Living in a new country grants you the opportunity to explore new places, soak in new cultures, and maybe even learn another language. But before you accept that job offer abroad, it’s important to weigh all of your financial considerations, including the tax implications.

Here’s everything you need to know about your US tax implications when you’re living in another country.

You May Owe Taxes in More Than One Country

As a US expat, your taxes are a little more complicated than when you were just a US citizen living within the country. Depending on where your work stations you, you could end up owing taxes to your new home country, as well as to the US.

Most foreign countries tax you based on residency, and not on citizenship. Usually to become a resident, you need to live in a country for a certain amount of time – typically several months, although it varies from country to country. Once you meet this criteria, you’re considered a resident and owe federal income taxes.

The catch is, the US charges tax based on citizenship, not on residency. So, even if you’ve lived outside of the US for an entire tax year, you still have to file US taxes as long as you’re a legal citizen (or Green Card holder).

If you’re wondering if this could lead to double taxation, don’t worry. We’ll explain how to avoid that.

Read more: What is Citizenship-Based Taxation? – Bright!Tax

How to Prevent Double Taxation as a US Expat

It’s possible to earn an income abroad and then owe taxes on this income to the foreign country you’re living in, as well as to the US. The good news is that the Internal Revenue Service (IRS) offers two main tax breaks designed to help US expats avoid paying double taxes on the same income. 

The tax breaks include the Foreign Earned Income Exclusion and the Foreign Tax Credit.

How the Foreign Earned Income Exclusion Works

The FEIE lets US expats exclude a portion (and in some cases, all) of their foreign income from their US tax returns. They can only exclude income earned through wages, salaries, bonuses, and commissions – they can’t exclude passive income. This lowers their US tax bill and in some cases, may wipe it out entirely.

For your 2021 taxes, you can exclude up to $108,700 in foreign earned income from your US tax bill using this tax break. For 2022, the threshold is $112,000. 

So, if your company moves you abroad to Japan and you make $96,000 in foreign income, you could exclude this entire amount from your US tax return using the FEIE, and eliminate your tax bill altogether.

To claim the FEIE, you have to pass one of the tests below:

• – You must prove you are a bona fide resident of a foreign country. If you meet a foreign country’s residency requirements for the entire tax year, you’re eligible for the FEIE. For instance, if you lived in Barcelona from January 1st through December 31st in 2021 and became a resident of Spain, you’d fulfill this requirement of the Bona Fide Residence Test for 2021.
• – You lived outside of the US for more than 330 days. If you were in one or more foreign countries for over 330 days during a 12-month period that fell within the tax year, you’re eligible for the FEIE. For instance, if you travelled across Asia in 2021 and were only in the US for 21 days, you’d likely pass this Physical Presence Test.

If you don’t pass at least one of these tests, you can’t claim the FEIE. But you may be able to claim the next credit.

Read more: IRS Foreign Earned Income Exclusion 2022 – Ultimate Guide

How the Foreign Tax Credit Works

The FTC works by reducing your tax bill by one dollar for every dollar you’ve paid in foreign taxes that year. This is a good option if you are already paying foreign taxes, especially if the country you’re living in charges a higher tax rate than the US.

For instance, say you earn $75,000 in Germany and pay $20,000 in income taxes there. Using the FTC, you can reduce your US tax bill by $20,000. So, if your US tax bill were $18,000, your $20,000 deduction would more than cover your tax liability.

You can only claim the FTC if:

• – The foreign taxes you paid were imposed by the foreign country
• – You have already paid this tax bill or it has accrued (and will be paid in the future)
• – You did not profit from paying the foreign tax
• – The US does not have sanctions against the country where you paid the tax

Read more: The US Foreign Tax Credit – A Complete Guide for Expats

The Foreign Housing Exclusion May Save You Even More on Your Tax Bill

When you live abroad, it’s also possible to deduct housing costs from your US tax bill. If you pay for your housing with money you have earned from your employer (such as your wages or salary), you can claim this tax break on Form 2555 as a housing exclusion. If you pay for your housing with income earned from self-employment, then you must claim this tax break as a deduction instead, this time on Form 1040. (The amount you exclude depends on where you live. Deduction limitations by location can be found on the instructions for Form 2555.)

Using this tax break, you can deduct rent, repairs, non-telephone utilities, furniture rental, parking costs, and property insurance.

If your employer reimburses you for your housing costs and expenses, this raises your taxable income and thus could raise your tax bill.

Read more: The Foreign Housing Exclusion Guide for Expats

What are tax equalization packages?

When your employer offers you a job outside the country, they may also offer a tax equalization package. This program ensures the taxes you pay outside of the country do not exceed what you would pay living in the US. If your taxes do happen to exceed this amount, then your employer would reimburse you for the difference.

Read more: Employee Expatriate Tax Services

Other Tax Considerations When Accepting a Job Offer Abroad

If your US employer reimburses you for any personal expenses, such as relocation expenses, educational costs, spousal allowances, home leave, or car allowances, these reimbursements increase your taxable US income – potentially sticking you with a larger tax bill.

