualifies for tax benefits, such as the Foreign Earned Income exclusion or the Foreign Tax credit, which substantially reduce or eliminate U.S. tax liability. These tax benefits are only available if an eligible taxpayer files a U.S. income tax return.
U.S. citizens and resident aliens must also report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to complete and attach Schedule B as part of their return to properly disclose the existence of foreign accounts, such as bank and securities accounts, and to report the country in which each account is located.
In addition, certain taxpayers may also have to complete and attach to their return Form 8938, Statement of Foreign Financial Assets, if the aggregate value of certain foreign financial assets exceeds established thresholds.
Separate from reporting foreign financial accounts on the federal tax return, taxpayers with an interest in, or signature or other authority over, foreign financial accounts, with aggregate value exceeded $10,000 at any time during 2017, must file a Report of Foreign Bank and Financial Accounts (FBAR), aka a Financial Crimes Enforcement Network (FinCEN) Form 114, with the Treasury Department.
The filing deadline for the annual FBAR is the same as for a federal income tax return. This means that the 2017 FBAR, Form 114, is eligible for an automatic extension until Oct. 15, 2018, if the federal tax return extension is requested.
Any income received or deductible expenses paid in foreign currency must be reported on a U.S. tax return in U.S. dollars. Likewise, any tax payments must be made in U.S. dollars.
Both Forms 114 and 8938 require the use of a Dec. 31st exchange rate for all transactions, regardless of the actual exchange rate on the date of the transaction. Generally, the IRS accepts any posted exchange rate that is used consistently.
If you are a U.S. citizen, a U.S. resident alien, or a U.S. dual citizen, living or working overseas, make sure to file (or request an extension of time to file) your federal income tax return, including any additional reporting requirements, on or before June 15th. Specifically, we recommend taxpayers with foreign assets, even relatively small ones, to check if the FBAR filing requirement applies to them.
If you need assistance, contact a tax professional or refer to the information on the tax rules that apply to U.S. citizens and resident aliens living abroad in Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, available on IRS.gov.
Should you have any questions or desire further insight, feel free to contact one of the members of our Tax Department: