US Expat Taxes for Americans Living in The Czech Republic
As a green card holder or a US citizen, your global income is subject to income tax and you must file a US tax return every year regardless of where you live or whether you already pay taxes in your country of residence. Income includes salary from both non-US and US sources, wages, interest, rental income, and dividends. You are also required to file estate tax returns and gift tax returns if you are a citizen of the US or a resident alien traveling or living outside the United States.
If you have a foreign investment company, financial accounts, bank accounts, or own at least 10% of a foreign corporation or partnership there are separate forms to be filled up. If you fail to file them or file them late, the penalties for each form can be $10,000 or more, which are due even if you don’t have to pay any taxes.
US taxpayers living in the Czech Republic have a tax filing deadline of April 15th for the previous year’s taxes, but any expat can get an automatic extension until the 15th of June to file. In addition, any taxpayer can apply for an extension until October 15th. However, you must pay any tax owed by April 15th to avoid interest and penalties. If you do not know how much yow will owe in taxes then you will need to file a estimated payments.
Deductions, credits, exclusions
The US has put many deductions, credits, and exclusions in place so that you are not taxed twice. Expats living in the Czech Republic can reduce or eliminate any us taxes owed in the US tax through the Foreign earned income exclusion, Foreign tax credits, and Foreign housing exclusion. In addition, the income tax treaties prevent double taxation for US citizens living in the Czech Republic by eliminating or reducing US taxes on some types of income. If you come back to live in the US, you still may be eligible to use certain expatriate exclusions and deductions that year, which would require you to file by the April 15th. To find out how you will be taxed, you should review the tax treaty with the Czech Republic.
Foreign earned income exclusion
According to Foreign earned income exclusion, any Czech income tax you pay can be claimed against the tax liability on your tax returns in the US on the same income. But it is not automatic and can only be claimed if you file your returns on time.
Foreign tax credit
You may be entitled to claim Foreign tax credit for the income that has been taxed in the Czech Republic. For that, you must qualify as an expat and have foreign income.
If you forget to take advantage of all the exclusions allowed or if you failed to report any income on your return, you should file an amended return for that year using 1040X. Amended returns will need to be filed before the three years from due date to seek a refund or credit because the clock starts ticking once the original return is filed.
Czech Republic residency
Different conditions apply to non-residents and residents of the Czech Republic. Residency is assessed by reference to domicile i.e., you are a resident of the Czech Republic if you have a home address in the country and have stayed in the country for 6 months or more within a year. Residents of the Czech Republic have to file and pay taxes on their global income except when their sole income comes from the Czech Republic. The foreign-sourced income of residents is subject to tax in the same way as income sourced in the Czech Republic. But nonresidents are only taxed on income sourced from the Czech Republic.
Types of income
In the Czech Republic, the income tax rate is 15%. The due date is March 31st of the following year. Czech accounting rules determine the taxable income, which includes employment income, business income, capital gains, dividends, interest income, annuities, and rental. Tax is payable on income less allowable deductions and expenses incurred in deriving or maintaining the income, which cannot be claimed for capital gains or employment income.
Employment income tax is withheld at source every month by the employer and sent to the tax authorities directly. If you make 48 times the amount of the average salary, you will have to pay a 7% tax surcharge.
Self-employed people have to register themselves at the Czech tax registry and must file a tax return by March 31st of the following year. However, this can be extended until June 30th if the return is prepared by a registered tax advisor. Penalties and interest apply for late filing, late payment, under-declaring income, or failure to file.
Income from the sale of assets is included with other taxable income at the regular corporate tax rate. If a foreign owner sells a company investment based in the Czech Republic, any gain will be taxed, regardless of the residency of the buyer, unless otherwise provided in a tax treaty. However, an exemption applies if the seller is a resident corporation of the Czech Republic and has been holding a minimum of 10% interest in the company that is sold for at least a year.
Dividends paid to nonresidents attract a 15% withholding tax. The rate can be exempt under the EC royalties and interest directive or reduced under a tax treaty. If the parent company maintains a minimum of 10% of the distributing company domiciled in the Czech Republic or an EU member state for an uninterrupted period of a year, dividend distribution between these companies is exempt from tax. Inbound dividends are also exempt from tax if the paying company is a tax resident in a non-EU country that has concluded a tax treaty between them or has a specific legal form or has met the terms for the dividend exemption under the directive of EU parent-subsidiary and is subject to domiciled country tax.
Interest paid to non-residents in the Czech Republic attracts a withholding tax of 15%, unless the rate can be exempt under the EC royalties and interest directive or reduced under a tax treaty. Taxpayers from EEA and EU member states can file a tax return at the end of the year where it will be possible to subtract costs related to royalty payments.
Method of payment
You can mail your returns using the postal service in the Czech Republic. You may also use private delivery services. The filing date is the postmark date if the mailing is done from outside the United States. In many cases, you can even e-file your tax returns. Participating software companies make them accessible through the IRS. Taxes should be paid in US dollars either online with a transfer from your US bank using direct pay or by using a US credit or debit card or through the Electronic tax payment system. If you are an international taxpayer who does not have a bank account in the US, you should ask your bank if it has an affiliate in the US where you can make same-day transfers. Your payment is considered not received until the date of receipt.
IRS Streamlined filing procedures
If for any reason you have failed to file your US tax returns or forgot to do so, don’t worry. Under the IRS Streamlined filing procedures, you are entitled to certify that your failure to pay taxes due as well as report foreign financial assets and accounts did not result from willful conduct. Give us a call or send us an email if you have any questions about the IRS’s Streamlined Filing Program.