Get Ahead of Tax Requirements Before Moving

If you’re considering a job offer abroad with your company, the best way to mitigate your tax liability is to talk with a tax professional before your move. Bright!Tax has helped thousands of US expats with their taxes, and we can help you understand your new tax requirements in advance. 

Bright!Tax will work with you to minimize your tax liability by helping you understand what expenses and reimbursements affect your tax bill. And when the time comes, we’ll help you apply for any eligible credits to make sure you are filing in the most tax-efficient manner possible.

Connect with a Bright!Tax CPA today to get answers to all of your tax-related questions about moving abroad.

The post US Tax Implications: Getting a Job Offer Abroad appeared first on Bright!Tax Expat Tax Services.

GILTI stands for global intangible low-taxed income – and US expats who own a controlled foreign corporation (CFC) are directly impacted. This tax rule provides a distinct way to calculate a CFC’s earnings so that the company pays a certain minimum of US taxes each year. 

Whether you’re a US expat who owns a foreign corporation or you’re considering starting one, here’s everything you need to know about GILTI and how it can increase your US tax bill.

What is a CFC?

Before we dive into GILTI, it’s important to understand what a controlled foreign corporation is, so you know if this tax regulation will affect your business. A CFC refers to a corporation registered outside the US, in which more than 50% of the corporation is owned or controlled by US citizens.

In other words, if you, an American expat, decide to form a corporation in Italy, where you’re living, and you’re the sole owner, then it’s classified as a CFC. That’s because you own 100% of the foreign corporation and you are a US citizen.

What’s GILTI tax and how does it impact your US taxes?

Most countries tax based on where you live. But the US taxes you based on your citizenship – meaning even if you live abroad, if you’re a US citizen, you’re on the hook for paying US taxes. GILTI is foreign income your CFC earns on intangible assets, such as patents, copyrights, and trademarks. You’re obligated to pay GILTI if you own at least 10% of a CFC, and if your company is a CFC (majority-owned or controlled by US taxpayers). 

How much do you have to pay with GILTI? Well, it depends on your individual tax rate. The individual tax rates range from 0% to 37%.

Before 2017, offshore corporate profits were not taxed by the US. When GILTI was enacted, it significantly changed the US expat foreign business owners’ tax bills.

Does GILTI only apply to US expats?

US expats who own a foreign corporation (or more than 10% of a share of a CFC) and whose foreign business is profitable will most likely need to pay GILTI. But, US citizens who do not live abroad may also need to pay this tax if they participate in a foreign corporation and have a stake that is 10% or greater. GILTI does not only apply to individual taxpayers but also applies to US businesses who have an interest in foreign companies as well.

Why was GILTI passed?

The US passed GILTI as part of the TCJA in 2017, in order to discourage business owners from moving intangible asset profits from US corporations to foreign-controlled corporations. By taxing foreign corporations controlled by US citizens and expats, GILTI makes it more difficult for companies to shift profits to avoid taxation.

How do you calculate and file GILTI?

You’ll determine and report GILTI using IRS tax Form 8992. The calculation is a bit complicated, and we recommend working with a tax specialist, particularly when calculating and paying GILTI for the first time.

To figure out your GILTI tax, you have to first determine how much income your CFC earned in excess of your company’s determined tangible income. Subtracting the total income earned from the tangible income can help you find your intangible income or GILTI.

If your company’s profits are high in intangible income, for instance, you’ll pay more in GILTI. The highest tax rate you could pay for GILTI is 37% – the highest tax bracket currently in the US.

Are there tax breaks to reduce how much GILTI I owe?

While GILTI was an unwelcome surprise for many US expat business owners, there are ways to eliminate this tax altogether – or significantly reduce it.

Reduce your GILTI with a 962 Election

A Section 962 election is a method for reducing your GILTI. This allows US expats who own CFCs and are on the hook for GILTI to treat themselves as a US corporation rather than an individual taxpayer, reducing their corporate tax rate on foreign income by 50%, effectively lowering the GILTI tax to 10.5%.

In addition, they can use Section 962 to take advantage of foreign tax credits for their corporate taxes, which can help lower the amount they have to pay in GILTI. Unfortunately, individual taxpayers are not eligible to offset GILTI tax with foreign corporate tax paid, unless the Section 962 election is made.

Although paying 10.5% in GILTI is much better than paying an individual tax rate of up to 37%, there is a catch with Section 962. In the future, when you receive your foreign corporation’s profits as dividends, you and any other shareholders will have to pay taxes on them again – effectively leading to two layers of taxation. However, US expats who have to pay taxes on dividends can use US foreign tax credits to lower the amount due.

The exact credits and deductions you can use vary depending on your income level and other factors.

Pay Yourself a Salary to Limit GILTI

If you own a foreign corporation, paying yourself a salary can also help reduce the amount you’ll pay in GILTI. If you’re a freelancer, for example, who manages your business through a foreign corporation and you qualify for the FEIE (Foreign Earned Income Exclusion), this approach could work well.

