The deadline of April 15 for filing US tax returns is approaching quickly. Although US persons – citizens and permanent residents of the United States – living abroad are allowed an automatic two-month extension of time to file their tax forms, they remain liable for payment of interest incurred on any tax not paid by the regular due date. Here are 10 basic tips to making your annual US tax filing as stress free as possible
By Ishali Patel
It feels like we have only just said goodbye to 2015, and yet we now need to start thinking about filing our 2015 US tax returns. Taxpayers are just getting back into the swing of things after the festive holidays while professionals are trying to grapple with all the new tax changes for 2015 to achieve the best result for their clients.
With the increasing complexities of the US tax system and the regulatory burden placed on taxpayers, filing US tax returns, particularly for expatriates living and working outside the United States, can be very stressful. Ensuring a smooth filing process is becoming more and more important. Here are our tips for making the 2015 filing season as stress free as possible.
1) Get in early
Although it feels like stating the obvious, getting your tax filing out of way as early in the year as possible really is best. For a start, you can forget about it once it is done. Secondly, you will suffer no late filing or late payment penalties, nor any interest on unpaid taxes if you file and pay your unpaid tax by the April 15 deadline.
Another advantage of this is that certain deductions for 2015, such as IRA (Individual Retirement Account) contributions, can still be taken on your 2015 US return if they are made up to April 15, 2016. Getting your return started early also allows your tax return preparer to identify these opportunities for you early enough to claim the benefits and reduce your taxes.
2) Tell of any changes in circumstances
It is really important to let your tax preparer know about any changes in your circumstances during the year so that they can advise you on – and prepare your – tax return based on full knowledge of the facts. It is also essential that you make them aware of such matters as early as possible so they can identify any tax planning opportunities around your new situation.
3) Inform about any one-off transactions
No one likes an unexpectedly high tax bill. By informing your tax preparer early enough about one-off events, such as the sale of your home or other property, bonus receipt, or share option exercise during the year, they can run calculations for estimated taxes due which you can pay ahead of time and minimize your exposure to incurring interest and penalties.
4) Start organizing funds for payment ahead of time
Often times, when you are living outside the US, it is difficult to raise checks or other forms of payment in US dollar. And there can be delays with electronic payments, especially if you do not have an account with a US bank. If you are looking to a non-US bank to write a check in US dollar, it can take from several days to even a longer period. It is best to find out ahead of time how long your particular bank usually takes for the process.
5) Review your prior-year tax return
To avoid repeated requests for information, it is always good to look at your tax return of the previous year and ensure that you have equivalent back up for the current year – documents that you have previously provided to your tax preparer and questions that you have been asked through the prior-year filing process. This is a great way to save time and improve efficiency.
6) Request relevant documents from third parties
Key documents issued by your banks, local accountants and employer should be collected as early as possible, particularly where you need to obtain information from non-US entities because it may take time for third parties to collate the information in a format that you need for the US tax year (January to December). This is especially important in Hong Kong as the Hong Kong tax year runs from April 1 to March 31.
Inadequate information can lead to delays and therefore potentially increase your exposure to interest and penalties. Your tax adviser will be able to help you with any information request to third parties or even approach them directly for certain specific information that they need for your tax return (provided that you grant them consent to do so).
7) Maintain records on a real-time basis
It is never too late to start maintaining real-time records and keeping your tax preparer informed of what is going on as and when it happens. Tax planning is always easier in advance rather than in hindsight. Fees for advisors are much better value when they are spent on coming up with tax-saving ideas ahead of time rather than trying to fix problems afterward.
By doing so, it also means you already have most of the documentation ready for tax return filing in a given year. Please note that under IRS regulations you should retain the records and documents relating to tax returns for at least seven years from the end of the relevant tax year.
8) Be aware of relevant deadlines
Most people are aware that the filing deadline for their income tax returns is April 15, with an automatic two-month extension to June 15 available for US persons residing outside the US). In addition, people are generally aware that the filing deadline is extendible to October 15, with a discretionary final extension available to December 15 available under certain circumstances.
However, it is important to note that there is no extension for payment of tax, and in order to minimize any penalties, it is essential to estimate the tax due and make your payment by the deadline of April 15, even if the return is filed at a later date. Furthermore, it is also important to note when your quarterly estimated tax payments are due (April 15, June 15, September 15 and January 15) and ensure that these are made on time.
Note also that for 2015, deadline for the Foreign Bank Account Report (FBAR) is June 30 2016, which is not extendible. The deadline for the 2016 FBAR (to be filed in 2017) will follow that of the tax return. Some other tax-related forms, such as Form 3520-A, are due March 15, with the available option of an extension to September 15.
9) Understand the filing process
Even after the return has been finalized, often the actual logistics around getting it filed can be a big cause of stress. A clear understanding of the electronic and/or paper filing processes for your tax return, FBAR and subsequent payment will allow you to avoid any conflict of schedule, especially when you need to manage all your tax-related deadlines around travel plans.
Whenever a return is being electronically or paper filed, authorization forms need to be signed and returned, and paper returns need to be posted and submitted along with tax payments. In the case of your return being filed close to the deadline, you need to make sure your tax preparer is aware of your availability to make any required authorization for the relevant tax forms.
10) Don’t panic if you can’t pay
Sometimes, you can be caught off guard with a large tax bill. If you can’t pay the full amount by the April 15 deadline, pay whatever you can at the time to bring the level of interest and penalty to a minimum. The IRS has an Online Payment Agreement application available on its website for those who need a little help with payments here.
Ishali Patel is a senior manager with the Expatriate Tax Services Team at Buzzacott, an accountancy firm based in the United Kingdom. She specializes in advising on all aspects of US and UK expatriate tax, with a focus on various programs of the US Internal Revenue Service (IRS), international pensions, expatriation and US tax-related issues surrounding ownership of non-US structures including corporates and trusts. Based in Hong Kong, she is dually qualified in US and UK tax, and is an IRS Enrolled Agent and a Chartered Tax Advisor (CTA) in the UK.