US Tax Help!

[Brynne]

All right,

So I've been reading tons of information on the IRS website, I've asked this question from the IRS office in London, from the US Embassy in Helsinki, and through the IRS website, and I still have not gotten the answer I need.

I am a US citizen living as a permanent resident in Finland, married to a Finnish citizen. I am unemployed, about to begin a Finnish Language course, and KELA is paying me benefits in the form of Integration Assistance. I -think- I can figure out everything else on my own as long as I have answers to two questions:

1. Are my KELA benefits taxable by the US?
2. If so, where do I put them on my tax forms? Everything seems to be about earned salaries and compensations provided by employers. Are there special forms that I need to fill?

Bear with me, I'm 19 and have never been employed and never paid US income taxes before, and after all the research I have tried to do on my own and all the questions I have asked from people who are supposed to know these things, but won't give me a direct answer, I'm feeling very frustrated and confused. I just don't want to get myself in trouble by not paying taxes when I am supposed to.

And I did search around this forum for information as well, but I couldn't find anything. If someone did already ask this question, a link to that topic will suffice.

Thank you!

[Pursuivant]

Well its like social security, so do you declare social security in the US? The limits something over 80K when Uncle Sam gets interested.

[AldenG]

If that's all your income, the bottom line is that you won't owe anything. It will be well under the $80,000 foreign earned income exclusion (going up to $94,000 for 2009), even after you prorate the exclusion for living only part of the year in Finland. The job of the IRS is to identify and receive or collect income tax obligations. As long as you don't write something like "Impeach George Bush" on your tax return, they don't waste sweat and resoures on returns that will obviously have zero obligation -- and that includes the large majority of returns for American expatriates, especially in Scandinavia. They know that well. In your case, they don't even know you exist, but it's good to start the filing habit while you have a simple case like you describe. If you ever decide to be a politician or work for the government, someone might go back and look at "Brynne -- The Early Years."

Now I'm not a CPA. But if I were filing for the situation you describe, I'd just put it all on line 23 (Other Foreign Earned Income) of Form 2555, then exclude it per the instructions for lines 37-42 of that form, and boom: you're almost done. Just plug the output into Form 1040 per instructions,sign it, and mail it off. One of the simplest expat returns ever filed.

Sure, it's not exactly "earned" income, but that line appears to be the catchall "miscellaneous" for foreign income. And like I said, they don't care whether it's done exactly right as long as the outcome is obvious -- especially when it's obviously zero. Even if there were a different form for government benefits, or even if foreign government benefits aren't/weren't taxable, the bottom line would still be zero and they recognize that. They don't "grade" on style. They grade on paying what you owe. You don't owe, they don't give a shiite.

I always found the consular tax-advice resources to be worse than useless, providing incorrect information even more often than the stateside IRS hotlines, which are fairly bad themselves. I once spent a few moments talking to a "tax expert" who was on a taxpayer-assistance tour of the U.S. consulates in Scandinavia. First of all, she was surprised that anybody showed up to interrupt her chatting with the local consular personnel. I came on the Friday afternoon of her week in Helsinki, and she said I was the only customer all week. Then I realized why. She was an unbelievable chatterbox who had never heard of the foreign earned income exclusion and also expressed surprise that the taxpayer was responsible for documenting the exchange rate on the date of each constructive receipt of income. Our entire conversation took place through the customer service window, with her leaning over a visa worker's shoulder. (In other words, she didn't even have her own spot at the customer service counter.)

It was a pivotal moment for me. That day was the first time I realized just how profound a level of incompetence was accepted or perhaps even deemed normal in some areas of our Foreign Service. This woman simply knew nothing about how expatriates are supposed to file their U.S. taxes. I have no idea why she was sent on this junket, unless perhaps to get her out of the home office where she may have been a loose cannon.

Hope I've been helpful. I've only been around Finland Forum a few months. In that time, I've seen a number of posts about filing U.S. taxes, but always in the form of questions and problems, and sometimes suggestions, but not solutions or current resources. If you find someone who prepares expat returns knowledgeably and at a reasonable price, I'm sure a lot of people here would like to hear about it.

