US Taxes for Americans Abroad

This post is intended for a specific target audience: American citizens who reside outside the USA and its territories.  Not one of those?  Go find something else to read, preferably on this blog.

There is a further refinement to my audience: I am assuming that, like me, you are not wealthy.  You do not earn more than the equivalent of US$ 100,800 per year, you have no hidden offshore accounts, no substantial savings or a complicated financial portfolio.  You are like the majority of Americans abroad that I know: artists, students, freelancers, church workers, etc. who make enough to get by (most years) and just happen to like living where they do.  If you do have money and a complex financial portfolio, you can afford a tax attorney to think about these things for you.  This post isn’t for you either.

Finally, nothing I write here should be construed as legal advice.  I’m not qualified to give it.  I am simply going to share with you what I do every year, and why, and give you hyperlinks to original government documents to back it up.  However, those documents are open to various interpretations and you may come up with a different approach.

Okay, here we go…  I’m going to number the paragraphs so you can work through them one by one.

1) First of all, don’t panic; just bite the bullet.  As long as you remain an American citizen you are going to have to give one day per year, at least, to keeping the US government happy.  Get over it.  My suggestion is to set aside a day – reserve it in your diary! – as soon as you have gathered all the written evidence of your income and financial dealings of the previous year, but certainly before June 15 of each year (p 7; the normal filing deadline is April 15, but if you live abroad you get an automatic two-month extension; just claim it in your cover letter).  The sooner you can get this done, the better; it won’t be hanging over you, spoiling your Spring.

2)  Which Americans, living overseas, should file US tax returns every year?  The IRS provides an overview of who MUST file a return (pp 7-10), but my short answer is: if you are living abroad, you should do it.  If you are like me, you will not actually have to PAY any taxes but it is wise to FILE every year and have the confidence that you are up-to-date with the IRS.  You don’t want something coming back to bite you later.  And besides, if you ever entertain giving up your US citizenship, the IRS will have to be told so that you can meet any outstanding obligations (different links either side of the comma; for the latter one see: “Documents” section, and the very last paragraph).  Best to have things tidy and not be trying to file back-taxes at that point.

3) So, gather your financial information: collect all the income-related forms from your employers and financial institutions, and any information you have about taxes you paid to other nations.  Essentially, anything that pertains to your income, investments, bank accounts, etc.  And of course you will need to know your US Social Security number (or “TIN” as it is now referred to – Taxpayer Identification Number).

Make a list of ALL your financial accounts anywhere, any personal accounts that you have authority over: include the account number, institution name and address, the maximum balance during the year for the account in its local currency, plus the equivalent in US dollars (using an exchange rate approved by the US government, important: see my *Note at the bottom of this article about using these numbers).  Aside from giving you a good picture of where you’re at financially, it will be necessary to help you know if you need to file FBAR or FATCA statements (we’ll get to that).

4) In fact, let’s go ahead and get FBAR out of the way.  This has nothing to do with taxes but it is required anyway.  It is part of the US Treasury’s attempt to hem in money laundering.  Who must file FBAR?  “A United States person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.”  So, if the total of your foreign accounts together went over US $10,000 at any time during the previous year, you need to file this document.  And you need to do it by June 30 of each year, no exceptions.  The whole thing is done online on a fairly straightforward form with instructions in the menu to the right (from which the quote above is taken).

5) Back to filing taxes with the IRS.  Depending on your investments or assets you may need a variety of IRS forms and schedules but these are the ones I’ve been getting by with: Form 1040, Form 2555-EZ, Form 8965 (Obamacare exemption!), Form 8938 (FATCA!), and if you are self-employed Schedule SE and Schedule C.  Just buy some extra printer ink and paper and print out the forms you need in duplicate (one for you, one for the IRS) and the instructions, if you don’t want to read them online (but don’t print out the instructions for Form 1040; that would be ridiculous).  Form 1040 is the main form that draws all the bits and pieces together from the others, so have it in front of you but plan to complete it last of all.

