Americans Living and Working Abroad
Report of Foreign Bank and Financial Accounts (FBAR)
Statement of Foreign Financial Assets
Estimated Tax Payments
Estimated Safe Harbors
June 15 is the due date both for Americans living and working outside the U.S. to file their 2021 federal income tax returns and for the second estimated tax payment for 2022. Here are some important details for both. Americans Living and Working Abroad - U.S. citizens and resident aliens (i.e., green card holders), and those with dual citizenship, living and working outside the U.S. must file their 2021 federal income tax returns by June 15. A taxpayer qualifies for the June 15 filing deadline if both their tax home and residence are outside the U.S. and Puerto Rico, or they were serving in the military outside the U.S. and Puerto Rico on the regular due date of their return. A statement should be included with the return that indicates which of the two situations applies. Taxpayers who can't meet the June 15 deadline can request an extension of time to file giving them until October 17 to file and avoid the late filing penalties. Taxpayers should file their extension requests electronically to avoid arguments with the IRS over whether the extension was filed on time. The other option is to paper file for an extension using Form 4868, checking box 8, that you are “out of the country.” Be aware the extension – whether filed electronically or on paper – is only for filing and not an extension to pay your tax liability. To be valid the extension must include a reasonable estimate of your tax liability and payment to avoid late payment penalties. Please contact this office for assistance in completing and filing an extension. U.S. Citizens Living Abroad May Also Need to File an FBAR - Generally, U.S. citizens and resident aliens with a foreign bank or financial account need to file Form 114, Report of Foreign Bank and Financial Accounts (FBAR). This reporting requirement is separate from, and in addition to, any reporting required either on Form 1040, Schedule B or Form 8938. The FBAR isn't filed with the IRS but is filed electronically using the Bank Secrecy Act (BSA) filing system. Taxpayers need to file an FBAR if they had an interest in, or signature or other authority over one or more foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2021. Because of this low threshold, taxpayers with any foreign assets should check to see if the FBAR reporting requirement applies to them as the penalties for failure to file an FBAR are extreme. Although the FBAR due date in 2022 was April 18, FinCEN grants an automatic extension, to October 17, to anyone who missed that original deadline. In addition to filing an FBAR, certain taxpayers may also need to file Form 8938, Statement of Foreign Financial Assets. Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds certain thresholds. The 8938 is attached to the taxpayer’s individual income tax return, but if the taxpayer isn’t required to file an income tax return, then the 8938 isn’t required either. Estimated Tax Payments – The next 2022 estimated tax payment is also due on June 15th. Unlike employees, who have income, Social Security, and Medicare taxes withheld from their wages, self-employed individuals must prepay their taxes by making quarterly estimated tax payments. These are referred to as estimated tax payments because the self-employed individual must estimate his or her net earnings for the year and pay taxes on a quarterly basis according to that estimate. Failure to do so will result in interest penalties. The self-employed are not the only ones who are subject to estimated tax requirements, which also apply to anyone who has income that is not subject to withholding taxes and even to those whose taxes are not sufficiently withheld. Thus, if you have income from stock sales, property sales, investments, alimony from a pre-2019 divorce, partnerships, S-corporations, inherited pension plans, or other sources that are not subject to withholding, you may also be required to pay either estimated taxes or an underpayment penalty. Others subject to making estimated payments are individuals who must pay special taxes such as the 3.8% tax on net investment income or the employment tax on household employees. Although these payments are called “quarterly” estimates, the periods they cover do not usually coincide with a calendar quarter. An underestimate penalty does not apply if the tax due on a return (after withholding and refundable credits) is less than $1,000; this is the “de minimis amount due” exception. When the tax due is $1,000 or more, underpayment penalties are assessed. These underpayment penalties are determined on a quarterly basis, so an underpayment in an earlier quarter cannot be made up for in a later quarter; however, an overpayment in an earlier quarter is applied to the following quarter. The amount of an estimated tax installment payment is determined by estimating one fourth of the taxpayer’s tax for the entire year. When the income is seasonal, sporadic, or the result of a windfall, the IRS provides a special form, and the underpayment penalty is based on actual income for the period. For individuals who do not want to take the time to estimate their quarterly taxes but who still want to avoid the underpayment penalty, Uncle Sam also provides safe-harbor estimates. However, even these can be tricky. Generally, a taxpayer can avoid an underpayment penalty if his or her withholding and estimated payments are equal to or greater than:
90% of the current year’s tax liability or
100% of the prior year’s tax liability.
However, these safe harbors do not apply if the prior year’s adjusted gross income is over $150,000, in which case, the safe harbors are:
90% of the current year’s tax liability or
110% of the prior year’s tax liability.
Sometimes, individuals who have withholding on some (but not all) of their sources of income will increase that withholding to compensate for the additional income sources that have no withholding. Although this may work, withholding adjustments are not as precise as quarterly payments and should be used with caution.
This blog is meant for educational purposes only. Articles contain general information about accounting and tax matters and is not tax advise and should not be treated as such. Do not rely on information from this website as an alternative to seeking assistance from a certified tax professional. Perlinger Consulting partners with certified tax professionals to assist our clients.