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U.S.TaxesforWorldlyAmericansbyOlivierWagner--1sted.

ISBN-13:978-1945884061

ISBN-10:1945884061

Iwanttothankallthosewhohelpedmeonthisjourney:

ThosewhoshowedmethatcorporateAmericawasnotthebestpathforme.

RobertChayerandJacintheMarquis,whotaughtmemanyU.S.taxconceptsandwerealwaysverypatientandrespectfulwithme.

JohnRichardson,whohassupportedmytransitiontoanomadiclife.Johnhasbeenwithmethroughthisjourneyandhashelpedmesustainmypracticeanddiscusstaxideas.

KasiaStrzelczykforherhelpat1040Abroad.Kasiahasbeenanoutstandinglyreliableemployee,ensuringthat the business keeps turning no matter what misadventures I get up to around the world giving mevaluablefeedbackonnewideas.

GregoryDiehlforoverseeingthecreationandpromotionofthisbook.GregoryhasbeenalongtimefriendwhoIhavewatchedblossomintoaglobalcitizenandentrepreneur(heonlyhadonecitizenshipwhenImethim,andnowhasthree).

Kevin Hoeltschi, Eric Z, Tyson Batino, Elisabeth Peltier, Chris Backe, Mariza Pavalama, BarbaraFernandez,DavidHemmat,andAmnaShamimforgivingmecriticalfeedbackonearlierversionsof thisbookandencouragingmetokeepgoingtobringmyvisionintorealpublication.

CONTENTS

FOREWORD

ACHANGEINMINDSET

PREFACE

INTRODUCTION

WHYTHISBOOKNEEDEDTOBEWRITTEN

EXPATRIATES

PERPETUALTRAVELERS

ACCIDENTALAMERICANS

WHATHAPPENSIFIDON’TFILE?

INTRODUCTIONTOFORM1040

HOWTHISBOOKISSTRUCTURED

MOVING,LIVING&WORKINGABROAD

THEDYNAMICSOFRELOCATING

FAMILYDYNAMICSABROAD

WORKINGABROAD

MAINTAININGTIESBACKHOME

MITIGATINGTRAVELEXPENSES

EMIGRATINGFROMTHEU.S.

FOREIGNBANKACCOUNTS&INCORPORATION

GETTINGANDSTAYINGTAXCOMPLIANT

PAPERWORKANDFORMS

FTC&FEIESTATES

FORM3520

FORM5471

PFICs&FORM8621

FBAR&FORM8938

OTHERIMPORTANTFORMS

INCOME

SCHEDULEB

SCHEDULEC

SCHEDULED

SCHEDULEE

PARTNERSHIPS&SCORPORATIONS

FORM5471

UNDERSTANDINGSUBPARTFINCOME

WHATQUALIFIESASSUBPARTFINCOME?

DORMANTCORPORATIONS

FOREIGNEARNEDINCOMEEXCLUSIONS(FEIE)

FORM2555-EZ

BONAFIDERESIDENCETEST

PHYSICALPRESENCETEST

NON-CASHINCOME

DEDUCTIONS

FORM2555&PASSINGTHEBONAFIDERESIDENCETEST

SEVENTYPESOFITEMIZEDDEDUCTIONSWITHSCHEDULEA

OTHERTAXES

PREPARINGSCHEDULEA

CREDITS

FORM1116

THEADDITIONALCHILDTAXCREDIT

OTHERTAXES

SOCIALSECURITY

SELF-EMPLOYMENTTAX

SOCIALSECURITYTOTALIZATIONAGREEMENTCOUNTRIES

PASSIVEFOREIGNINVESTMENTCOMPANIES(PFIC)

HOW&WHYTORENOUNCEU.S.CITIZENSHIP

COVEREDVS.UNCONVEREDEXPATRIATES

UNDERAGERELINQUISHMENTS

AVOIDINGCOVEREDEXPATRIATESTATUSBEYONDTHEEXITTAX

YOURFINALTAXRETURN

WHYYOUSHOULDCONSIDERACQUIRINGANEWPASSPORT(ORTWO)

HOWTOGETASECONDPASSPORT

THEPRICEOFCITIZENSHIP

THEPRICEOFRESIDENCY

CONCLUSION

ABOUT1040ABROAD

INDEX

FOREWORDWhenImetOlivierWagneratadigitalnomadconferenceafewyearsagoin

Bangkok, we were both already active global citizens. Each of us had thefreedomtogowherewewanted.Wecouldmaintainourincomefromanywherein the world (so long as we could get online occasionally).We had adjustedfairlywell to thecomplexities this lifestylecancarry,andwerefreetoexploreanyopportunitiestheworldcouldoffer.Theplanetwasouroyster,sotospeak.We’vecomealongwaysincethenthough.I have been traveling the world almost nonstop since age 18. While most

people transition tonomadicorexpatriate livingaftermanyyearsof followingtheconventionalpath,Ihavehadthesomewhatrareexperienceofspendingmyentireadult lifeexploringtheworldonecountryata time.Thispathhas takenmetomorethan50countriesthusfarandgivenmeaprofoundnewperspectiveon both myself and our planet. The experience has matured my mind andbroadenedmyperspectiveinwaysIdon’tbelieveanythingelsecouldhave.Though I grew professionally during my travels, collecting customers,

registeringcompanies,andopeningbankaccountsinvariousnationsasIwent,itwouldnotbeuntil ImetOlivier that Iwouldstart toget seriousabout the taxobligation Iwas forced into as anAmerican citizen by birth. I had enjoyed acomfortable upbringing in sunny San Diego. As a global nomad, I now tookadvantageoftheeaseoftravelaffordedtomeasanAmericanpassportholder.But I rarely stopped to consider the seriousness of my home country’sworldwidetaxpolicyandhowitcouldaffectme.AsItraveledandworkedonline,Imanagedtodosoinamostlyanonymous

and“underthetable”sortofway.Iwasalwaysworriedaboutcomingoutoftheshadowsandmakingtoobigofanameformyself.Nottheleastofmyworrieswas becoming tax compliant.What if I filed something incorrectly?What if Ididn’tgivethegovernmentenoughinformation?WhatifIgavethemtoomuch?Ihadremainedinvisibletothemthislong.WhyshouldIriskanythingnowbycomingintothelight?ThoughI’venowworkedalongsidesomeofthebiggestnamesin“offshore”

services, Olivier was the first person to clearly explain to me why it wasimportant forme toget taxcompliant.Hemademesee thatavoidingmyU.S.

taxobligationwouldonlygetmorecomplexandriskyastimewenton.Asmyearning capabilities increased, I would stand out more and more on thegovernment’s radar. He also showedme that because I planned to eventuallyrenouncemyU.S.citizenship,Iwouldneedtopreparenowbygettingcaughtuponatleastthelastfiveyearsofunfiledtaxes.Despitemyunconventionalworkhistoryandlifestyle,Olivierhelpedmeget

everythingintotheauthoritiesontimewhilekeepingmytaxobligationaslowaslegallypossible.Iwasfinally,for thefirst timeinmylife,fullytaxcompliant.Gettingtothispointwasanimportantmilestoneinmypersonalandprofessionaldevelopment.As I continue to growmy influence, it’s going to be evenmorevitalthatmyfinancialaffairsareinorderandeverythingIdostaysaboveboard.Most importantly, Ino longerhave thatnagginglittleworry in thebackofmymindthatifIevergettoosuccessfulormaketoomuchnoiseintheworldthateverythingI’vebuiltcouldcomeunderattackbybureaucratswithbusyfingers.My situation is not entirely unique. I’ve befriended andworkedwithmany

U.S. citizens who have obtained multiple residencies and passports, startedbusinesses in strategic locations, managed millions in nontraditional assets,retired on some tropical shore overseas, or even brought their children alongwith themas theysold theirhomeandventuredaround theworldasa family.Eachofthemlearnedtobranchoutfromtheconstraintsoftheirhomecountrytopursuetheirownversionofanauthenticlifestyle.Theyovercamethefearoftheunknowntolearntherulesofthenewsystemstheywereentering.Nowtheyareeachmastersofthosesystems.Youcandothesamewithwhatevernewsystemslaybeforeyou:bethattheUnitedStatestaxsystemoranyother.

ACHANGEINMINDSETRecently,Ibeganchroniclingthelessonsthislifestylehastaughtmeinbooks

andotheronlineeducationalmaterials.That iswhyIwassogladtobeabletohelpOlivier bring this book together into the finishedversionyou are readingnow.Irealizedhewantedtogobeyondgivinganoverviewofhowtofileyourtaxesfromoverseas.Hewantedtointroduceanewwayoflivingtopeoplewhomight,atfirst,beintimidatedbyallthelittledetailstheydidn’tunderstand.Hisgoal is toopen theirminds tonewwaysofexisting. Justashehelpedme,hiswordsherewillbroadenyourmindsetabouthowtoliveaworldlierexistence.Mindset determines everything inour lives.Yourmindset is thebeliefsyou

holdabouthowtheworldworks.Mindsetiswhatwillshowyouyouroptionsforactingintheworld.Ifasubjectappearsforebodingandcomplex(liketheU.S.tax codeoftendoes), youwill never explore theoptions it holds. If youdon’tknowwhatoptionsyouhave,youwillneverusethem.Makingforeignconceptsfeelfamiliarisvitaltoourcontinuinggrowthasindividuals.Thisshiftchangeshowyouviewbothyourselfandyourplaceaspartofthewholeworld-notjustwhereyouarbitrarilycamefrom.In spending the last decade living this life andminglingwith the “experts”

whodominate theprofessional industry, I’ve seena lotof fearmongeringandemotionalbullyingtakeplace.Thepeoplewhohaveamonopolyonuncommonandhighlyvaluableinformationprefertoholditovertheheadsofeveryonewhohasn’t already discovered what they know. They scare ordinary people intotaking massive actions they aren’t necessarily ready for. That is how theymaintaintheirsocialstatureandfinanciallivelihood.If you poke around enough online about nomadic life, expatriation, or

retirementoverseas,you’llencounteracacophonyofvoicesallscreamingatyouto “Move everything you own and everyone you love offshore before thegovernmentimplodesandyourdollarsareworthless!”.Orthey’llpressureyouto follow in their own footsteps and start living the “JamesBond” lifestyle ofmartinis on white sand beaches, secret bank accounts, and homes on everycontinent.Theyareintimidating,overlyposturing,andquiteinaccessiblefortheaverageperson. I’msick todeathof itandcouldn’tbehappier that theseoncescarce resources are finally being made more available to the public throughdown-to-earthpeoplelikeOlivierthroughhiscompany1040Abroad.Maybeyouarejustgettingstartedinyourjourneyawayfromwhereyougrew

up.Maybe travelandexpatriationarestill just ideas foryou toplaywithuntilyouunderstandall thestepsinvolved.Ibelievethatbysharingrealstoriesandmaking these examples very true to life, Olivier’s book will help you makesignificant progress in the direction of actually living the global lifestyle youdesire. Although the information contained here is ostensibly about theintricaciesof theUnitedStates taxsystem,Isee itasafundamentalpieceofamuch larger puzzle about how to live a more fulfilling life beyond locallimitations.Thinkof this book as a partial guide to themuch larger topic of expanding

your identity beyond what the legal and cultural rule makers of your homenation toldyouwaspossible foryour life. Itmaynotcover thewhole journey(no single book could), but it brings vital clarity to something many peopleconsidertobethemostobfuscatingandoffensivepartofbecomingaresponsibleworldcitizen.JustasOlivier’sinfluencehasbroughtamuch-neededfoundationtomyoncewildnomadiclife,I’mquitesurethathisbookwilldothesameforyouifyoutakehisadvicetoheartinyourownuniquecircumstances.Tolivinglifeauthenticallyanywhereintheworld,GregoryV.DiehlJanuary2017Author, Travel As Transformation Founder, Identity Publications

www.GregoryDiehl.net

PREFACE

Are you a citizen of theUnited Stateswho lives abroad?Youmight be anAmericanwhomovedabroad,butwhohasn’tgivenupyouroriginalcitizenship.Maybeyouwereborn in theU.S.,buthavenoreal ties to it.Such“accidentalAmericans” aremore common thanyoumight think, andmanyof themdon’tevenrealizetheyareobligatedtopayU.S.taxes.Maybeyou’verecentlymovedfromtheUnitedStates,andaren’tsurehowthisaffectsyourfilingrequirements.Haveyouestablishedresidencyinanothercountry?Doyoustillderiveincomefrom the US? Or in another country? All these factors will change your taxsituation.You could be a self-employed “digital nomad” who works from several

differentcountries,movingwhereveryouwantatyourleisure.Despitesuchanunconventionalwayofmakingaliving,youmightstillowetaxestotheU.S.Ifyoudon’tfilecorrectly,youcouldbemissingoutonimportantopportunitiestolegally reduce your tax burden. Or worse, you could end up with your owngovernmentrevokingyourpassportandcomingafteryoufortheyearsofbacktaxesyoumayneverevenhaveknownyouowedthem.YoumayalreadyknowthattheU.S.isoneofonlytwocountriesintheworld

thattaxesitspeoplebasedontheircitizenship,notonwheretheyliveorwheretheirmoneycomesfrom.Ifyoumakemorethan$10,350peryear(asof2016)and are aU.S.Citizen, you stillmust file a return eachyear.Even if you canarrange thingsso thatyou legallyowenothing,youmuststill file.ThiscanbeespeciallyproblematicforthoseofyouwhohavenotfiledU.S.taxesinalongtime–orever.HowdoyoumakesureUncleSamgetshisduewithoutsufferingenormouspenaltiesasyoustruggletogetcompliant?Maybeyouhavebeentoldthatyoudon’toweanyU.S.taxesonmoneymade

overseas.Thisistrueuptoacertainamount,butonlyifyouknowhowtotakeadvantage of the proper avenues. Exclusions can cover the first $ 101,300 ofearnedincome(asof20161),wagesandself-employmentincome.Toclaimthisexclusion,youmustlettheIRSknowwhat’sgoingonthroughtheregularfilingof your tax return. Combined with certain other tests and exemptions, it is

possibleformostpeoplewhoworkabroadtolegallykeeptheirtaxesat$0.Howdoyouknow if this is the right situation foryou?Howmanydaysdo

you spend abroad each year? Do you have residency, bank accounts, orcorporations in any other jurisdiction?Howmuchmoney do youmake as anindividualorcompanyentity?ThereisnooneeasyanswerforeveryAmericanliving abroad,nomatterwhat their circumstances. If youdon’t understand thefullspectrumofpossibilitieswhich laybeforeyou,youcouldenduppayingalotmorethanisnecessary.Orworse,youcouldbeconsideredtaxnon-compliantbyyourowngovernment.Youmaybeabletoevadeanynegativerepercussionsfor awhile, but sooner or later youwill have to face up towhat you’ve beenrunningfrom.Myworkwith1040Abroad(andmygoalinwritingthisbook)hasnotbeento

scareyouintotakingtheactionyouhavebeenavoiding.Onthecontrary,Iwishtoempowerthepeopletolivefullerlivesandfeelmoreconfidentintheiractionsby taking control of their unique tax situations. By reading the informationcontainedhere,youshouldgetamuchbettergrasponexactlyhowtheU.S.taxsystemuniquelyaffectsAmericansabroad,andyoushouldbeonestepclosertogettingthefreedomofmindyoudesire.Ifyoulikewhatyou’vereadhere,Iencourageyoutocheckoutthewealthof

articlesonthe1040Abroadblogformorevaluableinformationlikethis.Ifyouhave any questions aboutwhat you’ve read here orwantmy help coming upwith a plan for how to handle your U.S. taxes as an overseas American, Iencourageyoutoemailmedirectlyatowagner@1040abroad.com.Yoursinfreedom,OlivierWagner

INTRODUCTION

WHYTHISBOOKNEEDEDTOBEWRITTEN

IgrewupinFrancenearStrasbourg,butalwayshaddreamsoflivingaroundtheworld.WhenIwenttotheU.S.in2004,IstudiedtheAmericantaxsysteminLouisianabeforemovingtoNewYorktoworkincorporatefinance.In2005,Ifinally receivedmyU.S. green card and became aU.S. citizen in 2009. I hadsuccessfullyclimbedthroughthehurdlessomanyimmigrantsfromallovertheworldstrivetoovercome,bringingintomylifeallthetrialsandbenefitsthataU.S.passportbringstoitsowner.IstillretainedmyoriginalFrenchcitizenshipaswell, so Iwasnowadual citizenof twoof themost powerful and free-to-travelnationsonearth.WithmynewAmericanwife,IstayedatmyjobinNewYorkforfivemore

years,untilwanderlustcamecrawlingback tome in2011.ThatwaswhenwedecidedtomovetoCanada,whereIexperiencedlifeforthefirsttimenotjustasanAmericancitizen,butanAmericanexpatriatelivingabroad.At this point in my life, the French government saw me as French, the

AmericangovernmentsawmeasAmerican,andtheCanadiangovernmentsawmeasaCanadian resident. Iwasalready livingaverydiversified life,mixingand merging international cultures and bureaucratic rules in ways that werecompletely unknown to me before. All that would seem small, though, incomparison to themajor lifestyle overhaul Iwould experience just four yearslater when I decided to pack my bags and transition to a life of full-timenomadismaroundtheworld.For the last few years now, I’ve embraced a life ofmuch greatermotion. I

travelwherevereitherofmypassportswillallowme,wheneverIwantto.I’veexperiencedlifeasanAmericanandFrenchexpatriateindozensofcountriesinalmosteverycontinentWhileIknowthatIamnotanAmericaninthesamewaythatsomeonewho

grewupintheU.S.is,asIdidn’tmovethereuntilIwasanadult,IstillthinkofmyselfasanAmerican.Insomeways,IhaveexperiencedmoreaspectsofbeingAmericanthanmostnaturalborncitizenseverwill.I’vebeenatourist,aforeignresident,animmigrantcitizen,andnowanexpatriatelivingandworkingabroad.I’veseenallsidesofthespectrum:thegood,thebad,andthemanyregulationsitall entails. This is what ultimately lead me to the path of helping otherAmericans likemyself inunconventional tax situationsdue to theirworldwidelifestylesoridentities.

TherearethreeprimarycategoriesanAmericanrequiringspecialattentionfortheirtaxesmightfallinto.

EXPATRIATESExpatriatesarewhatmostpeoplethinkofwhentheypictureanAmericanwho

has lefthishomecountry.They livepermanentlyor semi-permanentlyoutsidetheU.S. inanothercountry,but theyhave retained theirAmericancitizenship.Theycouldbepermanently retiredorcouldbeworking long-term ina regularjobintheirnewlocation.Eitherway,theyaren’tderivinganyincomefromtheU.S.itself.Expatspaytaxesintheforeigncountrywheretheylive,whichallowsthemtouseaForeignTaxCreditwhenfilingtheirreturnsbackhome.Becausetheyalreadypaytaxinaforeigncountry,they’remorelikelytonothavetopaytaxatallintheU.S.(butonlyiftheyfileeverythingcorrectly).

PERPETUALTRAVELERSAtruenomadissomebodywhotravelsfromplacetoplaceconstantly,rarely

staying in one place for more than a few weeks or months. Because of thistransient lifestyle, they do not ever establish enough ties to any country tobecomea taxpayer there.Theytravelon touristvisas,oratmoststudentvisas.Most of them either have a nest egg of savings, are retired, or run an onlinebusinessfromwherevertheygo.ThisisadesirablepathforAmericansbecauseitistheonlywaytomakeitsoyouneverhavetopaytaxesbecauseyouneverhave to file a returnanywhereelse.Butbecause thesepeople stillmust file inAmerica,evenif theyneversetfoot thereduringtheyear,Ihavetohelpthemfigureouthowtosetitalluptolegallyminimizetheirobligation.

