A Question of Circumstances
The special tax liabilities of U.S. expats
Staying compliant with American tax laws is often a burden for American expatriates. This is especially true for expats that are dealing with taxes associated with their pension plan. If a U.S. expat is planning to retire abroad or is eventually planning to return to the U.S., they should be aware of how these circumstances could affect their pension.
Millions of Americans reside abroad and need help with managing their pension plan as they were likely surprised to learn how it affected their tax liability. The Internal Revenue Service does not permit foreign pension plans to qualify for special tax treatment like an individual retirement account (IRA) or a 401(k) plan. As a result, expats may have to deal with a number of tax issues regarding their pension income plans, such as double taxation for a foreign pension.
Foreign pension plans
The majority of foreign pension plans will have to endure U.S. taxation because of the way the U.S. treats foreign pensions. For example, as foreign pension plans are not considered qualified when an employee contributes to the plan, it does not reduce the employee’s taxable income. Additionally, when an employer contributes to a foreign pension plan, this action will also increase the employee’s taxable income.
It is also important to note that foreign pension and U.S. qualified pension plans are treated differently by the IRS. In some cases, a qualified pension plan will have the benefit of accruing income without taxes. Alternatively, foreign pension plans are taxed as they are treated as income for the owner of the plan.
As mentioned, foreign pension plans result in an expat being subject to double taxation. One form of taxation will come from the U.S. and the country where the expat resides. Fortunately, an expat may be able to avoid taxes under these circumstances by claiming a foreign tax credit. Additionally, an expat would pay the second round of taxes to the U.S. when the taxes accrue and when they are paid out.
It can often be difficult for a U.S. expat to get a handle on their tax reporting requirements. There are a number of forms that may only apply in specific circumstances, which could make it difficult for an expat to decipher what portions of the tax code apply to their particular situation.
The following are a list of forms that a U.S. expat may have to file as a result of possessing a pension plan:
- Form 8938 – This form must be filed when a taxpayer has foreign financial assets, and they have met the filing threshold set by the IRS.
- FinCEN Form 114 – A taxpayer must file a FinCEN Form 114 (FBAR) when they have foreign bank and financial accounts.
- Form 3520 – If a taxpayer has transactions with a foreign trust, they must file Form 3520.
- Form 8621 – When a taxpayer is a shareholder of a passive foreign investment company or qualified electing fund, they are required to file this form.
As a U.S. expatriate, you should also be aware that you may be subject to some tax exceptions depending on the circumstances of your case. For example, if you may be able to shield a significant portion of your income from U.S. taxes by using the foreign earned income exclusion. Note, however, that various requirements must be met before a person could qualify for this exemption. For instance, if you are a bona fide resident of a foreign country for at least one year, you may have the standing to claim the foreign earned income exclusion.
We at Allure Accounting recognize the many tax issues faced by expats, and we would be pleased to help you manage your foreign tax liability. You should waste no time in contacting us to discuss your unique tax situation.