[AldenG]

Addendum: the rule of thumb is that any kind of income is taxable unless there's something in the tax code that specifically says THAT kind of income is not taxable (or is taxable at a lower rate). So it doesn't matter how U.S. social benefits are taxed. If you were going to make more than 80K or 94K, then you might have to go looking to see if there's anything in the code or in treaties referenced by the code (because there are US-Finnish treaties about KELA/SocSec retirement benefits), making some kind of exception for certain types of payments from KELA.

Just the fact that payments are conceptually analogous has no bearing on their taxability. But rules and treaties can have a bearing.

But again it's all made moot by the 80K exclusion. The only reason that would ever hypothetically exist to treat this income specially would be to get a further cut in your tax obligation. (Like you were close to 80K and this income would put you over -- then it would make sense to go searching for exceptions.) But since that obligation will be zero anyway, there is no reason and no responsibility on your part to find a fancier way to report the income. Hence my advice to just called it "Other Foreign Earned Income."

[Pursuivant]

If you were earning 80K you wouldn't be getting jack from KELA.

[Brynne]

Oh my god, thank you so much.

That is the first comprehensible, common-sense piece of information I have read ever since I started thinking about taxes. I was beginning to wonder if the IRS didn't want me to file my taxes, seeing as their website made everything as complicated as possible.

So the Foreign Earned Income Exclusion means that I do have to file a tax return, but I don't have to pay any taxes until my total income (over all the years that I have been making income) reaches around that 80K mark? Meaning I will add up my KELA benefits over the years, and even after school, when I do start working, I won't have to pay until I have reached that number?

And for now all I need to do is fill out Form 2555 as you suggested, fill out Form 1040, and mail them by April 15th? I won't need to do anything else until I have passed the exclusion mark? I was afraid I would forget forms that I need, since I didn't have all the information about what I may or may not need to file all in one place.

I can't thank you enough. I've been feeling really stressed about this, wondering if I could even find the answers to my questions. All of the so-called "experts" that answered my questions didn't actually answer anything themselves, but rather directed me to pages and pages of things that I had already read or that didn't really have much to do with my specific question. I was beginning to think that if I did get an answer from one of them, I wouldn't be able to trust it. It's just frustrating that there isn't a more simple guide for handling these things, and if the experts can't answer my questions, how do they expect me to figure it out? I suppose it doesn't help that I have never done taxes even while in the US.

I do have one other question: When I do need to start paying taxes, I'm confused about how I go about paying? As I understood it, a tax return is a report on income that is supposed to already have been taxed? So do I need to file different forms with my payments enclosed before April 15th, and then file the tax return in addition? I'm sorry, you'll have to forgive my utter cluelessness. Maybe looking at the IRS website to learn about taxes was the worst choice I could have made.

[Pursuivant]

Its 80K per year, not accumulative. Slate is cleared yearly. So you just need to *file* - you only start to pay if you get to be the CEO of Nokia.
I'd be more worried in dealing with the Finnish tax return, as for that you need to know how to claim your deductions - if you're working I don't think students get much of a chance in those.

[Brynne]

Are you serious? So basically unless I start making over $6,600 a month, I just have to report my income to the US, but not pay anything?

I just assumed the 80k was something that added up over the years. I suppose I was assuming that the US government would take all the money they could get. xD

As for my Finnish taxes, unless I have to handle them differently than a normal Finnish person because of being a US citizen, I've got my husband's help with those.

[Pursuivant]

Well thats why they have yearly returns, like. US is a bit peculiar in this manner they require you to file even if you're overseas (it gets interesting if you have property and assets as like theres restrictions in owning stock and whatnot). As far as Finland is concerned, 6 months out of the country and its a gonner. They squeeze only the people they catch here

[Brynne]

Thank you. That makes my life far less complicated than I was expecting it to be.

[AldenG]

I do have one other question: When I do need to start paying taxes, I'm confused about how I go about paying? As I understood it, a tax return is a report on income that is supposed to already have been taxed? So do I need to file different forms with my payments enclosed before April 15th, and then file the tax return in addition? I'm sorry, you'll have to forgive my utter cluelessness. Maybe looking at the IRS website to learn about taxes was the worst choice I could have made.

