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Tax.appeal.168
Tax.appeal.168, Tax Accountant
Category: Tax
Satisfied Customers: 2544
Experience:  Nearly 30 years of varied tax industry exp. Tax Biz owner
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Dear Sirs, I am a dual citizen of the USA and Switzerland.

Customer Question

Dear Sirs,

I am a dual citizen of the USA and Switzerland. I have been living in Switzerland since 1974 and was nationalised Swiss in 1992. I am 63 years old and will retire in two and a half years. I have a bank account in the US with about 36,000 dollars in it but, aside from this, have no holdings over there. I worked for two years in the US Virgin Islands as a teacher before coming to Switzerland.
I am a secondary school teacher in a private school and, at the moment, earn a gross salary of about 1000,000$. I have not filed a US tax return for around thirty years or more. I did so yearly during my first few years in Switzerland at great inconvenience and with much confusion. I did not do so one year and, as I was not reminded of this, have not filed since that time and had completely forgotten about doing so. I am of course, subject to Swiss tax.
My bank the UBS has sent me a letter saying I must sign a form giving them permission to inform the US government of all my transactions. As I see it I have, regrettably, not much to hide as my salary is not extravagant and I have, over the years, earned considerably less than what I earn at present. I am remiss in not having filed US tax for many years. I simply can not afford to pay an enormous (or even moderate) back tax bill if I owe any tax of which I have no idea. I am confused and distressed by the current situation concerning US expats. My life style is not extravagant although I can not complain about “my lot”. I will renounce my US citizenship if I have to but would much prefer not to do so. I do not know what to do at the moment.
I would appreciate some advice on these issues.
Thank you,
DKMaxwell
Submitted: 1 year ago.
Category: Tax
Expert:  Tax.appeal.168 replied 1 year ago.
Welcome, THANK YOU for using Just Answer. My goal is to help make your life...a little...LESS taxing.

Hello DK,

I know that the situation must seem overwhelming to you, but it is not as bad as it may seem. This is going to be a long response, as I have several matters to bring to your attention, therefore I am going to break the response up in 2 parts to try to keep matters less confusing for you. You will be receiving a 2nd answer from me shortly after I send you this one. Let me start off by saying that as a U.S. citizen you are required to report your WORLDWIDE income, even though there is the possibility that you may not have a tax liability. You are also required to complete a FBAR reporting your financial accounts that have aggregate balances of that exceed $10,000. Link to information relating to the FBAR below:

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Report-of-Foreign-Bank-and-Financial-Accounts-%28FBAR%29

Link to Form to TD F 90-22.1:

http://www.irs.gov/pub/irs-pdf/f90221.pdf

-----------------------------------------------------------------


To become compliant relating to tax return filings;

1) Filing the last 7 years of returns will bring you into compliance on that end.

Note that there is a tax treaty between the U.S. and Switzerland, that eliminates double taxation. Refer to Article 23. Link to full treaty:

http://www.irs.gov/pub/irs-trty/swiss.pdf

Also note that you may qualify for the Foreign Earned Income Exclusion as well. In some cases, claiming the Foreign tax credit is more beneficial, especially if the country where you reside has a higher tax rate than the U.S. does.

I will provide you with information relating to the foreign earned income exclusion and foreign tax credit in my next answer that shall follow shortly. Thank you for your patience.

Expert:  Tax.appeal.168 replied 1 year ago.
Hello again Duncan,

Answer Part Two:

--------------------------------------------------------------

Foreign Earned Income Exclusion:

If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude from income up to an amount of your foreign earnings that is now adjusted for inflation ($91,400 for 2009, $91,500 for 2010, $92,900 for 2011, $95,100 for 2012). In addition, you can exclude or deduct certain foreign housing amounts.

 

You may also be entitled to exclude from income the value of meals and lodging provided to you by your employer. Refer to Exclusion of Meals and Lodging in Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, and Publication 15-B, Employer's Tax Guide to Fringe Benefits for more information.

 

You can refer to the following IRS webpage for more detailed information relating to the exclusion:

 

http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion

 

You will use Form 2555 to take the exclusion.

 

Link to Form 2555/instructions:

 

http://www.irs.gov/pub/irs-pdf/f2555.pdf

http://www.irs.gov/pub/irs-pdf/i2555.pdf

 

---------------------------------------------------

 

Foreign Tax Credit Information:

 

If you paid or accrued foreign taxes to a foreign country on foreign source income and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes. Taken as a deduction, foreign income taxes reduce your U.S. taxable income. Taken as a credit, foreign income taxes reduce your U.S. tax liability. In most cases, it is to your advantage to take foreign income taxes as a tax credit.

 

Once you choose to exclude either foreign earned income or foreign housing costs, you cannot take a foreign tax credit for taxes on income you can exclude. If you do take the credit, one or both of the choices may be considered revoked.

 

You would use the Form 1116 to take the Foreign tax credit.

 

Link to Form 1116/instructions:

 

http://www.irs.gov/pub/irs-pdf/f1116.pdf

http://www.irs.gov/pub/irs-pdf/i1116.pdf

 

Again, I know all of this may seem a bit overwhelming, but with the help of a reputable, qualifed tax professional, you should be able to become compliant without much stress.

Please let me know if I can be of further assistance to you regarding this matter.

Thank you again for using JUST ANSWER.

 

 

 

Tax.appeal.168, Tax Accountant
Category: Tax
Satisfied Customers: 2544
Experience: Nearly 30 years of varied tax industry exp. Tax Biz owner
Tax.appeal.168 and other Tax Specialists are ready to help you
Customer: replied 1 year ago.


Dea Angela,


 


Firstly thanks for what I assume is an accurate and comprehensive answer to my dilema. I have a lot to do before I know how comprehensive an answer you have given me. I was rather hoping for you to tell me I had nothing to do and that everything would go away on its own but I guess things do not work that way. One more (for the moment) question. Can I file the last seven (someone else told me it was six) years with one form or do I have to go through the entire procedure seven times. Thanks, Duncan

Expert:  Tax.appeal.168 replied 1 year ago.
Hello again Duncan,

You are welcome. Thank you for the high rating. I wish that I could have made your life a little...LESS taxing by informing you that you had nothing to do, but as you stated, it just doesn't work that way. To the best of my knowledge the information was accurate until I researched a bit deeper. Regarding the number of years that need to be filed, according to an article by Forbes that was written in June 2012, there are some NEW regulations regarding expats filing returns and FBARS. Now only the last 3 years of returns are required to be filed, but the last 6 years of FBARS. I wasn't aware of this new change. I must put this information in our Forum in the event that others are unaware of the change as well. SEE BELOW:

The IRS said today that beginning Sept 1., those expatriates, dual citizens and green card holders living abroad who owe less than $1,500 a year on unfiled 1040s will be eligible for special relief. They will only have to file three years of back tax returns. And while they’ll have to file six years of back FBARS, they won’t get hit with an FBAR penalty. Moreover, participants in certain foreign tax deferred retirement plans such as the Canadian RRSPs ( like IRAs) will be able to exclude the deferred income from their back returns.

Q: Can I file the last seven (someone else told me it was six) years with one form or do I have to go through the entire procedure seven times.

A: The new regs state that you will need to file a separate return for the 3 years and a separate FBAR for each of the 6 years. Filing fewer years of tax returns should make things a bit easier for you.

REFERENCE SOURCE:

http://www.forbes.com/sites/janetnovack/2012/06/26/irs-cuts-middle-class-expats-big-and-deserved-penalty-break/

Thank you again.

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