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I hope this question is appropriate for SE Money but based on this one I think it is U.S. citizen, working for U.S. company, living in Mexico: Where do I pay taxes?

If you are an American citizen not living in the US but a bona fide resident of European country and you work for a European company which has no clue what a W2 is what do you do when you report your taxes?

I'm also curious about FBAR reporting. http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Report-of-Foreign-Bank-and-Financial-Accounts-%28FBAR%29

"The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported."

That's a rather low number especially if it's just used for a small buffer to pay bills and collect pay checks and not used for investing. Anyone with a similar experience?

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  • FBAR is a very problematic issue. People didn't know about it until very recently because no-one was enforcing it. When it was enacted, $10K was a lot. But now its peanuts, and they started enforcing it several years ago, and many many people (some of which had never stepped foot in the US, just happened to be born by US parents) got hit with huge penalties and fines (up to $100K per unreported account per year, but for most it was in the tens-of-thousands range in totals). – littleadv Jun 20 '13 at 17:13
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The IRS taxes worldwide income of its citizens and green card holders.

Generally, for those Americans genuinely living/working overseas the IRS takes the somewhat reasonable position of being in "2nd place" tax-wise. That is, you are expected to pay taxes in the country you are living in, and these taxes can reduce the tax you would have owed in the USA. Unfortunately, all of this has to be documented and tax returns are still required every year.

Your European friends may find this quite surprising as I've heard, for instance, that France will not tax you if you go live and work in Germany.

  1. A foreign company operating in a foreign country under foreign law is not typically required to give you a W-2, 1099, or any of the forms you are used to. Indeed, you should be paying taxes in the place where you live and work, which is probably somewhat different than the USA. Keep all these records as they may be useful for your USA taxes as well.

  2. You are required to total up what you were paid in Euros and convert them to US$. This will go on the income section of a 1040.

  3. You should be paying taxes in the EU country where you live. You can also total those up and convert to US$. This may be useful for a foreign tax credit.

  4. If you are living in the EU long term, like over 330 days/year or you have your home and family there, then you might qualify for a very large exemption from your income for US tax purposes, called the Foreign Earned Income Exclusion. This is explained in IRS Publication 54. The purpose of this is primarily to avoid double taxation.

  5. FBAR is a serious thing. In past years, the FBAR form went to a Financial Crimes unit in Detroit, not the regular IRS address. Also, getting an extension to file taxes does not extend the deadline for the FBAR.

Some rich people have paid multi-million dollar fines over FBAR and not paying taxes on foreign accounts. I've heard you can get a $10,000 FBAR penalty for inadvertent, non-willful violations so be sure to send those in and it goes up from there to $250k or half the value of the account, whichever is more. You also need to know about whether you need to do FATCA reporting with your 1040.

There are indeed, a lot of obnoxious things you need to know about that came into existence over the years and are still on the law books -- because of the perpetual 'arms race' between the government and would be cheaters, non-payers and their advisors.

http://www.irs.gov/publications/p54/

http://americansabroad.org/

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  • Thanks for the info, especially about FBAR. The deadline for FBAR appears to be June 30 2013 and it can be done electronically so there is still time. – user10366 Jun 20 '13 at 13:25
  • @raxman be careful with "totalling up", you should be using the right exchange rates, you do not just convert the whole year amounts at once. If you receive salary in EUR on the first of each month, you have 12 separate conversions to make, etc. Same for FBAR amounts (they want the highest amount a year, in $$ that may not be the same as in EUR, because of currency fluctuations). – littleadv Jun 20 '13 at 16:49
  • That's a good point. – user10366 Jun 20 '13 at 18:18
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I'll add a bit to Paul's excellent write up.

  1. Foreign Earned Income Exclusion (form 2555): notice the earned there. It doesn't exclude capital gains, interest, dividends, and basically everything that is not salary. You pay US taxes on it from the first cent.

  2. Foreign tax credit - foreign tax credit (form 1116) doesn't reduce your US tax dollar for dollar (even though it may appear that it does from the generic explanations). By using this form you may end up accumulating unused credit while still paying double taxes at the same time. Happened to me. Thank Congress for the logical and reasonable US tax laws.

