We have selected six need-to-know tax issues for U.S. expats to keep in mind before preparing U.S. Tax returns: Mutual Funds, U.S. Bank Account, CTC, Tax Preparation, Streamline Procedure and how to pay the IRS
- Mutual Funds outside the U.S. (PFICs)
All US Citizens must file their income tax return annually in the USA, due to their nationality status and in Spain due to their residence.
It is well known that the IRS penalizes U.S. citizens who have investment funds outside the United States on their annual income tax return (Form 1040), forcing them to file a Form 8621, along with their income tax return, for each mutual fund. The fine for not filing 8621 is $ 10,000 per fund and year not filed.
In general, the IRS calls them PFICs (Pasive Foreign Investment Companies) and they are all types of investments managed by foreign financial entities, not only Spanish ones, that do not distribute dividends annually and generally do not pay taxes until you sell them: e.i. “Fondos de inversion” in Spanish, SICAV, … regardless of whether they are American funds or not, the key is who manages the fund.
The penalty can exceed the undistributed capital gain that the fund has had during the year, so little by little the capital of the fund would be reduced, so it will drastically reduce the investment made.
It is very important to bear in mind that Spanish Banks are required to report annually to the IRS, through the AEAT, all the balances of any financial account that an US Citizens have in Spain (BOE 160/2014 of July 2, 2014), because Spain signed the agreement called FATCA with the United States (BOE 159/2014 of July 1, 2014).
What can you do? Actually, there is only one option, to immediately sell the investment funds you have in Spain and in general outside the United States, and buy, if you want, shares, which distribute annual dividends, of any Spanish or foreign company.
- Bank Accounts in USA
U.S. Citizens living outside the United States have serious problems opening a checking account in the United States with a foreign address, in general American banks are reluctant to work with expats. In many cases, a checking account is needed in the USA to be able to collect IRS refunds in a reasonable period of time, and especially these past years to collect any of the three “Stimulus Check” that all U.S. Citizens have received in 2020/2021 due to COVID19.
What can you do? You have the option to become member of ACA (American Citizens Abroad) and Benefit from the agreement signed with the State Department Federal Credit Union (SDFCU) that makes it possible to open a checking account with an address abroad, without the need to move from home..
- Child Tax Credit
Most of the rules of the Child Tax Credit that were written in 2017 in the post Four Things to Know About the Child Tax Credit still valid. But since 2018 two mayor changes have modified the income limitation and the refundable amount.
The Child Tax Credit is available to taxpayers who have U.S. children who are under age 17 at the end of 2021. The American Rescue Plan, signed into law on March 11, 2021, expanded the Child Tax Credit for 2021 to get more help to more families. It has gone from $2,000 per child in 2020 to $3,600 for each child under age 6. For each child ages 6 to 16, it’s increased from $2,000 to $3,000. The CTC was a partially refundable tax credit, as much as $1,400 (2020) and fully refundable in 2021, per child and it is not adjusted each year for inflation. It is income-restricted, so it is not available to taxpayers whose adjusted gross income exceeds certain levels: if single (S), married filing separately (MFS) and Head of the household (HOH) the maximum AGI is $200,000 and if married filing jointly (MFJ) the threshold is $400,000
What can we do? Be sure that your children are US Citizens with a valid SSN to be claim as qualifying dependents. If you have doubts, please do not hesitate to call us, US Tax Consultants, for the appropriate explanations
- Use the same tax preparer for your US and Spanish Tax returns.
Since you are fiscal resident of Spain you must file and pay taxes in Spain, according to the bilateral agreement to avoid double taxation and then as US citizen you must file your Individual tax return in the US (Form 1040) using the Foreign Tax Credit. This tax treaty between the US and Spain, helps you determine the tax distribution between both countries. The purpose of the treaty is to ensure taxes are paid to the right country. Navigating the treaty on your own can be a bit complicated, so it’s a good idea to consult with an expat tax professional if you’re unsure of the requirements for your situation. It is important to understand both US and Spanish fiscal systems to know how one affects the other one while filing tax returns. Your Spanish Tax Preparer needs to know how to read and understand all kind of US fiscal documents such as W2, 1099, 401k and K1, so he can apply them properly in the Spanish returns or not, according to the Spanish fiscal law and vice versa while preparing the US Tax returns.
- Streamlined Foreign Offshore – Amnesty Procedure.
The IRS streamlined filing compliance procedure is available to taxpayers certifying that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part.
The SFO is the procedure for fling amended or delinquent returns, and Terms for resolving their tax and penalty obligations. The procedure that was first offered on September 1, 2012 has been expanded and modified to accommodate a broader group of U.S. taxpayers.
Taxpayers must certify that conduct was not willful. And that they will pay all tax and submit all required information returns, including FBARs (FinCEN Form 114, previously Form TD F 90-22,1).
The streamlined procedure can be very beneficial for taxpayers because they allow the taxpayer to comply with income tax rules and regulations in a relatively easy manner and at the same time, they can recuperate the three “Stimulus Checks”. The Streamlined Foreign Offshore Procedure will protect the taxpayer from having to pay various penalties, including the failure-to-file penalties, failure-to-pay penalties, accuracy-related penalties, information return penalties, and FBAR penalties. This protection from penalties will remain in place even if the amended tax returns are later selected for audit, unless the IRS demonstrates that the original tax noncompliance was fraudulent or that the failure to file FBAR reports was the result of willful behavior. However, if, during the course of the examination, the IRS determines that an additional tax deficiency is due by the taxpayer, the taxpayer may at that point be subject to any applicable taxes and penalties for that additional deficiency.
What can we do? U.S. taxpayers eligible to use the Streamlined Foreign Offshore Procedure must contact US Tax Consultants and later upload the Spanish Tax Return from the last 3 years and the needed information to prepare the last 6 years of FBAR.
- How to pay the IRS and dates.
Only a few years ago the IRS has increased, up to four ways to pay your taxes: bank account (Direct Pay), with a Credit/Debit Card, you can request a payment plan or you can use foreign electronic payment.
International taxpayers who do not have a U.S. bank account may transfer funds from their foreign bank account directly to the Internal Revenue Service for payment of their individual or business tax liabilities. Although this method of payment is available to anyone with a foreign bank account (which includes many types of financial institutions), it can be costly. Keep in mind the other ways mentioned before such as paying by credit card. In order to use the funds transfer method, your foreign bank must have a banking relationship with a U.S. bank, although the U.S. bank does not have to be an affiliate or otherwise related to the foreign bank. If your bank is able to transfer money to the U.S., it will ask you to complete an application for international wiring. You will need the Routing Transit Number (RTN), also known as the American Banking Association (ABA), number for the “Destination Bank”, sometimes referred to by banks as “Beneficiary’s Bank”.
To complete a wire transfer you will need the following information:
- A completed Same-Day Taxpayer Worksheet
- IRS account number – 20092900IRS (optional)
- IRS account RTN/ABA Number – 091036164 US TREAS SINGLE TX
What can we do? You can always check all other options at the IRS Website Make a Payment.