Now we’ll look at the forms one by one:

6) Form 8965.  Might as well start with the easiest one; you probably don’t need this form at all, but you should know what it is: The chances are really good that you already have some kind of health insurance coverage, likely through private coverage or a national medical coverage plan.  So, if you want to make sure you don’t get bothered with the Affordable Care Act (Obamacare) and you’ve been covered by another plan for all 12 months of the previous year then all you have to do is tick the little box on Form 1040, line 61 (and leave the amount blank).   If for whatever reason you need to clarify or specify the nature of your exemption (or you simply enjoy doing redundant paperwork) submit Form 8965.  Most Americans abroad will have an exemption based on code “C”.  (See instructions.)

7) And now a form many of my (poor) friends can ignore: Form 8938.  This has to do with the much hated FATCA and is the IRS’s version of tracking your foreign financial assets.  Fortunately their threshold for Americans abroad having to file this form is considerably higher than the US Treasury’s FBAR above.  For example: “If you are not married, you satisfy the reporting threshold only if the total value of your specified foreign financial assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year.”  (The threshold is the same for married individuals filing a separate return from their partner.)  Remember, US dollars, not Canadian ones.  So, if the value of your foreign financial assets is less than the amounts specified above you “get out of jail free” and can skip this step entirely.  Refer to the Form 8938 instructions to be sure.  And keep in mind that when you DO have that amount of money, you’ll need to start filing this form.

At this point you’ve probably started daydreaming about joining a religious order and taking a vow of poverty, or keeping all your assets in the form of gold coins in a sock under your bed.  Or, if you completely trust your non-US-citizen partner, let them hold all the assets until they die. Okay, focus…

8) This next step is only for self-employed people (you do have income from work but you don’t have an employer taking taxes from your pay check).  Do Schedule C, Profit and Loss from a Business, and then do Schedule SE, Self-Employment Tax.  See, here’s the thing: if nobody is taking taxes from your pay check then it is quite likely that you are not putting anything aside for a state-run old age pension.  So you’ve got to pay that tax to the US government.  However, there is also a likelihood that the country you are living in has a social security agreement with the USA and you might be covered simply by virtue of being a legal resident in that country.  If so, you might ask your local social security office (of the country where you reside) for a document showing you are covered.  If you can do that, you may not be liable for any American self-employment tax and can skip this step too.  Research it.

So far, so good.  If you are like me, you haven’t had to do anything yet except tick the box on Line 61 of Form 1040.  Now for some serious work…

9) Form 2555-EZ.  This one is important.  It establishes that you are a legitimate resident of a foreign country and thus provides you with an exclusion: the first big chunk of your income will not be taxed by the US.  In 2015, that amount is up to US$100,800, if you haven’t spent any days in the USA on business in the past year.  You may need to use the regular Form 2555, but most of the people I know can use the EZ version and qualify as “Bonafide Residents” of a foreign country.

Really important: when you finish this form and get to 2555-EZ’s line 18 you will have an amount of income you can exclude from US taxes (in my case, all of my income).  You need to take that amount and put it in parentheses on the main tax form, Form 1040, on line 21. Next to it write “2555-EZ.”  The parentheses makes it a negative value.

10) We’re almost there now; on to the big one: Form 1040.  The first sections are fairly simple.  Then comes the record of your Income.  If you did Form 2555-EZ and carried the amount over to Form 1040 (above) then all your foreign earned income is already accounted for and marked down as a negative value (in parenthesis) on line 21.  You should not re-enter those same wages again on a different line (for instance line 7).  Fill in the other income lines as necessary, leaving them blank if you have nothing.  I never have any, so the total of my income (Line 22) is always a Big Fat “0”.  In fact, the next sections are also all blanks for me, so I end up with “0” at lines 37, over the page at 38, 56, 63, 74 and 78.  But your situation is likely to be different.  Just go line by line, looking up the instructions if you need help.  Don’t get bogged down by stuff that only applies to people living in the USA.  Make sure to tick the box at Line 61 if you had a full 12 months of medical coverage.  Don’t forget to sign and date Form 1040 and you’re  done.

