What Happens If You Dont File Taxes While Living Abroad
Figuring out your tax obligations as a U.S. expat tends to be extremely complicated. Not only does an American living abroad face the same income tax return filing requirements as domestic citizens and residents, but they also have to include several additional forms and filings as well. Most of these requirements are conditional, so a single taxpayer probably will not need to include all the extras with their return. Some, however, are quite common among those who live overseas, including Form 2555 used in conjunction with the foreign earned income exclusion and FinCEN Form 114, which is used to file an FBAR. If you are a U.S. citizen or permanent resident living abroad and are unsure about your filing obligations or what happens if you dont file, keep reading as the international tax accountants at U.S. Tax Help explain.
What Is The Additional Medicare Tax
If youre a high earner, you might owe not only the standard Medicare tax, but also the additional Medicare tax, on some of your earned income for the year. The additional Medicare tax is an extra tax on earned income in excess of the threshold amount for your filing status.
If youre married and file a joint return, the tax doesnt kick in until your combined earned income exceeds $250,000. But, if youre married and file separate returns, the additional Medicare tax kicks in when either spouse exceeds $125,000 of earned income on his or her income tax return. For singles and heads of household, the threshold is$200,000.
If you work as an employee, your employer will start withholding for the additional Medicare tax when your earned income at that job exceeds $200,000, regardless of your filing status. You cant request that your employer not withhold until you cross $250,000 if youre married and plan to file a joint return, or request that your employer start withholding once you exceed $125,000 if youre married but will file separate returns. Instead, youll have to make up any underpayment, or receive any excess withheld as a refund, when you file your income taxes.
There is no additional Social Security tax or any Social Security equivalent to the additional Medicare tax as of 2020.
How Do I Make My Quarterly Payments
Estimated tax is the method used to pay Social Security and Medicare taxes and income tax, because you do not have an employer withholding these taxes for you. Form 1040-ES, Estimated Tax for Individuals, is used to figure these taxes. Form 1040-ES contains a worksheet that is similar to Form 1040 or 1040-SR. You will need your prior years annual tax return in order to fill out Form 1040-ES.
Use the worksheet found in Form 1040-ES, Estimated Tax for Individuals to find out if you are required to file quarterly estimated tax.
Form 1040-ES also contains blank vouchers you can use when you mail your estimated tax payments or you may make your payments using the Electronic Federal Tax Payment System . If this is your first year being self-employed, you will need to estimate the amount of income you expect to earn for the year. If you estimated your earnings too high, simply complete another Form 1040-ES worksheet to refigure your estimated tax for the next quarter. If you estimated your earnings too low, again complete another Form 1040-ES worksheet to recalculate your estimated taxes for the next quarter.
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Paying Taxes On Social Security
You should get a Social Security Benefit Statement each January, detailing the benefits you received during the previous tax year. You can use it to determine whether you owe federal income tax on your benefits. The information is available online if you enroll on the Social Security site.
If you owe taxes on your Social Security benefits, you can make quarterly estimated tax payments to the IRS or have federal taxes withheld from your payouts before you receive them.
Do Seniors Have To File Federal Taxes
For tax year 2020, for which the deadline to file in 15 April 2021, many seniors over the age of 65 do not have to file a tax return. If Social Security is your sole source of income, then you don’t need to file a tax return, says Turbo Tax.
The exceptions to this are as follows, if you are over 65 and
- you are unmarried and your gross income is $14,050 or more – social security is not included in income
- you are married, filing jointly and your combined gross income is $27,400 or more – social security is not included in income.
- if your spouse is under 65 years old, then the threshold amount decreases to $26,100
If any of the above apply to you, then you do need to file a tax return.
If youre a senior and do need to file a tax return, Turbo Tax advise that there are ways you can reduce the amount of tax you have to pay on your taxable income.
#FYI – Senior Citizen’s – Social Security / Federal Benefits – Find out if you missed any first- or second-round economic stimulus payments and how to get a rebate credit when you file your federal income tax form. –
Smith A D
As long as you are at least 65 years old and your income from sources other than Social Security is not high, then the tax credit for the elderly or disabled can reduce your tax bill.
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State Taxes For Expats Summary
Every expats situation is different. Their reasons for moving abroad, their present and future financial circumstances when they move, their income types and sources, which country they move to, how long theyre moving abroad for, and the state where they last lived in the US, all affect whether expats are liable to file state taxes from abroad or not.
