Four Things Your Expat Employees Should Know

If you are a U.S. company and you have employees outside the U.S. who are U.S. citizens or green card holders, here are four things you should make sure your employees know.

By Cheryl Leydon, senior manager, global mobility tax

In today’s global economy, many companies have employees that spend a portion of their career working and living outside their home country. If you are a U.S. company and you have employees outside the U.S. who are U.S. citizens or green card holders, here are four things you should make sure your employees know.

1. THEY WILL NOT ONLY CONTINUE TO HAVE U.S. FILING REQUIREMENTS, BUT MAY ALSO HAVE A TAX FILING REQUIREMENT IN THEIR NEW WORK LOCATION.

Your employees who are U.S. citizens and green card holders continue to have U.S. filing requirements even if they are living outside of the U.S. and utilizing the foreign-earned income exclusion and foreign tax credits, with no expectation of a U.S. tax liability. Most foreign countries also require compliance with filing tax returns and paying tax, possibly even for trips of short duration.

In addition to the reporting of income, ownership in various types of foreign bank accounts, assets and entities, as well as the receipt of inherited property, may trigger additional information reporting requirements in many jurisdictions, including the U.S.

Noncompliance with these reporting requirements may result in steep penalties of $10,000 or more per occurrence in the U.S. Programs are in place for individuals who have not been in compliance with prior year filing requirements to reduce or eliminate penalties.

2. THEIR TAX RETURNS MAY HAVE A DIFFERENT FILING DUE DATE.

As a U.S. citizen living abroad, the complexities of filing your tax return not only include the reporting of foreign income, creditable taxes and financial assets, but also administrative differences. U.S. citizens, green card holders and even certain nonresident aliens who are living outside the U.S. on April 15 must file their U.S. income tax return by June 15. If extra time is needed, a Form 4868 may be filed to extend the due date through Oct. 15. An additional extension may be filed through Dec. 15 if more time is required.

Note that the extensions will not extend the date for payment of tax. Additional late payment penalties may be assessed on any payment of tax after the original due date. A tax return filed after the due date, original or extended, may be subject to late filing and late payment penalties.

3. THEY MAY BE ABLE TO EXCLUDE FOREIGN-EARNED INCOME AND HOUSING COSTS.

An individual living outside the U.S. may be eligible to exclude up to $100,800, for 2016, of foreign-earned income if they meet either of two tests – the Substantial Presence Test or the Bona Fide Resident Test:

  • Substantial Presence Test – In addition to having a tax home in a foreign country, an individual should have presence outside the U.S. for more than 330 days in any twelve-month period.
  • Bona Fide Resident Test – An individual must be considered a resident in a foreign country for a period that includes at least a full calendar year.

If either of the tests are met, an additional amount may be excluded or deducted for housing costs incurred in a foreign country. The individual may be able to take a pro-rata portion of the exclusions in partial years. The amount of the housing exclusion or deduction will vary based upon where your employee is living. The IRS has released an updated table which provides the current housing exclusion amounts for 2015. If your employee will qualify under either test, even in a following year, the foreign-earned income and housing exclusions may be prorated for short years.

4. THEY STILL NEED TO COMPLY WITH THE AFFORDABLE CARE ACT.

Compliance with Affordable Care Act (ACA) requirements for the full year should be considered for U.S. citizens or green card holders living outside the U.S. or foreign nationals living in the U.S. Obtaining health insurance through foreign government-sponsored or private plans may not satisfy the health care insurance coverage requirements.

If your employee does not meet the health care insurance coverage requirements, an individual responsibility payment may be assessed on their tax return. Exemptions from minimum essential coverage may be available if they meet either of the tests for the foreign-earned income exclusion (see above). Note also that certain expatriate health plans may be considered as minimum essential coverage. The IRS has recently issued proposed regulations, effective Jan. 1, 2017, which provide additional clarity regarding the plans that will qualify as expatriate health plans.

If you plan to send employees abroad or already have U.S. citizens working for you in other countries, make sure your employees are aware of these requirements so that they can plan accordingly.

If you have any questions, please contact Cheryl Leydon at cheryl.leydon@aprio.com or 770-353-5331.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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