The American Expat’s Guide to Processing Tax Returns
Working abroad benefits many U.S. citizens who want to expand their opportunities and improve their lifestyles. Thanks to its growing popularity, an estimated 9 million Americans are now working and living in different parts of the world.
While migrating to locations such as Europe and Asia has been more common, many American expats have also found their way to different Central American countries. But regardless if you are stationed in Honduras or planning to retire in Panama, your stay has many legal implications. Part of this includes filing your taxes accurately and on time.
A 2021 survey showed that nearly 1 out of every 4 American expats are seriously considering or planning to renounce their U.S. citizenship due to tax issues.
Common Tax Problems for Expats and What to Do
Dealing with taxes is often a tedious and confusing process to go through. Nonetheless, it is a crucial procedure that benefits all citizens and helps you avoid legal complications that may hinder your stay abroad. Here are some common tax issues that American expats may face while living in Central America.
● “Double” Taxation
Double taxation typically happens when a company pays a corporate tax rate on income as dividends. This begins when the business pays off the taxes on its annual profits or income. Followed by this is a payment made from its dividends given to shareholders.
As of now, the United States currently holds no tax treaty with countries located in Central America. However, you will still be subjected to paying taxes in whichever nation you reside in.
For some expats, preferential tax treatments can apply depending on their situation. This can help you reduce the total amount you need to pay as an American expat.
● Unfiled Tax Returns
American citizens have until April 15 to file for their taxes. But American expats gain the benefit of extending this deadline until June 15. While you have more time to complete the process, it is still best to accomplish it as soon as possible to minimize the risk of any penalties or fees and have enough time to correct any mistakes you may make.
In the event that you fail to file a tax return, you will need to contact the IRS and negotiate a method of settling your tax debt. This can be done in the form of an IRS payment plan if you meet the requirements and eligibility to apply.
● Tax Penalties
Penalties can be incurred if you do not meet your tax obligations. The IRS typically charges these additional fees depending on many factors. This can include failure to pay the tax debt in full, not following the proper procedure, or missing the indicated deadline.
All American taxpayers must file a foreign bank account report form by April 15 to avoid tax penalties. American expats should file this through the BSA E-Filing System by October 15 as the extended deadline. If there are different filing requirements, it is important to look into them to avoid further complications.
Stay on Top of Your Taxes
Working and living abroad grant different benefits that can help you learn new skills, improve your lifestyle, and build your career. But whether or not you are planning a short-term or long-term stay in Central America, you still need to meet many legal implications as an American expat. Since everything is returning to normal again, you must also know their return-to-work policies.
During your stay, it is essential to stay on top of your tax filing and ensure that they are sent in an accurate and timely manner. This is to help you avoid issues with the IRS and prevent severe consequences and penalties from occurring.
Should you need help understanding the process, it is best to consult with a U.S. tax resolution professional.