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Barron's International Tax Service

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Beating the Infernal Revenue Service

Many American expatriates prefer anonymity to exposure, and so will continue as in past years as non-tax filers.  Non-filers who own businesses or work for a foreign employer, and who receive no unearned or trust fund income from the United States, are in the best position to remain anonymous.

But to those expatriates who are concerned about complying with the tax law by filing and paying the legal minimum in taxes, end of year tax planning can impact significantly on their tax bill in 2007.  Therefore the following tax-planning strategies may be pertinent to your situation.

Consider the timing of sales of stock or capital assets.  Selling prematurely can incur unnecessary taxes.

If you have U.S. income and are eligible for a year end bonus, it may be advantageous to defer the bonus until 2007.

Is your investment in that partnership or S corporation enough to allow you to deduct your share of anticipated losses?

Gift tax planning is always in order for those with significant estates.  Consider gifting before year end the allowable $11,000 per individual before the opportunity passes after December 31.

Getting married or divorced before end of year can incur marriage penalties.  It might be better to wait until 2007 before changing your status.

Consider making tax deductible expenditures before year end:  medical, professional dues, business expenses, job-related courses, etc.

The Standard Deduction for 2006 is $10,300 for joint filers and $5,150 for singles.  But you may have more deductions to itemize on Schedule A than the Standard Deduction allows.  So consider which is best for you.  Personal exemptions are $3,300 per dependent. 

But if you are more concerned about foreign earnings and tax credits, you'll need to determine whether you'll qualify as a resident in a foreign country and whether you can qualify for the full $82,400 earnings credit.  Then you may need to look at how to qualify for the foreign tax credit, which is a fairly complex exercise.  If there is no foreign taxable income, there can be no foreign tax.  But sometimes a foreign tax can be deducted rather than credited.  That is another story.

If you are among those non-filers who are not reporting your foreign earnings. the Infernal Revenue Service, ever on the prowl, could in discovering your furtive behavior, require that you file tax returns for the last three years and then deny you the foreign earned income exclusion.  And if they suspect fraud, they could require more years of tax filings.  That being the case, you could find yourself paying U.S. taxes on the foreign income in spite of having already paid taxes to the foreign tax authority.