Taxes have been on my mind lately. We filed an extension to the original deadline so for us, the deadline to file our U.S. Income Tax for 2011 is October 15th. We came across the website for Taxes for Expats which has a lot of helpful articles and decided to share some with you in coming newsletters. Here’s the first one, written by I.J. Zemelman, MBA, EA.
Should I File My Expat Tax Return by Myself?
If you have stumbled across this article, it’s most likely because you are thinking about preparing your own expat tax return – which is just fine! Many international employees successfully file their own overseas tax return. If you are new to expat taxation, however, there may be more ins and outs than that of which you’re fully aware. Here is a list of pros and cons to filing your own overseas tax return and a few extra topics to think about along the way.
Why Prepare your Own Expat Tax Return
1) Spend Less Money!
Saving money seems to be the primary reason why expats elect to prepare their own taxes. Traveling across the Universe can get quite costly, and many expats are interested in saving as much as they can however they can.
2) Finding a Trustworthy Accountant or Tax Professional can be Difficult
The process of filing taxes exposes all of your most sensitive information. The current times in which we live have shown us that professionals with titles can be as conniving and dishonest as anybody else. Take a look at Enron, for example, an entire group of ‘professionals’ who were only out for their own good. Just because a person has initials after their name doesn’t mean they are a trustworthy professional.
3) You Know Your Financial History the Best!
A professional preparer of taxes may quite logically ask you a series of questions to maximize your deductions and credits to help you get as high of a return as possible on your taxes. In the event you’re preparing your own overseas tax return, you contain all the knowledge you need. When you take a seat at your computer to begin the long process of filing your return, you will generally recall somebody telling you that specific expenses were deductible. You may also recall the donation slip which came from Goodwill or Out of the Closet. Of course you will have to fish all this paperwork out, but you would have to do that anyway in the event that somebody else was filing your return for you.
4) You Can Take Advantage of the Information Available on the IRS Website
If you are like most expats you have a good head on your shoulders and you are quite comfortable using the internet to find the answers you seek. The IRS has a fully functional comprehensive website with education tools to help US citizens working as international employees file their expat taxes accurately. The IRS has information on their website including various forms and publications, tax software links, foreign exchange rates, and information on tax treaties and SSA agreements in effect with various foreign countries. The most definitive challenge of using the IRS website is the ability to understand IRS jargon. For example, you may consider yourself a nonresident after moving overseas and may be led to believe you need to file a 1040NR. In this case, however, ‘nonresident’ is being confused with ‘nonresident alien’ – a person without a green card and who is not a US citizen who needs to file a 1040NR.
5) Filing Your Own Return Offers You Better Insight as to How to Prepare for Tax Season Next Year
The first time you prepare your own taxes, you may find that the bulk of your time is trying to locate paperwork to back up some of your deductions. Other time is spent simply wrapping your head around the multiple forms and pubs you will need to file your taxes. Tax professionals become more and more versed in this process as the years pass, and so will you. Filling your own expat taxes will give you an idea of how you can better prepare for tax time the entire year. Perhaps next year you will designate one folder for all of your taxable and deductible items to make your compilation process a lot simpler.
6) File Your Taxes on Your Own Time
It will probably take you around 30 hours to complete your expat taxes for the first time. The benefit about doing this on your own is that you are working on your own time – there is nobody else waiting on you to provide them with the information they need. If you have the time it takes to invest in learning and compiling your documentation, self preparation may be the ideal route for you to take.
7) Take Advantage of Guided Tax Preparation Software
Hundreds of thousands of American citizens are taking advantage of tax preparation software to help make filing their returns easier. Many of these programs are intelligent and interactive, informing the taxpayer about possible deductions and exemptions along the way. There is a downside to these programs, however, when it comes to filing expat taxes. Most of the widely used tax preparation software programs are generally designed for the standard US family with double income, a mortgage and 2 or 3 children; thus, they are not geared toward the active and ever-changing lifestyle of the expat taxpayer.
