Expat Tax for Americans in the Czech Republic – What You Need To Know

Expat Tax In Czech Republic – Expat Living In Czech Republic

As one of the most developed and industrialized economies in Central Europe, ex-pats moving to the Czech Republic will find that the country is popular for tourists and expats. Read on to discover important tips on US Expat Tax In Czech Republic.

The Czech Republic’s turbulent history, particularly the transformation from a communist state to liberal democracy in the second half of the 20th century, has shaped the nation and left its mark on the country, making it a culturally fascinating destination. With an increasingly multicultural population, the Czech Republic now has approximately half a million foreigners living within its borders.

The Top 10 Cities In the Czech Republic for expats: (in no particular order):

• Říčany
• Prague
• Černošice
• Třeboň
• Trhové Sviny
• Beroun
• Brandýs nad Labem-Stará Boleslav
• České Budějovice
• Hustopeče
• Turnov

About Czech Republic

The Czech Republic is a modern country with high living standards. They have extensive social security, and accessible healthcare system, and outstanding educational opportunities. The majority of the population is Czech; other ethnic groups include Slovaks, Ukrainians, Germans, Vietnamese, and Poles. Prague, the national capital, has historically occupied a predominant role. Brno is the chief industrial and cultural city of Moravia. Other large cities include Ostrava, the leading coal-mining and steel center, and Plzeň, with old, established engineering and brewing industries.

Continental influences cause large fluctuations in temperature and precipitation, while moderating oceanic influences diminishes from west to east. Czechs make up roughly two-thirds of the population. The Moravians consider themselves to be a distinct group within this majority. A small Slovak minority remains from the Czechoslovakian federal period. An even smaller Polish population exists in northeastern Moravia, and some Germans still live in northwestern Bohemia. Roma (Gypsies) constitute a still smaller but distinct minority, having resisted assimilation for the most part. Czech is the official language, but German and English are also spoken. The currency is the Czech Koruna (CZK), known as the Czech crown.

Guide To US Expat Tax In Czech Republic

The Tax Samaritan country guide to U.S. ex-pat tax in the Czech Republic intends to provide a general review of expat tax in the Czech Republic and how that will impact your U.S. expatriate tax return as a U.S. Expat In Czech Republic.

As a U.S. taxpayer, all worldwide income is subject to taxation and reporting. For most expatriates, you have a requirement to file a U.S. tax return on an annual basis due on April 15 each year. June 15 if you are residing overseas on the April 15 deadline.

The tax treatment for different classes of income can vary greatly from the Czech Republic and the U.S. For example, certain benefits may be tax-free or excluded from taxable income in the Czech Republic. Still, in the U.S., these benefits are likely to be non-qualified benefits that are subject to being included as taxable income in U.S. As such, there are several considerations related to  U.S. expat tax in Czech Republic, and this brief article will address a few of those considerations.

Czech Republic Expat Income Taxes

Who Is Liable For Income Taxes In Czech Republic

The individual’s tax residence status determines a person’s liability to the Czech income tax. A person can be a resident, non-resident, or split resident for part of the year for Czech tax purposes. The general rule is that a person who is a tax resident of the Czech Republic is liable to declare and pay tax in the Czech Republic on the individual’s worldwide income, which includes employment income, income from self-employment, rental income, investment income, and capital gains, and other taxable income from whatever source. Extended business travelers are likely to be taxed on employment income relating to their Czech workdays. Non-residents are liable to pay tax on income generated from sources in the Czech Republic.

Tax Year In Czech Republic And Tax Filing And Payment Rules

Individuals considered as tax residents in the Czech Republic are levied a flat personal income tax rate of 15% from the super-gross income. Super-gross income calculates as gross income plus employer social security contributions (33.8%). For individuals with yearly incomes exceeding 48 times the average monthly salary within the calendar year, there is a solidarity surcharge of 7%. Czech Republic income tax is payable on assessable income less expenses and allowable deductions. Assessable income includes business income, employment income; other capital gains; dividends, rental; interest income; annuities, and other income.

Czech Republic corporate income tax rate is 19% in 2020. Residence determination is by reference to domicile or where the individual has spent at least 183 days of the relevant calendar year in the Czech Republic. Residents are subject to taxation on their worldwide income. Nonresidents are subject to taxation only on Czech-source income.

Real Estate Tax is paid annually, usually levied to the owner and in special instances to the lessee. The tax on buildings is based on the area of land occupied. Self-employed individuals are subject to a mandatory contribution of 42.7% (13.5% for health insurance, a 28% old-age pension, and 1.2% for unemployment).

Foreign tax relief is available only under tax treaties. If relief is not available under a treaty, income tax payments abroad may have a deduction as an expense in the following year provided it is on income included in Czech taxable income.

Expat Tax Withholding in Czech Republic

As an ex-pat living abroad, you get an automatic extension to file until June 15th of the following calendar year-end. However, you must pay any tax that may be due by April 15th to avoid penalties and interest. You can get an extension to file until October 15^th if properly requested.

The taxpayer must file an annual income tax return for all resident years. The taxpayer must also file an annual income tax return for the year the assignee leaves the Czech Republic. In the year concerned, the taxpayer performed activities in the Czech Republic and is not protected by a double tax treaty. The tax return is to be filed within the statutory deadline(s) for filing. In the years following the expatriation year, the assignee does not generally have any filing requirements. That is provided that the assignee is a tax non-resident and has no Czech-sourced income. As a U.S. citizen or green cardholder, you have a requirement to file a U.S. tax return each year regardless of whether you already pay taxes in your residence country.

Any Czech income tax you already pay on foreign source income can be a credit against the tax liability on your U.S. return.