Since Pursuivant answered most of your follow-ups (and in particular the annual exclusion), I'll just comment on this last paragraph.

First of all, if you haven't already seen it, you may find this page helpful, particularly the part on extensions. Since you are living abroad, your standard filing deadline is is June 15th. Like any American, you can file for an automatic extension using Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return. That extends the deadine for filing (not payment) until October 15th. I see that now there is also a Form 2555-EZ, a simplified version of the Foreign Earned Income Exclusion. I haven't looked at it yet, but it's probably made for people like you.

In practice, penalties are for late payment rather than late filing. If all your payments are made by April 15, I haven't heard of someone getting dinged for the return being late when sufficient payment was made by April 15. Of course, as noted earlier, the concept of late payments is purely hypothetical here since you won't have an obligation. And as noted earlier, I'm only a taxpayer, not a tax professional.

Now to your more basic question. Again the answer is mostly hypothetical for you, but I see that you want to understand how the basic system works.

For U.S. taxes, you are said to accrue a tax obligation during the income year. You are supposed to make Estimated Tax payments using Form 1040-ES (not ez, note) during the income year to begin meeting that obligation. Normally you should make 4 equal payments by 4/15, 6/15, 9/15, and 1/15 (of the following year). Note that these dates are NOT spaced evenly at 3-month intervals. If you find, after calculating your taxes, that your estimated taxes were not sufficient, then you also make a payment on 4/15 of the following year when you file your tax return. Even if you have an extension on your filing date, the final payment is normally due 4/15.

Many people use http://www.officialpayments.com to make those payments with a credit card. You have to pay a convenience fee of several percent, but you get an instant receipt. For people who worry about mail and bureaucracies, the receipt is cheap reassurance and you avoid the hassle of setting up delivery confirmation through the post office.

If you were paid by a U.S. employer, they're required to withhold your taxes and you normally don't worry about Estimated Taxes. If they didn't withhold enough, you could end up owing on April 15, so you are allowed to makes Estimated Tax payments even if you have U.S. withholding going on. But you're not required.

If your income is not evenly spaced through the year, your Estimated Tax payments don't have to be equal amounts, either. You can pay the estimated tax as the obligation accrues, with a big payment for a quarter in which you received a lot of income and a small payment for a quarter in which you received a little.

And finally, even if your estimated taxes are underpaid or not paid, there is a small penalty. Some CPAs will tell you that such a "loan" from Uncle Sam has a better interest rate than a loan from a bank, so go ahead and underpay the estimated taxes if necessary. I don't know if that's ethical advice for them to give, but I've heard it from more than one CPA. The big, hard payment deadline is April 15th. That's the one to try hard to meet. But there again, if part of your obligation is somewhat late being paid, you pay interest and penalty on only the unpaid portion. The IRS doesn't come down on you like a ton of bricks for things like that. It's routine for them and can be somewhat costly for you, depending on the amount of monthly interest and penalty. But it's not like outright criminal activity.

The thing that WILL get them on you like a ton of bricks is deliberately misstating or hiding income that would accrue a tax obligation. That's where a person crosses the line into criminal activity. At best the IRS will demand immediate payment, quite possibly seize property, and audit you every year thereafter for quite a while. At worst you can go to jail.

Basically Form 1040 is where you summarize your income and deductions. Where other forms are required, the purpose of those forms is normally to determine whether some reduction in your obligation is appropriate. Thus people with rental income get a chance to offset it with landlord expenses. People who sold stocks explain how much of the sale was profit or loss over the original investment.

One other observation on why it's so rare for an American to pay U.S. tax on foreign income in Europe, and especially Scandinavia:

If your income exceeds the $80K or $94K foreign earned income exclusion amount, a person in Scandinavia still won't normally owe U.S. tax. That's because the obligation accrues, but then it gets offset by credits for taxes paid in the country of residence. At any income level, you pay more tax in any Scandinavian country than you would have paid in the U.S. There are forms that reduce your U.S. tax obligation by the amount of tax paid on that income.