U.S. Tax Planning and Compliance for Expats, Investors and Businesses
If you are living, investing or working abroad, international tax planning and offshore tax reporting can become extremely complex. In the article below, and throughout this site, I will attempt to explain and simplify the offshore tax compliance rules for U.S. citizens.
Unfortunately for the American abroad, the United States is one of the few nations on earth that taxes its citizens on their worldwide income regardless of where they live. If you have a U.S. passport, you are locked in to the Internal Revenue Service until death or you renounce your citizenship.
I strive to provide high quality and actionable tax information on this website and will continue to research and write on the topic of international tax and offshore tax compliance in the months to come.
Please signup for my newsletter for the latest on international tax and business issues with just a little spin and good humor. The taxation of offshore structures and American Expats is an ever evolving subject and, as an American expatriate myself, one that is near and dear to my heart.
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Premier Tax and Corporate, Inc. provides the following services to American Expats and U.S. citizens with international corporations, offshore LLCs or asset protection trusts:
- Offshore tax reporting for trusts and corporations,
- Offshore tax reporting for offshore self directed IRA LLCs,
- International tax research and compliance,
- U.S. personal income tax return preparation for those with international tax considerations,
- Representation before the Internal Revenue Service,
- IRS debt settlement and IRS problem resolution,
- Offshore tax reporting of Foreign Bank Accounts (FBAR), and
- International tax planning for U.S. citizens who live and/or work abroad.
Our U.S. licensed Enrolled Agents are located around the world, including USA, Panama and Belize. We are uniquely qualified to plan, maintain, and prepare U.S. returns for your international business, asset protection trust or other offshore structure.
Please contact us at info@premieroffshore.com or by phone to (619) 550-2743 for a confidential consultation regarding any international formation, tax preparation, IRS dispute, or compliance issue.
Offshore Tax Benefits
There are three primary categories of offshore tax benefits available to Americans:
- Personal and business offshore tax breaks for entrepreneurs and employees living and working abroad. For more information, download my 120 page International Tax and Business Guide.
- Maximizing the tax benefits of your retirement account by moving it offshore. See: Offshore IRA LLC
- Tax planning available to offshore businesses setting up branches or divisions in low tax countries. See: Offshore Business Planning
We focus on Americans living, working and investing abroad. This site and my writings are intended for small to medium sized businesses, expats, and for those looking to diversify their holdings out of the United States.
Offshore Tax for ExPats Living and Working Abroad:
Let’s start with the bad news: If you are an American living and working abroad, you are taxed on your worldwide income and required to file U.S. tax returns each year.
Now for the good news: There are a number of offshore tax breaks available to the American Expat that may eliminate or defer all of your U.S. taxes if you know how to qualify for them and know how to claim them.
These international tax breaks and techniques are described in detail in my 120 page ExPat Tax and Business Guide, 2015 Edition, available as a free download. I will cover the basics below.
The most important tool in the Expat’s offshore tax kit is the Foreign Earned Income Exclusion. If you are outside of the United States for 330 of 365 days, or if you are a tax resident of another country, you can earn up to $100,800 in wages / salary / ordinary income free of Federal Income Tax in 2015. This amount increases a bit each year. Wages can be from your employer or from your own corporation if you are self-employed.
Take it or Lose It: If you don’t file a U.S. return, and the IRS audits you, you might lose the Foreign Earned Income Exclusion. This means that, even though you qualified for the exclusion, 100% of your income will be taxable in the U.S. because you failed to file your returns on time. If you are behind on your IRS filings, and the IRS has not yet caught up with you, contact us immediately… you may still qualify for the Foreign Earned Income Exclusion.
If you and your spouse are operating an offshore business together, both of you can use the Foreign Earned Income Exclusion and draw a combined salary of up to $201,600 free of U.S. Federal Income Tax. If that business is incorporated in a country that does not tax foreign source income (for example, because your clients are in the U.S.) you might be able to operate completely tax free… no U.S. taxes and taxes from your country of residence.
Note that I said you might be free of “Federal Income Tax.” If you are operating a business without a corporation, you will be hit with self-employment tax at about 15%. To eliminate this, you must 1) qualify for the foreign earned income exclusion, 2) operate your business through an offshore corporation, and 3) draw a salary from that corporation of up to $100,800.