You’ll want to make sure to pay yourself a salary that reduces GILTI to the amount of your standardized deduction, in order to reduce the amount you’ll owe. We recommend talking to a Bright!Tax CPA before attempting this approach. We can help you determine how much of a salary you should pay yourself and make sure you’re eligible for the right tax credits.

In addition, there is a GILTI high tax exemption that you may qualify for. This exemption allows expats who pay GILTI for their CFC at a tax rate that is over 90% of the US corporate rate (which is currently set at 21%). If your country’s corporation tax rate is above 18.9% – and many countries tax rates are – you could qualify.  

How New GILTI Rules Affect Past Returns

Although the US passed GILTI in 2017, it wasn’t until mid-2020 that the US posted final regulations on GILTI. If you paid GILTI in 2018, 2019, or 2020 (before the rules were finalized), you can retroactively go back and file amended returns.

Bright!Tax Can Help You Navigate GILTI

US expat taxes are complicated. And if you have foreign business profits to report, filing your tax return can seem even more daunting. Bright!Tax CPAs are well-versed in US expat tax law and can help you navigate the process of paying GILTI.

Our CPAs will work with you to make sure you receive any foreign tax credits you’re eligible for, so that you don’t pay a penny more than you have to. We can also help you catch up on previous tax returns through the Streamlined Procedure and look for opportunities for a refund on past GILTI payments. Reach out to a Bright!Tax CPA today to get started.

The post What is GILTI? What Expats Need to Know About IRS Form 8992 appeared first on Bright!Tax Expat Tax Services.

It was the case for Louisiana native Chara Richterberg, who until March of 2020, was living across four different continents due to her husband’s career in the oil and gas industry. According to Richterberg, in an article for the Financial Times:

“The older we get, the more important it becomes to be closer to home, and we did not want to be stuck halfway across the world, away from elderly parents and with such uncertainty about air travel,” says Richterberg.  “Moving to Houston [Texas] for his job has been lonely for me but, wherever I am, I eventually find my own people.”

The rise of remote work has made it easier for American expats who work remotely for a foreign company to return back to the land of the free while keeping their job. But there’s a catch: while they can still work for their foreign employer, spending too much time in the US could make them liable to also owe money to the IRS. 

The reason is because you’re now subject to the tax rules of the US because of your presence there, even if your employer is withholding foreign taxes. 

Working Remotely for a Foreign Company: What About Taxes? 

If you come back to the US while working remotely for your company based overseas, they’re still withholding your foreign taxes. However, here comes the central dilemma: Since you are now in the US again, you also are liable for taxes to the IRS.  

The thing is, as an individual taxpayer, your wages are sourced based on your physical location. That means if you decide to stay in the US for a certain period of time, the IRS gains taxing rights over your now US-sourced earned income. According to the IRS official website:

“All wages and any other compensation for services performed in the United States are generally considered to be from sources in the United States. The place, where the personal services are performed, generally determines the source of the personal service income, regardless of where the contract was made, or the place of payment, or the residence of the payer.”

As a result, Americans who return to the US while continuing to work remotely for a foreign company could end up owing a bunch of money to the IRS. So much for a warm welcome back home, huh? 

The Best Way to Avoid Double Taxation While Working for a Foreign Company

Thankfully, working for a foreign company while staying in the US doesn’t have to be a logistical nightmare regarding taxes. It’s still possible to work remotely for a company overseas while avoiding double taxation. 

Some tax experts recommend changing your employment contract with a foreign company to become an independent contractor. The issue with this approach is that while the company won’t be withholding taxes, you’ll be in charge of paying all of your employment taxes (such as Medicare and FICA) on your own. 

Some options you might explore include: 

Tax Treaties

Some US tax treaties include a provision for resource income. Meaning even if the person was on US soil, the income might still be considered foreign-sourced.  

Foreign Tax Credit Type Deduction on the Foreign Return

While the income you earn in the US is US-sourced on the US tax return, it would be foreign-sourced on your tax return abroad. You might explore an FTC (1116) like provision on your foreign tax credit to eliminate double taxation by way of the foreign return.

How to Qualify For Foreign Tax Credits (FTC)

To benefit from the Foreign Tax Credit, your foreign earned income must comply with certain criteria. The basic requirements to qualify for the Foreign Tax Credit include:

• – The foreign must impose its taxes on your income. You won’t qualify for the Foreign Tax Credit if the country that’s paying doesn’t tax its residents or citizens. 
• – The taxes you paid need to be legal. 
• – You must have paid income tax. The types of taxes that don’t qualify for the Foreign Tax Credit include sales tax, real estate taxes, or taxes to a sanctioned country under the US government. 

However, if you don’t want to deal with all the paperwork that comes with claiming your Foreign Tax Credits, you can always hire a team of tax experts to help you. The tax advisors will prepare your US return with the balance due and then you would have to inform the credits to claim on the foreign tax return. 

