By: Randall J. Lindner E.A.
For U.S. citizens living in foreign countries, there is little or no relief in income-tax filing requirements. Often we are faced with new requirements and situations, and given wrong advice from fellow citizens.
As a professional U.S. income tax preparer specializing in U.S. citizens living in foreign countries, I have provided in this column answers to some frequently asked questions.
Now that I am living in Costa Rica, do I need to file a U.S. income tax return?
Most U.S. citizens must file an annual income tax return on their worldwide income. As a general rule, Think as you are living in the United States and if you think need to file a return, you are probably correct. It is better to file than not. Where you live has no bearing on your filing requirements.
My only income is from a Costa Rican company, and I pay taxes to Costa Rica. Do I have to include this income on my U.S. tax return?
U.S. citizens must include all worldwide income on their tax returns. This income could qualify for the $80,000 foreign earned income exclusion, but the exclusion is not automatic. You must include the income on your tax return and then exclude it by using IRS form 2555. If you do not meet the requirements for the exclusion, then the tax you paid to Costa Rica could possibly be taken as a foreign tax credit.
I live in Costa Rica and work for a U.S. company. Does this income qualify for the $80,000 foreign earned income exclusion?
If you meet the other requirements for the foreign earned income exclusion, the wages you receive from your U.S. employer can also be excluded. Your employer is still required to withhold Social Security and Medicare on your wages.
I have my own small business in Costa Rica and work as a self-employed person. My business is not incorporated. Does this income qualify for the foreign earned income exclusion?
Yes. This income can qualify for the exclusion just as if you were working for a U.S. employer. Caution: The exclusion is for federal income tax only. You will still be required to pay self-employment tax (Social Security and Medicare taxes) on your profits.
I receive dividends from a Costa Rican company. Are the dividends “foreign earned income,” and do they qualify for the exclusion?
No. The foreign earned exclusion does not apply to income such as interest, dividends, capital gains, pensions, annuities and gambling. The exclusion applies strictly to earned income – in other words, your wages, salaries, bonuses, commissions, fees and other compensation for services rendered.
Note: If you own 10% or more of a foreign corporation, you are required to file with your individual income tax return IRS form 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations).
I receive interest from my Costa Rican bank account. Do I have to report this interest on my U.S. income tax return?
Yes. U.S. citizens must include in their income monies received worldwide. This includes interest and dividend income. In addition, if the aggregate value for your foreign accounts is greater that $10,000 at any time during the year, a Report of Foreign Bank and Financial Accounts must be submitted to the U.S. Treasury Department.
I transferred money from the United States to Costa Rica. Is there anything special that I need to do?
If a U.S. citizen has a financial interest in or signature authority over any financial accounts, including bank, securities or other types of financial accounts in a foreign country, and if the aggregate value of these accounts exceeds $10,000 at any time during the year, the accounts must be reported to the U.S. Treasury Department.
Last year I got married to a Costa Rican citizen. Can I file a joint return with my spouse, who is not a U.S. citizen?
Yes, but in doing so, you make the election to report your income and your spouse’s income worldwide. If your spouse does not work, or has very little or no income, it could be to your advantage to file a joint return. If your spouse does not have a taxpayer identification number, one must obtained.
My Costa Rican wife has a child from a previous marriage. The child is living with us. Can I claim the child as a dependent on my tax return?
To be claimed as a dependent, the dependent must be a U.S. citizen or a resident of the United States, or, in certain cases, a legally adopted child of a U.S. citizen.
I have been living in Costa Rica for years and have not filed a tax return. What should I do?
It is to your advantage to seek professional help to determine whether or not you need to file.
My business is incorporated as a Costa Rican S.A. (sociedad anónima, incorporated company). Currently it is not making a profit, and I am not receiving a paycheck. Does this have to be included on my tax return?
Yes. If you own 10% or more of a foreign corporation, you are required to file with your individual income tax return IRS form 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations). This includes inactive S.A.s and corporations not making a profit.
For more information on U.S. taxation, call U.S. Tax & Accounting Service at 288-2201 , e-mail
ustax@lawyer.com. U.S. Phone number 1-786-206-9473.
For U.S Citizens
Do Not Fall Into an IRS Trap!
By: Randall J. Lindner E.A.
Part 1 of 3
Living and or working in a foreign country does not release you from your responsibility
to the United States Internal Revenue Service. The fact is you may have increased responsibilities, which if not fulfilled, could lead you into a Pandora’s Box of trouble.
Do not think that just by living, working, or investing in a country outside of the United States you are protected from the strong arm of the U.S. Internal revenue Service. It is very easy to convince yourself by listening to friendly advice from some long time expats that you do not have to concern yourself with the IRS. They might tell you there is no way the IRS can do anything to you while you are living here. They might tell you that they have been living here for a long time and have had no problems. They might ask how the IRS can audit you from outside of the U.S. Are they going to send an auditor here just for you?
