How to file US tax returns while living in Saudi Arabia
Ask any adult US citizen what they need to file by mid-April and they will know exactly what you are referring to without even completing the sentence. Their reaction will be either relief or panic.
At a recent American Chamber of Commerce event in Riyadh, there were grim faces at every table. The topic of discussion was one that has been taxing on US citizens for decades — how to file returns while working in Saudi Arabia. By the time the presentation was over, a few weak smiles emerged.
Tax day is always on April 15, unless it falls on a US weekend or holiday then it is postponed until the next business day. For that reason, tax day this year was on April 18. But US citizens living in Saudi Arabia have an automatic two-month extension to file by June 15.
The US reserves the right to tax its citizens regardless of their country of residence. With some exceptions, all US citizens living in Saudi Arabia must file their taxes if they live and work in the Kingdom. There are some tax exclusions and credits for foreign income that could result in a zero US tax liability. The terms are vaguely described and could be complicated for the average user.
Thomas Carden, the Bangkok-residing director of American International Tax Advisors, flew in to the Saudi capital to extend his expertise to AmCham members and offer tips for filing.
“TurboTax (software) I think does a really good job for the average US citizen who’s living in the United States, but the rules get very obscure when it comes to US citizens abroad. The average expat living overseas just doesn’t even know they may have to file what’s called an FBAR, the Foreign Bank Account Reporting form,” he told Arab News.
The FBAR can be filed online and is required for those who have over $10,000 in one or more accounts abroad.
Oddly, the FBAR does not go to the Internal Revenue Service but to the US Treasury Department’s Financial Crimes and Enforcement Network.
“Over the years a lot of people have said that if you’re filing through the Financial Crimes center, they must assume you’re guilty for living overseas. I don’t know. It’s not a pleasant name, especially when you do get a letter back about a question about your FBAR,” Carden said.
“If you don’t do that, the IRS can come in and penalize you for 50 percent of those high balances, whether or not you still have the money or not. So in that particular case, it’d be a little bit over $5,000 of penalties. What we don’t want to have to do is fight with the IRS over why you didn’t file that when they detected the accounts — that’s because those banks are telling the IRS how much you’ve had in those accounts,” he said.
There are many tax benefits to living in Saudi Arabia as a US citizen.
“One of the first benefits of being an expat is, especially in Saudi Arabia, you can use the Foreign Earned Income Exclusion, which is $120,000 per year. You can exclude off (this criteria) if you meet one or two tests. The first test is you’re outside the US for 330 days a year, that’s called the Physical Presence Test.
“The second is called the Bona Fide Residence Test. The Bona Fide Residence Test is exactly that, your primary abode, your home, is in another country. So if you’ve lived here for a couple of years, your kids are here, you’re a resident here and qualify under bona fide residence,” Carden explained.
“The second advantage of living abroad is — because of the time zone and getting all the documents living overseas and all your tax stuff — they give you an extra 60 days to file your tax return so that you don’t have to file anything on April 15, which would be your normal filing deadline,” he said. “You do have to pay any tax due by April 15 or you’ll have interest on that money until you pay it but you don’t have to file a tax return until June 15.”
For US citizens living abroad, the FBAR, which is also typically due on April 15, gives you an automatic extension until Oct. 15.
With Saudi Arabia’s introduction of Value Added Tax, US citizens in the Kingdom are paying more than they have done before. But since it is a consumption tax and not considered income tax, that amount of VAT one pays cannot be used against a US tax credit.
While the US and Saudi Arabia have enjoyed being allies for over half a century, there is currently no tax treaty between the two countries. This means that there are no clear tax breaks and it is slightly more complicated and more expensive to file taxes for Americans living in Saudi Arabia.
“The US and Saudi Arabia need to look at a tax treaty, as the world is growing and as the world is changing, people and money are moving. People and money are flowing around the globe at a much faster rate and you can end up in something that is a total conflict like this,” he said.
“In a way, you are paying taxes here, but they don’t qualify so they can’t use that as an advantage. But Saudi Arabia could negotiate a tax treaty that says: Wait, a second, because we don’t have any income tax here we would like the Foreign Earned Exclusion increased by 50 percent for US citizens living in Saudi Arabia,” he said.
That treaty could also work if a Saudi company owns assets in the US. In that case, the Saudi company operating in the US could have a tax advantage.