ACCIDENTALAMERICANSAn accidental American is someonewhomay not even realize formost of

theirlifethattheyare,infact,technicallyAmericancitizens.Usually,theywerebornin theU.S.,but theymovedsomewhereelsewhentheywereveryyoung.BecauseeveryonebornonAmericansoilisgrantedcitizenshipbydefault,thesepeople have been carrying this status with them for years and are blissfullyunawareofthetaxconsequencesitcarries.It’samajorlegalandfinancialriskthat a lot of people are subject to, but they aren’t even aware of the danger.Peoplewhosuspecttheymightfallintothiscategoryshouldtalktoexpertswhocanhelpthemfigureouttheirsituationandwhattodoabouttheirtaxes.ThereasonIhelpthesekindsofpeopleisbecausemostU.S.taxpreparersare

onlyfamiliarwiththetaxlawsforpeoplewholiveandworkdomestically.It’squiteaswitchwhenyoudecidetotakeyourlifeoverseasinoneformoranother.Thepersonyouhavebeenusingforyearstohelpyoustaylegalandaboveboardmightbetotallyoutofhisorherelementwhenyoumaketheselifestylechanges.Eveniftheyareterrificintheirspecialization,theymightnotevenrealizethereareendlessnewlimitationsandopportunitiesthatnowapply.Suddenlykeepingyourmoneyinforeignbankaccounts,runningforeigncorporations,andhavingresidencyorevencitizenshipsomewhereelsemeanstherearenowgoingtoberulesthatmustbegivenspecialattention.Thereareamultitudeofnewformstobeawareofandstrategiestotakeadvantageof.MorepeoplearerenouncingtheirU.S.citizenshipnowthaneverbefore.Each

has their own reasons for doing this. Some are worried about the changingpoliticallandscapeoftoday.Otherspayattentiontonewrulesandrestrictionsonfreedom of travel, or (for better or worse) how the rest of the world viewsAmericans.Mostly,theywanttoavoidallthecomplicatedtaxburdensthatcomewiththeterritoryofbeingaU.S.citizen.Partofmyjobistoeducatethemabouthowthisprocessworksandhelpthemcompletetheirrenunciationthroughlegalmeansifthatiswhatisthebestoptionforthem.It’snotnecessarilydifficulttogetridofyourAmericancitizenship,but itdoeswarranta lotofdeepthought,planning,andabitofmoneytopulloffproperly.Many Americans living abroad have never even filed their taxes, or else

haven’t filed inmany years. Some have been abroad so long that, aside fromtheirpassportsandtheoccasionaltripbackhometoseefamily,theyhavenorealtiestotheU.S.(notevenaSocialSecuritynumber).Intheirminds,they’velongago sworn off the idea of getting involved with U.S. taxes and would be

completelyfinanciallyunabletogetcaughtuponthemanyway.Someofthesepeoplehavebeenveryluckytocoastundertheradarthislong

without any consequences. It’s very important that they get tax compliant asquicklyaspossible,and that theyutilizeevery toolavailable tominimize theirexpensesatthistime.Thereareverylargeconsequencestocontinuingtoignorethis,yetsomanypeopledon’tpayanyattentiontoitatallbecauseitseemssooverwhelming to consider. Theymay even take personal offense to having topayanythingatall.Thiskindofpersonwillnevergetitalldoneontheirown,andtheyneedprofessionalguidancetominimizetheirtroubles.ThingsareonlygettingmorecomplicatedforAmericanslivingabroadastime

goeson.Startingin20152,anewlawwentintoeffectacrossthegloberequiringforeignbankstoidentifywhichoftheirclientsareAmericancitizensandreporttheir name, address, and account balance to the IRS back home (althoughlitigationsbetweentheDepartmentofJusticeandSwissbankscausedthetrendtostartinSwitzerlandasearlyas2012-oneofmyclients,aSwissresident,saw50% of his account balance frozen until he filedU.S. tax returns). It’s calledFATCA,anditstandsforForeignAccountTaxComplianceAct.Additionally,anyoneholding an equivalent balanceofmore than$10,000 in a foreignbankaccountmustfileanFBARreport.WhentheIRSreceivesthisdata,theywilltrytomatchthattothetaxpayeronrecordasreportedbytheforeignbanksdirectly.The penalty for willfully failing to file an FBAR could be up to 50% of theaccountbalanceperyear,givingseriouscautiontoanyoneinterestedinholdingevensomeoftheirmoneyoffshore(or$10,000peraccountifthefailuretofilewasnotwillful,andpossiblyzeroifthetaxpayerhadareasonablecause).SomeAmericanslivingabroadtodayknowabouttheForeignEarnedIncome

Exclusion(FEIE),whichallowsthemtoexcludeupto$101,300(asof2016)offoreign income from their taxable income.Nomads and expatriateswho don’tmakea tonofmoneywill typicallyuse this toavoidpaying taxesatall in theU.S.,butonlyiftheyknowhowtoclaimthingsontheirtaxreturncorrectly.OnecanclaimtheFEIEbybeinganactualresidentofaforeigncountry(a“bonafideresident”).There’s also a physical presence test for peoplewho spend at least330 days in any 12-month period outside theU.S. This is fine for thosewhohave truly relocated outside the states, but what about others who still returnfrequentlytovisitfriendsandfamily,orsplittheirtimeequallybetweenmultiplehomes?The information contained in these pages goes far beyond just filing tax

returns. I wanted to give a more meaningful outlook on many aspects of

internationallife,basedonmyownuniqueperspectivehavingimmigratedtoandultimately expatriating from the United States of America. I’ve lived theconventional stationary life, and I’ve hopped from place to place with greatrapidity. This includes things of a technical nature, like foreign banking andincorporation. As well, I’ve included advice I’ve gathered after a lifetime oflivingasamulticulturalexpatandcitizenoftheworldtooneextentoranother.It includes the little necessities I’ve learned to appreciate that make my lifeeasier andmore enjoyable, includingmailbox services in theU.S. (where youcanstillhaveyourmail sent locally,nomatterwhereyouare),VirtualPrivateNetworksthatallowyoutoaccesstheinternet inrestrictedcountries,andevenhowtokeepflightcostslowwhenyoutravel.IbelieveI’mabletoguideotherslikemeonmanyaspectsofexpatriatingor

livingamoresuccessfullifeabroadthanyoumightalreadybe.Youcandoallthis and never have to risk your freedom or finances by staying 100% taxcompliantasyougo.

WHATHAPPENSIFIDON’TFILE?Many Americans have always been non-compliant. They have spent their

wholeadultlivesoutsidetheU.S.Othersfigurethatsincetheywon’tbewithinU.S.borders, itwouldbe impossibleor impractical for thegovernment to takeanycollectionmeasures.Citizenship-basedtaxationdatesbacktothecivilwar,andinmanycasessuchassumptionswerecorrect.Atthetime,theIRShadlittleenforcementpoweroutsidetheU.S.ButasFATCAisnowareality,andallyourpersonal information is digitized, this assumption is becoming less and lessvalid. Furthermore, the greater a person’s income, assets, or foreign activities(suchashavingforeigncorporationsorforeignbankaccounts),themorelikelyaperson is to be noticed and the more they will have to lose. Both foreigncorporations and foreign bank accounts come with filing requirements andpotentiallyseverepenaltiesfornotmeetingthem.You’lllearnallabouttheseinthe coming chapters. Before you decide to take this route, it’s a good idea tofully understand the consequences youmight encounter if you fail to file forlongenoughtogetcaught.ThefirstthingtounderstandisthatanythingyouowetheU.S.thatyoudon’t

paywhilelivingoverseasissubjectto3.25%interest.Thoughimprisonmentisunlikely,youcouldfacegrowingfines.Nonpaymentoftaxescanhurtbothyourfinancesandtravelplans.How do expatriates become compliantwith theU.S. tax system? The 1040

isn’ttheonlyformyouneedtofile.Manyactivitiesthatseembenigncantriggerspecificfilingrequirements,andyoumayhavetofileotherformsaswell.TherulesarethesameforAmericanslivingintheU.S.,butAmericanslivingabroadaremuchmorelikelytohaveparticipatedinthese“foreign”activities.Theycanbringaboutheftyfines(upto$10,000)ifthey’renotturnedinontime.Dependingonyoursituation,youmayalsoneed toknowaboutForm5471,

Form3520,andForm8621.Form5471mustbefiledifyouownmorethan50%ofthestockofaforeigncorporation(or insomecases just10%).Constructiveownershiprulesapply.So,forreportingpurposes,youcouldbeconsideredtobeowningshareswhichareactuallyownedbyarelatedpartysuchasaspouseoracorporation you also own. Form 3520 is pertinent if you are the grantor or“substantialowner”ofaforeigntrust.Whiletheword“trust”bringsuptheideaofwealthyfamilies,theU.S.taxrulesseeproductssuchastheCanadianRESP(similar toaU.S.529plan)orforeignretirementplans(similar toa401(k))asforeign trusts. Form 8621 is for people who own stock in a Passive Foreign

InvestmentCompany(PFIC).Inmanycases,foreignmutualfundswouldalsobeclassifiedasPFIC.My advice to everyonewho does not already file is simple: you have a lot

moretolosebynotfilingthanbygettingcaughtupwithyourtaxes.Youmaynothavetofacetheconsequencesofittodayortomorrow,butthelongeryougowithoutpayingyourlegaldues,themorelikelyitisthatitwilleventuallycomebacktobiteyou(andtheworsethebitewillbewhenithappens).Mostpeopleowe a lot less than they think they do, and getting compliant can be amucheasierprocessthantheyassume.Inchapter2,I’llshowyouexactlyhowtogofromnon-compliancetobeing

totallycompliantintheeasiest(andcheapest)possibleways.WhilemanypeopletodayrelyontheIRS’standardinterviewprocesstofileyearly,Ihopetoshowyouthatitpaystogoovereverythingwithafine-toothcombandtakeadvantageof every policy at your disposalwhen you file. Tax preparation software likeTurboTax can certainly be useful for organizing your information, but oneshouldalwaysreviewtheactualformsbeforefiling.

INTRODUCTIONTOFORM1040Beforewegetstarted, Iwant to introduce to themost important taxformof

all.It’ssoimportant,infact,thatmycompany1040Abroadisnamedafterit.Form 1040 is your personal tax return. Your income, deductions and tax

owing or tax refund will be shown here. Depending on the source of yourincome and whether you incurred expenses, you will need to attach theappropriateschedules(whichareexplainedinthecomingchapters).

The form begins by asking for all your personal details and filing status.Entering the wrong SSN number or omitting it entirely disqualifies yourpersonalexemption,sopaycloseattentiontodetailhere.

Here, you must report all your income. The schedules are used to providegreaterdetailaboutthenumbersyouinputonForm1040’slines.Remember,allmonetaryfiguresmustbeconvertedintoU.S.dollars.SeemoreintheScheduleDdescriptionthatfollows.Online22,reportyourtotalincomefromallsources.

TheAdditionalGrossIncomesectionoftheformallowsyoutodeducteligibleexpensesyou incurredduring theyear.Subtracting thesedeductionsfromyourtotalincomegivesyoutheadjustedgrossincomethatyou’llbetaxedon.ThisistheendofthefirstpageoftheForm1040.

TheTaxandCreditssectionstartswithyouradjustedgrossincome.Itisquitesignificant,asmanylimitationsarebasedonthisnumber.Here,wewilladjustitevenmore.Therearepersonalexemptions, aswell as standarddeductionsanditemizeddeductions to further decrease your taxable income. If the amount ofyour incurred deductible expenses during the year is higher than the standarddeduction,usethisnumbertodecreaseyourtaxableincomeevenfurther.Ifyouusetheitemizeddeduction,seetheScheduleAinstructions.ThisisalsothepartwhereyoucanclaimtheForeignTaxCredittooffsetyourU.S.taxowingifyouhavepaidtaxestoaforeigncountry.

HerearereportedadditionaltaxesthatyoucannotoffsetwiththeForeignTaxCredit,suchasself-employmenttaxorNetInvestmentIncomeTax(NIIT).Wewillcovertheseingreaterdetailinthelaterchaptersofthisbook.Payparticularattention to Line 61: health care. If you live abroad and don’t pay SocialSecurity, you will have to file Form 8965, Health Coverage Exemption, andcheckthatyoulivedabroadduringtheyear.Thereisapenaltyfornothavingthehealthcoverageexemption.ThenextpartofForm1040isforpayments.Alotofpeoplearenotawareof

the Additional Child Tax Credit, which you claim in this section on line 67.MoreinformationonthiscanbefoundinChapter5:Credits.

Lastly,ifyoupaidtoomuchtax,oryouhavenotaxowingbutyouareeligibleforclaimingtheAdditionalChildTaxCreditandyoureceivearefund,inputthenumber onLine 76a of theRefund section.Calculate the tax owing, sign andsendtotheIRS.

HOWTHISBOOKISSTRUCTUREDIn preparing this book, I have chosen to structure the chapters around the

designofForm1040,sinceitiseffectivelyasummaryoftheentiretaxreturn.Chapter 1 is a simple introduction to the expatriate or perpetual traveler

lifestyle, including the most important things I’ve learned and observed for

makingthemostoutofthisinnovativewaytolive.Chapter2servesasanoverviewofthebasicsyouwillneedtounderstandto

movefromnon-compliancetofullcompliance,nomatterhowlongithasbeensince you last filed (if ever). It will introduce you to the breadth of differenttypesofcircumstancesyoumaybeabletotakeadvantageofwithyourfiling.Chapter 3 focuses on lines 7 through 21 of Form 1040, which pertain to

income items. The Foreign Earned IncomeExclusion is entered as a negativenumberonline21,andassuchitwillalsobecoveredhere.MovingontoChapter4,wewillgoovertaxdeductions.Thesearehandledon

lines 22 through 42 of Form 1040. The main topic will be the itemizeddeductionsfoundonScheduleA.InChapter 5, tax credits (lines 48 through 55)will be explained. Themain

credittobeconcernedwithistheForeignTaxCredit,buttheAdditionalChildTaxCreditcouldalsobeapplicabletoexpats.Chapter6islines57through63,relatingtoothertypesoftaxes.Iwilldiscuss

theSelf-EmploymentTaxandPFICtaxhere.TheAffordableCareActpenaltyfor failing tohavehealth insurance isalsobe reported in this section (but it israrelyapplicabletoexpats).Finally, in closing out Chapter 7 I will explain how and why you should

considerrenouncingyourU.S.citizenship,thusendingyourtaxobligationtotheIRS for good. I will also give you some guidance on what alternativecitizenshipstoconsider,whetherornotyoueveractuallyrenounce.Let’sbegin.

MOVING,LIVING&WORKINGABROAD

IfyouarestillintheplanningstagesofleavingtheUnitedStatestobeginyournewlifeabroad,thereareprobablyendlessquestionstointimidateandconfuseyou.Leftunaddressed, theycouldgreatlydelayorevenpermanentlyhaltyourdreams ofworldwide exploration.A lifestyle overseaswill change a lotmorethan just the way you file your taxes, so it’s important to understand thechallenges andopportunities thatmay await you.These are things I’ve had tolearnthehardwaythroughmyownexperienceasanomadandexpatriate–andwhich I’ve seen countless times in the lives of my clients, colleagues, andfriends.Theyarethefirstobstaclesyoumustlearntoworkwith,wellbeforeyoueverbeginfillingoutyourtaxreturn.

THEDYNAMICSOFRELOCATINGBecoming an American expat or perpetual traveler can be disorienting and

enlightening.You’ll experienceawide rangeof lifestyles ifyoukeepyourselfopen.Don’texpecttheprivilegeofbeingabletogoaboutmostofyourdayinanisolatedbubble.Yourpresencewillbringaboutlotsofinteractionandattentionin someplaces. In the thirdworld, themoreyou live likea local and skip theluxuryitemsyoumightfindathome,thefurtheryourdollarwillgo.Ontheotherhand,movingfromthedevelopingworldtosomewhererelatively

wealthycanbeveryrelaxingandliberating.Butyoumayalsofeellikethereisstronger pressure to conform to their far more established cultural identity.Everyone’scupofteaisdifferent,soifyou’venevertraveledyoumaynotknowwhereyouridealdestinationlies.Onsomelevel,weareallconsciousoftheculturalrealmsofthecountrieswe

choose to visit: formal, historical Europe... lively, humble LatinAmerica... orcrowded,collectivistAsia.Youmayfeelacalltooneoftheseplacestoproveordisprovewhat you feel.Nothingwill offer you the complete picture until youlivetheexperienceforyourself.Youmayalsobereadytodrinkinasmanyoftheseculturalbiomesasyoucan.Ifcoveringasmuchoftheglobeaspossibleisahighpriorityonyourbucketlist,thedestinationof“nowhereinparticular”isalways available to you. In the ageofGoogle, there are no carelesswhimsordark frontiers. A certain class of perpetual traveler is made possible by theremote working capabilities of the internet.With a little tech savvy andwisemoney management, you could become a digital nomad whose address isanywhereintheworldwithgoodWifi.Themostwidelysharedqualityamongculturaldifferencesisthattheycanbe

managed.Berealaboutyourconcerns.Laughaboutyourovercorrections,andtake credit for those strokes of quick thinking and luck that helped youradventuresturnoutmorememorable(whereveryougointheworld).

FAMILYDYNAMICSABROADIfyouarealreadyaseasonedtraveler,youmustkeepinmindthatjustbecause

you’readventurousandadaptableitdoesn’tnecessarilymeanthatyourchildrenor spouseare.Norwill theyautomaticallypick these traitsup fromyou.Theylikelyvaluetheirexistingstabilityandrelationships.Communicationandmutualrespect are essential. As you start having the desire to relocate, you shouldcommunicateitsothatyouareonthesamepagewitheveryoneinyourfamily.Evenifyoudon’thavekidsandneverwantto,youmayfindthatlifeonthe

road or under vastly different circumstances can be a great strain on yourrelationshipwith your spouse or partner. Youwon’t have the freedom to justpackupandgowhereveryouwantatamoment’snoticeunlessyourpartnerisincompleteagreement.Marrying a foreigner can bring opportunities in terms of being able to

immigrate to their country, and youwould be a global couple from the start.Depending on your background though, you will also have to navigatesometimessignificantculturaldifferences.If children are in the works, their citizenship will depend on both the

citizenship of their parents and their place of birth. In the United States andmuchof theAmericasandBritishheritagecountries,birthrightcitizenship(jussoli,“rightofsoil”)isineffect.Bycontrast,othercountriessuchasFrance,IrelandorItalyrelymoreheavily

onancestry (jussanguinis,“rightofblood”) toestablishcitizenship.Although,mostcountrieswillhavesomecombinationofthesetwo.To the extent that your children are U.S. citizens, you will receive an

AdditionalChildTaxCreditatarateof$1,000perchildperyear(solongasyouhaveatleast$3,000ofearnedincomeanddonottakeadvantageofcertainotheroptionsliketheForeignEarnedIncomeExclusion.IfyourchildrenarebornoutsidetheUnitedStates,theywillautomaticallybe

consideredU.S.citizensiftheyareeither:1. bornoftwocurrentU.S.citizens,or2. bornofonecurrentU.S.citizenwhohasspentat least fiveyears intheU.S.beforethechild’sbirth.

Inaddition,theU.S.constitutionmakeseverychildbornintheUnitedStatesaU.S.citizen.

WORKINGABROADYour biggest concern about relocating might not have anything to do with

overcoming cultural obstacles. You might be more focused on how you aresupposed to make a living in a new country with its own laws, language,marketplace demands, and requirements. Many people in the modern agecontinuetoworkforaU.S.companywhilegoingwherever theirheartdesires.Afterall,whynot?Mosteverythingdoneinanofficeenvironmentcanbedoneonline,fromconferencingface-to-facetosendingandsigningdocuments.Ifyoueverwanttodothisinacompanythatdoesn’talreadypracticethisarrangement,consideractivelydemonstrating toyouremployer thatworkingremotelywon’tbe any functionally different to the operation of the company (or that yourproductivitycouldactuallyincreasefromhome).Personally, I have found that convincing an employer inmost conventional

workplaces to let you work on your own schedule from halfway around theworld is toomuchofacultural shock for them tohandle. It isgenerallymorefavorable to create a living for yourself on your own terms. This also has anamplifying effect on the personal freedommost people are pursuing by goingabroadinthefirstplace.Alternatively,ifyoutakeyourskillsabroadtoaforeignmarketplace,youmaysuddenlyfindyourselfinhighdemandinthejobmarket.Working for a larger foreign company is the easiest tax situation for

Americanslivingabroad,andthemostlikelytocauseyoutoavoidbeingliableto pay both income tax and Social Security. Being fully liable to both in acountrywithahighertaxrateandwithaSocialSecurityTotalizationAgreementis anotherway to go about it.Youmay be surprised to find that some of thecommonplaceskillsandexperienceyouhavedevelopedinyourordinarycareerathomearehighlyvaluedincertainotherplaces.Youcouldfindyourself inamuch higher-salaried position with the same qualifications simply by goingwhereyouareingreaterdemand.Ifyourgoalistostartanewcompanyandregisteritabroad,youcansaveon

Social Security. You could simply create a foreign corporation with otherAmericansorbyyourself.However,havingmore than50%of thecorporationowned by U.S. shareholders will make it a Controlled Foreign Corporation(which, aswewill cover in the following chapters, is best avoided). As yourbusinessbecomesmorelocationindependent,youwilllikelyalsohaveagreaterpooloftalentavailableforhiring.Yourmoneycouldgofurther–butyoumighthave to spend more of it to overcome the shortcomings of the local

infrastructure. The new variables to deal with are nearly endless, but can bemasteredwith time. Just be aware that thewayyou are used to getting thingsdoneintheUnitedStatesmaynotbeappropriateinotherplaces.

MAINTAININGTIESBACKHOMEThe internet is crucial to nearly every location independent business. But

copyrightholders,localutilities,andgovernmentsallinfluencehowtheinternetperforms.Insomeplaces,likeChinaorIran,theinternetisheavilycensoredtothe great lament of foreigners. Virtual Private Networks, or VPNs, allowbrowserstobypassgeographicalinternetrestrictionsbymaskingyouraccessinanotherlocation.BewarnedthatVPNscanrangefromsecureandlegitimatetosketchy and spammy.Unfortunately, the countriesmost notorious for InternetcensorshiparetheonesthathavethetightestrestrictionsonVPNs.BesidestheregularVPN offers, roamingwith your cell phone and tethering it to create aWifinetworkisalsoasolutiontoborrowaremoteI.P.address.Google’sprojectFi is interesting in that respect. A Hong Kong phone company also offersroaminginChina,whilemaintainingaHongKongI.P.address.If you’re a perpetual traveler, youmay want to consider a mailing address

basedintheU.S.,forsimplicity’ssake.PaidservicesexistspecificallyforexpatswhichmindyourU.S.P.O.Box.Theyshowyouyourmail,andletyoudecidewhether they should forward it toyou, scan it,or toss it. Ifyou’readdicted toAmazon.comandcan’tfathomlivingwithouteasyaccesstoonlineretail,amailforwarding service like this can be invaluable. While scanning letters andreceivingapdfiseasyenough,forwardingpackages(orotherphysicalproductssuch as credit cards) can be trickier whenmoving too oftenmeans lacking astablemailingaddresstoactuallyreceiveit.HavingaU.S.basedmailingaddresscouldalsobepartofyourstatetaxation

strategy.Notonlywillyoube liablefor incometaxto thefederalgovernment,but thestatewhereyouwere lasta residentmightcontinue toseeyouassuchand expect you to pay state income tax.Thiswould continue unless and untilyouseveryourtieswiththatstate.Although,manydooffersomerelief,eitherprovidingsafeharbortobetreatedasanon-resident,allowingsomeForeignTaxCredit,orallowingtheForeignEarnedIncomeExclusion.Somedonotofferanyrelief at all (yes, Pennsylvania, I am looking at you). The states of Alaska,Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas,Washington, and Wyoming do not have an income tax (although NewHampshiredoeshaveataxondividendsandinterest).Commonstepstomoveyourresidencetoanotherstateincluderegisteringto

vote in thenewstate,gettingadriver’s license in thatstate,andmaintainingamailingaddressthere.