In addition, some U.S. states will attempt to tax your worldwide income. For example, California does not have a Foreign Earned Income Exclusion and is quite aggressive in pursuing Expats who can’t prove they have moved out of the State permanently and taken up residence in a foreign country. Care and planning are required to eliminate these state tax issues and the burden of proof is on you.
Finally, what if you earn more than $100,000 or $200,000 of net profits in a year? You have two choices to reduce or eliminate U.S. taxes on earned income that exceeds the Foreign Earned Income Exclusion:
- Contribute to a U.S. compliant tax deferred retirement account, such as a Solo 401k, and/or
- Retain the profits in your offshore corporation tax deferred until you take them out in one form or another.
Both of these offshore tax options require that you a) qualify for the Foreign Earned Income Exclusion and b) utilize an offshore corporation. Care should be taken when creating these international tax structures to minimize U.S. and local taxes while remaining in compliance with an ever evolving tax code.
Tax Neutral Offshore Structures:
International trusts and offshore corporations owned by Americans living in the United States are tax neutral.
- It doesn’t matter if the income to your foreign corporation is from international (non-US) clients. If you do not qualify for the Foreign Earned Income Exclusion, the profits in your offshore corporation are taxable in the U.S.
- An International trust is funded with after tax money. This means you have already paid tax on the money you put in an international trust. Also, the profits earned within an international trust are taxed in the U.S. to the settlor.
These structures have complex reporting requirements, but should not increase or decrease the U.S. tax obligations of a resident.
Offshore Self Directed IRA:
IRAs and other forms of tax advantaged savings accounts are the most valuable investment tools Americans have. But they’re generally underperforming, largely ignored by the brokerage firms that manage them, and few realize their full potential.
When you move your IRA in to an Offshore Self Directed IRA LLC, you take control over its investments. If you add an offshore corporation to your IRA structure, you can maximize returns. Here’s how:
The general rule is that investment income in your retirement account is either tax exempt or tax deferred, depending on the type of account utilized (IRA, ROTH, 401-K, etc.). However, there are many situations where a sophisticated retirement account will incur tax, losing its default preferred status. The more common examples of taxable income are:
- If your IRA makes leveraged real estate investments, a portion of the profits will be taxable.
- If your IRA uses leverage (margin) to buy and sell stocks, a significant portion of the profits earned will be taxable.
- If your IRA earns profits from an LLC or partnership, that income will be taxable at trust rates.
- If your IRA invests in a fund that utilizes leverage, a portion of the profits from the fund will be taxable.
However, sophisticated investors with high-dollar lawyers don’t pay these taxes. In fact, the uber-rich “one-percenters,” like Mitt Romney, have been making use of a loophole in the tax code for years.
NOTE: Mr. Romney was able to grow his IRA to $100+ million tax free or deferred using offshore IRA planning techniques. For an article on this topic, click here.
I have decided to break the lawyer’s vow of secrecy and disclose these offshore IRA techniques on this website and in my free newsletter. These strategies are not complex, just closely guarded.
The basic loophole in the US international tax code is this: by taking your IRA offshore and adding an offshore corporation to your structure, you can usually convert the taxable income listed above into tax exempt income, thereby eliminating the IRA tax. For a more detailed article on Offshore IRAs, click here.
Late Filing of Offshore Returns
If you have an unreported offshore account, corporation, or trust, getting into compliance can be a tricking matter. As expats ourselves, we know what you are going through and can advise you on the best course of action.
If you have not filed for a few years, and have no offshore issues, getting right with the Services is not a big deal. You file your returns, set up an installment agreement if you owe money, and get on with your life. Sure, there are interest and penalties to deal with, but it won’t be all that bad.
Add an offshore account to the mix and everything changes. The IRS has decided to make examples of expats. We are on their hit list and, believe me, they’ll take every dollar they can from you.
The IRS has collected hundreds of millions from expats since 2009 and will continue to come to the well as long as they can.
If you file late, penalties can be hundreds of thousands of dollars per year. You must take offshore filing, compliance, and negotiating very seriously, regardless of the amount of tax you owe. It’s the penalties, not the tax, that will get you.