What You Need To Know About US Income Taxes

Some of these preferential tax treatments or benefits for US expat tax in Czech Republic include:

• If you are a U.S. citizen or a green card holder of the United States and you live in the Czech Republic, your U.S. ex-pat tax in the Czech Republic is based on your worldwide income. And as such, you must file a U.S. return for all the years that you are residing in the Czech Republic. However, as a U.S. expat you may qualify to reduce your U.S. taxable income up to an amount of your foreign earnings that is adjusted annually for inflation ($107,600 for 2020). You can also exclude or deduct certain foreign housing amounts depending on other factors if you exceed the initial exclusion. This is known as the Foreign Earned Income Exclusion and foreign housing exclusion.
• When it comes to your U.S. expat tax in Czech Republic, most U.S. expatriates worry about “double taxation”. (i.e.,– paying taxes to two different countries – the U.S. and Czech Republic). A U.S. taxpayer working overseas in the Czech Republic may reduce U.S. taxable income and “double taxation” by claiming the Foreign Tax Credit on Form 1116. Should any foreign income not be fully offset by the foreign earned income exclusion, housing exclusion, or housing deduction, the foreign tax credit may be used as a deduction or credit on the U.S. tax return. Taxpayers can either deduct the taxes as an itemized deduction on Schedule A or claim a credit against tax. In most cases, it is to your advantage to take foreign income taxes as a tax credit.

Avoid The Common Dangerous Mistake

A common but dangerous mistake is the assumption that if there are zero taxes with these tax benefits. Then, there is no U.S. tax filing requirement. This is not true. If you are working overseas, it is likely that you meet the filing requirements and must do so. It is important to note that the preferential tax treatments, such as the foreign earned income exclusion and foreign tax credit, are not granted automatically and must be claimed on a properly filed U.S. tax return.

When faced with U.S. expat tax in the Czech Republic, there are many tax items to consider, but the above are by far the most common benefits individuals can take advantage of. If you can qualify for both of these benefits (the foreign earned income exclusion & foreign tax credit), an analysis should be done to determine the strategy to optimize the return outcome as much as possible. For example, those with young children may want to consider forgoing the foreign earned income exclusion and utilize the foreign tax credit.

With top-notch experience and knowledge of expat tax preparation from Tax Samaritan, you have the assurance that all these eligible benefits will have the best outcome pursued. The decision to utilize the foreign earned income exclusion or the foreign tax credit can be complex and depend on various factors, so it is typically best to discuss with a tax professional if unsure which option is best or what you may qualify for.

Czech Republic Foreign Bank Account Reporting – The FBAR (FinCen Form 114)

Another important tax deadline that frequently applies to  U.S. expat tax in Czech Republic is in regards to the disclosure of foreign assets on the FBAR (Foreign Bank Account Report – Form 114 – formerly known as TD F 90-22.1)

The FBAR filing deadline is April 15th. Or, the preceding business day if April 15th falls on a holiday or weekend) of the following year. Unfortunately, requesting an extension on your individual return does not extend the FBAR due date. However, in years past, the Treasury Department has granted an automatic six-month extension to October 15th for those who miss the April 15th due date. Any reports after this date are a delinquent FBAR. Also, the FBAR is different than many other tax forms in that there must be receipt by the deadline date.

Where To File The FBAR

The FBAR must be filed with the Treasury Department (it is not filed with your federal income tax return) whenever you meet the FBAR filing requirements, which in a nutshell is whenever a U.S. person has a financial interest in, or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust or other types of foreign financial account (including an insurance policy with a cash value such as a whole life insurance policy) maintained with a financial institution, with an aggregate value of over $10,000 at any time during the calendar year based on the highest value of each foreign account during the tax year.

If you have bank accounts at Ceskoslovenska Obchodni Banka, Ceska Sporitelna, Universal bank Komercni Banka (KB), UniCredit Bank Czech Republic and Slovakia, Raiffeisenbank CZ, or at another bank in the Czech Republic or any other foreign country, you may meet the filing requirement to disclose your foreign accounts on the FBAR. Please don’t hesitate to contact Tax Samaritan to learn more about your filing requirements.

Please don’t hesitate to contact Tax Samaritan to learn more about your filing requirements.

U.S. – Czech Republic Social Security Totalization Agreement

An agreement effective January 1, 2009, between the United States and the Czech Republic improves Social Security protection for people who work or have worked in both countries. It helps many people who, without the agreement, would not be eligible for monthly retirement, disability, or survivor benefits under the Social Security system of one or both countries. It also helps people who would otherwise have to pay Social Security taxes to both countries on the same earnings.

The agreement covers Social Security taxes (including the U.S. Medicare portion) and Social Security retirement, disability, and survivors insurance benefits. It dictates which system a worker should pay into and receive distributions from when eligible.  The Czech Republic system covers self-employed individuals living and working in the Czech Republic. They should obtain a certificate of coverage to claim the benefits of the totalization agreement. Attach a photocopy of this certificate to your U.S. individual tax return to properly exempt yourself from the U.S. self-employment tax. Tax Samaritan can help guide you through this process if unsure of how to proceed.

U.S.- Czech Republic Tax Treaty And Tax Relief For US Expat Tax In Czech Republic

The United States and the Czech Republic do have an income tax treaty in place. Many of the articles apply to non-resident aliens for U.S. tax purposes. Still, they can also extend certain benefits to U.S. citizens, residents, and green card holders (limited by the ‘Savings Clause’), so it is important to understand if you qualify for these benefits.

Tax Samaritan Takeaways For U.S. Expats In Czech Republic

Please click on the hyperlinks below for additional takeaways for your expat tax in Czech Republic:

Czech Republic Tax Treaty documents

Agreement Betweenthe United States and Czech Republic

Top banks in Czech Republic