I have been using www.travellingmailbox.com in many locations, but toestablish an address in a no-income-tax state, you could also use any of thefollowing services.Youwill needanotarizedcopyofyour ID toopen suchamailbox(PSForm1583).

www.myrvmail.com(Florida)www.escapees.com(Texas,FloridaandSouthDakota)www.mydakotaaddress.com(SouthDakota)www.sbimailservice.com(Florida)www.earthclassmail.com(Texas,Florida,andWashington)www.scanmailboxes.com(Texas)

Additionally, if you need a non-US address, you can set up an address inCanada through www.canadianaddress.ca. Heavy usage can becomeprohibitively expensive ($3/letter), but it is a good backup address, with apersonalized service. UK Post Box (www.ukpostbox.com) offers a similarserviceintheUnitedKingdom.Keeping a U.S. bank account while abroad will give you access to more

ATMsandcreditservices.Bankingiseasilymanagedonlinenowadays,thoughyoumayfindyourdebitcardgettingtemporarilyblockedeverytimeyouenteranewcountrywithoutnotifyingyourbankfirst.Manynowofferserviceswherecustomerscandepositchecksbytakingpicturesofthem.MostU.S.bankswillservecustomerswithforeignmailingaddresses.Forday-to-daybanking,though,and for purchases to stores that won’t accept a foreign check, you’ll want toestablishanaccountwithareputablebankinyourhostcountry.Anotherlifestylefactortoconsider:yourfavoriteAmericanbrandsareallnow

suddenlyimports.Ifyou’reacreatureofcomforts,expecttopayalittlemoreinsomecases.MypreferenceforsomeproductsiswhatcausedmetocontinuetouseAmazon.com andU.S. eBay instead of their foreign site variations, but italsoledmetohavetoforwardpackagestoomanytimeswhichhadarrivedatadestination after I had already left. Youwill also need the appropriate poweradapters for the regions you visit, and to explore your cell phone’s SIM cardsituation ineverynewcountryyougo. IusuallybuyanewSIMcard ineverycountryIarrivein,beforeevenleavingtheairport,sothatIcangetonlineandmakecallsrightaway.

MITIGATINGTRAVELEXPENSESI have not found travel expenses to be that significant. Although there are

somenew thingsyoumustpay for, this is counteredby the fact that, unlike avacation, you do not have to maintain two houses. You can save on tax andenjoyacheapercostoflivingifyouadaptyourwayoflifetoalessexpensivecountry.Aplaneticketcanalsobeamortizedovertime.Youcanbuyaone-waytickettostayinalocationforafewmonths,notnecessarilyhoppingfromplacetoplaceeveryweek.Frequent flyer programs can also be a way to enjoy special perks. A U.S.

credithistoryandmailingaddresscanbehandy.Hereareafewresourcestohelpyoutomakethemostoftheseprograms:

www.awardwallet.com: I use it to keep track of my variousfrequentflyeraccounts.www.flightfox.com:Beforebuyingaplaneticket,Icheckwiththemto see if they can find it cheaper. If they cannot beat the quotedpricebymorethantheirfee,theywillrefundyou.www.buyairlinemiles.com:forbuyingmiles.www.flyertalk.com:wheretraveldealsshowupfirst(warning:lotsofcontent).www.travelhacking.org: a membership website created by ChrisGuillebeauwhichcuratesallthebestinfofromFlyertalk.www.hotwire.com: the best website for finding 3-star and abovehotels for less.The catch is that youknow thenameof thehotelonly after the non-refundable booking has been made. Feelingadventurous?www.priceline.com:whereasHotwiregivesyouaprice,Priceline’s“NameYourOwnPrice”featureletsyouchooseaprice,whichthehotelthenacceptsordeclines.www.prioritypass.comandwww.loungeclub.com:provideaccesstoairportlounges.IfyouhavegoodU.S.credithistory,youshouldbeabletofindacreditcardwhichprovidesthisforfree.www.nomadlist.com: various information (cost of living, internetspeed, climate, and more) about the world’s most popular long-

term travel destinations to help digital nomads decide “wherenext?”.

Forthosewhocanaffordit,ahotelcanbeacomfortablewaytocelebratethestartofyourstay.Hostelsaremuchmoreaffordableplaces,mostwithfreemaps,bread,andWifi.Butthesecommunallodgingscanbecramped,chaotic,andofquestionablesecurity.Whenyou’vegraduatedpastthedorm-likequalityofthehostelandarelookingforsomethingmorepermanent,seekoutanapartmentorhouse rental recommendation fromyour localcommunityof fellowexpatriatesonline. They can hopefully recommend foreigner friendly accommodationswithinyourpricerange.Thelessyouburdenyourselfwiththepossessions,theeasieryourtravelswill

be.Bemorediscerningwhenpackingyoursuitcasebyselectingdurable,easy-care, versatile clothing and other items. Pack light because almost everythingyouneedcanalsobepurchasedlocallywhenrequired.Forstayingproductiveon theground,airport loungesareconducive toquiet

work during long layovers. Any modern city will offer many cafes andrestaurantoptionswithfreeWifi.Forthosewhocanswingit,coworkingspacesare rapidly becoming more popular. They offer high-quality office space,community events, and networking opportunities at daily or monthlymembershiprates.

EMIGRATINGFROMTHEU.S.When you’ve become firm in your decision to leave theUnited States, it’s

timetostartgettingintothedetailsyou’regoingtoneedtoknowaboutlegallyentering another country. As a citizen of the United States, you are veryprivilegedtoownthe4thmostpowerfulpassport in theworld3. Itwillgetyouinto174nationsasatouristwithoutrequiringavisaaheadoftime.Still,Iwilloftengotheextrastepofgettingabettervisaandhavingfewerrestrictionsonmytravel.ForThailand,a6-monthvisaisavailableinyourcountryofresidence.ChinaandIndiaoffer10-yearvisastoU.S.citizens.Anextra$50willgetyoua90-dayvisainNepal.Ifyouplantostayalongtimeorworkinanothercountry,you’lllikelyneedtoapplyforanentrepreneur,employment,retirementvisa,oranotherformofpermanentresidency.Shouldeventualcitizenshipbeoneofyourgoals, permanent residency is also generally what opens the door tonaturalization.Expatriate organizations often compile lists of accessible housing in urban

neighborhoods thatare friendly to foreigners. It canbeagreatcomfort to findtheseenclaves,fromwhichyoucanbranchoutintobuyingahomeorstayandenjoy thechangingfaces.Asforyourhouseback in theU.S.,agoodpropertymanagementcompany,orevenAirbnb,cangiveyouasteadysideincome.Travelers with childrenmust consider their education. International schools

believe that their standards are superior to the educational standards of anyparticular country.Alternatively, some travelingparents of theveryyoung areforegoing schooling altogether, in linewith studies that propose a later schoolstarting age. Lately, there has even emerged a growing movement of “worldschoolers”–aformofhomeschoolingwheretheclassroomisallovertheworld.This is the idealsituationforparentswhowant tokeepmaximuminfluence intheirownoffspring’seducation,andtheworldofferssomeamazinganduniqueeducationalopportunitiesforpeopleateveryage.Ifyouarestillinschoolyourself,youcantrytoacquireastudentvisainyour

destination countryby enrolling in school.Transferrable creditsmeanyou canpick up and continue your educational journey where you see fit – providedyou’reafanofpaperwork.If possible, it is alwayswise tomake an in-person visit to the place you’re

planning to relocate to before any long-term stays. It’s the best way to get ahandleon the safetyof thearea, aswell as toavoidanydisappointmentswith

your living arrangements. You can use your vacation time away from yournormaljobtoscopeoutpartsoftheworldyou’veconsideredmovingto.Then,whenyou’vehadampletimetomakeallthenecessaryarrangements,makethejumpforgood.

FOREIGNBANKACCOUNTS&INCORPORATIONThelistofpotentiallydesirableoptionsforbankingandincorporationislong,

butthereareafewjurisdictionsthatstandoutonmyradarandIthinkshouldbeaddressedhere.Hong Kong is popularly cited as an ideal place to incorporate and bank.

Singapore also holds high regard as being great for banking. However,SingaporeisnowalmostentirelyofflimitstoU.S.citizensbecauseSingaporeanbanksdon’twantthehassleofFATCAreporting.Ifyouareverywealthy(ableto work with an opening deposit of $250,000 or more) or a legal resident ofSingapore,youmaybeabletofindbankswhowillmakeanexceptionforyou.HongKongislikewisenowmuchhardertobankinthanitusedtobe,butitis

stillpossibleforthosewithlocaloperations.However,operatinginHongKongwould also subject you toHongKong income tax (15%).HongKongdoesn’timposetaxonthosewithnoHongKongincome,butitisgettingmuchhardertoqualifyforthisexception.When it comes to ease of opening,Belize stands out. It is an easy place to

incorporateandbankwithnoincometax.However,itlackstheprestigeofotherpopularjurisdictions.Ifyouincorporatethere,preparetobankthereaswell.LikeBelize,Georgia(thecountry,notthestate)isajurisdictionwhichmakes

iteasy for foreigners todobusiness.Onecanopenabankaccountwith justapassport,andtheyarequitehappytoworkwithAmericansdespitetheFATCAregulations.Estoniaisnowofferingane-residencyprogram,whichissimplytheissuance

ofanidentitycardwhichallowsonetoopenandoperateanEstoniancorporationandbankaccountremotely.Estoniahasataxrateof20%,butitonlyappliestoearnings actually distributed (not to retained earnings staying within thecorporation).Finally,while it is tempting to shy away from first-world countries, British

Columbia(inCanada)offerspartnershipsandcorporationstonon-residents,bypaying out all the earnings in the form of wages to officers (i.e. you), youwouldn’t have any tax to pay (if serviceswere performedoutside ofCanada).However,thecorporationwouldstillhavetofileataxreturn,andwageswouldbesubjecttoreasonablecompensationrules(neitherofwhichwouldbeissuesinBelize).

GETTINGANDSTAYINGTAXCOMPLIANT

So…You’vedecidedtofileyourU.S.taxes.Congratulations,andwelcometothecluboftaxcompliantAmericansabroad.Readontofindoutexactlyhowtomake that happen while preserving as much of your wealth and sanity aspossible.April 15 (or April 18 in 2017, taking into account the weekend and

EmancipationDay4)iswidelyknownastheduedatefortaxes.ButthetruthisthatdateonlyappliesifyouarelivingwithintheU.S.whenithappens.Ifyou'relivinginaforeigncountryonApril15,youhaveuntilJune15,2017,tofile.Youdo not need to file for this extension; it is automatically afforded to anybodylivingoverseas.Ifyouneedevenmoretime,youcanapplyforanextensionthatwill give you until October 16, 2017, to file. No response from the IRS isneeded.Solongasyou'vesentoffForm4868bytheJuneorAprilduedate,yourlatetaxreturniscovered.Please note, however, that the extensions are an extension to file, not an

extension to pay. Interest on taxes owed starts accruing on April 15. If yoususpectthatyouwillowetax,youcanattachapaymenttoForm4868.Ifyouhavelivedoutsideofthecountrymostoftheyear,youcanhaveupto

$101,300ofyourincomeexcludedfromfederaltaxesundertheForeignEarnedIncomeExclusion(FEIE)(Form2555).Youcanalsoclaimacreditforanytaxesyou have paid to foreign governments through the Foreign Tax Credit (FTC)(Form 1116). This is very useful if you are a resident or worker in anothercountry.Generallyspeaking,ifyourforeigntaxrateisgreaterthanyourU.S.taxrate,theFTCwouldbeamoreadvantageoustactictouse.Otherwise,theFEIEisbetter.Inadditiontothesecredits,itisimportanttoestablishyourU.S.residenceina

statewhich does not impose state income tax.Many states have tax laws thatmirror the federal exclusions, allowing either the FEIE or FTC for state taxpurposes.Othershaveso-called"safeharbor"laws-thatis,youwouldbetaxedas anon-resident even thoughyou list yourmain residence in that state.They

apply to peoplewho have been out of the state for a specific number of daysthroughtheyear,soit'simportanttokeeptrackofwhereyouwere.For instance,NewYork has developed a reputation for its “548 days” rule.

Under this rule, if someone spends at least 450 days in a 548-day period in aforeign country and less than 90 days inNewYork, even though that personmight otherwise be a resident theywould be treated as a non-resident for taxpurposes.Mainehasasimilarrule.Ohio upholds the following safe harbor rule, which applies to anyone who

meetsallthefollowingconditions:(i)Theindividualspentlessthan183daysinOhioduringthetaxableyear,(ii)The individualhasat leastoneabodeoutside this stateduring theentire

taxableyear(thelawdoesnotdefine“abode”),(iii)TheindividualdidnotchangedomicilefromortoOhioduringthetaxable

year(referredtoasapart-yearresidentintheinstructionstoFormIT1040),(iv)ByMay 30 of the immediately succeeding calendar year the individual

files the affidavit of non-Ohio domicile Form ITDA - NM (affidavit fornonmilitary),and:(v)Theaffidavitdoesnotcontainanyfalsestatements.Ifyou'relookingtochangethestateofyourresidencefortaxpurposes,keep

in mind that some states do not collect income tax. To prove that you'veestablishedanewresidence,however,youwouldneedtore-registertovote,getadriver’s license in thenew state, andupdateyourmailing addresswithyourbanks and other organizations. Getting a driver’s license in the new statetypicallyrequiresavisittothatstate.Thereareafewmailboxservicesthatnotonlyprovideyouamailingaddress in thenewstate,butalsoguideyou in theprocess.VirtualmailboxeswhichcatertopeoplelivinginanRVhaveagreaterfocusonalsohelpingyouestablishresidencyinyournewstate.Expatswithchildrentakenote-ifyouhaveaU.S.citizenchild,youcangeta

refundabletaxcreditof$1,000peryearperchild.Thisiscalledthe“AdditionalChildTaxcredit”.Toqualify,youmusthaveat least$3,000ofearned incomeandnotusetheForeignEarnedIncomeExclusion.

PAPERWORKANDFORMSPaperwork… the bane of taxpayers everywhere. Of course, when I say

“paperwork”, I don’t just mean actual physical paper forms that must becompleted,signed,andmailed in(though thosearestillquiteoftenrequired inmany tax situations). The paperwork also includes electronic files, pdfs, andanything you turn into the IRS containing your tax information. Althoughsoftware exists to aid with electronic filing, many Americans abroad are noteligibleforelectronicfiling.The enormous amount of paperwork is already bad enough for Americans

who live and earn their income within the borders of the U.S. In fact, theintimidatingamountofpaperworkinvolved,muchofittotallyindecipherabletothe average American, is probably one of the most important unconsciousbarrierstopeoplegettingandstayingtaxcompliant.Afterall,asingleerroronjustoneofmanyformsyou’lllikelyneedtofilloutcouldleadtoserioustroublewiththeIRS.It’sabizarreandstressfulformofmentalterror–andthat’swhytaxprofessionalswillalwaysbegainfullyemployedbyAmericansociety.For example, if you look at the bottom of the instructions for Form 8621 -

PassiveForeignInvestmentIncome(PFIC),you’llseethattheestimatedburdenforallothertaxpayerswhofilethisformis49hours(justforthisoneform!).IfyouseePFIC,youmightthinkthatitissomethingthatonlywealthypeoplemustdealwith,butthereisnodeminimisruleinthecaseofsaleofsharesofaPFIC.Therefore,evenasaleofafewhundreddollarswouldrequirethatform.Failuretofilethisformmeansthatthestatuteoflimitationswon’tstart(i.e.theIRScanaudityouforever)andnowalsocomeswith thestandardpenalty for failure tofileforeignrelatedforms(i.e.$10,000).That’sright:49hoursjustforoneform.As an American living abroad, you’re going to have your own paperwork

specifictoyoursituationandyourgoals.Itcanbeanoverwhelmingheadacheifyoudon’thavesomeexpertguidancetohelpyousortoutthemessbeforeyou.In thischapter, I’llcover thebasicsofwhatyouneed toknowhere tomakealittlemethodoutof themadness the IRSbrings toyour lifeeachyearwith itsendlesspaperwork.Whenitcomestounderstandingtheseeminglylimitlessslewofdocuments,I

havefoundthatthemostimportantstrategyistobeorganized.Isuggestlookingat what information each form requires, and assembling the data before youbeginthefilingprocess.Inmyexperience, thebeststrategyis togatherall the

informationinoneplace,preferablyinadigitalformat.Ifyouareataxresidentofaforeigncountry,youwouldgatherinformationfromyourforeignemployersandprepareaforeigntaxreturn,whichwouldthenbeyourstartingpointforthepreparationofyourU.S.taxreturn.Ifyouareself-employed,yourstartingpointwouldbeyourbookkeepingsystem(suchasXeroorFreshbooks).Ifyouownaforeign corporation, it would be the financial statements for that corporation.When the correct numbers have been collected, going through the paperworkwillbemuchlessoverwhelming.It’s important tonotethatallmonetaryfiguresmustbegiveninU.S.dollars

(unlessotherwisespecified,suchasonForm5471),nomatterwhereyouareintheworld or inwhat currency you derive your income. For a lot of you, thismeansconverting the income, currency, andvalueof assets to theU.S.dollar.Taxpayers can either use the exchange rate at the time you “receive, pay, oraccrue the item”or the average exchange rate during the year.The average isgenerally used since it is much easier, and leads to a similar outcome. Theexchange rateofany reliablesourceusedconsistentlycanbeused.Forcapitalgains, youwould have to use the exchange rate on the dayof the transaction.That may sound intimidating, but that’s where I come in. I have spent manyyears of my life helping Americans abroad file taxes, and have yet to find asituationwithoutasolution.Remember, as an overseas resident, you get an automatic extension to June

15th,andcanfileforextensionsupuntilOctober15thifneeded.ThedeadlinetofileanFBAR(reportofnon-USbankaccounts)onformFinCEN114willmatchtheduedateofyourtaxreturnstartingin2017(itusedtobeJune30).TheIRScanclaimhalfyourbankaccount ifyouwillfully fail to file anFBAR, so it’scrucialtogettheseformsin.Becausehavingabankaccountinthejurisdictionwhereyounowliveorwork

issoconvenient, themajorityofoverseasresidentswillhave tofileanFBAR.Remember,havingmorethan$10,000(cumulativelyinallyouraccountsatanytimeduringtheyear)iswhatwillcauseyoutohavetofileanFBAR.Butcertainotherformscanapplytoyoursituationaswell.Generally,theIRSwillpaymoreattentiontoaccountswithlargebalances,situationswithmoreentitiesinvolved,orinstancesinwhichthefailuretofilewaswillful.Onthatlastpoint,intheageofFATCA,Istronglyrecommendagainsttryingtohideyourassets.Itsimplyisnotasustainablestrategy.Whew.Stillwithme?Itcanbealottotakein,butIpromisetotrytosimplify

things as much as possible for you in the following chapter as I cover the

distinctionsbetweenthevariousformsyouwillneedtoknowasyoupreparetofile.It’snotascomplicatedasitseemsatfirstglance.Thebestwaytoexplaintheprocessistoincludeareal-lifescenarioofhowI

helpedanexpatwhowantedtostaycompliantwhilelivingoverseas.Laura(notherrealname)cametomelastyearasanAmericanlivingabroadwhileteachingEnglish inMilan.Themoveabroadwasonly temporary, soherhome stateofOhiostillconsideredheralocalresident.Lauracametomeforthesamereasonmanypeopledo:whenitcametotaxes,shedidn’tknowwheretostart.Shehadearnedan incomeinboth theUnitedStatesandItaly,anddidnotknowwhichincomeshehadtoclaimtoeachcountry.Whilethe“taxseason”canbedauntingfor many Americans abroad, I always strive to make the process moremanageableforpeopleinthesekindsofsituations.Laura had to file for both state and federal taxes on the income she earned

fromwritingmagazine articles as a freelancewriter. Although Laurawas notphysically inOhiowhensheearned themoney,shewasstillanOhioresident.ShestillhadtoreportherfreelanceincometoOhio.Itisvitaltocheckthestatusofyourstateofresidence,aseachvarieswidely.Somestatesallowtaxpayerstouse the Foreign Earned Income Exclusion for state purposes. Others allow aForeignTaxCredit.Someothershavesomevariationonasafeharborrule,suchasNewYorkandthe548-dayrulewhichstatesthatifyouspendmorethan548daysinaforeigncountryyouwillbetaxedasanon-resident.Ohiohasaweakerversionofthesafeharborrule,whichinvolvesthefilingofanaffidavitandstillrequiresyoutoestablishtiesinanotherstate.

FTC&FEIESTATESThefollowingtableshouldgiveyousomeguidelinesastowhichstatesallow

Foreign Tax Credits or the Foreign Earned Income Exclusion. Please doublecheckwiththestate’swebsitetoseeexactlyhowitappliestoyoursituation(forinstance, Massachusetts only allows a Foreign Tax Credit for taxes paid toCanada).

FORM3520

Form3520 is theAnnualReturn toReportTransactionswithForeignTrustsand Receipt of Certain Foreign Gifts. You must file this form if you are thegrantoror“substantialowner”ofaforeigntrust.Ifyoureceivedover$100,000fromaforeignindividualorover$15,601fromaforeigncorporation,youwouldalso have to file this form. A common example of a foreign trust is theRegistered Education Savings Plan. The RESP was established by parentswanting to send their children to university inCanada.Any payouts a studentreceives must be claimed on Form 3520. Pension plans similar to a 401(k)(“definedcontributionplan”)mightbetreatedthesameway.Taxtreatiesmightexemptonefromthisrequirement,aswouldbethecasewithCanadianRRSPs.