  3. New FATCA form 8938: as opposed to FBAR (that goes to the FinCEN in the Treasury), this one goes to the IRS. it contains very similar info, but the threshold requirements are different. You may have to file FBAR, but not these, or you may have to file both.

  4. Being an American citizen, some European banks will refuse to provide services to you. Again, thank Congress for FATCA. It requires foreign banks to enforce US tax regulations on US citizens, and banks that won't will get penalized in the US. Many banks refuse to provide services to Americans because of that because what IRS requires is illegal in most countries. Some countries (like UK and some other EU countries) have signed treaties with the US to resolve this, but many haven't.

  5. Currency conversion - as I commented to Paul, you convert the amounts when you receive them, which may have your fixed EUR salary be converted to different dollar amounts every time. You need to make sure you do it right.

  6. Pensions, savings, investments - if you're doing these in non-US instruments prepare to be penalized. US taxes foreign investments much more aggressively than domestic. If you're investing in indexes/mutual funds, or you're a principle in a corporation, or you create a pension account - you'll get hit by additional reporting requirements and tax.

  7. Tax treaties - the US has tax treaties with many EU countries, and equalization treaties with some. The tax treaties affect the standard tax treatment by the US and some of the "generic" info you got here may not apply because of a tax treaty, and some other rules may apply. Equalization treaties work similarly with regards to the Social Security.

Bottom line, and I know Paul disagrees with me on this - talk with a US-licensed adviser in the country you're going to. It is very important for your tax adviser to know the relevant treaty (and not read it the first time when you call him), and to understand each and every financial instrument in your country. Missing piece of paper in your tax return can cost you thousands of dollars in penalties (not exaggerating, not filing form 3520 triggers a $10000 penalty, even if there's no tax) and additional taxes.

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  • Were you really doubly taxed? I would be surprised. I think your tax is max(US, Europe). That's not double taxation. It's only double taxation if you end up paying more than max(US, Europe). For example if your tax in the UK is $1000 and the tax in the US is $500 then you pay $1000 to the UK and owe the US nothing. It's only double taxation if you end up paying more than $1000. If the US tax is $1500 instead you pay $1000 to UK and $500 to the US. That's still not double taxation. – user10366 Jun 20 '13 at 18:21
  • @raxman that's in theory. In practice, both the FEIC and the foreign tax credit may work so that you end up being double taxed. In my case it was because the foreign tax was much higher than the US, but the foreign income was significantly less than US income, so I ended up being able to credit only a little portion of the foreign tax. My foreign tax was 35%, and after the credit I paid ~15% in addition to the US, even though my US marginal rate was only 28% (i.e.: in theory I wasn't supposed to pay anything in the US). – littleadv Jun 20 '13 at 18:27
  • I don't follow that. Rates are not very useful to compare with, especially marginal rates. You have to look at the the absolute value of what you are expected to pay in both countries. For example $1000 in the US $500 in the other then you pay $500 to each. That's not double taxation. – user10366 Jun 20 '13 at 18:39
  • @raxman what I'm saying is this: assume for the example I got $1000 in the foreign country. I paid 35% there - $350. I reported income on my 1040 for additional $1000, and used form 1116. Theoretically, the tax should be exactly the same as if I hadn't reported the income and the foreign tax. In practice, my US tax liability was higher by 15% of the additional income - extra $150 tax, form 1116 ended up with less than half of the tax paid as credit. I ended up paying 50% tax, even though in neither of the countries the tax rate is that high. – littleadv Jun 20 '13 at 18:44
  • @raxman the reason for this calculation, as I said, is a combination of two factors: foreign tax significantly higher than the US (35% vs 28%), and substantially larger US sourced income that overshadowed the foreign income. 1116 appropriates tax to income, and doesn't allow credit for more than the US tax liability. I ended up paying more tax on the income because I paid tax to two countries, which is exactly what double taxation is. – littleadv Jun 20 '13 at 18:51

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