No foreign tax surprises

The United States tax authority – Internal Revenue Service – is the only institution that requires U.S. citizens and deemed U.S. residents to file an annual tax return on which is reported income from all sources worldwide. Other countries apply this requirement to residents rather than citizenry.

Occasionally Americans living abroad are surprised by this requirement in those circumstances where they are already filing a tax return and paying taxes to a foreign country of residence. So refusing to file a U.S. tax return, they may also believe that filing tax returns on the same income to both countries means double taxation.

As the Internal Revenue Service has in place the power and wherewithal to assess rather stiff penalties against anyone who neglects his/her duty, noncompliance can ultimately be expensive. Where one has not filed a return stateside for many years, IRS requires filings for three prior years in addition to the current year. In 2011 this means filing tax returns for 2007, 2008, 2009 and 2010. While owing taxes to the United States Treasury is unusual due to filers being able to apply foreign tax credits and/or foreign earned income exclusions against any IRS assessments, the Service will require that six years be filed in the event that taxes are owed.

Filing requirements are actually based on a predetermined income level per filing status. It works something like this:

Filing Status Age End of 2010 Gross Income Determines

Single Under 65 $9,350
65 or older 10,750
Married Filing Joint Under 65 (both spouses) 18,700
65 or older (one spouse) 19,800
65 or older (both spouses) 20,900
Married Filing Separate Any age 3,650
Head of Household Under 65 12,050
65 or older 13,450
Qualifying widow(er) Under 65 15,050
65 or older 16,150

So if your filing status is, say, Head of Household and you are under 65, you would have to file a U.S. tax return if your gross income in 2010 was at least $12,050.