FORM5471Form5471appliestoyouifeither:

Youhaveboughtorsoldsharesofaforeigncorporation(duringthetax year in question), causing you to own at least 10% of thecorporation,orifyouownatleast10%ofaControlledForeignCorporation(CFC),thenyoumustfileForm5471foreveryyearthatcontinuestobetrue.ACFCisaforeigncorporationinwhich“U.S.shareholders”ownatleast50%ofthecorporation.AU.S.shareholderisdefinedasaU.S.personwhoownsatleast10%ofaforeigncorporation.

PFICs&FORM8621Form 8621 deals with Passive Foreign Investment Companies, or PFICs.

Thesecouldincludeforeignmutualfundsandotherinvestmentvehicles.Unlikethe other forms covered here, it has no minimum threshold. The PFIC taxregimes and the excess distribution regime are punitive tax rules. InvestingoutsidetheU.S.istoobigasubjecttocoverhere,butit’sonemanypeoplearegrowingmoreandmoreconcernedwitheverypassingtaxyear.IfyouneedhelpfiguringoutthebestwaytoinvestoutsidetheU.S.,mysuggestionwouldbetoreadthearticlesonwww.1040abroad.comorcontactmedirectlythroughthere.

FBAR&FORM8938AmericansneedtofileformFinCEN114(theFBARform)iftheyhavemore

than$10,000 in foreignbankaccountsat anypoint in theyear ($10,000beingthesumoftheaggregatebalanceoftheirbankaccounts).TheyalsoneedtofileForm8938ifthevalueoftheiroffshoreassetsis$200,000ormoreonthefinalday of the tax year, or $300,000 anytime throughout the year (though thisamount ishigher formarriedcoupleswhofile jointly– lower filing thresholdsapply to thosewho residewithin theUnited States).Assets reported on Form8938 include bank accounts and interests in foreign entities (such as trusts,partnerships,orcorporations).TheFBARisfarmorecommonduetoitsmuchlowerthreshold.ItisaformIhelpmyclientsfillouteveryyear.Lastyear,amannamedWillreachedouttomeforhelpwithhistaxes.Hewas

livinginCanadawithhiswife,whowasanon-residentaliennotinvolvedintheU.S. tax system. After incorrectly filing the previous years, he asked me forassistance.He had an email from an accountant erroneously claiming that theFBARnolongerexistedandhadbeenreplacedbyForm8938.Thisbadadvicefromaprofessionalendedupbeingvitaltohisabilitytoavoidpayingapenaltysince he now had “reasonable cause”. He now needed to fill out an FBARbecausehehadbankaccountsinCanadawithanaggregatebalanceofmorethan$10,000.Theformitselfcanbefilledoutonlineandisfairlysimpletocomplete.ThemostpressinginformationwiththeFBARinvolvesknowingexactlywhattoincludeasanasset.WhatyouarerequiredtoclaimontheFBAR:

Foreign accounts where you have financial interest or authority ofsignature.FinancialaccountsinaforeignbranchofaU.S.financialinstitution.Foreignmutualfunds.Foreign-issuedlifeinsuranceorannuitycontract.

WhatyouarenotrequiredtoclaimontheFBAR:Domesticmutualfundsthatinvestinforeignstocks.Personalpropertyhelddirectly.RegulatedfinancialaccountssuchasTFSAandRESPinCanadaorLivretAinFrance.

Again,thisprocessismadeeasierifyou(forgivethepun)takeintoaccountallyourinvestmentsandbelongings. 

OTHERIMPORTANTFORMSScheduleAistheformyou’llusetodeductyouritemizedexpenses,suchas

mortgage interest, property taxes, medical expenses, and charitablecontributions. Note that only charitable contributions to U.S. and Canadiancharities are deductible. Using this form is beneficial when your itemizeddeduction amount ismore than the standard deduction, which is $6,300 for asinglepersonor$12,600foramarriedcouplefilingjointlyin2015and2016.ScheduleBisusedtoreporttaxableinterestanddividends.Youmustfillout

Part III of the form if at any point during the tax year you’ve had a foreignfinancialaccount(e.g.abankaccount,securitiesaccount,orbrokerageaccount).ScheduleC is used to report the income (anddeductible expenses) for your

self-employmentactivityduringthetaxyear.Schedule D is where you report the capital gains and losses on your

investmentssuchasstocksales.Schedule SE computes your self-employment tax, which comes into play

whenyoucannotclaimthebenefitsofaSocialSecurityTotalizationAgreement.Form8938istheStatementofSpecifiedForeignAssets.Filingthisformdoes

notreplaceyourobligationtofileanFBAR.Youneedtocheckwhetheryourforeign financial assets are subject to these reporting requirements and if theyexceed certain financial thresholds. The threshold can vary. For an unmarriedtaxpayer residing outside the United States, the total value of assets is set at$200,000ormoreonthelastdayofthetaxyear,ormorethan$300,000duringthe year. For married taxpayers residing outside the United States and filingjointly,thethresholdis$400,000onthelastdayoftheyearor$600,000atanytimeduringtheyear.Form 8854 is known as the Initial andAnnual Expatriation Statement. It is

usedbypeoplewhohaverenouncedtheirU.S.citizenshiporendedtheir long-termresidentstatustoconfirmthattheyarecompliantwiththeU.S.taxsystem.The United States is the most expensive country in the world to renouncecitizenshipfrom.Youmightalsobesubjecttoanexittax.TheIRSrequiresfiveyears of tax returns to avoid covered expatriate status, and you would attachForm8854 toyour final return.Thiswillbecoveredmore inChapter7:HowandWhytoSurrenderU.S.CitizenshipNow,continuetoChapter3,wherewewilldiscussincome.

INCOME

Incomeseemssimpletounderstandatfirstglance,butfromthepointofviewoftheU.S.government,itcangetfairlycomplicated.ThisappliesdoublysotoAmericans earning their income fromoverseas.This chapterwill focuson themain types of income encountered by U.S. citizens living outside the UnitedStates.Beforeseeingincometypesindetail(whicheachhavetheirownforms),Ifirstwanttodiscussafewthingsmoregenerally.Wagesfoundonline7ofForm1040wouldincludealltypesofwages.They

would be reported here regardless of whether Form W-2 was issued or not,whether these wages were U.S. sourced or foreign sourced, and whether theForeign Earned Income Exclusion or the Foreign Tax Credit were used. I’veseentoomanyinstancesoftaxpayerspreparingtheirowntaxreturnsandmakingthe same simple mistakes over and over. Most frequently, they report theirwages on line 21 alongside the Foreign Earned Income Exclusion. Or worse,theysimplyreportedtheForeignEarnedIncomeExclusionanddidn’treportthewages(resultinginanegativetotalincome).Rental income, as well as income from partnerships, would be reported on

ScheduleEandflowtoline17ofForm1040.Then, as IRC section 61 states, all income is taxable, unless otherwise

specificallyexempt.Thismeansthatanyotherincomewouldenduponline21of Form 1040, I frequently see government grants and subsidies provided byforeigngovernmentsmistakenlyenduphere.Ofcourse,line21isalsowhereyouwouldreporttheForeignEarnedIncome

Exclusion, Subpart F Income, as well as income from PFICs (excessdistribution) allocable to the current year. Don’t worry.We’ll go over this ingreaterdetaillaterinthebook.

SCHEDULEBUse ScheduleB to report your interest and dividend income during the tax

year.Generally,youdon’tneedtofiletheformunlessyourdividendandinterestincome exceeds $1,500 and you have no foreign financial assets.However, ifyou live abroad and you have a bank account in a foreign country, youmustcompletePartIIIofScheduleB.Bearinmindthatevenifyourearnedinterestanddividendsaresmallerthan$1,500,youstillmustreportthisincomeonyourpersonaltaxreturn.ButyoumightnothavetocompleteScheduleB.Ifyouneed to fileScheduleB, enter thenameof thepayer and theamount

paid to you on the appropriate lines. If you require more space, attach astatementtothereturninthesameformatasScheduleBlistingthedetailsoftheotherpayersandenterthetotalonScheduleB.InterestIncomeInmostcases, the interestyouearnonyourbanksavingsaccount,corporate

bonds,or similar is subject to federal tax in theUnitedStates.Therearesomeexceptionsregardingthistypeofincome,sotheinterestyouearnonSeriesIorEEsavingsbonds(issuedafter1989)canbeexcludedfromyourtaxreturn.

IftheinterestwaspaidbyaU.S.financialinstitution,yourtaxableinterestcanbefoundonForm1099-INTgivenbytheinstitutionthatyoureceivetheinterestfrom. Form 1099-INT contains all the information you need to determinewhetheryouneedtofiletheScheduleBornotandwhatamountstoreport.Else,youwouldfinditintheforeignequivalent(T3orT5inCanada)ordirectlyfromyourfinancialinstitution.

DividendIncomeTherearetwotypesofdividends:ordinarydividendsandqualifieddividends.

Ordinarydividends are taxedat ordinary rateswhereasqualifieddividends aretaxedat long-termcapitalgain rates (0/15/20%). If thesearepaidbya foreignpayor, inmanycases, theywouldstillbequalifieddividendsbyusinga treatymaking the payor a “Qualified foreign corporation”. You would provide thenameofthedividendpayeronScheduleBandenterthedividends-ifqualified,theamountwouldalsobereportedonForm1040,line9b.

IfthepayorisaU.S.company,youwouldreceivetheForm1099-DIVattheend of the tax year with all the necessary information required to completeScheduleB.Ifforeign,theforeignequivalentandthetreatytoseeifitqualifiesasaqualifieddividend.ForeignAccountsandTrustsThissectionmustbefilledifyouhaveaforeignbankaccountortrust.PartIII

ofScheduleBmustalsobecompletedifyouhaveenoughincomefrominterestanddividendsrequiringyoutofileScheduleB.

Ifyouholdforeigntrusts,youmightalsohavetofileanadditionalForm3520andForm3520A

SCHEDULECSchedule C is used to report income or loss from a business you operated

during the taxyearasa soleproprietororU.S. single-member limited liabilitycompany(LLC)taxedasadisregardedentity.Thetaxpayerreportsthebusinessincomeonhispersonal taxreturn.Ifyourunabusinesswithyourspouse,youmight still be able to report half of it on ScheduleC under the “joint ventureexception”,otherwiseapartnership(oranLLCwithmultiplemembers)wouldbetaxedasapartnership.Inthiscase,thepartnershipwouldreportitsincomeonForm 1065, and issue forms K-1 to its partners, who would then report theincomeontheirindividualincometaxreturns.Jointventureexception:If twospousesoperateabusiness together, theycan

each directly report half of the income and expenses on Schedule C of theirindividual returns (treating it asa soleproprietorship insteadofapartnership).NotethatthejointventureexceptionisnotavailableifthebusinessisanLLC(itisonlyavailabletounincorporatedbusinesses).Small businesses with expenses amounting to $5,000 or less might file

ScheduleC-EZinstead.You’llfindmoreinformationaboutScheduleC-EZlaterinthischapter.ThefirstpartofScheduleCisforgeneralinformationaboutyourbusiness.

You’llneedtoprovidetheprincipalbusinessorprofession,nameandaddressofyourbusinessifit’sdifferentfromyourname,employerIDnumber(EIN),oryour SSN, aswell as state the accountingmethod you’re using to report yourbusinesstransactions.Thecashmethodisusedwhenyoureportyourtransactionswhenevercashis

receivedorpaid,whiletheaccrualmethodisbasedonreportingthevalueofthebusiness transaction as it occurs (regardless ofwhether the payment has beenmadeorreceived).

Hereyouwillreportthegrossbusinessincomeduringthetaxyear.Yoursalesreturns of your damaged or unwanted products and allowances should bereportedasapositivenumberonline2.

The second part of Schedule C is for expenses that your business incurredduringtheyear.Youwillneedtocalculatethecostofgoodssoldandevaluateyour ending inventory to calculateyourgrossprofit. In thispart, youcanalsodeduct other business expenses such as advertising, wages, salaries, payrollexpenses, theemployer’s taxespaidandvehicleexpenses (providingyouhaveadditionalinformationtosupportyourdeduction).ScheduleCallowsyoutoalsodeductother expenses suchasyour cell phone,website expenses,partofyourhome if you’re using it regularly and exclusively as a home office and othermiscellaneousexpenses.

Inthelastpart,youneedtoaddupallyourexpensesonLine28andsubtractthisnumberfromyourgrossincome(Line7)togetyourNetProfitorLoss.Youmustreportthisnumberonyourincometaxreturn,Form1040,Line12.Ifyouhavemorethanonebusiness,youwillhavefileaScheduleCforeach

ofyourbusinessesandthenadduptheincomefromthemtoreportonLine12ofForm1040.RefertoChapter6formoreinformationontheSelf-Employmenttax(Social

Security’sversionforself-employedpeople).ThistaxmaywellbeapplicabletoyouifyoufiledScheduleC.

SCHEDULEDScheduleD isused to reportgainor losson the saleor exchangeof capital

assets such as stocks, cars, houses, bonds, etc. Let’s review some basicterminologytofullyunderstandhowwearecalculatingcapitalgains.Thebasisistheamountyoupaidtoacquireaparticularasset(cost).Adjusted

basisincludesthemoneyyouspentontheassetduringtheholdingperiod.Youneedtoknowthebasistofigureoutthecapitalgainorloss.Proceedsarethepriceoftheassetssold(theamountreceivedfromthesale).When the holding period for assets is one year or less, they are short-term

capital gains. The first part of the ScheduleD focuses entirely on these. Youmustreportthepriceoftheassetsacquired,ifithappenedoutsidetheU.S.inaforeigncurrencyusetheexchangeratefromthedateofacquisition.Report thedateoftheacquisition,thesalesprice(convertedintoU.S.dollarsonthedaytheassetissold),andcalculatethegainorloss.

Whentheholdingperiodforassetsismorethanoneyear,theyareconsideredlong-termcapitalgains.There’salowertaxrateforlong-termcapitalgains.

ScheduleDisusedtoreportcapitalgainsorlosses.Inmanycases,youmayhavetouseForm8949beforecompletingScheduleD5.Thegainsyoureportaresubject to theincometax.Thetaxratedifferswhether theassetwasheldforashortorlongtimeperiod.Lossesonassetsheldforpersonaluseareusuallynotdeductible.However,ingeneral,youcandeductcapitallossesuptheamountofyour capital gains plus $1,500 ($3,000 formarried couples filing jointly) andcapitallossesabovethatlimitcanbecarriedovertofutureyears.Do you still rememberwhat a Controlled ForeignCorporation is? It is any

corporationinwhichmorethan50%ofthevalueorthevotingpowerbelongstoU.S.shareholders.AU.S.shareholderisaU.S.personwhoowns10%ormoreofthevotingpowerorvalueofthecompany.Until 1962,U.S. investors could investmoney in a foreign corporation and

defer the income tax until the income was distributed as dividends, or evenbetter,whenthecorporationwassold(andtakeadvantageofthelowertaxratefor long-term capital gains). Such practices were seen as particularly abusivewhen the foreign corporation wasn’t a genuine business. Many corporationswere just used as investment holding companies. U.S. taxpayers created thecorporationsinlow-orno-taxjurisdictionsandtransferredinvestmentstothem,guaranteeing that the incomewouldbe taxedata lowrateornotatalluntil itwasrepatriatedtoitsU.S.shareholders.In other instances, a genuine business might exist, but the profit might be

distortedbytransferpricingorothermeans.ImagineaU.S.companyproducingtoysforpets.Theycreateasubsidiaryina

common low-tax haven, such as Panama. The subsidiary company won’t besubject to income tax in Panama (under Panamanian territorial taxation). TheU.S.parentcompanysells thetoysat thecostofmanufacturing, thusreportingnoprofitforthetaxyear.NoprofitmeansnotaxowingtotheU.S.government.

The subsidiary in Panama exports the toys to Europe and receives tax-freeincomeinreturn.Theretainedearningsstaywithinthesubsidiarywithoutbeingtaxed(oraretaxedatalowerrate).As all U.S. persons are taxed on all their worldwide income, the U.S.

government obviously does not like this tax loophole. The taxes on thePanamaniancorporation’searningswentdirectlytothegovernmentofPanama.TheU.S. cannot impose taxes on a foreign corporationwithout income beingsourcedfromorotherwiseengaginginU.S.basedactivities.In response to this issue,congressenactedSubpartFprovisions toeliminate

the deferral of tax on some categories of foreign income. These new rulesrequired U.S. shareholders to report and be taxed on controlled foreigncorporations, even if the CFC did not distribute any profits (I.R.C. § 951(a)).EveryU.S.personholdingat least10%votingpowerof thevalueof theCFCmust include the pro rata share of retained profits and earnings (known asSubpartFIncome).SubpartFIncomeincreasestheshareholder'sbasis.Anydistributionsdecrease

thebasis.

SCHEDULEEScheduleEisusedtoreportrentalincomeonahomeorbuilding,orreceive

royaltiesorincomefromapartnership,Scorporation,trustorestate.Youmustreportallincomeandexpensesincurredduringthetaxyearandattachittoyourpersonaltaxreturn.Bear inmindthat individuals,estatesandtrustsmightalsocauseyoutopay

theNet Investment IncomeTax (NIIT),which is3.8%of the lesserof thenetinvestment incomeor the excessofmodified adjusted income.Net investmentincludes rental and royalty income, as well as partnership or S corporationincome.Todetermineyournetinvestmenttax,useForm8960.ScheduleE ismost commonly used to report rental properties income.You

mightbesubjecttoself-employmenttaxifyoumanagerentalpropertiesasyourmainbusinessactivities.Inthiscase,youwillhavetofileScheduleCinsteadofScheduleE.Let’slookathowtocompleteScheduleE.Thefirstpartisconcernedwiththedetailsoftherentalproperty,itsaddress,

the amount of days it has been rented out, the type of property it is and theamountof incomecollected.Youshouldalsoreporthere the incomefromanyroyaltiesyouhavereceived.Expenses are reported on lines 5 through 21 for each property in the

appropriate column. You can deduct taxes, interest, repair, insurance,management fees, depreciation, etc. In general, all ordinary and necessaryexpenses are deductible. However, you cannot deduct the value of your ownlabororinvestmentsintheproperty(thelaterwillbedepreciatedoveraperiodoftime).

PARTNERSHIPS&SCORPORATIONSPartnersofpartnershipsandshareholdersofScorporationsreporttheirearned

incomeonScheduleE,Part II. If you are a partner in aU.S. partnership, youshould receive a Form K-1 that reports your share of the income, losses anddeductions.IfyouhaveanScorporation,theScorporationmustgiveyouaK-1.Transfer these figures to your Schedule E and report it on your personal taxreturnasotherincomeonLine21.Schedule E also allows you to deduct losses incurred in your particular

businessactivity.However,theIRSlimitsthedeductiblelosstotheamountthatis “at-risk”. The amount of losses incurred above the “at-risk” amount is notdeductible.PartIIIofScheduleEisusedtoreporttheincomeorlossfromafiduciary,so

ifyouareabeneficiaryofanestateortrust,youmustfileScheduleEregardlesswhetheryoureceived incomeornot.All the informationyoureport inPart IIIcanbefoundonFormK-1providedbythefiduciary.

FORM5471ThisformisdesignedforU.S.personswhoownsharesofcontrolledforeign

corporations,aswellasforU.S.personswhoacquiresharesandthenownmorethan10%oftheoutstandingshares(andinsomecasesofficersanddirectorsofsuchcorporations).Itisaninformationalformthatyoumustfileevenifthere’snotaxableincometoreport.Itcouldalsobeusedtoreportsomeincomeonthetaxpayer’sreturn(SubpartFIncome,whichwewilldiscusssoon).Once U.S. shareholders own more than 50% of a foreign corporation, the

company is a Controlled Foreign Corporation (CFC). The Internal RevenueCodedefinesaU.S.shareholderasaU.S.personwhoholds10%ormoreoftheforeigncorporation’svotingpowerorvalue.Failingtofilethisformmeansthepotentialforheftypenalties,andthepenaltiescanbeassessedforeachformfiledlate,incomplete,orinaccurate.What’smore,ifyoufailtofileForm5471,you’lllose the statute of limitations and your tax returnswill remain open for auditindefinitely, insteadof just threeorsixyears.Thepenaltystartsat$10,000forfailure to fileForm5471on time. If the IRS sends you a notice, a penalty of$10,000isimposedforeach30-dayperiodthatyoufailtofilethisformandanadditionalmaximumpenaltyof$50,000.Bearinmindthatevenifyouonlyhave10percentofthevalueoftheCFC,you’restilllegallyobligatedtofilethisform.Form5471requiresdifferentschedulesdependingonyoursituation-themost

comprehensivebeinginthecaseofsomeoneowningmorethan50%ofaforeigncorporation.While preparing Form 5471, you might encounter the term “Subpart F

Income”, which must be reported on your personal tax return. The rulesgoverningSubpartFIncomearerathercomplex.Iwantyoutoknowthatitwasdesigned to prevent tax avoidance on easily portable income associated withCFCs.In thepast,U.S. investorscouldtransferassets toaforeigncorporation.Without Subpart F rules, this incomewouldn’t be taxed until either dividendswerepaidtothetaxpayerorthesharesoftheforeigncorporationweresold(andthen qualifying for long-term capital gain rates). Therefore, Congress passedSubpart F tax rules and implemented Form 5471 to reflect it and prevent taxevasion. Even though you might not be receiving any distribution from yourforeigncorporation,youarestillsubjecttoU.S.taxonyourshareoftheSubpartFIncome.Thereisalotofconfusionrelatedtotheclassificationofthecategoryoffilers,

treatment of a foreign company, and ownership in international law.Determining whether the taxpayer is required to file the form and whichcategoryheorshefallsintoisthefirstobstacle,sincenotonlytheownersofacontrolled foreign corporation are required to file the form. In some cases, anindirect owner (based on constructive ownership among family members orthrough the entities controlledby the taxpayer that have an interest in aCFC)mightbeobligatedtofiletheformaswell.Forcategory2,manybelievethattheregulations do not complywith the Internal RevenueCode. I’ll spare you thedetails,butitisacomplextopicindeed.IfyouhaveaninterestinaCFC,itwouldbehighlypertinentforyoutogetin

touchwithaCPAspecializingininternationaltaxationforAmericans.

