You are an American expatriate. You live and work in London, Paris, Hong Kong or Timbuktu. And the growing U.S. burden of taxation, regulations and paperwork is driving you crazy.
What can you do?
This is a big and growing issue, say experts. The U.S., almost uniquely, imposes a second tax and disclosure regime on citizens living abroad. And with new laws and enforcement measures, it is tightening the rules on disclosure and forcing foreign financial institutions to hand over more personal financial data of Americans living overseas.
Expats with $10,000 or more in savings held abroad—in other words, nearly all of them—must report all foreign financial assets and the balance of all foreign bank accounts to the U.S. government every year or face potentially draconian penalties, including possible confiscation, fines and criminal prosecution. They must file separate tax returns with their host country and the U.S., nominally pay taxes to both, and juggle overlapping and conflicting rules to avoid double taxation.
Under U.S. laws, for example, even simple mutual funds held in a host country are subject to harsh extra taxes and paperwork by the Internal Revenue Service. And expats may find many or all of their retirement accounts are subject to taxation by one country or another, limiting their access to tax-deferred savings vehicles.
The U.S. estimates there are seven million Americans living and working abroad. Yet fewer than one million people each year are filing the required Foreign Bank Account Report, or FBAR.
A small but growing number of expats are throwing up their hands and renouncing their citizenship. But if you don't want to hand in your passport, your options are limited.
To comply with the law, those who are behind on their paperwork need to start filing. That includes an annual FBAR if you have more than $10,000, and a separate Foreign Account Tax Compliance Act form, or Fatca, if they have at least $50,000, although the reporting thresholds for Fatca vary.
The FBAR is due by June 30 every year and the Fatca form when you file your taxes. (The Treasury Department on Friday said it would temporarily relax enforcement of Fatca provisions relating to banks that take effect July 1.)
The IRS also offers a "voluntary disclosure" program supposedly to let you catch up on past years. Because of the hefty penalties, this program is a good deal for rich tax cheats looking for a partial amnesty, says U.S. Taxpayer Advocate Nina Olson, whose role is to be the taxpayers' voice before Congress and the IRS. But, she warns, it is often a bad deal for honest people who are simply behind on their paperwork.
If you have investments or complex financial affairs, seek out specialist tax, investment and legal advice. The complexity of the rules applying to U.S. expats mean ordinary accountants won't be enough.
For example, some Americans living abroad may benefit from taking the foreign earned-income exclusion and its associated housing benefit, which allows them to shelter more than $100,000 of their pay against U.S. tax liabilities, while others may be better off taking the foreign tax credit, experts say.
There is a small but growing number of professional firms—in the U.S. and overseas—which specialize in the tax and accounting needs of U.S. expats. However, the costs of professional advice can be high, as can the costs of filing two sets of tax returns prepared by a specialist.
Taxpayers may be able to shelter some of their income by taking advantage of tax treaties between their host country and the U.S. On the other hand, say experts, citizens may be running the risk of steep additional taxes and fines by choosing the wrong investments.
For example, few U.S. citizens in Great Britain realize that if they buy U.K.-based mutual funds they face severe penalties at the hands of the IRS, but that if they invest in most U.S. mutual funds they face similar treatment at the hands of British authorities, says Kristopher Heck, managing partner of London-based Tanager Wealth Management, which advises U.S. citizens. There are, he says, about 200 U.S. funds that avoid this double jeopardy.
Expats, unless they are very rich and are able to hire expensive accountants, should probably avoid all overseas mutual funds. The IRS calls these "passive foreign investment companies" and subjects any gains to steep extra taxes.
"The forms to fill in are a nightmare," and the taxes are "punitive," says Mr. Heck. The costs of complying can run to thousands of dollars a year for each fund, he says.
It may make sense to move your investments to the U.S., if possible. Assets held in U.S. institutions aren't subject to the Treasury's foreign-disclosure rules. Money held in U.S. tax shelters, such as an individual retirement account, also may help reduce your overall tax burden, experts say.
However, Peggy Creveling, executive director of Creveling & Creveling Private Wealth Advisory in Bangkok, says more U.S. expatriates are being "shut out" of U.S. as well as overseas financial institutions because those institutions are afraid of U.S. compliance rules. That may make it difficult or impossible for many expats to hold U.S. brokerage or investment accounts.
You could consider investing in real estate, collectibles and precious metals instead. All are free from annual reporting rules on foreign assets, the IRS says. So are individual stocks and bonds, but only if held directly, rather than through a brokerage account. (In the electronic age, this can be difficult.) You must still pay tax on any gains. And the U.S. also taxes real estate, collectibles, precious metals and bonds more heavily than stocks.
Traditional pension plans earned overseas also may escape double jeopardy, depending on your country's tax treaty with the U.S.
Such tax complications are why most countries leave their expats alone.
Write to Brett Arends at brett.arends@wsj.com