Tax Tips for Mid-Year Returnees to the US
For foreign-based US citizens and residents, returning to their home country in the middle of the year seems like the best option. Aside from avoiding holiday rush, there will be more room for adjustment and relocation. But, does it make a difference when it comes taxes? These are tips to consider while planning to go back to the US.
Aim for Foreign Earned Income Exclusion
Foreign-based US citizens are still taxed based on their incomes despite staying abroad. They must report and pay on their annual tax return. But, they can qualify for the Foreign Earned Income Exclusion (FEIE). Qualified citizens can exclude a portion of their foreign income for the final computation of taxes. But, it is only available for foreign-earned income. Any US-earned income for a foreign-based citizen is not included in the FEIE.
There is no need to worry about US citizens who plan to return home in the middle of the year because they are still qualified. There will be the partial exclusion of their income earned during the part of the year abroad.
To qualify for FEIE, one must pass one of the following tests:
o Bona-Fide Residency Test (BF Test)
The Internal Revenue Service (IRS) will determine if an applicant is a bona fide resident of a foreign country or countries covering an entire tax year. Here are the two factors to be considered:
- – Length of stay and nature of work
- – Residence in a foreign country in an entire tax year
If one has already qualified for the BF Test, one can continue to claim the exclusion even in the middle of the year, albeit partially.
o Physical Presence Test (PPT)
To qualify for the PPT, one must live abroad for at least 330 days out of a 12-consecutive month period. The 12-month calendar period does not automatically mean the actual return to the US. It can be any period leading to the filing of the tax return. The eligible foreign income for exclusion will be based on the number of days in the calendar year one is present in the foreign country.
The BF Test qualifies those who work for an indefinite or extended period and set up permanent residence in a foreign country. For those who have a contract with a defined end date, the BF Test is not plausible, so they must try PPT instead.
Track Moving Expenses
Moving expenses leaving and returning to the US differ. When first moving abroad, the moving expenses are adjusted related to excluded foreign income. But when going back to the US, there are no adjustments. Instead, one can deduct the full amount. One could also opt to split the deduction to two years. Thus, moving back to the US is favorable.
Use Unclaimed Foreign Tax Credit
While working abroad, one could accumulate unused foreign tax credit. This is usable for 20 years and transferable from one foreign country to another. But, one cannot use it against US-based income. But if one chooses to move again within the following 20 years, it can be reused.
Be Aware of State Taxes
While staying in the US, one will be certainly required to pass a Non-Resident or Part-Year Resident Tax Return. It will be filed in the state where an overseas US citizen resides. These are some things to do:
o Find out what type of foreign income is taxable in the state level.
o Generally, pension income is taxable at the state level. Hence, it is better to convert foreign retirement plan into cash before moving back to the US.
o Unlike pensions, capital gains are generally taxed by the locality it came from. So, it is only taxable at the federal level.
It is advisable to consult a tax advisor about these matters to be able to plan better while moving back to the US.
Secure US Health Coverage
Every PPT and BR Test qualifiers have the right for a short-term gap for US Health coverage exemption up to three months. It will be effective until one obtains a health insurance through an employer or private health insurance. One must be mindful to secure US Health Coverage upon returning to the US. Also, be aware of other changes concerning the estimate of tax liability.
Be Aware of Changes in Filing Due Date
It is more likely for someone to take advantage of the automatic two-month extension on filing taxes to expats.
Upon returning to the US, one must be mindful that one’s day of return is also the tax return’s due date. But if one went abroad, there is an automatic extension of one month. EXTENSION TO FILE DOES NOT MEAN EXTENSION TO PAY. Pay on time so that there will be no added interests.
If more time is needed, one can file Form 4868 to request an additional extension to file the tax return until October 15. However, one must file their extension form this coming April 15 if one is already in the US.
Be Aware of Compliance Requirements
Whether a US person lives in the country or abroad, the Financial Reporting compliance requirements remain. It includes filing FinCen 114 (or FBAR) and Form 8938 (or FATCA).
- The threshold for FBAR reporting is the same whether one lives stateside or abroad. It is $10,000 in the total balance of all foreign financial accounts. If a foreign pension account may be dormant in the country where one previously worked, it still needs to be reported in FBAR.
- The threshold for FATCA reporting differs if one lives stateside or abroad. It is now lower and applicable for the year of return to the US as well.
Stateside FATCA (Form 8938) Filing Thresholds
|Filing Status||Single/ Head of Household/ Married Filing Separately||Married Filing Jointly|
|Aggregate Value At Year End:||$50,000||$100,000|
|Highest Aggregate Value At Any Time During the Year:||$100,000||$200,000|
One must continue to file additional informational returns required while living abroad. With proper planning and budgeting, returning to the US in the middle of the year will be a breeze.