Two essential final pieces of advice: firstly, check the rules in the state where you last lived, ideally before you move abroad, but otherwise as soon as possible. Checking before moving abroad of course gives you the best possible chance of ensuring that you can minimize having to file state taxes as an expat.
Secondly, seek advice. Filing US taxes from abroad, both federal and state taxes, is more complex than filing in the states. There are additional forms to file, additional filing and reporting requirements, and often foreign currencies to convert, too, so its almost always beneficial to seek assistance from a US expat tax specialist.
How Much Can A Small Business Make Before Paying Taxes
If you operate a small business, you must pay taxes on the income, regardless of the profit and loss. The tax return you must file depends on how your business is structured. For example, if you have a sole proprietorship youll file the schedule C with your personal tax return.
If youre a freelancer, you must also pay self-employment taxes for income more than $400. These taxes cover Medicare and social security taxes.
Sole proprietors must file IRS Form 1040, Schedule C and Schedule SE if your net income is greater than $400. If you have an employee, you will need to withhold federal and state income taxes and Social Security and Medicare taxes for each employee.
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File Your Missing Returns
You may want to file your old returns before a demand is made. Thereâs no time limit for submitting a previously unfiled return. However, if youâd like to claim your refund, you have up to three years from the due date of the return. It may be a good idea to speak with an experienced tax attorney or CPA before filing old returns. But, here are some benefits of getting missing tax returns filed:
- Protect your Social Security benefits: If youâre self-employed and donât file, you wonât receive credits toward Social Security retirement or disability benefits.
- Avoid issues obtaining loans: Loan may be denied or delayed if you cannot prove income by providing tax returns or reportable income.
- Not having to worry about your unfiled taxes: Once your tax issue is resolved, it will free up your time for more enjoyable pursuits.
When Seniors Must File Taxes
For the tax year 2019, you will need to file a tax return if you are not married, at least 65 years of age, and your gross income is $13,850 or higher. But, if you live on your Social Security benefits, you dont include this in your gross income according to TurboTax. If this is solely the income you receive, then your gross income comes out to zero, and you wont have to file a federal income tax return. But if you do earn additional income that is not exempt from being taxed, then each year you must figure out whether the total exceeds $13,850.
For tax years previous to 2018 , these amounts are based on the years standard deduction, in addition to the exemption amount for your filing status and age. For tax years after 2018, only the standard deduction is used because exemptions are no longer used in calculating your taxable income under the new tax law passed in the latter part 2017.
When you and your spouse are 65 years of age or older and married and are going to file a joint return, you have to file a return if your joined gross income exceeds $26,600 or more. When your spouse is under 65 years old, the threshold amount diminishes to $25,300. Bear in mind that these income thresholds only apply to the 2018 tax year, and usually increase somewhat each year after.
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Why You Might Want To File A Tax Return Anyway
If your income is below the threshold or your income comes solely from Social Security benefits, you dont have to file, but you might still want to send in a return. This idea might sound counterintuitive, so bear with us. There could be circumstances that warrant you filing a tax return.
The most compelling reason is that youre due a tax refund. These refunds could be in the form of:
Further, if you do have losses from investments, youll want to make sure you file so that you can potentially claim those losses as a credit in future years. Without filing, the IRS wont have a record of the losses, which would prevent you from being to claim a credit during a more profitable year.
The same principle is true for business losses, but the rules are slightly different. For example, a net loss from business operations, also called a net operating loss or NOL, can be carried for two years. This gives you some flexibility on when and how you want to apply a business loss.
Tax Credit For Seniors
Even if you must file a tax return, there are ways you can reduce the amount of tax you have to pay on your taxable income. As long as you are at least 65 years old and your income from sources other than Social Security is not high, then the tax credit for the elderly or disabled can reduce your tax bill on a dollar-for-dollar basis.
Remember, with TurboTax, we’ll ask you simple questions about your life and help you fill out all the right tax forms. Whether you have a simple or complex tax situation, we’ve got you covered. Feel confident doing your own taxes.
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Can Expats Mitigate State Taxes By Claiming The Foreign Earned Income Exclusion Or The Foreign Tax Credit
Expats can claim either the Foreign Earned Income Exclusion or the Foreign Tax Credit by filing the relevant forms when they file their federal taxes to reduce their US federal tax bill and avoid double taxation.
