A few years ago, I worked for a company based in Taiwan. Whenever I received a check from this company, taxes paid to Taiwan were deducted. Then, during tax time in the United States, I was required to report that income, even though it was earned working for a foreign company. The good news is that I received a tax credit for the money paid to Taiwan’s government.
My situation was fairly straightforward; I lived in the United States and the income from the foreign company wasn’t very large. Others face a more daunting situation related to their residency in a foreign country.
“Americans who work overseas can have a complex tax filing situation in the United States,” says Andrew Poulos, principal of Poulos Accounting and Consulting, Inc., in Atlanta.
For the most part, if you are a U.S. citizen, the government expects you to report all of your income on your tax return — no matter where it was earned.
Foreign income exclusion
Just because you report the income, though, doesn’t mean that you have to pay taxes on it.
“The foreign income exclusion is $97,600 for 2013,” says Poulos. “A U.S. person can earn up to that amount of income and have it be tax free if they meet either the bona fide residence test, or the physical presence test.”
In order to qualify for the foreign income exclusion, citizens need to prove their long-term residence in the country. This is done one of two ways:
- Bone fide residency: According to Vincenzo Villamena, a CPA specializing in expat taxes, it’s possible to prove that you are a true resident of another country by maintaining all the trappings of residency, including buying a home, maintaining a visa, and “essentially settling in a foreign country.”
- Physical presence: An easier way to qualify for the foreign income exclusion is to make sure that you spend 330 days abroad out of a 365-day period.
Any income that exceeds the foreign income exclusion amount is taxed by the U.S. government. However, the tax is offset by the foreign tax credit. This means that expats need to fill out the appropriate paperwork associated with the income exclusion (if they qualify) and fill out the paperwork associated with the foreign tax credit. This can ease the pain a little bit.
Other tax issues to consider
Before heading to another country to work, it’s important to understand some of the issues that might crop up. Villamena points out that foreign pensions need to be reported on as well as income that contributed to a home country mandatory provident fund, like the arrangements in Singapore, India, Australia and Hong Kong.
“Will they pay Social Security taxes?” Villamena says. “Does their home country have a Social Security totalization agreement with the United States?”
These are questions that should be answered before moving to another country in order to further a career.
Villamena also reminds his clients that foreign accounts worth more than $10,000 in aggregate need to be reported on the FBAR form.
When it comes to your taxes as a U.S. citizen living and working abroad, the important thing to understand is that the government expects you to report your income and most of your assets. You might not be taxed on all of it, but the government likes to keep tabs on its citizens.
(Photo: Flickr user Nomadic Lass)