Tax Matters

I'm sure my devoted blog followers (all 4 or 5 of you) are wondering why I havent posted the next installment from our recent holiday.

The IRS.

Thats right. I'm blaming the IRS.

Because recently we found out some things.
Such as:
- If you are a US Citizen, even if you live and work and pay taxes overseas, you still have to submit a tax return to the IRS.
- If you are a dual citizen of the USA and another country, no matter where you live & work, you still have to submit a tax return to the IRS.
- If you are an expired permanent resident, but still have your expired green card, you are still treated as a US resident for tax (not immigration) purposes, and still have to submit a tax return to the IRS, even if you cant live or work in the USA.
- If you have children who were born into a US dual citizenship mess, they will still have to file 2 income tax returns (once earning income) if they live in a country other than the USA.
- IRS paperwork is time consuming.
- Accountants dont like doing tax returns that involve international tax law; the ones that will do international tax law...are ex pen sive.
- Even if you despise mathematics, you can still teach yourself to conquer the mountain of IRS paperwork and submit your own tax returns.

So basically, the reason I havent blogged, is that I've been doing 6 years worth of back taxes for the IRS. 2004 was confusing...we had income from both countries. 2005 was slightly less confusing. 2006 the tax system changed, and since its within the statute of limitations to receive a refund, I changed the way we filed our return. 2007-2009 were tedious yet less painful, since I had some idea of what to do.

If by chance, one day, you stumble across my blog and find yourself in our situation....here's what we did.

- 2004 & 2005- Standard 1040 form filing jointly; 2555 EZ (one for each of us) the Foreign Income Exclusion form. The 2555 EZ is basically a form which wipes out your foreign income if you earn under the limits and fulfil a bunch of other criteria. Therefore, you have no taxable income, and no US tax is payable. If you use this form, the IRS will assume that you always intend to use this form. Cool.

- 2006-2009 Standard 1040; A statement REVOKING our choice to use the 2555EZ in 06; A 1116- Foreign tax credit form; A 8812- additional child tax credit form.

Why should you revoke your decision to use the Foreign Income Exclusion?
There are many reasons. But if you have children who are US citizens, and you live in a country which pays higher taxes than the USA, then its definitely worth considering.
Rather than having your income excluded, you get a foreign tax credit. So taxes you pay overseas are converted and converted and so on and so forth...and ta-da...you dont owe any US tax. It also leaves you eligible to claim credits on your tax return. You realise (unfortunately) that you are ineligible for the child tax credit. HOWEVER you may be able to (and probably can) claim the 8812- Additional Child Tax credit. This is usually $1000 per child. And since you dont owe any taxes, it is issued as a direct refund. In theory. I'm still waiting to mail our returns to see what the IRS reckons :). But during my conversation with an IRS international tax law specialist, he said that it should work out, provided you file them within the statute of limitations to receive a refund.

The negative to revoking the 2555-EZ...is that you cant use it again within 5 tax years, which is a big call to make. Since we were virtually 5 years behind, it wasnt so hard for us to decide.

Another caution, be wary of different financial years. The US financial year runs from January-December. Compare this to the Australian financial year which runs July- June. And you can end up with a mess.

Remember, dont ever mess with the tax man. He ALWAYS wins.

:)