The Foreign Earned Income Exclusion lets expats exclude their earned income while they live abroad from US tax , while the Foreign Tax Credit provides US tax credits in lieu of foreign taxes paid abroad.
Unfortunately, federal tax filing rules are entirely separate from those for state tax filing, and these IRS provisions cant always be applied to state tax liability the ability to use the Foreign Earned Income Exclusion or the Foreign Tax Credit varies by state.
This does unfortunately mean that some expats who still have state tax filing responsibilities while living in a foreign country may experience double taxation, paying both state taxes and foreign taxes on their income without the ability to claim tax credits.
Other Situations That Require Filing A Tax Return
In addition to requirements based on age, your filing status and income, along with rules regarding the Affordable Care Act and self-employment income, there are several other situations that require you to file a tax return.
This includes if you owe any special taxes, such as the alternative minimum tax extra taxes on qualified plans like an IRA household employment taxes for employees like nannies, housekeepers or gardeners or tips you didnt report to your employer. You must also file if you had write-in taxes that might include taxes on group term life insurance or health savings accounts. You also have to file if you have recapture taxes on the profitable sale of an asset.
A second instance in which you have to file a return is if you or your spouse received distributions from a health savings account, Archer MSA or Medicare Advantage MSA.
If you worked for a church or a church-controlled organization that is exempt from paying social security and Medicare taxes and you had wages of $108.28 or more, youre required to file a return.
Finally, if you have a tax liability and are making payments under an installment agreement, you must file a return.
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Penalties For Not Paying Your Taxes
Even if you file an extension to submit your tax return, you must pay any estimated tax you owe by April 15, 2021. If you do not pay your taxes, you will be charged a penalty and owe interest on any unpaid balance.
The penalty for failing to pay your taxes by the due date is 0.5 percent of your unpaid tax for each month or part of a month that your return is late. This penalty is capped at 25 percent of late unpaid taxes. If you file your return on time and request to pay by an installment agreement, the penalty drops to 0.25 percent for each month or part of a month of the installment agreement.
Youre also charged interest on the unpaid balance, which compounds daily. The rate is set each quarter and is based on the federal short-term rate, plus an additional 3 percent.
If you owe taxes and dont file your return on time, youll be charged a penalty for failing to file. This is usually five percent of the tax owed for each month or part of a month your return is late. This penalty is also capped at 25 percent
How Much Of Your Social Security Income Is Taxable
Social Security payments have been subject to taxation above certain income limits since 1983. No inflation adjustments have been made to those limits since then, so most people who receive Social Security benefits and have other sources of income pay some taxes on the benefits.
No taxpayer, regardless of income, has all of their Social Security benefits taxed. The top-level is 85% of the total benefit. Here’s how the Internal Revenue Service calculates how much is taxable:
- The calculation begins with your adjusted gross income from Social Security and all other sources. That may include wages, self-employed earnings, interest, dividends, required minimum distributions from qualified retirement accounts, and any other taxable income.
- Then, any tax-exempt interest is added.
- If that total exceeds the minimum taxable levels, at least half of your Social Security benefits will be considered taxable income. You then have to take the standard deduction or itemize deductions in order to arrive at your net income.
The amount you owe depends on precisely where that number lands in the federal income tax tables.
Combined income = your adjusted gross income + nontaxable interest + half of your Social Security benefits
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Should I File A Tax Return Even If Im Not Technically Required To
There are some cases where its advisable to file a tax return anyway, even if you could legally decline.
First, if you had federal income tax withheld from your pay, or if you made estimated tax payments, you should file in order to get any surplus withholding refunded back to you.
Second, there are a few tax that can give you a refund even if you didnt make enough income to file. These are called refundable credits. Nonrefundable credits can only apply against taxes you owe.
- Earned Income Tax Credit You could qualify for the EIC if you worked but didnt earn a lot of money. Your credit amount will depend on income level, filing status and how many dependents you claim.
- Additional Child Tax Credit This credit could be available if you have at least one qualifying child and you didnt receive the full amount from the Child Tax Credit.
- American Opportunity Credit The maximum credit for this education credit per student is $2,500 for the first four years of postsecondary education. Up to $1,000 of the credit can be refundable.
With these credits, you have to file in order to receive the benefit.