Understanding US Expat Taxes (and Crypto trading) – Interview with Enrolled Agent Clinton Donnelly
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One of the least favorite topics for American expats has got to be US expat taxes. Does your stomach get into knots just hearing the words? You’re not alone! Yet it’s a vital part of living abroad that cannot be ignored. Can you succeed at it without the stress? Yes – you can do it! So before you go running in the other direction, hear us out (and let yourself relax).
Whether you’re just starting out on your expat life and want to avoid any problems (and save money), are ready to face and fix a snowballed problem, or are a Crypto trader (more on this below), learning from an Enrolled agent (EA) is the place to start. EAs are the experts in American taxes and are the only tax professionals federally licensed and with unlimited rights to represent taxpayers before the IRS.
So we interviewed Enrolled agent Clinton Donnelly, an amazing specialist in US tax preparation and problem solving for American expats and Crypto traders. In this post, he answers some key questions that help us understand how to handle US expat taxes and Crypto trading.
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What are the most common myths that American expats have about filing US taxes when living abroad?
The number one myth is that you don’t have to file taxes if you live outside of the US. 70% of US expats don’t file tax returns, and they should. In fact, Americans are unique in the world in that we have to file/pay taxes in the US on our worldwide income even if we don’t live there. On the surface, that seems shocking, but Congress allows two massive tax breaks to soften the burden (more on this below).
The second myth is similar to the first – that you don’t have to file taxes because you wouldn’t owe any taxes due to the two tax breaks (mentioned below). On the contrary, you don’t get tax breaks unless you do file. Even more, you can lose these tax breaks if you wait too long to file.
The third tax surprise is that if you are self-employed overseas, you may have to pay US self-employment tax (about 15%) unless you are contributing already to the foreign social security system [of where you’re living abroad].
What are the massive tax breaks for US expat taxes?
The first [tax break] is the Foreign Tax Credit which basically gives a dollar-for-dollar credit on your US taxes for every dollar spent paying foreign income taxes. In countries with tax rates higher than the US, you likely will owe no US taxes.
The second break is the first $105,000 of foreign wages are not taxed by the US if you live abroad 330 days or more in a year. (There are a number of restrictions on this second break.)
Since American expats get an extension for filing their taxes, when do you recommend they file their taxes each year?
If you are outside of the US on tax day (April 15th) you can get an automatic extension of two more months (up to June 15th) to file.
However, you need to mark on your return that you were abroad. Each tax software product does this differently.
For my clients, I just request the maximum six month extension (October 15th) and be done with it.
What are the latest changes to US tax laws that American Expats need to be aware of?
Starting in 2016, every serious bank in the world reports to the IRS twice a year the maximum balance of all US citizens with accounts at their bank.
US taxpayers must also file a foreign bank account report (FBAR) each year declaring the maximum balances of the foreign accounts.
Don’t duck or hide the annual obligation to file an annual FBAR form. You can’t hide from the IRS. They try to catch people lying. Don’t behave like a child hiding under the bed from their mother. File your anti-money laundering forms – FBAR and Form 8938.
The second change every expat shoould know is that if the IRS thinks you owe them $52,000 or more, they can have your passport revoked. This is serious when living abroad.
Do you have resources/contacts you can recommend for filing taxes in the foreign country where one is residing? For example, can you recommend someone/a company for filing one’s Spanish taxes in Spain?
Expats are always looking for one person to do their tax returns for two countries. You have to have a foreign accountant to help you file in a foreign country, and a US tax preparer to help you file in the US.
If someone claims to be able to prepare both tax returns for you, run the other way.
The length of the US tax code is compared to the length of 40 sets of all 7 volumes of the Harry Potter series. To think a person could master one tax code, let alone master another in a foreign language, is preposterous.
Read More: #LivinginSpain Series
How does being registered as self-employed in the foreign country you are living in, affect one’s US tax filing?
File your foreign tax return first. You might want to file an extension on your US tax return to give you more time.
Next, you can use the Foreign Tax Credit or Foreign Earned Income Exclusion to reduce your US income tax.
Also, unless you are paying in to a foreign social security system, you are responsible to pay the US self-employment tax.
What top 3 pieces of advice would you give an American Expat regarding their US taxes (in addition to what’s already covered here)?
In addition to filing your taxes and FBAR every year:
1) If you like doing your own taxes, don’t use any software product but TaxAct or TurboTax. They are the only ones that support foreign tax credit and foreign earned income exclusion.
2) If you form a foreign company or trust, you have to annually report the corporation on your tax return, or there’s massive penalties. Get professional help on this.
3) Trading in cryptocurrencies also requires reporting on anti-money laundering reports. Get professional help on this.
What is Crypto trading?
Crypto currency is anchored on a concept called block chain. And a block chain is also called a distributed ledger, which is where you record things, like a bank keeps a ledger.
With a distributed ledger, like a block chain ledger, many people have access to tracking these ledgers. It develops a sense of confidence in what the current balance is.
What it does, is it takes the bank or federal government out of the transaction. You don’t need them to know the value.
Bitcoin is the first of this. It becomes a scarce commodity. It’s not limited to cash. It can be used for election results.
It’s gone beyond coins and is moving into gaming, elections, any sort of thing where you’re looking for confidence, say even Facebook friends or likes on social media to see if they’re real or not.
It introduces trust independent of banks and governments.
What is your business, Donnelly Tax Law?
Donnelly Tax Law is a company that focuses on doing US taxes for Americans who live abroad or have assets abroad, and for Crypto Traders, because they have a lot in common. My company prepares taxes and fixes tax problems that these people have. Expats have a lot of problems in particular.
Why and how did you get into US expat taxes?
I got into this because I retired from IBM years ago and wanted to return to live in Panama, where I had lived for a time working for IBM. And I was exposed to different laws of the country and tax laws. I eventually decided to get a law degree, so I wouldn’t have to deal with lawyers. I got a law degree specializing in international laws of financial regulations.
I came to know the forms and could tell my friends who had questions what forms to fill out. The FATCA law had just passed and everyone was concerned about it.
So I became an Enrolled Agent, the highest federally licensed tax practitioner. It required a 3-day exam by the IRS that is all about taxes (not about accounting like accountants take).
I have clients in 47 different countries, and in the states as well. 60% of my work is fixing tax problems, whether you haven’t filed, or you got an audit or have a past debt you need to fix.
What are the books that you’ve written about US expat taxes?
The first book I’ve written for American expats, called The Foreign Earned Income Exclusion, is about one of two great laws that the US has to offset the burden of worldwide taxation on Americans. Other countries don’t have this.
It can work in any country and you get the first $105,000 income excluded from US income taxes (you may be subject to self-employment taxes). This is worth a $25,000 tax break.
I wrote the book on how to fill out the form so you can avoid IRS audits. This 320 page book on a single IRS form, is the only one on Amazon. It includes court cases and synopsis’ of those stories.
The second book was Expat Tax Overview, written for International Living as an overview of US expat taxes and its key aspects. For getting this book, please contact me.
The third book is 10 Steps to a Great Crypto Tax Return, which documents how I do Crypto tax returns, which is unlike how anyone else is doing them. I’m the trend setter.
The fourth book is a prequel to the one before, which is a sequence of emails. It’s called Why Crypto Traders are Low-Hanging Fruit for the IRS.
Donnelly Tax Law
Get help with your US expat taxes.
What’s your experience with US expat taxes? Did you already know what Crypto trading is?
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Written by Amalia & Eric
Founders & Producers of Move to Traveling
We’re Amalia and Eric – a traveling couple who are living a traveling lifestyle. Do you love to travel? Perfect! Come along…