UNDERSTANDINGSUBPARTFINCOMEUntil 1962, one could create a foreign corporation and defer taxation on its

income(especiallypassiveincome)untilthecorporationwassold.Furthermore,itwould convert regular income into long-termcapital gains (taxed at a lowertax rate).Congress passed provisions to prevent this deferral. The part of thiscode that does the excluding is called Subpart F. The basic premise is thatincomeearnedbythecorporationistaxedtotheshareholderevenifitwasnotdistributed.Enacted in 1962, Subpart F tightly regulates income earned by Controlled

ForeignCorporations.ThetwobroadcategoriesofincomeclassifiedasSubpartFIncomeincludeincomeearnedoutsidethecompany’scountryofincorporation[“Foreign base company income (FBCI)”] and passive income [“Foreignpersonalholdingcompanyincome(FPHC)”]Whether the income is from rents, royalties, interest, dividends, sales or

services,youwillendupowingunderSubpartF.Totheextentthatthesegainswere not distributed, they would have to be listed as part of your individualreturn.Thereareafewexceptionstothisrule.Forinstance,ifyoupaidtaxestoaforeign country equal to 90% of what you would pay in the U.S., it is notconsidered Subpart F Income (since the top tax rate is 39.8%, that means aforeign tax rate of 35.82% or greater). Also, regular operating income earnedwithin the country of incorporation is not considered Subpart F Income, butimportantly, the work you performed for the corporation (“Personal ServicesIncome”)is.TheForeignTaxCreditappliestoanytaxestheCFCmayhavepaidtoitshost

country– the taxpayercanclaimhis/her shareofFTCas ifhe/shehadpaid ithimself/herself.Anotherthingtowatchoutforisthefactthatthesaleofrealestateistaxable

underU.S. tax rules. Inmany countries, these salesmaybe tax-free.As such,you wouldn’t be able to offset it with a Foreign Tax Credit. There are somenotable exceptions available on theU.S. side, but it should ideally be brokendown on a case-by-case basis. If you’re not sure if there are any exceptionswhich apply specifically to you, contactme throughmywebsite andwe’ll gooveryoursituationtogethersonothingismissed.Digital nomads can avoid having to pay into Social Security by being the

employeeoftheirownforeigncorporation.Thewagewouldequalwhatwould

otherwisebenetincome,andassuch,therewouldn’tbeanyincometobetreatedas Subpart F Income. It would otherwise be Subpart F Income – “PersonalServicesIncome”tobespecific.

WHATQUALIFIESASSUBPARTFINCOME?Subpart F Income is a set of new categories of income that taxpayersmust

include on their personal tax return. It is incomegenerated by the corporationwhich would have to be included in the personal tax return of the U.S.shareholder.Thesearethecategoriesaremostsubjecttoabusethroughdeferralof income toControlledForeignCorporations.Code section951 requires that,under certain conditions, profits of a CFC must be treated as dividends andreportedonU.S.shareholder'spersonaltaxreturns.CategoriesthatqualifyasSubpartFIncomeinclude:

1. InsuranceIncome.Insuranceincomegeneratedoutsidethecountryofincorporation.

2. ForeignBaseCompanyIncomeForeignPersonalHoldingCompanyIncome(IRC954(c)).

This is income derived mainly from investment income, such as dividends,capital gains, property transactions, foreign currency gains, commoditytransactions, and personal service contracts6. Personal service contracts areapplicablewhentheserviceisprovidedpersonallybyaU.S.shareholderowningatleast25%ofthecorporation.

ForeignBaseCompanyIncome(IRC954(d)).This rule oversees transactions outside the country of incorporation betweenrelated persons7. The income derived from these transactions is regarded asSubpartFIncome.

ForeignBaseCompanySalesIncome(IRC954(d)).Thisprovisionapplies torelatedpersonsbuyingorsellingpropertyoutside thecountryofincorporation.●Foreign Base Company Service Income (IRC 954(e)). Only certain

personal services such as technical, managerial, engineering, commercial,skilled,etc.areconsideredSubpartFIncome.Theservicemustbeperformedbyor on behalf of a related person and performed outside the country ofincorporation.

ForeignBaseCompanyOilRelatedIncomeThis applies to the sale of oil that comes from outside the country of

incorporation.ForeignPersonalHoldingCompanyIncome

Foreign Personal Holding Company Income (FPHCI) generally consists ofincome such as dividends, interest, royalties, rents, annuities, gains ondispositionsofpropertygeneratingothertypeofforeignincome,netgainsfromcertaincommoditiestransactions,netforeigncurrencygains,incomeequivalentto interest, income from notional principal contracts, payments in lieu ofdividends,andincomefromcertainpersonalservicecontractsunlessthereisanexception.SubpartFIncomeisreportedonthetaxreturnsofU.S.shareholders,whether

theyownthesharesdirectlyorindirectlythroughownershipofanotherforeignentity.

DORMANTCORPORATIONSWhilethepreparationofForm5471issomethingIwouldrecommendbeing

lefttotaxprofessionals,ifyouhaveadormantcorporationyoumightbeabletodoityourself.Tobeclassifiedasadormantcorporation,acompanymustmeetallthefollowingcriteria:

The corporation does not own any stock or do any businesswith anon-dormantcorporation.Nosharesoftheforeigncorporationweresold,exchanged,redeemed,orotherwisetransferred.No assets of the foreign corporation were sold, exchanged, ortransferredabovetheminimaltransferthreshold(next2points).Thecorporationhasaccrued$5,000orlessofgrossincome.Thecorporationhasaccrued$5,000orlessofexpenses.Thecorporation’sassetscannotbemorethan$100,000.Adormantcorporationisalsonotallowedtomakeanydistributions.The corporation has only de minimis changes in accumulatedearningsandprofitsornone.

Fortunately,youonlyneedtocompletethefirstpageofForm5471whichispretty straightforward. You need to provide name and address, tax year,identifying number, the country under whose laws incorporated, date ofincorporation, principal place of business, principal business activity, currencyused,filer’scategory,andthepercentageof thecorporation’svotingstockyouownedduring the tax year. For each dormant corporation you have, youmustfileaseparateForm5471.Don’tforgettolabelthesummary“FiledPursuanttoRev.Proc.92-70forDormantForeignCorporation.”However, if you have a foreign owned corporation that does not meet the

criteria of a dormant corporation, you will have to provide much moreinformation.Form5471becomesmorecomplicatedandtime-consumingaswemove to other categories of filers. I would advise you to consult a taxprofessional as the penalties for failure or an incorrectly completed form aresevereandmistakesareveryeasytomake.NowthatyouknowwhattypeofincomewillbetaxedbytheIRS,it’stimeto

talkaboutwhatstepsyoucantaketogetasmuchreliefaspossiblefromthem.

YoualreadyknowabouttheForeignTaxCreditandtheForeignEarnedIncomeExclusion–butdoyouknoweverythingyouneedtomakethemworkinyourfavor?Readontofindout.

FOREIGNEARNEDINCOMEEXCLUSIONS(FEIE)Do you remember my friend Laura, the self-employed English teacher in

Milan,whoImentionedinthelastchapter?BecauseLaurahadbeeninItalyforthe entire tax year and earned significantly less than the exclusion amount($101,300in2016),shequalifiedfortheForeignEarnedIncomeExclusion.Onealso must have a “tax home” in a foreign country to qualify for the FEIE.However, anyone qualifying under either theBona FideResidence test or thePhysical Presence test would also need to have their “tax home” in a foreigncountry.InLaura’scase,hertaxhomewasinMilan.TheFEIE can be claimed on either Form2555-EZor Form2555.As a tax

preparer,IusuallyuseForm2555,butifyou’repreparingyourownreturn,youmightenjoythesimplicityofForm2555-EZ.

FORM2555-EZ

Tofilloutthe2555-EZ8:1. YoumustbeaU.S.citizenorresidentalien.2. Youmustearnwagesorasalaryinaforeigncountry.3. Youmusthaveatotalforeignearnedincomeof$101,300orless.4. Youmustfileacalendaryearreturnthatcoversa12-monthperiod.5. Youmustnothaveself-employmentincome.6. Youmustnothavebusinessormovingexpenses.7. Youmustnotclaimtheforeignhousingexclusionordeduction.

While the 2555-EZ is an enticing option, it is not applicable to peoplewhoreceiveself-employedincome,claimedmovingexpenses,orclaimedtheforeignhousing exclusion or deduction. This becomes a problematic area for manyEnglish teachers who give private courses outside of a structured workenvironment,andarethereforeconsidered“self-employed.”Withmyhelp,Lauraconsideredclaimingtheforeignhousingexclusion.We

chose to forgoapplying for thehousingdeduction,but thereare timeswhen itmakesperfectsenseforothertaxpayers.Theforeignhousingexclusionisusefulfor those whose earned income exceeds the limit of $101,300. Even so, itsimpact is limited since the first $44.28per day is not deductible.TheForeignHousingExclusion is called theForeignHousingDeduction for self-employedpeople,buttheconceptisthesame.InordertoqualifyfortheForeignEarnedIncomeExclusion(FEIE),onemust

meeteitheroftwotests:theBonaFideResidenceTestorthePhysicalPresenceTest.

BONAFIDERESIDENCETESTThis isa somewhat fancyphrase thatexplainsLaura’s situationperfectly.A

bonafideresident issomeonewho truly, legitimately isa residentofa foreigncountry(don’ttryclaimingthatyou’rearesidentininternationalwaters,astheIRS won’t be amused.). Although she was in Italy for an undetermined,potentially indefinite period of time, Ohio still saw her as a resident for taxpurposes.Herbonafideresidencythoughis inItaly,whereshehadearnedherincomeandwascurrentlyresiding.Inordertousethistest,onemustbeabonafideresidentforanuninterrupted

periodwhichincludesanentiretaxyear.Whatthismeansisthatonthefirstyearyoumoveabroad,aswellasthelastyear,whenyoucomebacktotheU.S.,youwouldhavetorelyonthePhysicalPresencetestinstead.

YouMUSTbeataxresidentofaforeigncountry(evenifthecountrydoesn’thaveanincometaxsystem,solongastheywouldotherwisehaveauthoritytotaxyou).Youcannothavesubmittedastatementtothecountrythatyouareanon-residentthere(suchasifyoutookthatpositiontogetbettertaxtreatmentthere).Italsomeansthatyoucannotlivethereasatourist.

Every other tie to the country counts, and the Bona Fide Residence test isinherentlysubjective.Tohelpyoumakethedetermination,thereisanExcelfiletohelpyoudetermine if you are truly abona fide resident. It canbe foundattiny.cc/feie-tool.Ifyouareunsure,Iwouldnotrecommendclaimingit.IadvisethatyouusethePhysicalPresencetestortheForeignTaxCreditinstead.

PHYSICALPRESENCETESTThistestistheotheroneusedtoqualifyfortheFEIE.Notehowever,thatyou

onlyneedtoqualifyusingoneofthetwo(thoughhavingbothwouldprovideasafetynet).Ifyouareeverauditedandyoufailonetest,youcansimplyprovideanotherForm2555usingtheother test. Inorder tomeet thePhysicalPresencetest one must spend at least 330 days in a foreign country in any 12-monthperiod.It needs tobe anentireday. I oncehada client say, “Ofcourse Iqualify. I

spendallmytimeinCanada.”Thiswasfollowedby,“IjustgototheU.S.onceaweektobuygas.”Oops.Thereare,however,acoupleexceptions:

1. beingintheU.S.forlessthan24hourswhileintransitbetweentwoforeigncountries,and

2. being in internationalwaters for less than 24 hourswhile in transitbetweentwoforeigncountries.Internationalwatersdonotcountasaforeign country (hence, time spent there does not count toward the330days).Likewise,timespentinCubainviolationoftheembargodoesnotcounttowardthe330days.

BecauseLaurawaslivinginItalyfortheentireyear,shepassedthistest.

NON-CASHINCOMEIncomethatincludesnon-cashbenefitsisreferredtoas“non-cashincome”on

theinstructionsforForm2555.Allincomeistobereported,evenifitwaspaidinkind.Ifyouremployerprovideshousing,itwouldbeincludedinyourwagesto be reported on line 7 of the 1040. Thiswas the original reason behind theforeign housing exclusion, although if your employer pays you cash and youthenuse thatamount topayforhousing,youwouldalsobeeligible touse theforeignhousingexclusion.So,whatisincomethen?Everythingexceptwhatisotherwiseexcludedbythe

Internal Revenue Code (“Except as otherwise provided in this subtitle, grossincomemeansallincomefromwhateversourcederived”–IRCSection61).Secondforeignhousehold:thisreferstocircumstancesofcivilunrestandwar.

Someonebeingabonafideresidentcantemporarilyrelocatetoaforeigncountryand remain a bona fide resident. It should be noted that the I.R.S. takes anextremelyconservativestanceon this.Preparingyourownreturn,youranswerwouldbe“No”toquestion8aonForm2555.ManyexpatsgetextremelyfrustratedwiththeU.S.tax-filingprocess,withits

seeminglynever-endingpagesofquestions followedby themassivecrunchingofnumbers. Ihavemetmanyof thosepeople,workedwith them,andassuredthemthatwewouldbeabletocomplywithall thetaxrequirementssolongasweweredetailedinourapproach.In Laura’s case,wemanaged to successfully file her taxes and her Foreign

Earned Income Exclusion. We also managed to receive a tax credit for theincometaxestakenoutbytheItaliangovernment,somethingthatIwillexpandoninChapter5.Nowpleasemoveontothenextchaptersowecandiscussdeductions.

DEDUCTIONS

To many taxpayers, deductions are the silver lining to their taxableincome.Theyallowanyonetoreducetheamountof incomethatcanbetaxed.You’reprobablyalreadyfamiliarwiththemostcommonexamplesofdeductions(such as business expenses and charitable donations), but these categories getmorecomplexwhenyoutakethewholeworldintoaccount.

FORM2555&PASSINGTHEBONAFIDERESIDENCETEST

PartIofForm2555regardsyourpersonalinformationandresidenceabroad,whichwe’vealreadycoveredinChapter2:GettingandStayingTaxCompliant.Therefore, Iwillnowmoveon toexplainingstepbystephowtocomplete theBonaFideResidenceandPhysicalPresenceTeststomaximizetheexclusionofyourforeignearnedincomeandescapedoubletaxation.

BonaFideResidenceTestRequirementsYouarealegalresidentofaforeigncountryorcountriesforaperiodduration of a whole tax year9 (January 1 - December 31 for mosttaxpayers).

Youmustbeeither:AU.S.citizen,orAU.S. resident alienwho is a citizenornational of a countrywithwhichtheUnitedStateshasanincometreatyineffect10.

WhoisaBonaFideResident?Living in a foreign country for a duration of a full tax year does not

automaticallymakeyouabonafideresident.Inordertobeabonafideresident,youmustmeetthefollowingrequirements.

1. Establisharesidenceinaforeigncountry.2. Resideinaforeigncountryorcountriesforanuninterruptedperiodof

timethatincludesanentiretaxyear.3. Youcannotmakeastatementtotheauthoritiesofthatforeigncountry

thatyouarenotaresidentofthatcountryandyouaresubjecttotheirincometaxlawsasaresident.

Let’shavealookwhattheformlookslikeinpractice!Matt moved to Thailand at the end of 2002 and is now a Thai citizen. He

nevergaveuphisU.S.citizenship,andeachyearheusesthebonafideresidencetesttoexcludehisforeignearnedincome.Heearned$84,000,sowearegoingto

excludeallhiswages.

Bear inmind that the information you providemust indicate that you haveestablishedapermanent residence there.Matthasalreadybeen inThailandformanyyearsandhasevenacquiredThaicitizenship.Citizenshipisnotrequired,asyoucanliveinaforeigncountryandbeitsresidentwithoutit.Inthecaseofanaudit,theIRSwillassessthevalidityofbeingabonafideresidentonacase-by-casebasis.Theywillfocusonthenatureofyourstay,length,andintention.Ifyou moved abroad for an undefined period of time and you established aresidence there, you will most likely qualify for the bona fide residence test.However, ifyoumovedabroadforadefinedperiodtocarryoutaproject,youwillnotqualifyforthistest.There’soneotherway to receive an exclusionofyour income: thephysical

presencetest.Inorder topass thephysicalpresence test,youmustbepresent ina foreign

country or countries for 330 full days out of 12 consecutive months, but thequalifying days do not have to be consecutive and you can use any 12-monthperiod.BothU.S.citizensandU.S.residentaliensareeligibletoapplyforthis.Thistestisentirelybasedonthelengthofyourstay,soyoudon’tneedtoprovethatyou’veestablishedpermanentresidenceanywhere.Youcancountthedaysyouspentabroadforanyreason.Itdoesn’thavetobeforemploymentpurposes,and you can include your vacation time. Nevertheless, the question of whatconstitutesafulldayarisesquiteoftenwithmyclients.Iconstantlyremindthemthatit’sthefull24hoursofaday.So,ifyouflewtoLondononJune1,at7a.m.,yourfirstfulldaywillbeJune2nd.

Ifyoutraveledduringthequalifyingmonths,youshouldinputtheinformationincolumns(a)–(f).OnceyoucompleteoneofthequalifyingtestsfortheForeignEarnedIncome

Exclusion,youcanexcludeyourwagesonline19ofForm2555.

Don’tforgettoinputtheexclusiononline21ofForm1040.

Itbringsdownyourtaxableincometozero.

SEVENTYPESOFITEMIZEDDEDUCTIONSWITHSCHEDULEA

Schedule A is used to claim an itemized deduction instead of a standarddeduction.Ithassevencategories:medicalanddentalexpenses,taxes, interest,gifts to charities, casualty and theft losses, job expenses, and certainmiscellaneous deductions. Each category has specific requirements andlimitationsthatIwilldescribebelow.MedicalandDentalExpensesYoucandeductpartofyourmedicalexpensesiftheyexceed10%ofyouradjustedgross income(Line38,Form1040).IfyouoryourspousewerebornbeforeJanuary2,1951,youcandeductthepartofyourmedicalanddentalexpensesthatexceed7.5%ofyouradjustedgross income (if you’re above 65), or 10% (if you are 65 or under). Forexample,ifyouradjustedgrossincomeis$50,000(10%×$50,000=$5,000),thefirst$5,000doesnotcount.DeductibleExpenses

Insurance premiums for medical and dental care. However, if youclaim any self-employed health insurance deduction onForm1040,Line 29, you must reduce the amount you claim on Line 1 ofScheduleAbythesameamount.Prescriptionmedicinesorinsulin.Acupuncturists,chiropractors,dentists,eyedoctors,medicaldoctors,occupational therapists, osteopathic doctors, physical therapists,podiatrists, psychiatrists, psychoanalysts (medical care only), andpsychologists.Medical examinations, X-ray and laboratory services, insulintreatment,andwhirlpoolbaths.Diagnostictests(i.e.full-bodyscans,pregnancytests,orbloodsugartestkits).Nursinghelp.Hospitalcare.Programstoquitsmoking.Weight-loss programs for a specific disease ordered by a doctor totreatspecificdiseasessuchasobesity.

Medicaltreatmentfordrugoralcoholaddiction.Medical aids (eyeglasses, contact lenses, hearing aids, crutches,wheelchairs, guide dogs, and the costs associated with maintainingthem).Surgeries.Lodgingexpenses(butnotmeals)whileawayfromhometoreceivemedical care in a hospital or a medical care facility. You cannotdeductmore than$50aday,mealsarenot includedand there isnopersonal pleasure, recreation or vacation while receiving thetreatment.Ambulance service and other travel costs to getmedical care. Youcanclaimtheamountyouspentonfuelifyouusedyourowncar,orclaim$23permile.Costofbreastpumpsandothersuppliesthatassistlactation.

AllyourmedicalexpensesshouldbeenteredonLine1,ScheduleA.Adjusttheamountbyreducingitbyanypaymentsyoureceivedfrommedicalinsuranceandotherrelatedsources.TaxesYouPaidYoucanelecttodeductthelocalandstateincometaxesorthelocalandstate

salestaxes,butyoucannotclaimboth.IncomeTaxesYoucandeductthestateandlocaltaxeswithheldfromyourpaycheckonthe

W-2,thetaxesyoupaidduringthetaxyearforthepreviousyear(donotincludethepenaltiesandinterest),estimatedtaxpaymentsyoumadeduringthetaxyearandmandatorycontributions.SalesTaxesYoucandeductthestateandlocalgeneralsalestaxesyoupaidduringthetax

year.Theamountyoudeductcanbelowerorthesameasthegeneralsalestaxrate.Ifyoupaidmorethanthegeneraltaxrate,youcanonlydeducttheamount

youwouldhavepaidusingthegeneraltaxrate.Thesetaxesareregardingyourpersonal property such as food, clothing,medical supplies, vehicles, etc. Youcannotincludethesalestaxonyourtradeorbusiness.RealEstateTaxesYoucanclaimtaxesyoupaidontherealestateyouownforyourpersonaluse

ifyourtaxpayableisassignedonayearlybasis.Personal Property Tax These are taxes you can claim as an expense ofScheduleAiftheyareassignedonayearlybasis.