11) Finally (yeah!), write a cover letter to the IRS.  Very simple; the less words, the better.  You want to claim – if necessary –  the automatic two-month extension given to those whose tax home is abroad and who were living outside the USA on the normal filing deadline (April 15).  Further, you trust that all is in order with the enclosed forms.  Sign off, and give your Social Security Number and your full address.  Keep a copy of your forms and your letter for yourself!  Put everything in a safe place (you’ve got some serious personal information here).

Send your letter and your completed tax forms with enough postage to the proper address.  Put your feet up and have a drink.

I know, I know, it is totally ridiculous that American citizens living abroad – all 6.3 million of us – have to go through this every year.  Taxation without representation, anyone?  But, it’s the law and to make life easier you need to be on the right side of it.  Good luck!

I have tried to keep this short and simple, and make sure the hyperlinks are correct.  However,if there are any mistakes, please let me know and I will update it.  Again, this is not legal advice; this is my experience.  Americans living abroad can find more helpful information and resources here.

*Note about using the Treasury historical exchange rates (point 3 above): these rates are given in the configuration of US$ 1.00 = x foreign currency.  However, if you earned money outside the USA, you want the opposite configuration, or Foreign Currency 1.00 = x US$?  Do this with your calculator: enter 1.00 (for US dollars) and divide it by the number given on the chart for your foreign currency.  Then multiply your foreign income by that number.  Here’s an example using Canadian dollars, using the Treasury rate given for 30 September 2015: 1.00 divided by 1.3410 (the number on chart) = 0.7457.  That’s how much 1.00 Canadian dollar was worth in US dollar amount; so now multiply your Canadian income by .7457 to get the US dollar equivalent.  If you had C$ 10,000 in income, it would be equivalent to US$ 7,457.  Got it?

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Wenatchee 

We left home in a downpour, crossing the border at Sumas where the young American immigration officer huddled in her little booth, efficient, pleasant, but not friendly. There was no wait, evidence that a weak Loonie has put an end, for now, to Canadian cross-border shopping sprees.

In farmland now, dairy, blueberry, assorted dormant vegetable beds waiting for spring. Highway 9 heading south toward Seattle has become familiar but still offers up surprises when we look for them: pulling over in Acme so more eager drivers can pass us safely by we notice a house with a castle-like turret at one end. The windows are odd too, for a dwelling. Oh, it’s an old church; the former steeple has been knocked down and shaped to lend a medieval flair.

Arriving in Sedro Woolley the rain turns to a light sprinkle and we nudge the car in the direction of the old downtown, to Joy’s Bakery and Cafe, a serendipity from a previous journey. Americana runs thick here, nearly as thick as the gravy over biscuits served up on enormous plates to matching patrons. The place is nearly full – workmen in reflective jackets and steel-toed boots, farmers in jeans and baseball caps, young families splitting cinnamon buns two ways or even four – but we manage to find a table and order coffee and a warm pastry. This is a movie set, but real; the America foreign tourists wish they knew how to find, but rarely do. We take it all in, sipping our coffee, seeing with Rockwellian eyes.

Back on the road, past Big Lake, the highway tilts and turns through forested foothills, empty now, rendering as fine a driving experience as one could wish for. No cops either.

So to Grandmother’s house we go, in Arlington, where my mom greets us and pulls us in and tries to feed us far too much, especially considering that pastry of an hour ago. We catch up, I weigh myself on her bathroom scales (yes!), and onward we go again.  We want to hit the mountain pass at the height of the day’s light and warmth.

Soon we turn east onto Hwy. 2, gaining altitude as we pass through small towns with curious names: Sultan, Goldbar, Skykomish. The grade steepens, the highway broadens to two eastbound lanes, snow lies thick on either side creating a tunnel-like effect as we approach the pass.

“Slide Area” a sign warns.

I move the car to the innermost lane, telling Renata “If there is a slide, the extra space might be handy.”

Not a mile farther up the road a sudden movement on the slope to our right grabs our attention. Avalanche! A curtain of white appears before us as I swerve into the empty oncoming lanes and the car is whacked from the side by snow and ice. We keep going, looking back to watch the ongoing spectacle of snow pouring into the road, laughing nervously at our good fortune.