You Don’t Have to Navigate the Complex US Tax System on Your Own

The US has a rigorous tax system that can be pretty complex with a lot of paperwork. For example, it’s one of the only countries in the world that requires its citizens to declare their worldwide income no matter where they live. It’s no wonder many US expats feel confused about their tax obligations. 

If you returned to the US while still working remotely for a foreign company and still have questions about your tax situation, Bright!Tax is here to help. Over these past turbulent two years, we’ve helped various clients come back to the US while on foreign payroll avoid double taxation during their return. 

Contact us today to learn more about our tax services. 

The post Working Remotely for a Foreign Company? Don’t Get Double Taxed appeared first on Bright!Tax Expat Tax Services.

Before any self-employment taxes (sometimes referred to as “SE tax“) are filed though, you’ll want to ensure that your global US tax strategy is maximum efficient. To accomplish this, you’ll need to understand your various options for business entity structures, your annual filing requirements under the US’s citizenship-based taxation model, ways to save on your personal & business taxes, and more.

In the following article, we break down what self-employment taxes for US expats look like and elaborate on the importance of establishing and following a cross-border tax plan.

A brief overview: Self-employed and independent contractor statuses

Self-employed individuals embody the term, “Be your own boss.” They typically get to work the hours they choose and decide what they work on. 

Independent contractors normally work longer term and predominantly with one company or client. In many cases, independent contractors, like consultants, provide expertise or services rather than specific products. 

Related: Differences Between an Independent Contractor and an Employee

What is foreign-earned income?

Foreign earned income is income received for work carried out or services provided when a US citizen or Green Card holder is physically abroad.

It doesn’t matter whether the income is business income (such as if you’re a sole proprietor), earned as an employed individual, whether it is paid into accounts in the US or abroad, or the currency transacted.

The US taxes all US citizens (and Green Card Holders) on their worldwide income. This method of taxation follows the principles of citizenship-based taxation. So, a US expat’s foreign income is generally considered taxable by the US.

How to file your tax return overseas with self-employment income

The threshold for filing an annual US tax return is much lower for self-employed expats than it is for earners of other income types. If you earn just $400 of self-employment earnings during a calendar year you must file a US tax return. 

Income is classified as US or foreign by where it is earned, according to the IRS. So if you are living and working abroad, your income is considered foreign-earned income. This is the case even if:

• a US company or client is paying you
• income is paid into a US account
• earnings are in USD.

It is a self-employed person’s responsibility to submit quarterly estimated payments to the IRS  based on their projected annual income. This differs from a W2 employee, where the employer withholds tax from their earnings.

Self-employment taxes

The total rate of self-employment tax for the 2024 tax year is 15.3% on the first $168,600. For the 2023 tax year, this amount was $160,200. 

This accounts for Social Security and Medicare payments, which are broken out as follows:

Use Schedule SE (Form 1040) to calculate the tax due on net earnings from self-employment. The Social Security Administration also uses the information from Schedule SE to calculate your credits. This, in turn, drives future benefits under the Social Security program. 

Is foreign income subject to self-employment tax?

When calculating self-employment tax on net earnings, all global income is taken into account, regardless of where it was sourced. This applies even if you plan to use IRS tax provisions. Common ones include the Foreign Earned Income Exclusion or Foreign Tax Credit to offset your US tax liability. Unfortunately, neither of these provisions reduces your self-employment tax due.

How to report foreign self-employment income

The main self-employment tax form is Schedule C (Form 1040). This form reports income earned as a self-employed taxpayer either through a sole proprietorship or single-member LLC.

In other words, you should use Schedule C to record your company’s (or your own) earnings and expenses.

Self-employment tax deductions cheat sheet for US expats

Self-employed expats can subtract ordinary and necessary business deductions from their gross income to determine the net earnings amount subject to self-employment tax. 

The IRS continuously revises most of these provisions. The following cheat sheet can serve as a starting point to help you determine eligibility for various tax deductions.

Of note: In certain countries, you are required to register your business abroad, which could affect the IRS deductions and credits you’re eligible for. We get into this more below!

How to file estimated payments for self-employed expats

Self-employment income is not subject to withholding. This means that business owners should proactively pay taxes every quarter, estimating the amount they will owe throughout the year. You can use IRS form 1040-ES to calculate your estimated tax payments.

It’s important to note that you should exercise diligence in making these quarterly payments. Failing to do so (or underpaying) can result in penalties. If you have doubts about how to file estimated payments for self-employed expats, a US expat tax professional can assist.

Related: Starting an LLC as a Foreigner: What Non-US Citizens Should Know

Totalization Agreements

The country in which you reside plays a big role in determining where you pay your self-employment taxes. For example, imagine you are a US citizen living full-time in France and making your living as a freelancer. In this case, you might create a French business entity and be required to pay Social Security and healthcare taxes to the French state. Every year, however, the US will try to collect Social Security and Medicare taxes from you, based on your freelancer status. This is where the Totalization Agreement comes in.

What is a Totalization Agreement?