“A good tax treaty helps the money and the individuals and the capital flow between the different countries much more efficiently,” Carden said.
The reason why filing taxes for citizens living abroad is so complicated is because there is no current representation, he said.
“Congress doesn’t pay attention to US citizens living overseas, because we as a group, we don’t have a member of Congress who represents us. We’re only allowed to vote for the president. So any of the politicians — and I don’t fault them on either side on this — they only have so much power to change inside Congress. They have to work with their constituents first, we don’t have anybody representing us and sitting there and there’s somewhere around 10 million of us living overseas,” Carden said.
Carden recommends that citizens hoping to hire him to streamline their tax filing process should contact him or his colleagues at their other offices and give about two weeks to complete their filing. They work remotely with most of their clients and ask everyone to fill out a questionnaire. His company, American International Tax Advisers, is the largest US tax firm in Asia with offices in several countries. The standard price to hire them starts at $400.
Bill Foster, chairman of the American Chamber of Commerce for Saudi Arabia, told Arab News that living in Saudi Arabia as an American has many advantages — and not what some people back in his home country might assume.
“There’s some misperceptions — especially among American lawmakers — that the reason why people choose to live overseas as American citizens is to save in their taxes or to evade taxes, and that’s not the case at all. I think in most cases, it’s a much higher purpose. In my particular case, I think taxes might not even be in the top 20. It’s truly a misperception and it’s getting in the way of some progress on this issue, I think,” Foster told Arab News.
His advice is to consult with a professional, like Carden, to avoid common mistakes.
“If you’re an expat overseas, there are quite a few mistakes that one can make if you tried to do it on your own and I’m among those people who probably needs to see a tax professional pretty quick. And one thing that also I think we, as AmCham, work on is through our various influencers both here and with the US government, is start pushing for a tax treaty between the Kingdom of Saudi Arabia and the US that would probably be to the advantage of both countries and also to the advantage of the US citizens living abroad,” he said.
Both Foster and Carden believe that Vision 2030 has been a catalyst for change and they hope for some kind of treaty that could benefit both countries.
“Taxes are an incredibly sensitive thing for everybody because it’s your finances. We understand that. I’ve had people come into my office physically shaking because they’ve read about the FBAR penalties — they’re so scared. And in the end, we put them through streamlined filing and they smile. That’s the rewarding part of this business, it’s not just being a tax agent. We truly help people,” Carden said.
Tax day is always on April 15, unless it falls on a US weekend or holiday then it is postponed until the next business day. For that reason, tax day this year was on April 18. But US citizens living in Saudi Arabia have an automatic two-month extension to file by June 15.
The US reserves the right to tax its citizens regardless of their country of residence. With some exceptions, all US citizens living in Saudi Arabia must file their taxes if they live and work in the Kingdom. There are some tax exclusions and credits for foreign income that could result in a zero US tax liability. The terms are vaguely described and could be complicated for the average user.
Thomas Carden, the Bangkok-residing director of American International Tax Advisors, flew in to the Saudi capital to extend his expertise to AmCham members and offer tips for filing.
“TurboTax (software) I think does a really good job for the average US citizen who’s living in the United States, but the rules get very obscure when it comes to US citizens abroad. The average expat living overseas just doesn’t even know they may have to file what’s called an FBAR, the Foreign Bank Account Reporting form,” he told Arab News.
The FBAR can be filed online and is required for those who have over $10,000 in one or more accounts abroad.
Oddly, the FBAR does not go to the Internal Revenue Service but to the US Treasury Department’s Financial Crimes and Enforcement Network.
“Over the years a lot of people have said that if you’re filing through the Financial Crimes center, they must assume you’re guilty for living overseas. I don’t know. It’s not a pleasant name, especially when you do get a letter back about a question about your FBAR,” Carden said.
“If you don’t do that, the IRS can come in and penalize you for 50 percent of those high balances, whether or not you still have the money or not. So in that particular case, it’d be a little bit over $5,000 of penalties. What we don’t want to have to do is fight with the IRS over why you didn’t file that when they detected the accounts — that’s because those banks are telling the IRS how much you’ve had in those accounts,” he said.
There are many tax benefits to living in Saudi Arabia as a US citizen.