Beyond the summit a man is standing in the middle of the road, holding a sign and signalling us to take a detour.  Too much slide risk ahead. We dutifully follow the back country road, looking for signs to Leavenworth. “Picturesque” is a feeble word to describe this mountain wonderland. Would that we took detours more often.

Leavenworth is snarled with traffic, the Friday afternoon rush not working well with the other end of the detour. But soon we are out of the crush, out of the mountains, and into the dry continental air of Eastern Washington.  The sun is shining brilliantly as it sinks to the jagged horizon.

Welcome to the Apple Capital of the World. Welcome to Wenatchee.

“How was your trip?” my brother asks.

“Great!”we reply.

And it was.

Canada is not the USA

One hears it quite regularly from Canadians.  Americans, on the other hand, rarely think about it.

I heard it again yesterday in the words of a news article covering the hasty withdrawal from Canada of Target, the giant American retailer.   As it turns out, Target is only one of a long list of American businesses which have tried and failed to enter the Canadian marketplace.  Part of the challenge is pure logistics: operating in a country that is larger than the USA in area but a tenth of the size in population calls for a completely different logistical strategy.

And yes, we can all think of a number of relatively minor cultural differences in the realms of vocabulary, sports, etiquette and the like.  During a recent conference held on the border town of Blaine, WA, where the 200 participants consisted of roughly equal numbers from Canada and the USA, I passed a woman coming the other way down the hallway in the hotel.  As it happened we crossed where a hotel employee had parked his cart outside a room, making our shared pathway somewhat narrower.  There was still plenty of room for both of us to get by, which we did, but as she passed me she issued a quite genuine-sounding, apologetic “Sorry!”.  I would be willing to put money on this woman being a Canadian.

However, the Canada-is-not-the-USA claim is, I believe, a plea to recognize and appreciate cultural values which are considerably deeper than those behavioural differences we find variously so quaint or annoying about each other.  I’m no expert – I’ve lived in Canada for four years and have been married to a Canadian eight times longer than that – but here, to begin with, are three pointers for Americans hoping for a successful venture in Canada:

1) The Past Looms Large.

Canadians and Americans share a similar view of how the present time relates to the future.  The future is optimistic, not-too-far-away, and is directly connected to the present.  Decisions taken today will affect our futures, in our lifetimes.  The future is important, it’s right around the corner.

However, when it comes to relating to the past, our predominant national cultures part ways.  To Americans the past is truly in the past: it is relatively insignificant and distant.  For the American, the past is all shot in black & white film, as it were.

Not so for the Canadian.  Here the past is very near, in a sense overlapping with the present.  The past is what makes us who we are today and so it needs to be remembered, honoured, and (here’s the rub!) preserved.  This is true not only of significant national events, but also of quite local and peculiar customs.

Practically speaking this means that Canadians seem overly traditionalist to Americans; yes, they are willing to embrace the future but not if it means leaving the past behind.  “Why do we need to keep doing it this way?” asks the American.  “Because our memories make us who we are,” replies the Canadian.

2) Patchwork – vs – Melting Pot.

Okay we all know this one.  Or we think we do.  You know, the classic comparison of the immigrant histories in our two countries: that in Canada the result was a society like a patchwork quilt of separate communities holding fast to their ethnic identities; in the USA, on the other hand, the fires of liberty burned away those former allegiances and forged a new, common identity, the “American”.

What we often fail to appreciate is that this preference is not only at work on a grand scale, but also in how we relate to other groups or jurisdictions in general.

Recently, while interviewing for a position within the Anglican Church of Canada and trying to understand the context of the parish, I asked a group of representatives from the congregation whether they ever did “joint activities with other churches”.  It was interesting to me that what they heard me say was “joint activities with other Anglican churches”, which they told me all about.  This was not the first time I’ve received such tribal-like responses to similar questions.

Until very recently it was illegal to take British Columbian wine with you over the border into Alberta.  I once sent a nice bottle of wine to a friend in Ontario as a gesture of thanks for a favour he had done.  It was confiscated by the postal service and he received a stern note threatening a hefty fine the next time he tried to “import” alcohol.  Again recently: my application for a criminal records check was rejected by the clerk at the police station because it was “not on our form”; she handed me “our form”, which was exactly the same in every detail to the one I had just attempted to hand in, but printed on different paper.