OTHERTAXESIf you paid any other deductible taxes, you can claim them as an expense

here11.Bob lives in France and he’s single. He has $100,000 of general income

(wages).Heowes$21,071 inU.S. taxes,asallU.S.personsare taxedon theirworldwideincomeregardlessofwheretheyreside.Buthealreadypaid$28,000intaxestotheFrenchgovernment.Whatoptionsdoeshehave?

1. HecanclaimtheForeignTaxCredit,or2. HecandeductthetaxespaidonScheduleA.

Let’shavealookwhatwouldbemorebeneficialforBob.ClaimingtheForeignTaxCreditSincethetaxesheowesarelessthantheamounthepaidtoFrance,hisU.S.

taxowingwillbebroughtdowntozero.Hecanalsousetheunutilizedtaxcreditand carry it over to future years. $28,000 - $21,071 = $6,929 remaining taxcredittousethefollowingyear!WiththeForeignTaxDeductionBob’staxableincomeis$100,000,soaftercomputingthenumbers(100,000–

28,000 + 6,300 no standard deduction = $79,300) he will have $79,300 ofadjusted gross income. The remainingU.S. tax obligation in this casewill be$15,619(ouch!).It’snotadvantageous,but it is theonlyoptionifyoudon’thaveanyforeign

sourcedincome(forinstanceincomeearnedoninternationalwaters)

HomeMortgageInterestAny loan that is secured by yourmain home or second home, home equity

loansandrefinancedmortgagesfallintothecategoryofhomemortgages.Homeequityloansareatypeofmortgageyouusetopayoffyourcreditcardbills,buyacarorpaytuition.Any property that provides basic living facilities such as a house,

condominium,mobilehome,boat,etc.countsasahomeforthesepurposes.LimitonHomeMortgageInterestYour deduction is limited if you took out the loan after October 13, 1987.

However, ifyourefinanced themortgageafter thisdate,youcan treat thenewmortgageasthoughithadbeentakenoutonorbeforeOctober13,1987.Note:Ifthevalueofthenewmortgageexceedsthevalueoftheoldmortgage,

theexcessistreatedasamortgagetakenoutafterthedate.If you took out the loan after October 13, 1987, and the sum of all your

mortgagesis$100,000orhigher,yourlimitis$50,000.Ifyoutookouttheloanafter October 13, 1987, and the sum of all your mortgages is $1,000,000 orhigher, your limit is $500,000.However, these numbers only apply if you aremarriedandfilingseparatelyfromyourspouse.ComputingtheNumbersTheamountofyourmortgageinterestgoesonLine10ofScheduleA.Don’t

forget to enter the points reported to you on Form 1098. Any refund youreceived or interest you overpaid on Form 1098 should be reported on Form1040,Line21.Don’treduceyourmortgageinterestbythisamount.Thepointsthatyoupaid

toreceiveyourmortgageareusuallyonForm1098.Nevertheless,if thepointsare not listed there, you can find them on your settlement statement. All thepointsaredeductibleingeneral,excepttheonesyoupaidforpurposesotherthanyourmortgage.IfyourpointsarenotlistedonForm1098,reportthemonLine12ofScheduleA.If you or another person paid themortgage interest, report the amount you

paidonLine11ofScheduleA.MortgageInsurancePremiumsAMortgage InsurancePremium isan insurancepolicypaidbyhomeowners

forFHA loanswhenyourdownpayment is less than20%. It canbedeductedsimilartohomemortgageinterest.Qualifiedmortgageinsurancepremiumscanbededucteduptothreeyears.However,toqualifythemortgagemusthavebeentakenoutafter2006.YourpremiumcanbefoundonForm1098,Box4.MortgageinsuranceprovidedbytheDepartmentofVeteranAffairsandRural

Housing Services are fully deductible. You should contact your insuranceprovidertoconfirmthedeductibleamountofyourmortgageinsurancepremium.The amount you can deduct is usually reduced by 10% for every $1,000, and

$500formarriedcouplesfilingseparately.The deductible amount of yourmortgage insurance premium is reported on

Line13.InvestmentInterestIf you borrowed money for an investment, the interest on it qualifies as

investmentinterest.However,itisnotdeductibleiftheinvestmentisallocabletopassiveactivitiesor securities.Youmayhave to fileanadditionalForm4952,unlessallthreeconditionsbelowaremet:

1. Yourinvestmentincomefrominterestandordinarydividends(minusanyqualifieddividends)arehigherthanyourinvestmentexpense.

2. There’snootherdeductibleinvestmentexpense.3. You have no disallowed investment interest expense from the

previousyear.EnteryourinvestmentinterestonLine14ofScheduleA.

CharitableGiftsandContributionsYou can deduct any contributions and gifts you gave to charitable

organizations registeredwith the IRS.Theoverwhelmingmajorityof themarebased in theU.S.Canadian charities are also eligiblebyusing theUS-Canadatax treaty. Ifyoumadecontributions toanyother foreigncharities,youcannotclaimthemasexpensesonyourtaxreturn.Contributionscanbemadeinmanyways.Theycanbecash,property,out-of-

pocket expenses you incurred while volunteering, andmore.With a qualifiedcharity, you cangenerallydeduct all expenses (so long asyoudidnot receiveanything in return). For contributions that amount to $250 ormore, youmustprovideastatementfromthecharityshowingtheamountyougaveandwhetheryoubenefitfromthedonationornot.Anybenefitsmustbesubtractedfromtheamountyoudonated.ContributionsmadebycashorcheckarereportedonLine16ofScheduleA.

Othercontributions,suchasclothes,arereportedonLine17attheirFairMarketValue(FMV).Ifyouclaimmore than$500ofdeductible charitable contribution expenses,

thenyouhavefilloutandattachForm8283.Iftheclothesyoudonatedhaveavalueofmorethan$500,youwillhavetoattachaqualifiedappraisalaswell.Ifyouhaveanycarryoverofcontributionsfrompreviousyears,enterthemonLine

18.CarryoverfromPriorYearsEnteranycarryoverofcontributionsthatyoucouldn'tdeductfromanearlier

year. Remember, you can only deduct 30% or 50% of your Adjusted GrossIncome as a charitable contribution, butwhatever remains can be carried overforupto5years.

CasualtyandTheftLossesIfyouwereavictimoftheftorincurredalossduetovandalism,fire,storm,

caraccident,orotheraccidentsduringtheyear,youmaybeabletodeductpartor all of each loss. If you lost money due to insolvency or bankruptcy of afinancialinstitution,youmightbeabletodeductthislossaswell.Ifyoupaidforrepairstoyourhouseorappliances,enterthemonLine20.YoucanevendeductthecostofprovingthepropertylossonLine23.CompleteForm4684andattachittoyourreturn.Toclaimthesedeductions,therearetworequirementsthatmustbemet:

1. Theamountofeachlossmustbemorethan$100.2. Thetotalamountofalllossesincurredduringtheyear,excludingthe

$100limit,ismorethan10%ofyouradjustedgrossincome(Line38,Form1040).

JobExpensesYoucan claimScheduleA expenses that exceed2%of your adjustedgross

income(Line38,Form1040).UnreimbursedEmployeeExpensesare themostcommonexpensesclaimedinthissection.Yourtotalordinaryandnecessaryjobexpenses (not reimbursed by your employer) qualify for this deduction. TheamountsreportedonyourW-2inBox1donotqualify.Anordinaryexpenseisdefinedasthemostcommoninyourfieldofwork,whileanecessaryexpenseishelpfultoyourbusiness.EntertheseexpensesonLine21ofScheduleA.Note:YoumustfileanadditionalForm2106if:

1. You want to deduct any travel, transportation, or entertainmentexpensesforyourjob.

2. Your employer has reimbursed some of the expenses you wouldotherwiseclaimonScheduleA.

Ifyouusedyourownvehicleandwanttoclaimtravelexpensesincurred,youshoulduseForm2106-EZ.Ifyoudon’tneedtofileForm2106,justlisteachofyourexpensesincurredon

Line 21. Ifmore space is required, you can attach a statementwith details ofyour expenses and just enter the total on Line 21 with the description “Seeattachedstatement”.Generally,youcandeductallsafetyequipment,tools,supplies,uniforms,and

protective clothing, as well as any required physical examinations, dues toprofessional organizations and chambers of commerce, subscriptions toprofessional journals, fees to employment agencies, and certain educationalexpenses12.Expenses you cannot deduct include political contributions, expenses

generatingtax-freeincome,lossofcashorproperty,expensesformealsduringyour working hours or overtime, travel as a form of education, fines andpenalties,etc.TaxPreparationFeesYoucandeductallthefeesyoupaidforthepreparationofyourreturn.Ifyou

don’t want to figure all this tax stuff out yourself, I encourage you to hire aprofessionaltodoitforyou.Notonlywillyousavealotoftimethatyoucouldotherwiseconvertintoadditionalincome,butitalsolowersyourtaxableincomeandminimizesyourchancesofacostlyerror.EnterthetaxpreparationfeesonLine22.Note:Ifyouusedacreditordebitcardtopayyourtaxowing,theconvenience

feeisalsodeductiblebutitisreportedonLine23instead.OtherExpensesThisisthefieldyouusetodeductalltheexpensesincurredtogeneratetaxable

incomeandmanagepropertyheldforgeneratingincome.Youcannotclaimanypersonal expenses here, but you candeduct legal and accounting fees, clericalhelpandofficerent,custodialfees,investmentexpenses,etc.

List the expenses on Line 23. If you require more space, you can attach astatementtoyourreturnwithadetailedlistofyourexpensesandtheamount.

OtherMiscellaneousDeductionsYou can only deduct losses from gambling, casualty, theft and income

producing property on Form 4684. Loss from other activities is reported onForm K-1, such as federal estate tax on income in respect of a decedent,amortizablebondpremiums,ordinary lossattributable toacontingentpaymentdebtinstrument,andimpairment-relatedworkexpenses13.TheseexpensesarereportedonLine28ofScheduleA.Ifyouchoosetoelectanitemizeddeductioneventhoughitislessthanthe

standarddeduction,checktheBoxonLine30.

PREPARINGSCHEDULEAPreparingyourtaxeswillbealoteasierifyouhavecollectedandstockedall

your receipts in one place.Remember that you don’t have to fill each line ofScheduleA,butjusttheonescorrespondingtoyouractualexpenses.Alotofmyclientsdon’trecognizethedifferencebetweeninvestmentincome

andmanagementsfees,or theyforgetfiguressuchas the2%onmiscellaneousexpensesor7.5%/10%onmedicalexpenses.FillouttheScheduleApplyingthelimitations for certaincategories and thenenteryour totaldeductionsonForm1040.Usingstandarddeductioniseasierthanusingtheitemizeddeduction,butyou

needtocomputethenumberstoseewhichonewillloweryourtaxableincome.Thestandarddeductionfor2016forasinglepersonwas$6,300and$12,600formarried couples filing jointly. You might be eligible to get an even higherstandard deduction if you and/or your spouse are above 65 years old and/orblind.Let’ssayyouare thirtyyearsoldandyourexpenses incurredduring the tax

year were $2,000 of unreimbursed employee expenses, $500 of charitablecontributions,and$1000ofmortgageinterest.Itwouldbebetterforyoutousethestandarddeductiontoloweryourtaxableincome.It’s only a good idea to use the itemized deduction on Schedule A if it is

greater than the standard deduction. A few people cannot use the standarddeductionandneedtousetheitemizeddeductionregardless,suchasdependents,taxpayersfilingadual-statustaxreturn(wereU.S.persons/residentsforpartofthe year and nonresident aliens the remaining) as well as taxpayers who arenonresident aliens. Everyone else is entitled to the standard deduction, theamountforwhichvariesbasedonyourfilingstatusThe2016amountswere:

Single:$6,300MarriedFilingJointly:$12,600MarriedFilingSeparately:$6,300HeadofHousehold:$9,300

In addition to the itemized or standard deduction, you are entitled to thepersonalexemption($4,050in2016).Sincethepersonalexemptionistiedtoa

person,someoneclaimingdependentswouldalsobeabletoclaimtheirpersonalexemption for them. The IRS will check the Social Security database whenprocessing such exemptions to avoid double claims. In the case of a name orSSN mismatch, the IRS will send an automated notice disallowing theexemptionandrequestingtheassociatedtaxowing,whichdoesn’tworkoutwellforanyone.

CREDITS

Tax credits are highly sought after in this modern day of ultra-hightaxation,especiallybythosewiththehighest incomeandtherefore themost tolose.Theyofferways tosubtractfromthe totalamountof taxowedafteryourtaxableincomehasbeenfullycalculated.InthecaseofAmericansalreadylivingandpaying tax inothercountries,your taxcreditsmay includewhatyouhavealreadypaidabroad.

FORM1116Form1116isoneofthemostcommonformsIprepareformyclients.Itisthe

form used to claim the Foreign Tax Credit (FTC), which aims to reduce thedouble tax burden. If you paid or accrued taxes in a foreign country, you canclaimacreditforthosetaxes.Asyoualreadyknow,yourforeignsourcedincomeistaxedbyboththeU.S.

andtheforeigncountrywheretheincomewasgenerated.IftheforeigntaxrateishigherthanwhatyouwouldbetaxedatintheUnitedStates,theForeignTaxCreditcancancelouttheentiretyofyourtaxowing.Toqualifyforthecredit:

1. Thetaxmustbeimposedonyou.2. Youmusthavepaidoraccruedthetax.3. Thetaxmustbelegalandactualforeigntaxliability.4. Thetaxmustbeanincometax.

Now,let’sprepareForm1116.Jessica lives inCanada.Shehas$70,000ofemployment incomeand$2,000

ofincomeindividends.Shehaspaid$14,801taxforherwagesand$360taxforthedividendincome.Shewillneedtwo1116forms,astheemploymentincomebelongstothegeneralcategoryandthedividendisclassifiedaspassivecategoryincome.Let’sstartwiththegeneralcategory1116.

Indicate the country of residence. In our example, Jessica is a resident ofCanada.You’llhave toenteryourgrossgeneral income(Ln7on1040) in thecolumnsillustratedabove.

Ln3,d:Yourtotalgeneralincome.

Ln3,e:Yourtotalincomeincludingpassiveincome.Ln3,f:Theproportionofgeneralincomedividedbytotalincome.We’lluse

thistocalculatethestandarddeductionattributabletogeneralincome.Ln3,g:Yourstandarddeductionfromyourgrossgeneralincome.Nextstep:reportingthetaxpaidoraccrued.

ThetaxyoupaidoraccruedisenteredonLnA(n),A(r),A(s)andLn8.LineArelatestoincomeearnedinCanada,whichwasreportedincolumnA.

Ifyouhadincomefrom14othercountriesincolumnsB&C,youwouldreportitthere.Let’sfigureoutyourtaxcreditnow!Since now we have all the numbers we need to compute the Foreign Tax

Credit, we can input them in Part III of Form 1116 and calculate the creditavailable.

Ln19:Theproportionofgrossgeneralincometothetotalgrossincome.It’sused toallocate theproportionofFTC in thegeneralcategoryand thepassivecategoryusedtooffsetU.S.taxowing.Ln20:YourU.S.taxowing.Ln21:Theproportionofyourgeneralcategoryforeigntaxthatnowbecomes

acredittooffsetyourU.S.taxowing.Ln 23: The proportion of your passive category foreign tax paid that now

becomesacredittooffsettheU.S.taxowing.

THEADDITIONALCHILDTAXCREDITTheIRSdoesoffersomereliefanddeductionsfortaxpayers.TheAdditional

ChildTaxCredit isa realbonus to thosewhohavechildren.Foreacheligiblechild, you can receive up to a $1,000 credit on your tax owing. This is theregular Child Tax Credit. The Additional Child Tax Credit will allow you tohave any remaining credit refunded. It is entered as a “payment” on your taxreturn.Let’s say you owe $250 in taxes. The Child Tax Credit would offset that

amount,andyouwouldthenusetheAdditionalChildTaxCredittohavetheIRSsendyouacheckfortheremaining$750.To be eligible for the Additional Child Tax Credit, the childmust be your

dependent, which means that he/she should be a U.S. citizen, a Canadianresident or a Mexican resident. It does not have to be your biological child.He/shecanbeafosterchild,adoptedchild,dependentsiblingorgrandchild,solongastheylivewithyouandmeettherequirementsofadependentprovidedbythe IRS. TheAdditionalChild TaxCredit can be claimed until the qualifyingchildrenturn17yearsold.There are also income limitations for claiming the Additional Child Tax

Credit. Ifyouearnaboveacertain threshold, theamountofcredityou receivegoesdown.Earnenough,andyou’llgetnothingatall.Formarriedcouplesfilingseparately, the credit amount starts dropping at $55,000, while for a singleperson or the head of a household it is $75,000. For married couples filingjointly, it’s $110,000. For every $1,000 of income above these numbers, theAdditional Child Tax Credit goes down by $50. So, a married couple with$120,000ofincomefilingjointlywouldonlybeeligiblefor$500ofthiscredit.Inthenextchapter,wewillgooverwhatremainsofForm1040:othertaxes.

OTHERTAXES

We’vecoveredthebreadandbutterofwhatgoesintocorrectlyfilingyourU.S. taxreturn.Nowit’s timetoroundoutyourknowledgewiththeperipherydetailsthatremainuncategorizedbywhatwe’vecoveredsofar.

SOCIALSECURITYIfyou’relivingoutsidetheU.S.,howmuchcanyoubeexpectedtopayinto

U.S.SocialSecurity?Theanswer,ofcourse,dependsonafewdifferentfactors– most importantly the existence of Totalization Agreements with your newcountryofresidence.What?Youdon’tknowwhataSocialSecurityTotalizationAgreementis?The United States Government has brokered Totalization Agreements with

severalforeigngovernments–mostlyinEurope–wherebyU.S.citizenslivingin thosecountrieswouldonlyberesponsibleforpaying into theothercountry,andnottheU.S.ItalywasthefirsttoenactSocialSecurityagreementswiththeU.S. in1978.MostofEurope followed suit, alongwithCanada,SouthKorea,Chile,Australia,andJapan.So,ifyou’repayingintotheSocialSecuritysystemsforanyof thesecountries,youdon’thave topay into theU.S.SocialSecuritysystem.HowSocialSecurityChangesWhenYouMoveAbroadSocialSecurityisafederalinsuranceplanprovidingbenefitsforretireesand

peoplewhoareunemployedordisabled.IfyouliveintheU.S.,youremployeralreadydeductspartofyoursalaryandpaysittothefederalgovernmenttosavemoney for your future as needed. The situation changes drastically once youmoveabroad.As an American, you are obligated to pay Social Security to the U.S.

governmentregardlessofwhereyoureside.However,someothercountriesoffersimilar programs to their residents. Thus, the United States government hasestablished international Social Security agreements, often called “TotalizationAgreements”. The purpose of these agreements is to eliminate dual SocialSecurity Taxation. Because of these agreements, if you work in Canada orEurope you won’t have to worry about Social Security. Check whether yourcountryofresidencehasaSocialSecurityTotalizationAgreementwiththeU.S.Ifyou live inacountrywithoutaTotalizationAgreement,youmayhave to

paySocialSecurity.

SELF-EMPLOYMENTTAXPeople who work for themselves must pay their own version of Social

Security called the “self-employment tax”. It is reported on Schedule SE,flowingtoline57ofForm1040.Self-EmploymentTaxappliesnomatterwhereintheworldtheworkwasperformed.

HowtoCalculateSelf-EmploymentTaxAsof2016,theSelf-EmploymentTaxrateis15.3%.Thisrateconsistsoftwo

parts:12.4%forSocialSecurity(old-age,survivorsanddisabilityinsurance)and2.9%forMedicare(hospitalinsurance).TheSocialSecurityportionappliesonlytothefirst$118,500ofself-employmentincome,whereastheMedicareportionappliestoanyamountthereafter.If you live in a country that maintains a Social Security Totalization

AgreementwiththeUnitedStates,youdonothavetopaythistax.Youalreadycontribute an equivalent in your country of residence. However, if you are aperpetualtravelerwhodoesn’tpaytaxestoanyparticularcountryorthecountryof your residence doesn’t have this agreement, youwill have to pay this tax.Additionally,ifyourbusinessgeneratedaloss(oranincomeoflessthan$400),youwon’toweanyself-employmenttax.AvoidingBothSocialSecurityandSelf-EmploymentTaxHowcantheSocial

Securityburdenbeaddressedforexpatslivingincountrieswhodon’tsharetheirSocialSecuritypolicywiththeU.S.?Social Security must be paid by employees of all American employers, no

matterwheretheywork.AnAmericanemployerisdefinedinIRC§3121(h)(5),toinclude,inthecaseofacorporation,“acorporationorganizedunderthelawsoftheUnitedStatesorofanyState”.So,forself-employedpeople,thebestwaytoease thisburden is toestablish theirbusinessasaforeigncorporation(i.e.acorporationestablishedunderthelawsofacountryotherthantheUnitedStates).Because there is no longer anAmerican employer involved, thewages earnedarenotsubjecttoSocialSecurity.Beadvisedthatifyougothisroute,youwillhave to fileForm5471 to report the interest in your foreign corporation.Youwillalsoincurthecostofmaintainingthecorporationabroad.Ofcourse,italsogoeswithoutsayingthatnotpayingintoSocialSecuritywill

reduceanybenefityouwouldotherwisebeentitledtoatyourtimeofretirement.

As you probably already know, the Affordable Care Act (ACA), otherwiseknown as “Obamacare”, imposes tax penalties on American citizens withouthealth insurance. Fortunately, anyone who qualifies for the Foreign EarnedIncomeExclusionisnotsubjecttothepenaltiesoftheACA.

