If you’re an expat from the US, now that you’ve said goodbye to 2016, it’s time to start thinking about filing your tax return. With the increasing complexities of the US tax system and the regulatory burden placed on taxpayers, minimising stress and ensuring a smooth filing process is becoming more and more important. Ishali Patel, Senior Manager in the Expatriate Tax Services team at Buzzacott, gives us her top ten tips for making this filing season as stress-free as possible.
1. Get in early!
Although it feels like stating the obvious, filing your tax as early in the year as possible really is best. For a start, you can forget about it once it’s done. Secondly, you’ll avoid penalties and any interest on unpaid taxes if you file and pay your unpaid tax by the deadline of 15 April 2017. Another advantage of this is that certain deductions for 2016 – such as IRA (Individual Retirement Account) contributions – can still be taken on your 2016 return if they’re made up to 15 April 2017. Getting your return started early allows your tax professional to identify these opportunities for you early enough to claim the benefits and reduce your tax.
2. Communicate with your tax professional about any changes in circumstances during the year
It’s really important to let your tax professional know about any changes in your circumstances during the year so they can advise you, and prepare your tax return, based on full knowledge of the facts. It’s 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 your tax professional of any potential one-off events (such as the sale of real estate) that occurred in the year
No one likes an unexpectedly high tax bill. When you inform your tax professional early enough about events such as the sale of a home or other property, receipt of a bonus or a share option exercise, they can run calculations for estimated taxes due, which you can pay ahead of time and minimise your exposure to interest and penalties.
4 Start to organise funds to pay your tax ahead of time
When you’re living outside the US, it can be difficult to raise dollar cheques, and there can be delays with electronic payments, especially if you don’t have a US bank account. If you’re looking to a non-US bank to raise a dollar cheque, this can take several days, so planning around tax deadlines is important to minimise interest and penalties.
5 Review your prior year’s tax return and ensure that you have equivalent backup for the current year
To avoid repeated requests for information, it’s always good to look at your last US tax return, the types of documents that you provided to your tax professional and the questions that they asked through the filing process to improve efficiencies.
6 Request relevant documents from third parties (such as banks, local accountants, your employer) as early as possible
Particularly where you need to obtain information from non-US entities, it may take time for third parties to collate the information in a format that you need for the tax return and for the US tax year (January to December). This is especially important in Hong Kong where the tax year runs from 1 April to 31 March. Inadequate information can lead to delays and therefore potentially increase your interest and penalty exposure. Your tax adviser can help with this.
7 Maintain records on a real-time basis
It’s never too late to start maintaining real-time records and keeping your tax professional informed of what’s going on as and when it happens. Tax planning is always easier in advance rather than in hindsight. And adviser fees are much better value when spent on coming up with tax-saving ideas ahead of time rather than trying to fix problems after the event or advising a client of a huge tax liability. It also means that you already have most of the documentation ready for that year’s tax return filing. 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 and plan accordingly
Most people are aware that extensions are possible when it comes to filing your return. However, it’s important to note that there is no extension for payment of US tax, and so in order to minimise interest and penalties, it’s essential to estimate the tax due and pay that when it is due, even if the return is filed at a later date. Furthermore, it’s also important to note when your quarterly estimated tax payments are due (15 April, 15 June, 15 September and 15 January) and ensure that these are made on time to minimise your exposure to the estimated tax penalty. Note also that for Foreign Bank Account Reports (FBARs) filed in 2017, the deadline will follow that of the tax return.
9 Understand the electronic and/or paper filing processes for FBARs, the tax return and payments
Even after the return has been finalised, often a big cause of stress can be the actual logistics around getting it filed. Whether a return is being electronically or paper filed, authorisation forms need to be signed and returned, paper returns need to be posted and then submitted along with payments, and so on. It’s really important that you understand the process from start to finish to minimise stress.
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 15 April deadline, pay whatever you can at that time to minimise interest and penalties. The IRS has an Online Payment Agreement application available on its website for those who need a little help with payments.
For more information, or if you require any help with your annual US tax filing, contact the Buzzacott team at 3752 8885 or pateli@buzzacott.com.hk, or visit buzzacott.hk.
This article first appeared in the Feb/Mar edition of Expat Living magazine. Subscribe now so you never miss an issue.
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