All of this boggles the mind of Americans.  I believe, however, that there is an admirable cultural value at the back of it, and it is this: Canadians value and respect each other’s group identities more than Americans do; their patchwork is purposeful.  It is a consistent – if not conscious – rejection of the melting pot approach.

3) Yes, m’ Lord.  (You jerk.)

Americans are famous for their relatively flat hierarchies.  Good leaders are accessible, have acquired their status by virtue of their achievements, and relate well to those who serve below them in rank.  When push comes to shove the boss is the boss (“the buck stops here”), but when the crisis is over and the dust settles, you’d expect the boss to have a beer with the rest of the team.

To understand hierarchies in Canada one needs to remember that the country is much more tied to its British heritage than is the USA.  There is a hint of Downton Abbey here, but not so extreme.  While operating “upstairs”, on the level of office, role or function, leaders are afforded greater respect and deference than their American counterparts.  But this is counterbalanced by the hidden world “downstairs”, away from the task at hand, where loyalty to the leader is a different matter altogether.

To put it another way, Canadians have greater respect for the office and less for the person filling it.

Any more?

I may add other cultural values here as I identify them.  Also, I will be happy to amend what I have written above if you want to comment and leave me your wisdom.

9/11 Remembrance

Here’s the text of a reflection I gave this afternoon at the 9/11 Remembrance service, sponsored by the United States Consulate General in Amsterdam (see a wee notice and photo on their website, here):

Eight years ago we gathered in this place, bewildered, fearful, anguished, angry, with little comfort or solace.  Hastily we gathered, people of all faiths and none – the news spreading by word of mouth – coming until every place was taken, knowing we needed to be here, our hands joined together as one even as we stood with weak knees and aching hearts.

On that day, if I remember correctly, Reverend Cowie, our host then as now, reminded us that it is not always ours to choose what overcomes us in life; but it is ours to choose how we will respond to what happens to us.

So, what have we done?  How have the intervening years shown up our response to the tragic events of that day?  Did our grief, our anger, our injury work to make us better?  Is our quality more noble, or ignoble, for what has overcome us?

We are perhaps neither qualified nor inclined, certainly on this day, to dwell on global politics, on how our governments have acted.  We must leave it to others, and to history, to judge whether their actions have been fitting and just.  If there have been failures we can rest in the knowledge that our democracies are tenaciously self-correcting.  As Martin Luther King Jr. once noted, the arc of history is long, but it bends towards justice.

But how have we responded – each of us as individuals?  9/11 changed us, we know that.  Eight years on and we have begun to harvest from the seeds that were sown into our own hearts on that day.  We have begun to see the fruit born of the way we chose to respond.  Have we nourished bitterness by stoking the fires of prejudice and intolerance?  Or have we sought to respond in the opposite spirit, bringing whatever influence we have been given to contribute to a more just and peaceable world?  We must in any case not loose heart, not give up, believing the false notion that our efforts are pointless.  The opposite of love is not hatred, but indifference.

We are here today, first and foremost, to remember those who died in the skies above America, and soon after in New York, in Washington, and in Shanksville.  Thousands lost their lives, and many more thousands their loved ones, at the hands of hateful men.  That there are those who should view their fellow men as mere objects, to destroy as they will, is a vile and perverse thing; it is opprobrious beyond description to do so in the name of the Creator, who created all men equal and endowed each with the right to life and liberty.

We have lost them, but we shall not forget them.  No one has died in vain whose dying has ultimately made our world a better place.  It rests on those of us who remain to secure and tend this noble legacy.

Blessed are the poor in spirit….blessed are those who mourn…blessed are the meek…blessed are those who hunger and thirst for righteousness…blessed are the merciful…blessed are the pure in heart…blessed are the peacemakers…blessed are those who are persecuted for righteousness’ sake.

Bless us, O Lord, and as we remember those who died and those who mourn; and renew in us the resolve to walk in ways that are just, worthy and upright of heart.  Amen.

