The days when American expats could count on an "out of sight, out of mind" approach by the Internal Revenue Service are long gone. The US taxman has signalled in no uncertain terms that he intends to scrutinise returns from overseas to ensure that all income is reported. So as the traditional April 15 deadline approaches, there are a few key items Americans in the Emirates should keep in mind. First of all, some newcomers may not realise that expats are eligible for an automatic two-month extension, making the true filing deadline June 15. However, any tax due must be paid by April 15, so those who will owe taxes should consider filing early to avoid paying interest.
To determine if you owe or not, the most important figure to note is the latest threshold for the amount of foreign income that can be earned tax-free: US$91,400 per qualifying person, for the 2009 tax year (a couple filing jointly could claim up to $182,800.) For US citizens to qualify for the exclusion, they must either be a "bona fide resident" of a foreign country "for a period that includes a full calendar year", or have been "physically present" in a foreign country for at least 330 full days during the previous 12-month period (for further nuances to the rule, search IRS.gov for the terms "foreign earned income exclusion requirements").
Income earned above the exclusion, up to $171,550 ($208,850 for couples), would be taxed at 28 per cent. There are progressive brackets above that, up to a maximum rate of 35 per cent. It's important to remember that you must file a return even if you earn less than the exclusion. For married couples filing jointly, everyone who makes more than $11,400 must file. Singles must file if their income tops $5,750.
Not filing a return, or even filing after the deadline, could be an expensive mistake. Virginia La Torre Jeker, a tax attorney working with Far East Management Consultants in Dubai, says the IRS is increasingly exercising its right to deny taxpayers the foreign earned income and housing exclusions if they file late. Next, don't forget to file the necessary disclosure forms for all foreign accounts that exceed $10,000 at any point during the tax year. These forms, called Foreign Bank Account Reports, or FBAR, have been required for years but they are a new point of emphasis for the IRS. Not surprisingly, the number of FBARs filed last year skyrocketed as a result - more than 550,000 were filed in 2009, a 60 per cent increase over the previous year.
"Most Americans did not even know of the FBAR until recently," said Vince Truong, a financial adviser with Holborn Assets, a firm based in Dubai. The forms are required for any foreign account in which an American maintains a financial interest, whether the funds are located in a checking account, brokerage account or cash-value insurance policy. As the rules governing FBAR forms are part of money laundering statutes, those who fail to file could be subject to civil and even criminal penalties.
A small plus: FBAR forms are not due until June 30, so there is a little bit of extra time available. In addition to the income exclusion, American expats are also allowed to reduce their tax liability by subtracting housing costs paid or reimbursed by their employers. The maximum exclusion generally is $14,624, but the IRS raises that limit for residents in locales where housing is significantly more expensive.
The UAE obviously qualifies, although it seems the IRS has not yet caught up to the changing rental rates in the Emirates. For 2009, the law allows a higher housing exclusion for residents of Dubai compared to Abu Dhabi. The maximum is $42,550 for Dubai residents and only $35,063 for those living in Abu Dhabi, says Ms Jeker. Of course, tax rules are endlessly complicated and every expat is burdened with his or her own special circumstances.
In many cases, it is wise to rely on a professional to determine which rules apply. Those who operate a foreign business, own property or establish an overseas trust should almost certainly consult a tax professional before filing. There is not an overabundance of experts in the UAE conversant in US tax law. Ms Jeker is one of the only - if not the only - tax attorney in the region who specialises in advising US individuals. Her advice: be careful when choosing a tax return preparer. While there are many qualified firms and accountants based in the US and elsewhere that concentrate on tax return preparation, she says she has seen many errors in returns for American expats.
"Those who specialise in overseas issues are much more skilled in this area than those who primarily do domestic returns," she said. email@example.com