The Challenges of International Tax Filing


NEW YORK (MainStreet) — IRS obligations are often overlooked by 300,000 international students studying in America, according to a survey.

"There are various penalties for non-compliance such as fines for filing late and also the possibility of future visa refusals," said Aoife Flynn, vice president with Sprintax.

A Sprintax study found that there are now 31% more foreign students studying in the U.S. than a decade ago and just like Americans working abroad, foreigners living in the U.S. have until April 15 to file an income tax return.

"U.S. citizens and residents are taxed on their worldwide income regardless of where they call home," said Shomari D. Hearn, enrolled agent and vice president with the Palisades Hudson Financial Group in Fort Lauderdale. "They can either claim a credit or a deduction for foreign taxes paid or accrued on the income they earn abroad."

When foreign income is the result of wages earned while living abroad, the foreign earned income exclusion is an option in some cases and the exclusion is indexed for inflation.

"It allows a taxpayer to exclude up to $97,600 of foreign compensation for 2013," Hearn told MainStreet. "If the employer provided an allowance to pay for reasonable housing expenses and is reported to the U.S. taxpayer as taxable foreign earned income, the taxpayer may claim a housing deduction for the housing expenses."

Americans with foreign investment income may need to file FinCEN Form 114 but in the process avoid mismatching.

"If the foreign income is earned in year one but the foreign tax will not be paid until year two, elect accrued instead of paid on Form 1116 so that you can claim for the same year that the income will be reported on the U.S. return," Hearn said. "Otherwise, the credit may be limited if foreign income fluctuates significantly from year to year."

The foreign tax credit offsets U.S. income tax liability so that Americans abroad aren't being double taxed however foreign-source investment income, such as dividends, interest and capital gains are subject to the Net Investment Income Tax (NIIT) when modified adjusted gross income is more than $200,000 for singles and more than $250,000 when married filing jointly.

"I'm talking to a lot of clients about NIIT this year," said Christine Ballard, partner with Moss Adams. "These investments are relatively common in today's environment. I find that more and more closely held businesses are using foreign captive insurance companies to self-insure risks and captives tend to throw off Subpart F inclusions."

Subpart F was designed to prevent U.S. citizens, resident individuals and corporations from deferring taxable income through use of foreign entities. Subpart F income includes Foreign Personal Holding Company Income (FPHCI), Foreign Base Company Sales Income, Foreign Base Company Services Income and Foreign Base Company Oil Related Income.

"Most overseas investments come with robust US income tax disclosure requirements and the cost of compliance needs to be factored into the overall rate of return," Ballard told MainStreet.

--Written by Juliette Fairley for MainStreet

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