SOCIALSECURITYTOTALIZATIONAGREEMENTCOUNTRIES

ItalyGermany

SwitzerlandBelgiumNorwayCanada

UnitedKingdomSwedenSpainFrance

PortugalNetherlandsAustriaFinlandIreland

LuxembourgGreeceSouthKoreaChileAustraliaJapan

DenmarkCzechRepublicPolandSlovakRepublicHungary

If you do not live in one of these countries, you may be obligated to paySocialSecurityinboththeU.S.andyourcountryofresidency.MyfriendMark,because he currently lives in China, does not qualify for the Social SecurityTotalizationAgreement.AlthoughheworksforanAmericancompany,becausehe isstationed inChinahe is required to follow theirSocial InsuranceLaw. Itmayseemunfairtopayinbothcountries,butheisalsoreceivingthebenefitsofthesetaxesinbothcountries.While we normally don’t think of Social Security as a lot of money, dual

coverage can make it much more expensive. This became an issue forMarkwhenhisemployerofferedhima“taxequalization”agreement,makingitsothathe would earn the same “after tax” income even though two countries were

taking out Social Security taxes. Because the employer agrees to cover thesepartsofthetax,thisbecomestaxableincome.BecauseMark had to claim the employer’s agreement, hewas taxed on the

moneypromisedtohim.Thecompanycoversthattax,andMarkistaxedfortheincreasedamountpromisedtohimbyhisemployer.Manytaxbrokersknowthisviciouscircleasa“pyramideffect”anditcanbequitecostly.Thankfully,Markcametomebeforetheproblemgotoutofhand.Thewaytoavoidthisinvolvescalculating the cost of the foreign taxes, and deciding if the agreement isnecessary.Althoughitmaycomewithgoodintentions,itisoftennotworththehassleoftaxcycles.HadMarkworkedinacountrywithaSocialSecurityTotalizationAgreement

with the United States, his tax situation would be quite different. Under thedetachedworkerrule,forupto5yearsMarkwouldonlyhavetopaythesetaxesto the U.S. government. Afterward, he would only have to pay the foreigngovernment.TheTotalizationAgreementsgofurtherthansimplyprovidingtaxrelief: they ensure proper Social Security coverage at retirement.Without theagreement,theemployeewillstillbecoveredinbothcountries,buttheirbenefitswillbedeterminedindependently.Itcanbefrustratingtoanemployeewhofeelshe/shecannotreapthebenefitsofthetaxesenforcedbybothcountries.As of 2016, the United States has Totalization Agreements with only 25

countries.AlthoughtheseterritoriesareamongthemostcommonplacestofindU.S.expats,therearestillmanygapsinthesystem.Taxpayers employed by a foreign corporation are not subject to Social

Securitytax.Butwhatabouttheself-employed?WhiletheyarestillabletousetheFEIE,theyaresubjecttoself-employmenttaxasameanstopaytheirSocialSecuritycontribution.Byincorporatingaforeigncorporationandreceivingtheirincome in the form of wages, they are not subject to Social Security andMedicarewithholding.Warning:becarefulwhatyouwishfor.FailingtocontributetoSocialSecurity

will impact your benefits at retirement. You need to decide what’s moreimportanttoyoubeforemakingsuchanimpactfuldecision.By now, you should understand that being anAmerican citizenwill always

carry certain responsibilities and tax obligations, nomatter where you live orwork. These far-reaching policies are unlikely to change anytime soon,whichhas leftmanytowonder thebestway to legallygetoutof thesystementirely.Theonlyway toeliminateyour taxobligationsasanAmerican is toofficiallyrenounceyourU.S.citizenship.Inthefollowingchapter,I’llwalkyouthrough

thestepsthatpeoplearetakinginrecordnumbertoceasebeinganAmericanandbreakupwiththeIRSforever.

PASSIVEFOREIGNINVESTMENTCOMPANIES(PFIC)

APassiveForeignInvestmentCompany(PFIC)isaforeigncorporationthatmeetsoneoftwotests:theincometestortheassettest.Theincometestismetifatleast75%ofthecorporation’sgrossincomeis“passive”.Broadlyspeaking,itmeans that the company derives its income from investments rather thanbusinessoperations.TheassettestdefinesacompanyasaPFICifatleast50%of company’s assets are investments that generate or could generate passiveincome (such as non-interest bearing cash equivalents resulting in interest,dividendsorcapitalgains).While PFICs might seem like investment vehicles used exclusively by the

wealthy, many taxpayers invest in foreign mutual funds, which sometimesqualify as PFICs. This can sometimes be hard to determine. They meet theincomeandassettests,butitoftenremainsunsurewhetherthemutualfundisacorporation. Only corporations are PFICs. To make the matter morecomplicated, the fund must be classified as a corporation under U.S. taxprinciples. Foreign classifications have no bearing. For instance, CanadianmutualfundsaretypicallytrustsunderCanadianlawbutmightormightnotbecorporations (hence PFICs) under U.S. tax principles (the determination ofwhichgoesbeyondthescopeofthisbook)15.PFICTaxationThere are three differentmethods to tax PFICs: excess distributionmethod,

QualifyingElectingFund(QEF),andthemark-tomarketmethod.Thelattertworequireanelection.Ifyoudonotmakeanelection,thePFICwillbetaxedunderthe excess distribution rule (which is allocated to prior years and would bereportedasanothertax).ThepremiseofPFICrulesisthatthetaxpayerisinvestinginPFICstodefer

taxation on the income. The rules are in place to create a punitive taxationregimeandcanceloutanybenefitthetaxpayerwouldgetfromthedeferral.Sincemost taxpayers are not aware of PFIC ruleswhen they first invest in

PFICs,manyofthemfailtomakethenecessaryelectionsandarethereforetaxedunderthedefaultregime:theexcessdistributionmethod.ThecomplexreportingofPFICscreatesanightmarefortaxpreparers,asthe

complicated interest and excess distribution tax are calculated separately for

eachblockofshareswithadifferentholdingperiod.Theexchangeratemustbetheexchangerateonthedayofacquisitionanddisposition.Theheavyfeesandtaxtreatmentmakeafairlygoodinvestment.TheformtoreportPFICsisForm8621,andIwouldadviseyoutoconsultataxprofessionalwhencompletingit.Evenso,manyprofessionalsstillstrugglewiththecomplicatedrulesthatgovernPFICtax.QEFMethodTheQEF regimeallows the taxpayer tobe taxed in the current year for the

incomeaccruedwithinthefund.Itisonlyavailableifthemutualfund(orotherPFIC)issuedaPFICAnnualInformationStatement.Sincethesedocumentsarerarelyissued,themethodisn’twidelyused.Furthermore,aQEFelectionshouldbemadewhenthetaxpayerfirststartsinvestinginthePFIC.Mark-to-MarketMethodThemark-to-market regimeallows the taxpayer to lookat thechange infair

marketvaluefromyeartoyearandreportitascapitalgains.Capitallossesareallowedonly to theextent that theycanceloutprior capitalgains.Youcannotreport losses bellow basis. Likewise, an election should be made when thetaxpayerfirststartsinvestinginthePFIC.ExcessDistributionMethodTheexcessdistributionmethodisthemostcommonlyusedmethod,anditis

theheaviest.Itisalsothedefaultmethodyou’llbetaxedonifyouhavePFICsanddidnotmakeanelectionwhenyoustartedinvesting.Anyexcessdistributionordeemedexcessdistributionisallocatedacrossthetaxpayer’sholdingperiod.Theamountistaxedatthehighestmarginalrateandaninterestchargeisaddedon the top of that.The interest is calculated based on the amount allocable toeachyearduringtheholdingperiod.TheIRSdefines“excessdistribution”astheportionofdistributionover125%

oftheaveragedistributionduringthepriorthree-yearperiod.Forexample,youreceive $1,000 of distribution in 2013, 2014 and 2015. In 2016, you receive$1,500.Your taxeswould be $250, according to the excess distribution underIRSSec.1291.$1,000+$1,000+$1,000dividedby3isjust$1,000.125%ofthatwouldbe$1,250.Subtractingthatfrom$1,500leavesyouwith$250owed.Anycapitalgain resultingfromdispositionofaPFIC isallocatedacross the

holdingperiodandtaxedatthemaximummarginaltaxrate(39.6%asof2016,althoughonly35%until2012),anditwouldthenhaveaninterestcharge.Overaperiod of a decade, one could face a tax on such capital gains of asmuch as

47%,regardlessofwhattheirtaxbracketwouldotherwisebe.HaditnotbeenaPFIC,itwouldbealong-termcapitalgaintaxedat0%,15%or20%.It’s time to move on to our final section, and a subject that many U.S.

taxpayers have reluctantly found themselves considering with greater interestthaneverbefore:breakingupwiththeU.S.governmentforgood.

HOW&WHYTORENOUNCEU.S.CITIZENSHIP

With all the arduous requirements and liabilities that come with Americancitizenship,morepeople thaneverarestartingtoquestionwhether thebenefitsoutweigh the costs. Youmay now bewondering yourself why you are still acitizenof theU.S.Or, ifyoufall intothe“accidentalAmerican”category,youprobably never even thought of yourself as one andwant no part in their taxgame. Situations like thesemay lead you to ask -- is there a way to endmycitizenshipandpermanentlyfreemyselffromtheIRS?TheU.S.hasmadeitcostlierinrecentyears,butitcanbedone.Renouncing

yourcitizenship isnotadecisionwhichshouldbe taken lightly. Inaddition tothe timeandmoney involved in theprocess, it’s somethingwhichwill foreveraffect how easily you can return to theUnitedStates, aswell as howyou aretreated in other countries around the world. There is only one little-knownexception: peoplewho renounced before the age of 18 can reclaim theirU.S.citizenshipwithinthefirstsixmonthsafterturning18.Additionally,ifyoudon’talreadyhaveanothercitizenshipinplacebeforeyourenounce,youwillendupstatelessand,dependingonyour immigrationstatuselsewhere,mightsuddenlyfind yourself struggling to prove your identity or move freely acrossinternationalborders.Relinquishmentofcitizenshipcanbedoneinseveralways.Ifyouhavetaken

a job with a foreign government or military, or become a citizen of anothercountrywiththeintentofgivingupyourU.S.citizenship,youhaveeffectivelyrelinquished your citizenship with the United States. A few decades ago, theUnited States took a strong stance against dual citizenship and assumed thatthosewhoacquireda foreigncitizenshipdidsowith the intentofsurrenderingU.S.citizenship.ThewaytoprovethatyouhaverelinquishedU.S.citizenshipisby obtaining a Certificate of Loss of Nationality (CLN). Those who indeedrequestedaCLNbackthen,orotherwisecausedtheDepartmentofStatetoissueone,areclearlynolongerU.S.citizens.Thereisastoryofsomeonesendinganinsulting letter toHenryKissinger,which alsomentioned that he had recentlybecome Canadian. He received a CLN in response. But nowadays, the

DepartmentofStateismuch,muchmoretolerantofdualcitizenship.Theonusis on the individual to convince them that he or she acquired their newcitizenshipwiththeintentofsurrenderingU.S.citizenship.ObtainingaCLNcanbedoneataU.S.consulateeitherbyconvincingthem

thatanexpatriatingactoccurredwiththeintentofsurrenderingU.S.citizenship(theactionsdescribedabove),orbyrenouncing.Renouncingisdonebymakinganappointmentattheconsulateandinformingthemofyourintenttorelinquish.ItistheclearestandeasiestwaytogiveupyourU.S.citizenship.Itis,however,onlyapplicablefromthedateofthatappointment.Itisnotretroactive,whereasaCLN obtained by having the consulate recognize an expatriating act will bebackdated to the date of that event.Only thenwouldyou legally stopbeing aU.S.taxpayer.Ifyouhavenotfiledyourtaxesforyears(duetosomenon-willfulreason),the

Streamlined Foreign Offshore procedures are the best way to get intocompliance without having to be liable for any penalty. In order to becomecompliantundertheStreamlinedForeignOffshoreprocedures,youwouldneedto file threeyears of income tax returns (and six years ofFBAR).You could,however,electtofilemoreyears.Youwouldhavetofilefiveyearsofreturnstoavoidbecomingacoveredexpatriate.Itisimportanttocleanlycutyourtiesandavoidbeingacoveredexpatriateif

youdon’twanttheIRSpursuingyouforpastsins.SurrenderingU.S.citizenshipremoves your filing obligation going forward, but doesn’t remove pastobligations.There is also no statute of limitation on unfiled returns.Avoidingcovered expatriate status alsomeans that you can give assets to U.S. personswithout making them liable for gift taxes, among other things. Once yourenounceyourU.S.citizenship,it’sbesttocuttiescompletelyifyoucan.Thatmeansproperlyfiling5yearsof taxreturnsso that theIRSwillnotbeable tochallengethesefilings.U.S. citizens obtaining a CLN, whether for renunciation or other forms of

relinquishment, comes with the same cost. At $2,350 (as of 2016), the U.S.chargesthehighestexpatriationfeeintheworld.Thisfeecouldraiseatanytimewithout reason. Itwasonly$450at theendof2014.This fee isnowlevied toeveryonerelinquishingcitizenship,regardlessofmethod.ItischargedontopofanyExitTaxyoumighthavetopayaswell.Still,formany,thisisasmallpricetopaytobeforeverfreeofthestickyfingersoftheIRS.Renouncing yourU.S. citizenship isn’t a decision to be taken lightly, and I

advise that you consultwith an expert to determine if it is the ideal course of

actionforyou(aswellasthebestwaytotieupanylooseendsbeforeyoucutthecordentirely).It’samajorchangeinlifethatwillaffectyoubothpersonallyandfinancially.

COVEREDVS.UNCONVEREDEXPATRIATESTheso-calledExitTaxreferstothefactthatacoveredexpatriateisdeemedto

havesoldallhisorherassetsatFairMarketValueonthedaypriortohisorherrelinquishment.Theassociatedcapitalgainwillbetaxedonhisfinaltaxreturn.TheExitTaxisacapitalgaintransactiononScheduleD,withthesaleprice

beingtheFairMarketValueonthedaypriortohisorherrelinquishment.Itwillbe based on the balance sheet included in Form 8854. The Internal RevenueCode, in its great generosity, does however provide that the first $680,000 ofsuchcapitalgainswillnottaxed(IRCSection877A(a)(3)(A)).U.S.citizenswhorelinquishtheircitizenshipareeither"expatriates"(whoare

not subject to exit tax provisions) or "covered expatriates"who are subject toexittaxprovisions.So,whoisacoveredexpatriate?Acoveredexpatriateissomeonewhofailsoneofthefollowingthreetests:

1. Hastoomuchincome:dependingonyourU.S.taxliability,$155,000(whichisindexedtoinflation,peryearforthelastfiveyears).

2. Hastoomanyassets:anetworthofmorethan2millionU.S.dollars(whichisnotindexedtoinflation).

3. Failstomeetthetaxcompliancetest:doesnotmeettherequirementsofTitle26foreachofthe5yearspriortotheyearofrelinquishment.

Thereare,however,twoexceptionstotheserules:1. Thosebornwithdualcitizenshipandarestillaresidentandsubjectto

taxintheircountryofsecondresidenceandcitizenship.2. Thosewhorelinquishbeforetheageof18yearsandsixmonths,and

havenotlivedintheUnitedStatesforatleast10years.IRC Section 877A(g)(1)(B)(ii) states that an individual is not a covered

expatriateifthefollowingtwoconditionsaretrue:(I) the individual’s relinquishmentofUnitedStatescitizenshipoccursbefore

suchindividualattainsage18.5,and(II)theindividualhasbeenaresidentoftheUnitedStates(assodefined)for

notmorethan10taxableyearsbeforethedateofrelinquishment.

UNDERAGERELINQUISHMENTSPleasebeawarethatintentishardertoproveforminors,sincetheDepartment

ofStateassumesthatsuchyoungpeoplehavebeeninfluencedbytheirparentsorotheradults.Forthem,renunciationsarepreferable(tohavemorecertaintythatthe Department of State will accept it). The Department of State will acceptrenunciationsstartingatage16,butwilllikelybringupintentissuesforanyoneunder18.So,realistically,youhaveonly6monthsimmediatelyafterturning18to do it. This is coupled with the fact that those under 18 can recover theircitizenshipiftheychangetheirmind(beforeturning18.5),andtheDepartmentofStatehasastrongpreferenceagainstdoingworkfornothing.Theydon’twanttoprocessarenunciationforsomeonewhomightrequesttogettheircitizenshipbackinjustacoupleyears.Basedonallthis,therearegenerallyfourcategoriesofpeoplewhorelinquish

U.S.citizenship:(I)BornexclusivelyAmericanandrelinquishaftertheageof18yearsandsixmonths.Youwillbea“coveredexpatriate" ifyoumeetanyoneoftheabovethreetests.(II)Relinquishbeforeage18.5havinglivedlessthan10yearsintheUnitedStates.Youwillbea“coveredexpatriate”onlyifyoufail tocertify that you have been tax compliant for the five years prior toyourrelinquishment.

Thisinformationisextremelyimportantforchildrenwhoarethebeneficiariesofwealth(suchastrusts).ThisisagoodreasonforwealthychildrentosurrenderU.S.citizenshipataveryyoungage.Keepingthefamilyfortunemaydependonit.

(III)Bornwithdualcitizenshipandstill living in theothercountry,nothavinglivedintheU.S.formorethan10yearsoutoftheprevious15.Youwillbea"coveredexpatriate" ifyoufail tocertify thatyouhave been tax compliant for the five years prior to yourrelinquishment.(IV) Born with dual citizenship, is older than 18 years and sixmonths, and is not living in the other country at the time ofrelinquishment.Youwillbetreatedthesameascategory(I)above.

DualcitizenswhointendtorenounceU.S.citizenshipshouldconsiderwhere

theyresideatthetimetheyrenounce.Somepeoplegohometodie.SomepeoplegohometorenounceU.S.citizenshipandmeetthecertificationrequirements.Ifthey are not met, the individual should ensure that he or she owes no U.S.incometaxastheygothroughtheirunrealizedgains.Iftherearenounrealizedgains,therecanbenotaxbaseandthereforenoincometaxcausedby"marktomarketrules."

AVOIDINGCOVEREDEXPATRIATESTATUSBEYONDTHEEXITTAX

Therearetwoadditionalpotentialpointsoftaxationtobeawareof.Thefirsthappens when you leave the United States, but only if you have “unrealizedgains". The second tax point occurs when someone receives a gift from acovered expatriate (IRC Section 2801). This can occur for decades into thefuture,longafterthedateofexpatriation.Itispossibleforsomeonetohavesignificantassetswithoutunrealizedcapital

gains.Bothrichandpoorindividualswouldbeinthesamepositionwhentheyexpatriate.Whethertheyhave$1millionworthofassetsoronly$5,000worthofassets,theywillnothavetopayanyexittaxsolongastheyhavenounrealizedcapitalgains.If they don’t meet the certification statement (certifying that they were

compliantfortheprior5years),theywouldbecoveredexpatriatesandsubjecttothegifttaxprovision.UnderIRCSection2801,iftheyevergiftmoneytoaU.S.citizen(evendecadeslater),therecipientwillhavetopayagifttaxofeffectively40%.A common example is a familymemberwhowould have retainedU.S.citizenship. This is why, in some families, relinquishment becomes a familyaffair.

YOURFINALTAXRETURNAfter renouncing,youwillhave to fileone final tax returnandattachForm

8854.Assumingthatyoudidn’trelinquishonJanuary1,yourfinalreturnwillbea

dual-statusreturn,meaningthatitcoversbothaperiodduringwhichyouwerearesidentandaperiodduringwhichyouwereanon-resident.Adual-statusreturntakes the form of a tax return (1040 or 1040NR) with the other one beingattached as a statement. The tax return is the one reflecting your status as ofDecember31. Inour case, youwere anon-residentonDecember31.As suchyouwouldprepareataxreturnonForm1040NRandattachForm1040afterit.Youwouldwrite“DUALSTATUSRETURN”atthetopofForm1040NRand“DUALSTATUSSTATEMENT”atthetopofForm1040.Form1040NRcoverstheperiodwhenyouwereanon-resident.Itwouldonly

coverU.S.sourcedincome(whichmightbezero).Form 1040 covers the period when you were a U.S. citizen, reporting all

worldwide income. It comes with all appropriate schedules and informationalforms,andofcourseForm8854.

WHYYOUSHOULDCONSIDERACQUIRINGANEWPASSPORT(ORTWO)

WhetheryoueverplantogiveupyourU.S.citizenship,youshouldknowthatyoualwayshaveotheroptions.TheUnitedStatesisoneofmanycountriesthatallows its citizens to holdmultiple simultaneous passports from other nationsever since two pivotal SupremeCourt rulings (1967:Afroyim v. Rusk; 1980:Vancev.Terrazas). It’s gettingmore commonnow for themodern traveler tohold two or more passports obtained through entirely legal means.Unfortunately, it’s also quite common to fall victim to black or gray marketpassport scams that promise quick results through backdoor channels andoutrightforgery.Youdon’thavetoresort tothesescamsifyouunderstandthelegaloptionsavailabletoyou.Having a second citizenship can facilitate travel, allowing one to get better

immigrationstatusorhaveaplacetogobacktoifaworst-casescenariooccurs.Being a French citizen, I can get permanent resident status anywhere in theEuropeanUnion(providedIgetajobthereorregisterintheirsystemasaself-employedperson).Argentiniancitizenswithanothercitizenship faredbetter in2001duringtheireconomicdepression,havingtheabilitytoresettleinanothercountry. Iexpect thesame toapply today toVenezuelancitizens toescape thecountry’scurrentrampanthyperinflation.