Some of this may be true, but only to a point. For starters the IRS can do what is called a mail-in audit. Second, no matter how insignificant you may feel your income is, beware. The IRS carefully chooses its audits to set examples for others, not just for the amount of money they think they can get. While you are out of the U.S. it is a bit difficult for the IRS to do much of anything to you if all of your assets and family members are also outside of the U.S. The problem arises when you return to the U.S. on a permanent or a temporary basis. You could be faced with answering many difficult questions, paying numerous penalties, and not being permitted to return to your foreign country of residence.
Living and working outside of the U.S. can be a great experience for everyone involved. However, you need to be aware of, and follow the rules of the U.S. government. To make the best of your time living overseas it is a good idea to be well informed, and avoid being surprised by the long arm of the Internal Revenue Service. Use the rules to your advantage.
U.S Citizens
Do Not Fall Into an IRS Trap!
By: Randall J. Lindner E.A.
Part 2 of 3
Living, working and investing in a foreign country does have its tax advantages. One of the biggest advantages and one of the most misunderstood is the Foreign Earned Income Exclusion. With this exclusion you 
have the potential to deduct up to $80,000.00 of your earned income from your tax return for each year that you qualify. The most important thing is that the exclusion is for income you earn as a wage earner. This is income you receive as a self-employed person or as an employee for a U.S. or foreign company. This does not include interest, dividends or capital gain income. For the self employed person this exclusion does not include the self employment tax (Social Security). If you are married and if your spouse qualifies, there is also the possibility to exclude up to another $80,000.00 of earned income. That’s a total of $160,000.00.
This exclusion is not automatic. The first requirement of this exclusion is that you must file your tax return. The IRS can disqualify you from the exclusion just on the basis that you have not filed a tax return. Then, to make things even worse, that income becomes taxable and carries with it penalties that could equal 100% of the original tax.
If you invest in a foreign corporation or start a business corporation of your own, there are some advantages. One of the advantages is that you are generally not taxed on the profits until you either take the earnings as a dividend or in the form of a wage. Even then you may escape tax on the income because of the foreign tax credit or the foreign earned income exclusion.
If you are an officer, director, or more than a 10% stock holder of a foreign corporation, you are required to attach an additional set of forms to your tax return. The amount of information that you must supply on these forms depends on the amount of ownership in the corporation and position with the company. Failure to file this form can result in a variety of fines and penalties in the hundreds of thousands of dollars. The fact that the company is not making a profit does not release you from filing this form. Even if you have an inactive corporation for your car, home or other assets you are required to file this form with your tax return. In today’s world of computers and internet, the exchange of information between countries is commonplace. The United States has an exchange of information treaty with many countries including Costa Rica.
Another new responsibility you have for living in a foreign country is the reporting of bank accounts that you have outside of the U.S. to the U.S. Treasury Department. If the total value of all your foreign accounts worldwide exceeds $10,000.00 (for even one minute of one day) you must report these accounts. This also includes accounts that you have signature power over and are not directly owned by you. The form does not carry any tax and is easy to file, but failure to do so is not easy to resolve. The problem begins when you elect to move yourself or your assets back to the U.S. Think of this. What are you going to say to the treasury agent when he knocks on your door and starts asking questions about your sudden deposits from outside of the country? You may have to prove that the money is not money illegally gained, and/or that you did pay income tax on the money.
U.S Citizens
Do not fall into an IRS trap!
By: Randall J. Lindner E.A.
Part 3 of 3
If you get married to a non U.S. Citizen you must choose to file your tax return as married filing a joint return, or married filing separately. In either case your new spouse needs to apply for a taxpayer identification number. If you choose to file a joint return with your spouse, the income your spouse earned worldwide during the tax year must be included in your income. Generally speaking if your spouse has little or no income, it could save you tax money by filing jointly. If your spouse has an income it may be best for you to file a return as married filling separately. You can not file as single.
If your new spouse has children that are not U.S. Citizens, they do not qualify as your dependants. This is true even if you support them 100 %.
If you and your spouse have a child together, it is important that you inform the U.S. Embassy of your new family member. This will enable you to apply for a social security number and U.S. Citizenship. This should be done promptly.
If you sell your foreign home and you meet the time requirements, you could be eligible for the $250.000 home exclusion. Because you are selling your home that is in a foreign country, it would be wise to show the sale on your tax return and show you are taking the exclusion. This will be extremely helpful if and when you decide to return the U.S. with the proceeds.
This is the same as if you were living in the United States. Combined with other income your benefits could be taxable. Make sure that your foreign income is included in your taxable income. If your income is solely from Social Security it is not taxable and you do not have to file a return.
Beware!
If you notice reduction in your Social Security and other retirement benefits, it could be assumed by the paying agency since you are living outside of the United States, that you may not be a U.S citizen. The paying agency could withhold 28% of your benefits. The only way to have this money refunded is by filing a timely tax return and requesting the refund.
Do yourself a favor. Do not ignore your responsibly to the U.S. government. File your income tax returns on time and avoid the possibility of unwanted and unnecessary trouble in the future.