Why Not to Prepare your Own Expat Tax Return
1) Possibility of Overlooking Deduction or Exclusions
The primary reason to rely on a tax professional to file your overseas tax return is to make sure you are claiming all the deductions and exemptions for which you qualify. Even though the IRS insists on taxing your earnings even in an international setting, they are still interested in offering a wide variety of credits to help offset the cost of international travel. An expert is more likely to get a higher amount back for you than if you were filing yourself, simply because they are more aware of that which is offered to you by way of deductions and exclusions.
2) Alternating Tax Periods in Various Countries
Living in the United States, you have become quite familiar with the tax year coinciding with the calendar year. There are quite a few countries, however, whose tax year is not based upon a calendar year, and the process of proration and conversion to adequately and accurately file your US tax return can be a daunting task. A tax professional is generally much more versed in these types of financial maneuvers and requirements of such on your expat tax return.
3) Complicated Mathematical Equations
With all of the varying deductions, exemptions, and credits available to expats, the amount of forms required can be astronomical. With each form is a new set of rules and regulations and a whole new list of numbers which need to be calculated correctly. Not only that, numbers need transferred from one form to others and one ultimate equation being wrong on one form can cause everything else to be wrong. Additionally, all exclusions are calculated differently. For example, some exclusions are calculated by international geographical location and other are calculated by percentages or bottom line dollar values. These contingent rules can quickly become overwhelming for a self-preparer who may become stuck without the help of a tax professional.
4) Sense of Calm
The IRS is becoming less and less sensitive to expats who do not file or who file inaccurately. For fear of tax evasion via offshore accounts, the IRS has added to the amount of auditors working on foreign tax claims, and they rely on voluntary disclosure initiatives to identify off-shore activity. You could be a target of the IRS for a simple mistake made on one of the numerous forms required without even knowing it. Doesn’t it bring you a sense of calm to think that somebody with years of experience can help you avoid IRS trouble by filing properly and accurately in the first place?
5) Knowing Whether to File a State Return
Many states in the US have their own tax laws. There are some states which require you to file as an expat if you so much as hold a driver’s license in the state, while others only require you to file if you exceed a certain dollar amount of income which originated in that state. Learning about each state’s requirements can be quite taxing on your time and brainpower, and hiring a professional who knows the detailed requirements of each state can help make sure you don’t overlook this important step if you are, in fact, required to file.
6) Knowledge of All Forms and Publications
Every year the IRS has a way of adding additional reporting requirements to expats and to foreign transactions in general. A large number of our customers are shocked to find out that an FBAR reporting requirement is in effect for any offshore account which contains more than $10,000. Additional sources of reporting requirements are foreign stock, foreign trusts (or foreign retirement plans which are viewed by IRS as a trust to which you are the beneficiary), and many other transaction types.
7) Incessantly Evolving Tax Laws & Regulations
Tax laws which change from year to year can make it difficult for regular citizens to file accurately. You can easily assume that last year’s tax laws will be the same as this year’s, so if you’ve done this before you think you’re walking on easy street, when – in fact – your way off base. A tax professional is constantly learning about tax updates and is prepared at tax season to apply all the changes throughout the year.
8) Widely Varying Tax Treaties
The US has 67 treaties in effect with multiple countries, and each has its own positive or negative implication on your expat taxes. Learning which country’s transactions earn you exclusions or subject you to penalties can lead you through a confusing maze of information and jargon almost impossible to understand. A tax professional who specializes in overseas tax returns has access to and is familiar with every active treaty.
It may have occurred to you while reading this article that we highly recommend hiring a professional to prepare your expat taxes. More often than not, the difference in the amount you get as a return easily justifies the cost of having hired an expert. Each of our reasons why and why not to prepare your overseas taxes on your own may have its own implication to you and your set of circumstances. Odds are, you would be able to ultimately file on your own and adequately submit all the forms and publications required, but you may not be fully aware of everything available to you. If you want to make sure you get the most out of your international employment, make sure to contact us for help.