HOWTOGETASECONDPASSPORTThebestplacetoholdapassportdependsonwhereyouplantotravelandhow

hard you arewilling towork to get it. If your ambitions lie inEurope, you’llprobablywanttogetapassportfromamembercountryoftheEuropeanUnion(orat leastonethatwill letyouvisit theSchengenzonewithoutavisa).SouthAmerica has theMercosur agreement, which will allow you to travel aroundnearlythewholecontinentwithonlyyourIDcardandstayforextendedperiodsof time if you are a citizen of any member country. Some former U.S.S.R.nations will give you easy access to Russia (normally very difficult forAmericans)andthesurroundingnations.Asfaraslegallybecomingacitizengoes,youarebasicallyrestrictedtofour

options: ancestry,marriage, investment, and residence. Bewary of any shadyfast talkerswhoclaim tobeable togetyouapassport foranycountrybyanyother means, such as “knowing a guy” in the immigration department. It ishighlylikelythatsuchapassportwouldbeeithergraymarket(alegalpassportobtainedthroughillegalmeans)orblackmarket(afabricatedpassport).Thatis,if theydon’t just take yourmoney and run, leavingyou emptyhanded.Thesehorrorstoriesaremorecommon thananyone likes toadmit,but Ihope thatasinternationallifestylesbecomemorecommonplacethiswillbelessofanissue.Ifyouaresuspiciousofanyoffshoreproviderwhomakesbigpromisesabouthisabilitytogetyouanotherpassport,feelfreetocontactmebeforeproceedingasImaybeabletovouchfor(ordismantle)theirso-calledcredibility.Many countries have ancestry programs for descendants of citizens to also

claim citizenship if they desire. The descent programs of Armenia, Bulgaria,Croatia, France, Ireland, Israel, Italy, Lithuania, Poland, Rwanda, Serbia,Turkey,andUkraineextendfor twoor threegenerations,so it’sworth lookinginto if you have a grandparent or great-grandparent from one of these places.Justbepreparedtoproducethedocuments(e.g.birthcertificates)provingyourlineage and take at least one trip there to apply for and/or pick up your newpassportwhenitisreadyafewmonthslater.Marryingaforeignerputsyouonthefasttracktocitizenshipintheircountry

(and them on the fast track to becoming American), but the process can bedifferent for each nation. Usually, residency is acquired first, and after apredeterminedamountoftimehaspassedyoucanapplyforyourpassport.Generally,themoredevelopedthecountry,thegreaterthemeasurestheywill

takeagainstmarriagefraud.TheUnitedStatesreportedlygoestogreatlengthstoprevent illegal aliens from obtaining passports through sham (usually paid)marriages. Still, this doesn’t stop many people from “helping their foreignerfriends out” by entering into “on-paper” marriages with them. Due to thepotentialproblemsthiscancausedowntheroad,ifthevalidityofyourmarriageisevercalledintoquestion,Idonotrecommendthatyoumarrysomeonejustfortheirpassport.However,ifyouhappentofallinlovewithsomeonefromanothercountry,morepowertoyou.For individuals of a certain net worth, economic investment opportunities

exist that will either put you on the short path or instantly qualify you forcitizenship. Many island nations are notorious for offering these passportopportunitiesatinvestmentordonationlevelsrangingfromsixtosevenfigures.Ifyouqualify,youcanexpecttoreceiveyourpassportinjustseveralweeks.ASt.KittsandNevispassportallowstraveltoalargearrayofcountries,includingtheSchengenarea,butitalsocomewithasocialstigmanototherwiseassociatedwith citizenships obtained through birth, marriage, residence, or ancestry in aworld superpower. I’ve heard many stories from people who acquired thesecitizenshipsyearsago,andstillmustspendseveralextraminutesateverybordercrossing as guards go through a few extra security precautions to make sureeverythingislegitimate.Manyofthemhaveneverevenheardofthesenations,letaloneseenapassportfromone.Ifyouarefeelingthriftyandcanonlyaffordthe $45,000 fee for a Comoros Islands passport, you would havemuchmorelimitedtravelopportunities.SimilarprogramsexisteveninsomeofthemostdesirablepartsofEuropeand

LatinAmerica, such asMalta, Cyprus, and Colombia. AU.S. green card canalsobeobtainedbyinvesting$500,000(EB-5program).Then,U.S.citizenshipcan be obtained after residing there for 5 years. I would not recommend thatsuch awealthy person enter theU.S. tax system (nonimmigrant statusE or Lwouldbemoreappropriate),buteconomiccitizenshipiswidespreadindeed.Butformostpeople,thebestwaytoobtainasecondpassportwillsimplybe

throughthepathofnaturalizationasapermanentresident.Therequirementsforobtaining residency vary widely from country to country, but they usuallyinvolve some combination of registering a local company, investing a certainamount of money (or just holding it in a local bank account), having anemployment contract with a local company, and spending a certainminimumamountof timewithin thecountryeachyear.Somecountry’srequirementsareveryeasytomeet.Othersareverydifficult.ButthisisoneareawherehavinganAmericanpassportcanmakethingsalittleeasierforyou.

American citizens are still treatedwith a high degree of reverence inmanyplaces that welcome foreigners. Panama is a popular choice for Americansseekingforeignresidency,astheymaintaina“friendlynations”visapolicywith47 countries that makes it easy to start a company and be approved forcitizenship just five years later (and with minimal requirements for actuallybeingpresentinthecountryduringthattime).

THEPRICEOFCITIZENSHIP16

Country Investment

Minimum17

Residence

Requirements18

Timeto

Citizenship19

AntiguaandBermuda

$250,000 5daysinoneperiodover5

years

Immediate

Cyprus €2.5million

None(underreview)

Immediate

Dominica $100,000 None ImmediateGrenada $250,000 None ImmediateMalta €1.15

million6months 1year

SaintKittsandNevis

$250,000 None Immediate

Australia AUD$5million

40days/year 5years

Bulgaria €500,000 None 5years

Canada20 CAD$800,000

730daysovera5-yearperiod

3years

THEPRICEOFRESIDENCY

Country InvestmentMinimum1

ResidenceRequirements2

TimetoCitizenship3

Canada-Quebec21

CAD$800,000

730daysovera5-yearperiod

3years

France €10million N.D. 5yearsGreece €250,000 None 7yearsHungary €250,000 None 8yearsIreland €500,000 None N.D.Latvia €35,000 None 10yearsNewZealand

NZD$1.5million

146days/year

5years

Portugal €500,000 7days/year 6yearsSingapore SGD$2.5

millionNone 2years

Spain €500.000 None 10yearsSwitzerland CHF

250,000/yearNone 12years

UnitedKingdom

£1million 185days/year

6years

UnitedStates

$500,000 180days/year

7years

CONCLUSION

We live in a rapidly changing world. The rules we were all once used toplaying by no longer apply. With the recent worldwide implementation ofFATCAreporting,stayingundertheradarwhilenotfilingtherequiredincometaxreturnsandFBARisnolongeraviableoption.Nomatterhowlongyouhavelaid low and kept your business to yourself, as an American citizen you arealwaysunderthreatofcrackdown.Don’t let panic stop you from taking the crucial step of becoming tax

compliant.People like to imagine theworst.Theysufferdelusionsofgrandeurabout theU.S. government keeping close tabs on their everymove.Odds are,you simply aren’t important enough to them (unless you are part of the ultra-wealthyorhavecommittedseriousfinancialcrimes,suchastakingactivestepsto hide your assets or income). It’s simply amatter of preparing your returnscorrectly and using the resources available to keep your stress and expensesdown.You also shouldn’t let this fear stop you from pursuing an international

lifestyle. I know better than anyone how complex it can all seem from anoutsider’s perspective. In addition to the many business and bankingopportunities afforded by looking outside your home jurisdiction, it’s anextremely exciting lifestyle.Youwill collaboratewith interesting people.Youwill learn more about yourself and grow as a person. It’s just one part ofsteppingintoamuchlargerworld.Youmayhavebeenreadingthisbookinaslightstateofdesperation,rapidly

nearingoralreadypast thestandard taxfilingdeadline. If that’s thecase, Iamhappy to help you file an extension . Contact me by email me atowagner@1040abroad.com, with the subject line “Free extension book offer”andI’llgetbacktoyoutosecurelycollectyourSSNandaddressandgetitfiled.I’llgladlyfileyourtaxextensionforfreeasathankyouforreadingmywork.I also created a tool to help you determine your eligibility for the Foreign

EarnedIncomeExclusion.Youcanfinditattiny.cc/feie-tool.Ihopethatitwill

beuseful,especiallysincemostexpatsrelyontheFEIE.Finally, the only definitiveway to be out of theU.S. tax system as aU.S.

citizenistonolongerbeaU.S.citizen.Relinquishingone’scitizenshipisaverypersonalandsometimesemotional thingtodo.Inmymindthemost importantbenefitofU.S.citizenshipistheabilitytocomebacktotheU.S.,beingabletoworkandstayaslongasonewisheswithnorestriction.Additionally,ifyoudonot have equivalent travel freedom in the form of another equally powerfulcitizenship,youmayfindyourselflamentingthelossofyourpreviousabilitytotravel with little visa restriction. No matter what your situation, I do notrecommendbecomingstateless(i.e.renouncingwithouthavingalreadyacquiredanothercitizenship).Thatsaid,IseemanyaccidentalAmericanswithlittletonotieswiththeUnitedStatesforwhomFATCAmadethedecisiontoleavetheclubaneasyone.IwishyoualltheverybestinyourlifeofadventureoutsidetheUnitedStates.

ABOUT1040ABROAD

BeforeobtainingmyU.S.citizenshipand travelingallover theworld, Iwasborn and raised in France.My experience learning the intricacies of the U.S.immigration process combined with my desire to travel freely lead me tospecializeintaxesforAmericanslivingabroad.Americansareexpatriatingingreaternumbersnowthaneverbefore,andthis

trend shows no signs of slowing. Technology is making it easier to liveunconventional and location independent lifestyles. I aim to serve as a bridgebetweenmyclientsandthegovernmenttheyareobligatedtostayfinanciallytiedto.IhelpAmericansAbroadfiletheirtaxesanddevisestrategiesthatmakesense

for their lifestyle. These strategies encompass all aspects of registering anoffshorebusiness,openingabankaccountabroad,andplanningnewresidenciesandcitizenships.Ifyouareconsideringgoingabroadforevenpartoftheyear,talktomefirst

todiscussyouroptions.Thestepsyoutakenowwillbringyougreaterfreedom,so take the right steps from day one. Find out more by visitingwww.1040abroad.com.

INDEX

401(k),401(k)

[SeeAffordableCareAct]ACA

accidentalAmerican,accidentalAmerican

accidentalAmericans,accidentalAmericans

AdditionalChildTaxCredit,AdditionalChildTaxCredit,AdditionalChildTaxCredit,AdditionalChildTaxCredit,AdditionalChildTaxCredit,AdditionalChildTaxCredit,AdditionalChildTaxCredit,AdditionalChildTaxCredit

AdditionalGrossIncome

AffordableCareAct,AffordableCareAct

assets,assets,assets,assets,assets,assets,assets,assets,assets,assets,assets,assets,assets,assets,assets,assets,assets,assets,assets,assets,assets

BonaFideResidencetestbonafideresidentbonafideresident

bonafideresident,bonafideresident,bonafideresident,bonafideresident,bonafideresident,bonafideresident,bonafideresident

CanadianRESP

capitalgains,capitalgains,capitalgains,capitalgains,capitalgains,capital

gains,capitalgains,capitalgains,capitalgains,capitalgains,capitalgains,capitalgains,capitalgains,capitalgains

CertificateofLossofNationality

[SeeControlledForeignCorporation]CFC

children,children,children,children,children,children,children,children,children,children,children,children

[SeeCertificateofLossofNationality]CLN

ControlledForeignCorporation,ControlledForeignCorporation,ControlledForeignCorporation,ControlledForeignCorporation

coveredexpatriates,coveredexpatriates

definedcontributionplan

digitalnomad,digitalnomad,digitalnomad

DividendIncome

dividenddividendsdividendsdividendsdividendsdividendsdividends

dormantcorporation,dormantcorporation,dormantcorporation,dormantcorporation,dormantcorporation

dualcitizenship,dualcitizenship,dualcitizenship,dualcitizenship

excessdistribution,excessdistribution,excessdistribution,excessdistribution,excessdistribution,excessdistribution,excessdistribution

ExitTax,ExitTax,ExitTax

extension,extension,extension,extension

[SeeForeignAccountTaxComplianceAct]FATCA

FBAR,FBAR,FBAR,FBAR,FBAR,FBAR,FBAR,FBAR,FBAR,FBAR,FBAR

[SeeForeignEarnedIncomeExclusion]FEIE

FinCEN114,FinCEN114

ForeignAccountTaxComplianceAct

foreignbankaccounts,foreignbankaccounts,foreignbankaccounts

foreignbanks

foreigncorporation,foreigncorporation,foreigncorporation,foreigncorporation,foreigncorporation,foreigncorporation,foreigncorporation,foreigncorporation,foreigncorporation,foreigncorporation,foreigncorporation,foreigncorporation,foreigncorporation,foreigncorporation,foreigncorporation,foreigncorporation,foreigncorporation,foreigncorporation,foreigncorporation,foreigncorporation

foreigncorporations,foreigncorporations,foreigncorporations,foreign

corporations

ForeignEarnedIncomeExclusion,ForeignEarnedIncomeExclusion,ForeignEarnedIncomeExclusion,ForeignEarnedIncomeExclusion,ForeignEarnedIncomeExclusion,ForeignEarnedIncomeExclusion,ForeignEarnedIncomeExclusion,ForeignEarnedIncomeExclusion,ForeignEarnedIncomeExclusion,ForeignEarnedIncomeExclusion,ForeignEarnedIncomeExclusion,ForeignEarnedIncomeExclusion,ForeignEarnedIncomeExclusion,ForeignEarnedIncomeExclusion,ForeignEarnedIncomeExclusion

ForeignHousingDeduction

ForeignHousingExclusion

foreignmutualfunds,foreignmutualfunds,foreignmutualfunds

ForeignTaxCredit,ForeignTaxCredit,ForeignTaxCredit,ForeignTaxCredit,ForeignTaxCredit,ForeignTaxCredit,ForeignTaxCredit,ForeignTaxCredit,ForeignTaxCredit,ForeignTaxCredit,ForeignTaxCredit,ForeignTaxCredit,ForeignTaxCredit,ForeignTaxCredit,ForeignTaxCredit,ForeignTaxCredit,ForeignTaxCredit,ForeignTaxCredit

foreigntrusts,foreigntrusts

FORM1040

Form1040,Form1040,Form1040,Form1040,Form1040,Form1040,Form1040,Form1040,Form1040,Form1040,Form1040,Form1040,Form1040,Form1040,Form1040,Form1040,Form1040,Form1040,Form1040,Form1040,Form1040,Form1040,Form1040,Form1040

Form1040NR,Form1040NR

Form1099-DIV

Form1099-INT

Form1116,Form1116,Form1116,Form1116

Form2555,Form2555,Form2555,Form2555,Form2555,Form2555,Form2555

Form2555-EZ

Form3520,Form3520,Form3520

Form3520A

Form4868,Form4868

Form5471,Form5471,Form5471,Form5471,Form5471,Form5471,Form5471,Form5471,Form5471,Form5471,Form5471,Form5471

Form8621,Form8621,Form8621,Form8621

Form8854,Form8854,Form8854,Form8854

FORM8938

Form8949

Form8960

Form8965

FormITDA-NM

FormK-1,FormK-1,FormK-1

FormW-2

[SeeForeignTaxCredit]FTC

greencard,greencard

HealthCoverageExemption

housingexclusion,housingexclusion,housingexclusion,housingexclusion

InterestIncome

[SeeForm8854]IntialandAnnualExpatriationStatement

LLC,LLC

long-termcapitalgains,long-termcapitalgains

NetInvestmentIncomeTax,NetInvestmentIncomeTax

[SeeNetInvestmentIncomeTax]NIIT

partnership,partnership,partnership,partnership,partnership

partnerships,partnerships,partnerships,partnerships

PassiveForeignInvestmentCompany,PassiveForeignInvestmentCompany

passports,passports,passports,passports,passports

[SeePassiveForeignInvestmentCompany]PFIC

physicalpresencetest,physicalpresencetest,physicalpresencetest

RegisteredEducationSavingsPlan

Renouncingyourcitizenship

renunciations

residencies,residencies

[SeeRegisteredEducationSavingsPlan]RESP

Scorporation,Scorporation,Scorporation

Scorporations

ScheduleA,ScheduleA,ScheduleA,ScheduleA,ScheduleA,ScheduleA,ScheduleA,ScheduleA,ScheduleA,ScheduleA,ScheduleA,ScheduleA,ScheduleA,ScheduleA,ScheduleA,ScheduleA,ScheduleA,ScheduleA,ScheduleA

ScheduleB,ScheduleB,ScheduleB,ScheduleB,ScheduleB,ScheduleB,ScheduleB

ScheduleC,ScheduleC,ScheduleC,ScheduleC,ScheduleC,ScheduleC,ScheduleC,ScheduleC,ScheduleC

ScheduleD,ScheduleD,ScheduleD,ScheduleD,ScheduleD,ScheduleD

ScheduleE,ScheduleE,ScheduleE,ScheduleE,ScheduleE,ScheduleE,ScheduleE

ScheduleSE,ScheduleSE

Self-EmploymentTax,Self-EmploymentTax,Self-EmploymentTax,Self-EmploymentTax,Self-EmploymentTax

SocialSecurity,SocialSecurity,SocialSecurity,SocialSecurity,SocialSecurity,SocialSecurity,SocialSecurity,SocialSecurity,SocialSecurity,SocialSecurity,SocialSecurity,SocialSecurity,SocialSecurity,SocialSecurity,SocialSecurity,SocialSecurity,SocialSecurity,SocialSecurity,SocialSecurity,SocialSecurity,SocialSecurity,SocialSecurity,SocialSecurity,SocialSecurity,SocialSecurity,SocialSecurity

[SeeSocialSecurity]SocialSecurityTotalizationAgreement

SubpartFIncome,SubpartFIncome,SubpartFIncome,SubpartFIncome,SubpartFIncome,SubpartFIncome,SubpartFIncome,SubpartFIncome,SubpartFIncome,SubpartFIncome,SubpartFIncome,SubpartFIncome,SubpartFIncome

TaxandCredits

U.S.529

BacktoTOP

Notes

[←1]Thehousingexclusioncanfurtherincreasethisamount.

[←2]TheForeignAccountTaxComplianceAct(FATCA)billwassignedintolawbyPresidentObamaonMarch18,2010.Itsfullimplementationoccurredin2015.Whowouldhaveguessedthatitwouldtakefiveyearstogeteverybankintheworldtocomplywithlocallaws?Otheraspectsofthelawwentintoeffectearlier.Forexample,thecreationofForm8938in2011wasalsoanaspectofFATCA.

[←3]Source:Henley&PartnersVisaRestrictionsIndex2016

[←4]AbankholidayinWashingtonDCfallingonApril17in2017.

[←5]Form8949reportsthedetailsofsuchtransactions,whicharethenaggregatedonScheduleD.

[←6]PersonalServiceContracts(IRC954(c)(1)(H))amountreceivedwhentheclientpersonallycontractsforservicestobeprovidedbyagivenperson,ortheserviceproviderownsatleast25%oftheCFC.

[←7]ArelatedpersonwithrespecttoaCFCissomeonewhocontrolsoriscontrolledbytheCFC,oracorporation,partnership,trustorestatewhichiscontrolledbythesamepersonwhocontrolstheCFC.

[←8]ThesearetheIRSinstructionsforForm2555-EZ.Whilecongresspasseslaws(theInternalRevenueCode),theIRSadministersthem,anddictateswhichformscanbefiledtocomplywiththeIRC.

[←9]“foranuninterruptedperiodwhichincludesanentiretaxyear”IRC911(d)(1)(A)

[←10]Notethatifyoufallinthiscategory,itprobablymeansyouhaveagreencard.Inthiscase,claimingtobeaBonaFideResidentofaforeigncountrycouldjeopardizeyourimmigrationstatus.

[←11]Ifyoupaidtaxestoaforeigncountry,youcanclaimthemhere.However,itismorebeneficialtousetheForeignTaxCredit.

[←12]ExcludeanyeducationalexpensesyouclaimedonLine23andtuition/feesdeductibleonLine24.Certaineducationalexpensesaresubjecttolimitation.SeeTaxTopic513orPub.970fordetails.Youareeligibletotakeacreditinsteadofadeductionforcertaineducationalexpenses.SeeForm8863fordetails.

[←13]SeePub.529fordetails.

[←14]Taxgeeksusetheterm“sourced”,asin“thisincomeissourcedtoCanada”.

[←15]Regs.Sec.301.7701-3providesthatanentityisacorporation"ifallmembershavelimitedliability".In2004,variousprovincespassedlegislationguaranteeinglimitedliabilitytomutualfundinvestors.Indeed,in2003,theBankofCanadaissuedareportconcludingthatthepersonalliabilityofinvestorsinCanadianmutualfundswaspossible.Anentity'sclassificationisdeterminedwhenitiscreated.Assuch,thereisastrongcasethatmutualfundscreatedbefore2004arepartnerships,andnotPFICs.

[←16]Source:InternationalMonetaryFund.

[←17]Otherformsofinvestmentmaybeauthorized.

[←18]ExtraMinimumResidenceRequirementsundertheImmigrantInvestorProgram.Thecriteriaforresidencequalifyingforcitizenshipmaybedifferent.

[←19]Includeswaitingperiodtobecomeapermanentresidentundertheresidencyprograms.

[←20]ProgramsuspendedsinceFebruary2014.

[←21]Whilethisisnotspecifictotheimmigrantinvestorprogram,aphysicalpresenceof730daysoverafive-yearperiodisrequiredtomaintainpermanentresidentstatus.