Filing U.S. tax returns for U.S. taxpayers in Ireland means there are differences which can confuse or trap the unwary.
Here are the main problems we see:
- Not-filing U.S. tax returns
If you (a) are a U.S. taxpayer in Ireland who (b) exceeds the income threshold for any year, then you must file a U.S. tax return with the IRS reporting your worldwide income (including income taxed in Ireland). This applies even if you have lived in Ireland for many years and is not removed under tax treaties or by holding dual citizenship.
2: Report of Foreign Bank and Financial Accounts (‘FBARs’)
Here ‘Foreign’ is from the U.S. perspective – so Irish accounts must be reported if you held more than $10,000 (from all – not each – accounts) at any point during the year. For example, if you have two Irish bank accounts with $8,000 and $3,000 in them at the same time during the year, then – as the total ($11,000) exceeds $10,000 – each account must be reported on the FBAR for that year. The fines for missing this begin at $10,000 per account rising steeply – but there are certain amnesties and voluntary disclosure options which can reduce or eliminate all of these. An FBAR must be filed even if the accounts are already reported on IRS Form 8938 (Statement of Specified Foreign Assets).
3: Irish Pensions
The IRS does not recognize Irish pensions – so both your contributions and those of your employer are taxable in the U.S., even though they are not subject to income tax in Ireland. While it is anticipated that a new tax treaty will bring these into alignment, that is not the case for now and the U.S. Senate takes a notoriously long time to approve tax treaties. The income growth in your pension could be taxable or could fall into the ‘PFIC’ classification. There are strategies to mitigate this using tax credits and Employee Trusts.
4: PFICs (Passive Foreign Investment Company)
A PFIC is an anti-avoidance tool that the IRS uses to discourage investments in offshore mutual funds. Unfortunately, many foreign pensions fall into this category. This may lead to withdrawals being taxed at the highest U.S. rates with interest running from the life of the plan. These may be avoided through timely elections and trust classification.
5: Sale of home
In Ireland (and the U.K.) any gain from the sale of a principal private residence is generally tax free, however the IRS will only allow the first $250,000 ($500,000 if married filing jointly) of gain to be tax free, anything above that is taxed. Furthermore, the gain is calculated by reference to $ F/X rates on the days of purchase and sale. We have seen cases where a loss in €uro resulted in a gain in $.
6: Non-U.S. dollar $ loans / mortgages
The IRS converts non-$ debts (such as mortgages) into $ on the day you take the loan, and then converts the $ amount paid back by you on the day you repay the loan. If the value of the S has moved over the life of the loan, then refinancing a non-$ mortgage could generate a U.S.-taxable gain – although there is a de minimsis amount per transaction ignored (so, for example, monthly mortgage payments of principal escape). Sadly, losses are not allowed for U.S. tax unless offsetting any gain on the sale of an underlying asset (e.g., a home) acquired with the loan (mortgage).
7: Redundancy Payments / loss of Job
Losing your job is distressing enough – but there are also additional tax complications for U.S. taxpayers in Ireland. Unfortunately:
- The IRS does not recognize tax free redundancy / termination payments
- The IRS does not recognize Irish pensions
- Jobseekers Allowance assistance is taxable
As these payments which are tax free in Ireland are taxable on your U.S. tax return you may incur additional U.S. taxes.
These additional taxes can be managed and reduced with planning and the correct use of credits and allowances.
These are some of the main differences, but there are many more relating to taxable income (e.g., lottery winnings, certain social welfare payments, etc.) and gifts / inheritances between spouses where one is a non-citizen or gifts to a U.S. person from a non-U.S. person. Many of these differences can be reduced to eliminated through analysis, planning, and the application of tax treaties.