If you have an international tax issue, you need an expert on your side. You can’t throw yourself on the mercy of the Service and hope for the best. You might find your most precious asset sitting behind bars.
You do have options. For example, the 2014 Offshore Voluntary Disclosure Program allows U.S. expats to file and avoid penalties under very specific circumstances. Before you apply, we need to prepare or amend your last few years of returns. With that information, we can determine if you qualify and the best path forward.
- This page was last updated May of 2015. The 2014 program is still in effect, but no one knows for how long. Time is of the essence.
If you have an international tax issue, please contact us at info@premieroffshore.com for a confidential consultation.
You may also be interested in the Tax Debt Portal on our sister site, Escape Artist. This portal has over 40 articles on dealing with the IRS and is focused on expat tax debt relief.
Offshore Tax Filing Requirements:
There are a number of international tax filing requirements for offshore corporations and international trusts. Failure to file the required returns may result in civil and criminal penalties and may extend the statute of limitations for assessment and collection of the related taxes.
The most critical offshore tax form is the Report of Foreign Bank and Financial Accounts, Form FinCEN 114, referred to as the FBAR. Anyone who is a signor or beneficial owner of a foreign bank or brokerage account with a value of more than $10,000 must disclose their account(s) to the U.S. Treasury.
The law imposes a civil penalty for failing to disclosing an offshore bank account or offshore credit card up to $25,000 or the greatest of 50% of the balance in the account at the time of the violation or $100,000. Criminal penalties for willful failure to file an FBAR can also apply in certain situations. Note that these penalties can be imposed for each year.
In addition to filing the Foreign Bank Account Report, the offshore account must be disclosed on your personal income tax return, Form 1040, Schedule B.
Other international tax filing obligations include:
- Form 5471 – Information Return of U.S. Persons with Respect to Certain Foreign Corporations (http://www.irs.gov/pub/irs-pdf/f5471.pdf).
- A foreign corporation or limited liability company should review the default classifications in Form 8832, Entity Classification Election and decide whether to make an election to be treated as a corporation, partnership, or disregarded entity (http://www.irs.gov/pub/irs-pdf/f8832.pdf).
- Form 8858 – Information Return of U.S. Persons with Respect to Foreign Disregarded Entities (http://www.irs.gov/pub/irs-pdf/f8858.pdf).
- Form 3520 – Annual Return to Report Transactions With Foreign Trusts (http://www.irs.gov/pub/irs-pdf/f3520.pdf).
- Form 3520-A – Annual Information Return of Foreign Trust (http://www.irs.gov/pub/irs-pdf/f3520a.pdf).
- Form 5472 – Information Return of a 25% Foreign-Owned U.S. Corporation (http://www.irs.gov/pub/irs-pdf/f5472.pdf).
- Form 926 – Return by a U.S. Transferor of Property to a Foreign Corporation (http://www.irs.gov/pub/irs-pdf/f926.pdf).
- Form 8938 – Statement of Foreign Financial Assets was introduced in 2011 and must be filed by anyone with significant assets outside of the United States. (http://www.irs.gov/uac/Form-8938,-Statement-of-Foreign-Financial-Assets).
International Tax Preparation Services
We can help you qualify for the Foreign Earned Income Exclusion and maximize the offshore tax benefits of living, working, and investing offshore. Our U.S. licensed Enrolled Agents have decades of experience with offshore tax issues and will be happy to work with you to make sure you do not pay a cent more in tax than is required by law. We can help you save money this year… AND NEXT.
International Tax Preparation Fees
- Basic personal tax return with W-2 wages and itemized deductions: $695.00 and up.
- Personal tax return with wages, itemized deductions, and Partnership or S-Corporation income (Form K-1): $725.00 and up.
- Personal return with self-employment income: starting at $850.00.
- Personal return with foreign earned income: starting at $695.00.
- Foreign Corporation and foreign trust informational returns average $950.00.
- US Corporation and Partnership returns with less than $250,000 in assets or sales: starting at $1,025.00.
- US Corporation and Partnership returns with more than $250,000 in assets or sales, and thus requiring a balance sheet, starting at $2,250.
Please email us at info@premieroffshore.com or at call us at (619) 550-2743 for a consultation on your international tax preparation or offshore tax compliance needs.
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