A Totalization Agreement is a treaty signed between the US and another country that prevents double taxation concerning social security taxes, including self-employment income. Twenty-four countries have Totalization Agreements with the US. If you reside in one of these countries and have already made contributions to their social security system, the Totalization Agreement may determine that you are exempt from paying US self-employment/social security taxes. 

Key US expat tax forms

Below are just a few of the important provisions and filing requirements that self-employed US Expats with a trade or business should be aware of.

Foreign Tax Credit (FTC)

Thanks to the Foreign Tax Credit, you can claim a dollar-for-dollar tax credit for foreign income taxes you’ve accrued or paid. It cannot be used to offset self-employment taxes, however.

The Foreign Earned Income Exclusion (FEIE)

The FEIE is a common expat tax provision allowing qualifying expats to offset up to $120,000  in tax year 2023 (filing year 2024) from their US tax return. This amount is indexed annually for inflation, and the provision is best used when the US taxpayer is living in a country with lower tax rates than the US, or is extremely mobile.

The Foreign Bank Account Report (FBAR)

The Foreign Bank Account Report (FBAR) is a key component of self-employment tax for expats. If you have $10,000 or more in your foreign bank accounts (combined) at any time during a given year, you will need to file an FBAR report. Missing this step is another common mistake that could create exposure to an unforgiving penalty.

Catching up if you’re behind

Building a business abroad is no small feat, and time can fly. If you’ve fallen behind on your US tax obligations while building your dream, you may be able to catch up penalty-free via an amnesty program. This program is called the Streamlined Procedure.

Seamlessly file or catch up on self-employed taxes overseas.

Being US tax efficient is crucial if you're an expat entrepreneur, independent contractor, or freelancer. Bright!Tax is a team of tax professionals specializing in expats to assure your self-employment taxes are filed seamlessly.

Get Started

References

1. Schedule C – IRS
2. Totalization Agreements

The post How to File Taxes for Self-Employed Expats: The Essentials appeared first on Bright!Tax Expat Tax Services.

Classifying a business entity is done via Form 8832, where business owners can effectively determine their US tax status by electing to be taxed as a certain type of entity (e.g., sole proprietorship or C corporation). In order for the classification to be accepted, however, the foreign business structure must “match” the entity election. An incorrect election may lead to unexpected IRS tax notices.

Below, we parse the intricacies of Form 8832, covering topics such as eligibility, effective dates, election relief, and the role of tax advisors in filing the form within the 75-day window to ensure proper tax classification.

For your reference: Here is the IRS Form 8832 PDF.

Who decides how to classify a business entity?

The choice of business structure ultimately lies with the business owner(s) and largely depends on the country where your company is formed.¹ As a US expat, you may well be familiar with classic US business entities for small businesses, such as sole proprietorships, partnerships, corporations, and limited liability companies. These structures will likely look a bit different (and have different names) in a foreign country.

Additionally, you will want to consider the tax implications of creating your business in a foreign country. Selecting the entity you create will likely involve a cross-border analysis of the tax implications in both the US and the foreign country, which will need to be fully understood and strategically reconciled prior to proceeding.

Once you have successfully formed your foreign company, the next step is to determine how you want the company to be taxed for US tax purposes. This decision should be made in consultation with a US expat tax professional and foreign tax professional to ensure the best outcome for your business.

What is Form 8832?

Form 8832: Entity Classification Election essentially lets you choose how you want your business to be taxed by the IRS. However, this selection must be substantiated by the structure of the foreign business. Let’s dig in a bit deeper to understand how the IRS assesses entity elections made on Form 8832. 

US federal taxation of your foreign company will initially depend on how many owners it has.

One-owner businesses can be taxed as either:

• A sole proprietorship (default tax classification) or
• A corporation.

Companies with two or more owners can be taxed as either:

• A partnership (default tax classification) or
• A corporation.

Is it necessary to file Form 8832?

The IRS has default modes of taxing foreign entities when reported on US expat returns. If the default classification is in your best interest, you do not need to file the Business Entity Election. It is when you want your foreign company to be taxed differently than the IRS default tax classification that you need to complete Form 8832.

Related: Tax Form 8858 and Foreign Disregarded Entities for US Expats

Let’s look at an example to put the above information into context.

Fabrice Amari, a US citizen, formed an impresa individuale in Italy.² He resides in Italy and he is the owner of the company. He has no business partners. By default, the IRS will classify his company as a sole proprietorship.

If this classification is in his best financial interest, he does not need to file Form 8832. However, if Fabrice and his expat tax accountants determine that it is in his best interest to be classified as a corporation, he would complete Form 8832. 

Form 8832 vs. Form 2553

Forms 8832 and 2553 are often confused because their base function is to establish how the IRS classifies and taxes a foreign entity. Below, we clarify the difference:

• Form 8832: allows you to change your tax classification,³ while
• Form 2553: allows a corporation to be taxed as an S-corporation.⁴

Essentially, Form 2553 is an administrative layer necessary to add onto US expat tax filings that wish to be classified specifically as an S-corporation. The reason for this is based on an IRS technicality: only domestic corporations can be S-corporations.