“One of the first benefits of being an expat is, especially in Saudi Arabia, you can use the Foreign Earned Income Exclusion, which is $120,000 per year. You can exclude off (this criteria) if you meet one or two tests. The first test is you’re outside the US for 330 days a year, that’s called the Physical Presence Test.
“The second is called the Bona Fide Residence Test. The Bona Fide Residence Test is exactly that, your primary abode, your home, is in another country. So if you’ve lived here for a couple of years, your kids are here, you’re a resident here and qualify under bona fide residence,” Carden explained.
“The second advantage of living abroad is — because of the time zone and getting all the documents living overseas and all your tax stuff — they give you an extra 60 days to file your tax return so that you don’t have to file anything on April 15, which would be your normal filing deadline,” he said. “You do have to pay any tax due by April 15 or you’ll have interest on that money until you pay it but you don’t have to file a tax return until June 15.”
For US citizens living abroad, the FBAR, which is also typically due on April 15, gives you an automatic extension until Oct. 15.
With Saudi Arabia’s introduction of Value Added Tax, US citizens in the Kingdom are paying more than they have done before. But since it is a consumption tax and not considered income tax, that amount of VAT one pays cannot be used against a US tax credit.
While the US and Saudi Arabia have enjoyed being allies for over half a century, there is currently no tax treaty between the two countries. This means that there are no clear tax breaks and it is slightly more complicated and more expensive to file taxes for Americans living in Saudi Arabia.
“The US and Saudi Arabia need to look at a tax treaty, as the world is growing and as the world is changing, people and money are moving. People and money are flowing around the globe at a much faster rate and you can end up in something that is a total conflict like this,” he said.
“In a way, you are paying taxes here, but they don’t qualify so they can’t use that as an advantage. But Saudi Arabia could negotiate a tax treaty that says: Wait, a second, because we don’t have any income tax here we would like the Foreign Earned Exclusion increased by 50 percent for US citizens living in Saudi Arabia,” he said.
That treaty could also work if a Saudi company owns assets in the US. In that case, the Saudi company operating in the US could have a tax advantage.
“A good tax treaty helps the money and the individuals and the capital flow between the different countries much more efficiently,” Carden said.
The reason why filing taxes for citizens living abroad is so complicated is because there is no current representation, he said.
“Congress doesn’t pay attention to US citizens living overseas, because we as a group, we don’t have a member of Congress who represents us. We’re only allowed to vote for the president. So any of the politicians — and I don’t fault them on either side on this — they only have so much power to change inside Congress. They have to work with their constituents first, we don’t have anybody representing us and sitting there and there’s somewhere around 10 million of us living overseas,” Carden said.
Carden recommends that citizens hoping to hire him to streamline their tax filing process should contact him or his colleagues at their other offices and give about two weeks to complete their filing. They work remotely with most of their clients and ask everyone to fill out a questionnaire. His company, American International Tax Advisers, is the largest US tax firm in Asia with offices in several countries. The standard price to hire them starts at $400.
Bill Foster, chairman of the American Chamber of Commerce for Saudi Arabia, told Arab News that living in Saudi Arabia as an American has many advantages — and not what some people back in his home country might assume.
“There’s some misperceptions — especially among American lawmakers — that the reason why people choose to live overseas as American citizens is to save in their taxes or to evade taxes, and that’s not the case at all. I think in most cases, it’s a much higher purpose. In my particular case, I think taxes might not even be in the top 20. It’s truly a misperception and it’s getting in the way of some progress on this issue, I think,” Foster told Arab News.
His advice is to consult with a professional, like Carden, to avoid common mistakes.
“If you’re an expat overseas, there are quite a few mistakes that one can make if you tried to do it on your own and I’m among those people who probably needs to see a tax professional pretty quick. And one thing that also I think we, as AmCham, work on is through our various influencers both here and with the US government, is start pushing for a tax treaty between the Kingdom of Saudi Arabia and the US that would probably be to the advantage of both countries and also to the advantage of the US citizens living abroad,” he said.
Both Foster and Carden believe that Vision 2030 has been a catalyst for change and they hope for some kind of treaty that could benefit both countries.
“Taxes are an incredibly sensitive thing for everybody because it’s your finances. We understand that. I’ve had people come into my office physically shaking because they’ve read about the FBAR penalties — they’re so scared. And in the end, we put them through streamlined filing and they smile. That’s the rewarding part of this business, it’s not just being a tax agent. We truly help people,” Carden said.
