Have you received an offer for a foreign work assignment in Hungary? Did your parents or grandparents hail from Hungary and you always wondered about reconnecting with your roots? Are you contemplating spending your retirement years in Hungary where your money can stretch further? If you answered yes to any of these questions, this article is for you.
Uprooting one's life in the United States and moving to a new country equals a long to-do list, including getting visas, selling your U.S. home while simultaneously buying property in the new country, learning the language, finding a good school for the children, and opening new bank accounts, just to mention a few. It’s not surprising that amidst all these important aspects of expat life, tax considerations often take a backseat.
Hungarian law imposes a fifteen percent flat tax on personal income, such as wages, capital gains, interest, dividends and rents. Additionally, real estate tax is seldom used, wealth tax is unheard of, and over eighty tax treaties provide for the elimination of double taxation. Most taxes are withheld at the source and the Hungarian tax authority automatically prepares personal income tax returns for individuals, thereby eliminating the burden of self-reporting. Sounds like a good deal, right?
What about your obligation to report to the IRS? Has the complicated Form 1040 reporting become a thing of the past? Can you just ignore the dreaded tax organizer sent by your U.S. tax accountant every January?
The answer to all of these questions is no because the reality is that the United States retains the right to tax U.S. citizens and residents on their worldwide income, without regard to where that income was earned. In other words, all your income from Hungary is also subject to tax in the U.S. and it is includible on your Form 1040 due on April 15th of the following year (or June 15th if you are a non-resident for U.S. tax purposes). Fortunately for expatriates, various tax tools are available to U.S. taxpayers residing abroad. Some of the ways double taxation can be avoided include: applying the provisions of the U.S. - Hungary income tax treaty; excluding wage-type income earned in Hungary; and crediting foreign taxes paid in Hungary against your U.S. tax liability.
Another important issue to keep in mind is the reporting of foreign financial accounts and assets. Non-U.S. bank and financial accounts exceeding the mandated threshold are reportable on FinCEN Form 114 (also called Foreign Bank Account Report or FBAR) and IRS Form 8938, a sister form to the FBAR. These forms are prepared based on the highest values during the year reported on the foreign statements.
While these issues are common to every country and U.S. accountants face these challenges regularly, Hungary has earned a special place in the international community due to the difficulty of its language. Although young Hungarians are well-versed in English, it is still poorly understood by older generations. Consequently, some documents required for the preparation of the U.S. tax return may only be available in Hungarian.
Tax documents and statements issued by Hungarian financial institutions can be difficult to understand, even to those who are fluent in Hungarian. Translating these statements requires a thorough knowledge of the language, and that’s why it’s important to find an international tax expert who is fluent in the language. As a native Hungarian living and working in Sarasota, Florida, I have helped Hungarian-speaking clients navigate U.S. tax requirements, whether they are expats living in the U.S. or Americans moving to Hungary.