Given that sole proprietorships are one of the most common and sensible business entities for small business owners, we return now to our example to illustrate the best path forward for a US expat with a sole proprietorship who wishes to be taxed as an S-corp.

If Fabrice wants his Italian company to be taxed in the US as an S-corporation, he’ll need to register his company in the US. He can then communicate his wish to be taxed as an S-corp to the IRS via Form 2553.  

When should business owners file to change their company’s tax status?

Form 8832 is a voluntary form that does not have a specific deadline. However, the “effective” date you select when filling out the form determines when your new tax status becomes effective. 

As with all things tax-related, there are rules and strategies to be mindful of when selecting the effective date for your company’s tax status. For example, the effective date for your new tax classification cannot be: 

• More than 75 days before you file Form 8832 or 
• More than one year after you filed Form 8832.

Instructions for Form 8832

At the top of the form, you’ll enter the name of your foreign company, its address, and EIN. If you don’t have an EIN, you’ll need to get one by completing Form SS-4 before submitting Form 8832.

Next, you’ll enter the type of entity you want to change to.

Then, you’ll select the date that the change is effective. As noted above, this cannot be more than 75 days before you file Form 8832.

Part 1 of Form 8832 includes a set of yes/no questions. The first required information is whether you’re making an initial classification or changing the current classification. 

Part 1 ends with a Consent Statement, which all owners of the foreign company must sign.

Part 2 of Form 8832 deals with Late Election Relief. This part is only necessary if you want to set an effective date earlier than the stipulated 75 days before the filing date.

Form 8832 deadline

In general, you’ll want to file Form 8832 no later than 75 days after you want your new tax classification to take effect.

Essentially, if you want to be taxed differently on January 1, you want to file Form 8832 by March 16th of the same year. 

You want your business to succeed; Bright!Tax wants to set you up for success.

Keeping track of the dates and deadlines of running a business abroad takes valuable time. Partner with Bright!Tax to ensure your filing and choice of business structure are done correctly, on time, and to your ultimate advantage.

Get Started

References

1. IRS Tax Classification Rules
2. Impresa Individuale (Italy)
3. Form 8832
4. Form 2553

The post IRS Form 8832: Business Entity Election for US Expats appeared first on Bright!Tax Expat Tax Services.

Background

In the digital age, companies can sell services online in other countries without having a physical presence there. Furthermore, large companies have often registered in a low corporation tax country to avoid paying tax in the countries where they have sales or are headquartered.

Governments have for years been trying to address these issues. The Organization for Economic Cooperation and Development has been coordinating talks on both the issue of international corporation tax avoidance and international digital services taxation for years, but, until now at least, without achieving widespread agreement.

President Trump tried to address the issue of American firms registering abroad in low tax countries to avoid US tax by introducing a new tax called GILTI (Global Intangible Low Tax Income). GILTI forced all American-controlled companies registered abroad to pay at least a 10.5% tax to the US.

Agreement

President Biden has given the issue fresh momentum, as he seeks to raise additional revenue to pay for his spending plans.

The aim is to remove the advantage of registering abroad to some extent. However, if the home country’s tax rate is more than 15% (as it is in most countries), while the advantage for the company still remains, they will pay a bit extra to their home country, which in turn will raise some additional revenue.

When will it be implemented?

The G7 countries have an agreement, and they can go ahead and implement it between themselves, however they are hoping to reach wider agreement with more countries, starting with the G20.

It shouldn’t be too hard an idea to sell to most countries, as it will mean additional revenue for all but those few with a corporate tax rate lower than 15%.

However, some countries, notably France, see the 15% figure as a starting point that should be raised over time.

How will it affect expats?

Americans with corporations registered in low tax countries were hit hard by the introduction of GILTI in the 2017 tax reform. Most have since restructured their offshore companies to minimize tax in the light of the new rules.

President Biden also has plans to double the GILTI rate to 21%, which, if enacted, will affect Americans with companies registered abroad more than the global minimum corporate tax. It’s worth noting though that GILTI can be offset by foreign corporation taxes paid, so it only affects American owned or controlled corporations registered in countries with very low (or no) corporation tax rates.

Example 1: An American living in the UK has a cafe. His business is registered as an LLC in the UK, where he trades. He must however report his business to the IRS every year, and when he files his US taxes, because the UK corporation tax he pays is more than the GILTI rate, he claims US tax credits so doesn’t owe any US tax. Neither will be affected by the new global minimum tax, as the UK corporation tax rate is currently 19%, so higher than the new 15% minimum.

While all American citizens have to file US taxes every year reporting their global income, most don’t up owing any US tax, as when they file they can claim exemptions and credits available to expats to reduce their US tax bill, most often to zero.

Americans living abroad who are behind with their US tax filing can catch up without facing penalties and while still claiming exemptions and credits under an IRS amnesty program called the Streamlined Procedure.

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This includes Americans living abroad, who have the same annual US filing and reporting obligations as Americans living in the US, and including self-employed US expats.

