CPAs for Expats
The Tax Deadline for US Expats
Dum, dum, dum, dum-di-dum, dum-di-dum…
You hear that? That’s the booming sounds of John Williams’s “Imperial March”, announcing the imminent arrival of Darth Vader…I mean the imminent arrival of the dreaded, all-consuming deadline of The Fifteenth Day of The Month of April, better known as Tax Day.
April 15 is the day that fills hearts across the United States with dread—it’s deadline day, the day where if I don’t make a mad dash to the downtown post office to get that all-important postmark on my return before 11:59 PM tonight, FBI agents are going to show up at my door on the morning of the 16th and drag me away as my children cry helplessly behind me.
Wrong. And CPAs For Expats is here to help show you why.
Like most of the tax code, Tax Day is surrounded by myths, legends, misconceptions, and some outright falsehoods, some of which comes courtesy of tax-prep firms trying to get you to hire them, others amplified by the echo chambers of Twitter, Facebook, and Reddit.
In addition, US expats have even less to worry about than the average American citizen. Let’s get that out of the way right off the bat, and then we will talk about why the Tax Day deadline still does have some relevance to US expats.
The Automatic Two-Month Extension for US Expats
While the IRS, with some justification, is often portrayed as a draconian institution, some of its provisions, especially when it comes to US expats, are actually quite reasonable. Let’s take our current topic as an example.
The IRS is aware that not all countries have the same end-of-year reporting laws that the United States has. In many countries, it is not uncommon for taxpayers to receive their end-of-year wage statements until March or April, which would make an accurate tax filing by April 15 well-nigh impossible for many people.
Therefore, the IRS allows an automatic two-month extension (to June 15) to file returns and pay tax for any US citizen or Green Card holder whose home and place of business is outside the United States and Puerto Rico, as well as any armed forces member whose post is outside the United States and Puerto Rico. If you are married and filing jointly, only one of the spouses has to be out of the country in order to qualify for the extension.
Unlike the regular extension, which must be requested in advance on Form 4868, the taxpayer-abroad extension is truly automatic. To claim it, all you have to do is to attach a statement to your return stating that you were living outside the country on April 15, and you’re good to go.
The Federal Extension (Form 4868)
Speaking of Form 4868, the automatic two-month reprieve also applies to filing the federal extension. All you need to do is to check the little box that says “Check here if you’re ‘out of the country’ and a U.S. citizen or resident” and mail the form in (or e-file it) before June 15, and you have until October, no further questions asked.
There’s always a catch, right? In our case, there are a couple of minor ones.
The two-month extension, as noted above, allows you extra time to file and to pay, but that only means there will be no late-filing or late-payment penalties. There is, however, interest that begins accruing on April 15 no matter what. Not a lot of interest (rates have hovered between 5% and 6% annually in recent years, which translates to a half-percent per month or less), but enough that I have gotten clients complaining about a three-dollar charge stuck on the end of the return that they filed in May. To anyone who may be thinking about a similar complaint: Consider yourself warned.
If you are the type of taxpayer that usually does owe tax (maybe you are self-employed in a jurisdiction without a social security totalization agreement, or you have US-sourced investment income), you should probably be making quarterly estimated payments for your current-year tax (i.e., you would be paying your Tax Year 2020 taxes now, as the year goes on). We touched on this topic briefly in our overview of the tax calendar a few weeks ago and we will go into more detail in a later post, but here is another reminder that your estimated payment for the first quarter is due April 15, and if you don’t pay it, you may be hit with an underpayment penalty next year. Just like the interest payments, these penalties are not particularly severe, but they do sometimes jump out at people, and we like avoiding surprises here at CPAs for Expats.
Conclusion: The Dirty Little Secret About April 15
Here’s the truth for US expats. While the April 15 deadline isn’t exactly what President Trump would call a “nothingburger” (we still haven’t seen his tax returns, have we? Still under audit?), the two-month extension makes it that most US expat taxpayers have very little to worry about on this particular deadline, especially compared to their Stateside compatriots.
The other reason that most expats don’t have to worry is because, as we discussed in my last post, most expats can use either the Foreign Tax Credit or the Foreign Earned Income Exclusion to legally avoid owing tax to the US. Because interest and penalties are only assessed as a percentage of tax due, most US expats can breathe easy when April 15 comes and goes without them.
Want to mitigate your exposure to tax penalties? Contact CPAs For Expatsfor a quote!