 

Two dollar bill

In my first year after high school I lived in Corvallis, Oregon, attending a small Bible school and working part-time at Bob’s Burgers, a small Oregon-based fast-food chain, now defunct.  One day I was at the front taking orders and received as payment for a milkshake a 1928-issue two dollar bill in pristine condition.

Two dollar bills in the USA have something of a mythical status.  Though they have been in almost continuous circulation for many years, consumers rarely use them, preferring instead to collect them and store them away.  For that reason, the US Treasury prints very few new ones.  In fact, it is quite commonly believed they are no longer legal tender.  A cursory internet search turns up confirmed anecdotal evidence:  “A Taco Bell patron attempted to pay for a burrito with a two-dollar bill. The cashier and the store manager both refused to accept it as valid U.S. currency, believing that there was no such thing as a two-dollar bill. When the patron then said that the only other bill he had was a fifty-dollar bill, the manager said that since it was less than an hour to closing, he didn’t want to open the safe. When the patron insisted on paying with it, they called the security guard, who then explained that two-dollar bills are actually valid U.S. currency.”  Another man, a “patron of Best Buy, attempted to pay for an electronics installation with 57 $2 bills. The cashier refused to accept them and marked them as counterfeit. The cashier then called the police, and the patron was handcuffed until a U.S. Treasury Agent arrived to clear up the issue.”

In keeping with American tradition,  when that beautiful 1928-issue two dollar bill slid across the counter to me at Bob’s Burgers, I discreetly slipped it into my pocket.  Later I added two regular dollar notes to the till to make up the difference.  I took my trophy home, showed it off to my house-mates, and put it away for safe-keeping.  What a prize!

Almost three years later, in the summer of 1983,  Renata and I were finding our way as newlyweds.  As far as sexual ethics go, we could be exhibit “A” for the Roman Catholic church: abstinence before marriage really is possible, as is faithful monogamy in marriage.  We’re as straight as they come.  Only to say that, three weeks after our wedding, our new-found freedom had us jumping into bed on any and every occasion which presented itself.

Our candidacy for the annual Papal awards ceremony, however, was always going to be dashed on the rocks of another aspect of sexual ethics: birth control.  Sure, we wanted children eventually, but we absolutely did not want them right away!  As zealous as we were about sex, we were equally so about preserving our status as married, without children.   Indeed, upon surveying all the various paraphernalia filling our shopping basket after one of our first visits to the drugstore, I wondered if we shouldn’t add an Epi-pen to the purchase; one of us was bound to go into prophylactic shock.

One evening, on a hot July day, the amorous delirium infected our brains again and we headed for bed to sleep it off.  I reached for the box of condoms, but to my utter amazement it was empty.  How could this be?  It seemed just yesterday we had bounteously replenished our supply.  Enough for weeks to come, we had reckoned then.

We discussed our options, and decided (wisely, I’m still convinced) that we really shouldn’t proceed without a condom, no matter what else we were additionally relying on.  It was getting late, but the Fred Meyer’s One-Stop-Shopping was open 24-hours, so I would nip down there and be back in a jiffy.  I got on my clothes, grabbed the car keys, and started looking for some money.  We soon discovered, however, that not only were we condom-less, we were also cash-less. Money there was, in the bank; but these were the days (just) before the ATM established its ubiquitous presence.  What to do?

Well, I’m sure you can guess the rest of the story.  “Love,” St. Paul says, “always perseveres.”  Faint with passion, sure we would not make it through the night without satisfying our ravenous appetites, our thoughts turned presently to my precious two dollar bill, stowed away in a small box of personal treasures.  Renata can laugh now, as can I, but she has never forgiven herself for the fact that it was she who first dared speak what should not be spoken.

Disheveled and dejected, this uxorious young man slid a crisp 1928-issue two dollar bill across the counter at Fred Meyer’s, watching with deep envy and contempt as the eyes of the cashier lightened ever-so-slightly upon seeing the note, watched him as he suppressed any display of emotion that might jeopardize his unexpected windfall.  With disgust I witnessed how he set it aside as he fished-out my change and gave me the receipt for a box of three condoms.

That night I discovered, for the first time, that sex is not always what it’s cracked up to be.