Many Americans living abroad with self-employment income wonder whether they have to pay US self-employment taxes on their foreign earned income though.

What is foreign earned income?

Foreign earned income is income received for work carried out or services provided when the American was physically abroad.

It doesn’t matter whether the income is for employment or self-employment, or whether it is paid in the US or abroad, or in what currency.

The US taxes all US citizens (and Green Card Holders) on their worldwide income, so an American citizen’s foreign income is considered taxable by the US.

Reducing US tax on foreign earned income

The Foreign Earned Income Exclusion can’t be applied to the same income as the Foreign Tax Credit, and furthermore it’s not applied automatically, but has to be claimed on Form 2555. Form 2555 requires expats to provide that they live abroad.

Self-employment tax on foreign earned income

Claiming the Foreign Tax Credit or the Foreign Earned Income Exclusion doesn’t reduce American expats’ US self-employment tax liability on their net income after business expenses though.

In fact, any American who has more than just $400 of self-employment income globally each year is liable to pay US self-employment taxes.

The only exception is if the American lives and pays foreign social security taxes in a country with which the US has signed a treaty called a Totalization Agreement. If so, they can claim an exemption from paying social security tax to one or the other country by filing a statement with their tax return, depending on how long they intend to live abroad, with contributions to either social security system counting towards both systems for future social security entitlement.

Employed or self-employed?

This can help reduce US social security tax liability, however it depends on each individual’s circumstances as to whether this is beneficial, and such a decision should only be taken in the context of holistic business and tax planning.

Note also that creating a company outside of the US brings additional annual reporting (and sometimes tax) liabilities, and furthermore not paying US social security taxes can affect future entitlement to US social security payments (which can be paid to Americans living abroad).

It’s always best to seek professional advice tailored to your individual circumstances.

Catching up if you’re late

Americans living abroad who haven’t been filing because they didn’t know they have to can often catch up without facing penalties under the Streamlined Procedure amnesty program, so long as they do so before the IRS contacts them.

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As a reminder, in 2017, the US government introduced the Tax Cuts and Jobs Act (TCJA), which initiated GILTI. The GILTI provision stipulated that if you are a US shareholder of a controlled foreign corporation (CFC), the offshore profits you earn on intangible business assets are now subject to IRS taxation.

(Note: A foreign corporation is defined as one where US shareholders own more than 50% of the vote or value of a foreign company.)

The 962 election is a way in which US taxpayers can significantly reduce the taxes owed on income earned from intangible assets. In some cases, the 962 election may eliminate those taxes entirely.

Here’s what you need to know about the GILTI 962 election.

Related: What is GILTI? What Expats Need to Know About IRS Form 8992

What is a 962 election? 

If you’re an expat who owns or is affiliated with a corporation registered in a low-tax jurisdiction, you may find the 962 election an appropriate tool to reduce your tax bill. 

In essence, making a 962 election means that a taxpayer’s portion of corporate profits will be taxed at the US corporate tax rate – but with a 50% deduction applied. This results in an effective corporate tax rate of 10.5%.¹

And besides slashing your effective tax rate by 50%, the 962 election also permits CFC shareholders to offset their tax liability with foreign tax credits that without the election they wouldn’t be eligible for.

This means a 962 election comes with two layers of benefits:

1. Reduction in the effective tax rate and 
2. A chance to offset your tax bill with the foreign tax credit.

On the flip side, if you’re an expat shareholder of a CFC and don’t make the 962 election, you will pay tax on the income you earn from intangible assets at your marginal personal federal income tax rate. This rate can be as high as 37%. However, this is exactly the type of tax a US expat tax professional can help you sidestep with ease.

Let’s look at a simple example to understand how taking a 962 election may yield substantial US tax benefits 

Assume Arthur is a US citizen and expat. He is the sole CFC shareholder in a corporation registered in the United Kingdom. 

Assume Arthur’s company earned $100,000 in intangible income (i.e., professional services fees for his digital marketing agency). And, the company paid $20,000 in British income tax.

If Arthur made a 962 election, this is what his US tax position would look like. 

Thanks to the 962 election, Arthur will not have to pay a dime to the IRS. 

Unfortunately, neglecting to make the 962 election would cost Arthur. In this case, he would pay tax at his marginal tax rate on his GILTI income of $100,000. Remember, without a 962 election, Arthur loses the 50% exclusion and the ability to take a foreign tax credit. 

Assuming his marginal tax rate is 37%, he will part with a massive $37,000.

Considerations before making a Section 962 election

The Section 962 election may allow certain US taxpayers to reduce their tax bill. However, each US taxpayer’s particular circumstances need to be considered before forging ahead. 

Below are several considerations you’ll need to consider before making a section 962 election. 

Whether the foreign corporation is qualified

A qualified foreign corporation is one that can claim the benefits of an income tax treaty with the United States.

