Paying US Taxes As An Expat In New Zealand

Throughout our time as certified and trustworthy tax professionals, we always face various questions concerning tax payments as a US expat.

Questions like;

  • How much will I pay in taxes as an expat?
  • Why do I have to pay US taxes if I live abroad?
  • Do US expats pay double taxes?

We’ve tried answering these questions here and there, but a much better approach is compiling a more definitive solution for your questions.

And that’s why we came up with this guide that will hopefully answer most of your commonly asked questions.

  • How Does The IRS Know About Foreign Income?
  • Why Do I Have To Pay US Taxes If I Live Abroad?
  • How Much Will I Pay In Taxes As An expat?
  • Do US Expats Pay Double Taxes?
  • Filing Requirements For Americans Living Abroad
  • What Happens If You Don’t Pay US Taxes While Living Abroad?

How Does The IRS Know About Foreign Income?

Many people come to us here at US tax pros asking if the IRS knows about their foreign income,

And the simple answer is, Yes – the IRS has systems in place to track your foreign income. One of the main ways for the IRS to learn about foreign income which was not reported, is through the FATCA which is the Foreign Account Tax Compliance Act. In accordance with FATCA, more than 300,000 foreign financial institutions in over 110 countries actively report account holder information to the IRS.

Need Help Filing Your Taxes?

Why Do I Have To Pay US Taxes If I Live Abroad?

It’s this simple.

US taxes are based on citizenship and not residence. It’s set up this way because all the citizens of the United States while in foreign countries are entitled to receive the same protection of persons and property which is accorded to every other US citizen, from the government. You still receive the benefits entitled to you as a lawful citizen of the USA so it’s only right you pay taxes, right?

Here are some of the rights you still enjoy as a US citizen living abroad:

  • Protection from deportation. Being a U.S. citizen protects you and your children from deportation
  • Citizenship for your children
  • Family reunification
  • Eligibility for government jobs
  • Freedom to travel
  • Ability to vote

For the government to fully accord you any of their services, they need you to also help them on the tax end.

How Much Will I Pay In Taxes As An expat?

American citizens who live and work for a US company, are self-employed, or even work for some foreign employers, may be required to pay US social security taxes.

For self-employed expats, US social security taxes total 15.3% of income (12.4% social security tax and 2.9% Medicare tax), or 6.2% for employees and 2.9% for Medicare tax.

However, expats could also be required to pay social security taxes in the nation in which they reside.

Do US Expats Pay Double Taxes?

There are systems in place that ensure you don’t go through the unfair route of double taxation. The US has totalization agreements with 30 other nations to assist in the prevention of duplicate social security taxation.

According to these treaties, expats who will be living abroad for a short period of time (typically 3-5 years) should continue paying social security taxes to the US but not to the country in which they reside.

However, if they will be living abroad for a longer period of time, they should pay social security taxes to their home country but not to the US. Contributions paid to either nation are taken into account when determining future social security benefits.

Filing Requirements For Americans Living Abroad

Expats are required to file the same federal income tax return (IRS Form 1040) as everyone else. This is because only two countries in the world—the United States being one of them—base their taxes on citizenship rather than locality.

According to the Foreign Account Tax Compliance Act;

  1. Expats who have financial assets worth more than $10,000 must file an FBAR,
  2. And those who have assets worth more than $200,000 probably need to file Form 8938, Statement of Specified Foreign Financial Assets. If any of these is not complied with, the IRS may impose severe fines.

There is some good news though,

Before you start worrying about your American tax bill, expats are eligible for a number of tax provisions that can hugely subsidise or even eliminate their financial obligations to the Internal Revenue Service.

The foreign earned income exclusion is one of the most well-known of these rules, allowing expats to lower their taxable income by more than $100,000 if it is earned income – indicating that it was obtained by active employment, rather than passive income.

When To File Returns For Those Living Abroad

American expats living and working abroad have to file US expatriate tax returns and to report their foreign financial accounts on FBARs every year if they meet the expat tax requirements.

If you are a US citizen who is currently living overseas, you are automatically given a 2-month extension to file your return. The automatic extension of two months for calendar year returns extends to June 15th. To avoid incurring interest, you must pay any unpaid taxes by April 15th.

What Happens If You Don’t Pay US Taxes While Living Abroad?

Failure to pay all your tax requirements can be problematic. The best approach is to always ensure you are on point with your tax payments – which will ensure you avoid problems in the future.

Revocation Or Denial Of Passport
Beginning in January 2018, if you owe the IRS a significant amount of money, they will be able to inform the State Department, which would then have the power to cancel your US passport or deny your application for one. Many Americans who reside abroad believe they only owe taxes to their current country of residence and ignore their US tax responsibility.

You should be aware, though, that the US has tax agreements with more than 40 nations, through which the IRS and foreign tax authorities can share information on tax filings made by US citizens. Moving abroad won’t help you escape your US tax obligation because America pursues taxes zealously across the world.

What Happens If You Don’t File Tax Returns While Living Abroad?

If you fail to file your US or state taxes while living abroad, just like any other US resident, you may be subject to a penalty even if you do not owe any taxes. A failure to submit penalty might cost you thousands of dollars, prevent you from receiving advantages that would lower your tax liability, or even both.

Failure To File Penalty

There are two primary financial penalties for failing to file your tax return on time.

  • The “failure to file” penalty
  • The “failure to pay” penalty

The late-filing penalty is not the same as the late-payment penalty. The late-filing penalty affects people who don’t turn in their Form 1040 and other important tax documents on time. The late-payment penalty affects people who pay their taxes late. The Failure to Pay Penalty is 0.5% of the unpaid taxes for each month or part of a month in which the tax was unpaid.

The penalty for not filing taxes is also known as the failure-to-file penalty or the late-filing penalty.

  • The penalty is usually 5% of the tax owed for each month or part of a month the return is late.
  • The maximum failure-to-file penalty is 25%.
  • If your return is more than 60 days late, the minimum penalty for not filing taxes is $435 or the amount of tax owed, whichever is smaller.

Each is determined differently, although they are all often based on a portion of your outstanding tax obligation. Generally, those who are overseas on the due date for filing taxes are given an automatic extension of two months, with the opportunity to extend the deadline even further. However, regardless of any extensions, interest will start to accrue on the April deadline and continue until the tax amount is paid; a skilled professional may further explain the complexities of submitting a U.S. expat tax return.

Not Filing FBAR And FATCA Forms

Failing to file the necessary FBAR or FATCA forms can have even steeper costs. For example, if you were supposed to file Form 8938 under FATCA but neglected to do so, you may be subject to a $10,000 penalty, with the possibility of an additional $50,000 for continued failure to file and a fine valued at 40% of the value of the undisclosed assets.

For FBAR, the maximum penalty for failing to file is almost $87,000 if the taxpayer has a pattern of negligence.
Remember that while there may be some overlap between FBAR filings and FATCA filings, completing one has no bearing on whether you must complete the other. Make sure you are meeting all your tax requirements as an expat so you can avoid any penalties.

US Tax Pros – We’re Right Here

We hope these helped you see how much you can save on your US taxes. Let US Tax Pros know in case you have any questions or need help. We’re here to make your life easier!

Need Help Filing Your Taxes?