Do I Prepare my Own Overseas Tax Return?
If you have landed yourself at this article, it probably means that you’re considering preparing your own overseas tax return. There is nothing wrong with this, many expats do it and do so successfully. However, if this is your first year, there are several factors that you’ll want to consider. Below you will find a list of advantages and disadvantages to preparing your own overseas tax return.
Reasons to Prepare your Own Overseas Tax Return
1) To Save Money!
This is the by far the most used justification when an expat decides to prepare his/her own overseas tax return. Travelling around the world is expensive, and most expats are always looking to save money wherever they can!
2) Availability of User-Friendly Tax Preparation Software.
Millions of US citizens are using tax preparation software programs. These programs are readily available, reasonably priced and offer technical support. Most of them even feature helpful hints during input to advise the taxpayer about potential deduction opportunities. The downside to this is that these programs are typically geared toward the traditional US family that includes two incomes, two and a half kids and a mortgage. Often times, they are not adequately prepared to support the foreign transactions connected with an expat’s lifestyle.
3) Nobody Knows Your Financials Better Than You!
A good tax preparer is someone that will ask questions to try to find additional deductions, credits, or otherwise help you save on your overseas tax return. If you prepare your own overseas tax return, you will already have these answers! As you sit down at your computer to start preparation of your overseas tax return, you will likely remember if someone mentioned that a certain expense was deductible, or when you received a statement from that final Goodwill donation before you moved abroad. You might have to dig this paperwork out (you would have to whether you prepared your own overseas tax return or not!), and research the issue online but you might not have given it much thought if you were relying on someone else.
4) The IRS’ Comprehensive Website
The majority of expats are very smart, and accustomed to using the internet for everything possible. The IRS has an informative and comprehensive website to assist US citizens living abroad dealing with their US expat taxes. The website includes numerous forms and publications, foreign exchange rates, links to software providers, and information on the social security agreements with different countries. When using the IRS website, the biggest obstacle becomes understanding IRS terminology. For example, many expats may consider themselves a “nonresident” once they move abroad, and may even consider filing a 1040NR. However, “nonresident” is not to be confused with “nonresident alien,” which is someone who is not a US citizen or doesn’t have a green card and who should file a 1040NR.
5) By Preparing Your Own Return This Year, You Will Know How To Better Prepare For Next Year!
Just as professional tax preparers are more efficient at preparing tax returns than a normal US citizen, each year that you prepare your own US expat taxes, you will become more versed in the requirements, documentation, and deductions. Each year will become increasingly smoother, less daunting, and less time strenuous. You can review the IRS website for significant changes to the tax law, and apply it to your US expat taxes accordingly.
6) Maybe You Have Some Free Time To Spare?
The average expat can expect to spend over thirty hours preparing their first overseas tax return once they move abroad. This is because you are doing the research, preparing the forms and worksheets, and gathering your own documentation. If you have extra time to spare and an interest in the US expat tax system, self-preparation may be for you!
7) Finding Someone To Trust Is Challenging
When you hire someone to prepare your overseas tax return, you are entrusting that person with your most personal and confidential information. You may see an alphabet of designations including CPA, EA, CFP, and the list goes on, but how do you know that you can trust the person that you have hired?
Reasons Not to Prepare your Own Overseas Tax Return
1) Missed Deductions & Exclusions
The biggest reason to hire an expert to prepare your overseas tax return is to ensure that you are receiving all of the deductions and exclusions for which you are eligible. Despite the fact that the IRS continues to tax your income once you move abroad, they still try to balance the playing field by offering numerous deductions, exclusions and credits for foreign dealings.
2) Various Tax Periods of Different Countries
As a US Citizen, you are likely accustomed to receiving a W-2 at the end of the year that provides your annual income and tax payments in a nice familiar, orderly fashion. Your bank interest statements, 1099s, and anything else provided to you will come detailing a period that follows a calendar year. However, when you move abroad, this very well may change. Many other countries have tax years that do not follow the calendar year. However, the IRS still requires your information to be reported on your overseas tax return on a calendar year basis. Gathering, converting or prorating this information can be a difficult challenge.
3) Complicated Calculations
Despite the additional deductions, exclusions and credits offered to those living abroad, each one has a specific form that must be completed to claim them. In addition, it seems that each form has supporting worksheets that need to be completed to accurately calculate the amounts. Some exclusions vary by foreign location, and others can only be claimed for a percentage of the days spent abroad. Moving abroad makes your overseas tax return all the more complicated. All of these factors can quickly overwhelm a self-preparer, leaving them frustrated and hiring a professional after wasting valuable time.
4) Peace Of Mind
The IRS is cracking down harder and harder each year on expats who fail to file or file an overseas tax return incorrectly. Fearing tax evasion through offshore accounts, they have increased the number of auditors working on foreign transactions, and utilized voluntary disclosure initiatives to determine the sources of off-shore activity. Wouldn’t you feel better knowing that your tax return was prepared by an expert who has prepared an overseas tax return multiple times?
5) Do Expats Need To File State Returns?
The filing requirement for each state is different. Some states claim that you have an overseas tax return filing requirement if you simply continue to hold a driver’s license in that state. Others don’t require an overseas tax return unless you make over a certain income threshold sourced to that particular state. Hiring a professional to complete your US expat taxes will ensure that your state filing requirement is not overlooked.
6) Additional Reporting Requirements: FBAR, 3520, 5472, Etc.
As the IRS continues their focus on foreign transactions, each year seems to bring additional reporting requirements on an overseas tax return for various reasons. Many of our customers are surprised to hear about the FBAR filing requirement, which is required for anyone that held more than $10,000 in foreign bank accounts at any one time during the year. There are reporting requirements for US citizens who own stock in foreign corporations, who are beneficiaries of foreign trusts, and who are members of foreign partnerships. Each brings additional filing requirements on an overseas tax return.
7) Constantly Changing Tax Laws
While the IRS may provide updates about tax laws each year, a tax professional generally spends dozens of hours each year learning about new tax laws, and understanding how they apply to their clients.
8) Maze Of Tax Treaties
The United States has tax treaties with numerous countries, each with different implications to your overseas tax return. Some treaties provide an exemption from US self-employment tax if the US citizen is living and paying tax abroad. Others negotiate taxation at reduced rates, or eliminate US expat tax all together on certain types of income. As a US citizen living abroad, you will want to become familiar with the US tax treaty (if existing) for your resident country. Experts in overseas tax returns have access and familiarity with each of the sixty-seven tax treaties currently in effect.
You may have noticed that the reasons NOT to prepare your own US expat taxes outweigh the reasons TO prepare your overseas tax return. Each facet will have different weighting to each individual and should be considered separately. It will go without saying that we recommend the hiring of an expert for the preparation of your overseas tax return. Although most expats are definitely smart enough to figure out how to prepare their own overseas tax return, it takes a lot of time, frustration and resources that could be avoided by hiring a US expat tax professional from the beginning.