If you receive a distribution in the form of dividends from a qualified corporation, your dividend will be designated as qualified. Because of this designation, you’ll pay a tax of only up to 20% of your dividend income.²

Conversely, dividends from a non-qualified foreign corporation attract a marginal federal income tax rate as high as 37%. 

Did the corporation pay foreign taxes?

In addition to receiving the 50% deduction on the intangible profits of their foreign company, by using the Section 962 election, taxpayers also are eligible to take the foreign tax credit for foreign corporate tax paid on their business profits.

So, bear in mind that if the corporation did not pay any foreign income tax, the benefit derived from a 962 election will either be eliminated or, at best, minimized.

Type of CFC earnings

You’ll need to remember that not all earnings will qualify as GILTI income. It has to be income earned abroad by CFCs and from intangible assets. 

Full spectrum CFC consideration

If you are a shareholder of several CFCs, you can’t make a 962 election on only one CFC. The 962 election applies to all your CFCs.

So, suppose one of your CFCs isn’t a qualified foreign corporation because it’s in a country without a tax treaty with the US. In that case, you’ll lose the preferential tax rates for subsequent dividend distributions.

Is the high tax election better for your circumstances

If your CFC’s intangible earnings are from a high-tax jurisdiction, your taxes can be uncomfortably high.

Although Congress created the GILTI tax with low-tax-income jurisdictions in mind, there is a GILTI high-tax election that may benefit CFCs in high-tax jurisdictions.

The GILTI high tax exemption allows a CFC to exclude its GILTI if that income was already taxed in a high tax locale such that with a foreign tax credit, little, if any, US income tax would be due. 

How to make a Section 962 election

To make a Section 962 election, you must attach a written statement when you file Form 8993 as part of your annual Form 1040. Taking the foreign tax credit as a result of the election will also require filing Form 1118.

There is no specific 962 form to complete beyond the written statement.

Navigate making a section 962 election as an individual with confidence.

In situations requiring a deft US expat tax hand, Bright!Tax will ensure you thread the needle right. We have over ten years of experience conducting hypothetical computations of federal tax liabilities necessary to ensure our business owner clients’ strategies are audit-airtight and tax-optimized.

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References

1. Corporate tax rate applied to GILTI
2. Capital gains tax on qualified dividends
3. How to make a 962 election on a 1040

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Initially intended to target large multinationals like Apple that had established offshore subsidiaries so as to pay less US corporate tax, GILTI (which is an acronym for Global Intangible Low Tax Income) also affects approximately 150,000 ordinary American expats who have a small business registered abroad.

US taxes for expats

Unlike most countries, the US taxes based on citizenship rather than on residency. This means that all American citizens whose income exceeds the minimum thresholds are required to file US taxes every year, reporting their worldwide income.

While US tax treaties don’t exempt expats from this requirement, when they file expats can claim provisions such as the Foreign Tax Credit and the Foreign Earned Income Exclusion to reduce their US tax bill (often to zero) – so long as they file and claim them in a timely manner.

This caused many foreign business owners to set up a new US parent company to reduce their tax bill. Under the newly announced final rules, this is no longer necessary.

The final rules provide some relief to what in its original form would have been a very high tax rate on corporate profits for many US expat small business owners.

Final GILTI regs

Monte Silver, the leading US expat tax attorney and campaigner who is suing the IRS to try to get a GILTI exemption for small business, said about the new rules: “The regs provide us small business owners with meaningful, permanent relief”.

Filing US taxes from abroad is complicated, and along with all expats, expats with a business registered abroad should always seek specialist advice to ensure that they remain compliant while minimizing their US tax bill.

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All American citizens, including expats, are required to file US taxes every year, reporting their worldwide income and their offshore financial accounts and businesses.

The suit focuses on the unintentional , unfair impact the Transition Tax, introduced in the Trump Tax Reform (the 2017 Tax Cuts and Jobs Act), has on expats with small businesses that are incorporated abroad.

The Transition Tax was dubbed the ‘Apple Tax’ at the time, as its target was offshore registered corporate giants such as Apple that, due to a loophole in US tax law, were stockpiling their profits abroad to avoid paying US corporation tax. The Transition Tax consisted of a one time 15.5% tax on these accumulated offshore profits.

Last week, both Republicans Overseas and The Center for Taxpayer Rights filed amicus briefs in support of the suit. It is unusual for a Republican Organization to file a brief in support of a suit going against a Republican law. The suit is non-partisan though (Silver also contacted Democrats Abroad, but received no response).

Now, Silver is turning his sights on another tax that was also imposed on small businesses in the Tax Cuts and Jobs Act: GILTI.

The tax has had a huge impact on the tens of thousands of American expats with small businesses, often causing them to have to restructure their companies (e.g. by setting up a US parent company) to reduce their GILTI liability, along with additional compliance costs, and the cost of the tax itself.

The legal action has been launched now as it is now over a year since the new rules came into effect. Monte has described it as a David vs Goliath scenario, but one in which he hoped to replicate the success he’s had with his Transition Tax case.

If you have any questions or doubts about filing US taxes from abroad, we strongly recommend that you get in touch.

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