For someone seeking the adventure of cultural exchange but bearing the financial responsibility for oneself and others, perhaps an overseas job can be a happy solution.
It can be a foreign work assignment, a business opportunity, or a serendipitous whim. But when it comes to the tax situation, the international transfer may not look all fun and rosy anymore. We do not want to dampen the experience or your enthusiasm. Living overseas need some serious preparation, especially if you want to enjoy your time abroad.
The Foreign Earned Income Exclusion
It’s always important to remember that the U.S. government taxes its citizens’ worldwide income. Of course, expats can take advantage of some exclusions and credit opportunities to avoid double taxation. This is to avoid paying double the amount of taxes. With the Foreign Earned Income Exclusion (FEIE), expats could treat up to $100,800 of the income as not taxable by the IRS.
As for the taxes paid to your current resident country, you may also receive tax credits to lower your U.S. tax liability.
Basic qualifications to receive tax credits
1) your tax home is in a foreign country
2) you earn income from personal services performed in a foreign country
Tax scenarios that you can face abroad
Situation 1: American Citizen Hired in the U.S. but Working and Residing Abroad
Scenario: Software developer working remotely from Mexico for a company based in Los Angeles.
In this case, she will pay taxes in her current resident country, Mexico. And because she is American, she will be subject to U.S. taxes.
Assuming she makes less than $100,800, her U.S. tax liability could be offset by the FEIE, although she will still have to file a tax return.
However, she must be careful to check her W-2 form provided by her American employer as her America company may not know her current residence and may withhold her income tax. Because she is paying her taxes through the FEIE, she doesn’t need to pay withholding taxes.
If that were the case, the withheld amount stated on the W-2 form would be refunded in full through filing a tax return.
Her work-at-home status may also qualify some of her business expenses to be tax deductible. What exactly constitutes business expenses are up for debate. However, she must keep track of all possible expenses at all times so that she may determine qualified expenses later on for tax purposes.
Situation 2: American Citizen Hired by a Foreign Subsidiary of a U.S. Company
Scenario: Financial analyst working at an American bank’s partner bank in Hong Kong.
For the most part, this case wouldn’t differ much from the above situation concerning U.S. taxes.
One difference may be that a good number of employees sent abroad by the company receive a generous financial package. This can consist of the cost of the flight, relocation, education, health insurance, and housing.
Determining whether those expenses are considered business or personal is somewhat tricky in real life.
What is clear is that personal expenses are not deductible while business expenses are. For that reason, it is crucial for international assignees to carefully discuss the financial situation with an expert. A tax expert who can help you discover opportunities to lower your taxable income lawfully.
Additionally, he would report all his financial accounts held in Hong Kong when filing his return. FATCA and FBAR compliance should be one of the top priorities for him. He can get him in serious trouble for non-compliance.
Of course, these two cases are overly simplified. But you can have an idea on what to expect and adequately prepare when taking a job overseas.
Individual cases vary from one another depending on the marital status, the number of dependents, income level, and many other variables.
To accurately identify deduction and credit opportunities for the duration of your stay in a foreign country, LocusTax highly advises that expats carefully study and plan their tax plans before, during, and after the international assignment.