Planning for a career move or educational offer overseas is exciting and exhausting. You’re arranging transportation, scheduling the movement of your stuff from one place to another, and collecting all of the documentation and records you need to make your move official.
If you’ll be earning money overseas, or if you’ve earned money in the U.S. in the past, there are some important tax tips you should remember as you prepare to start your new life in a fresh location.
Before you board that plane, train, or ship to begin your journey, consult with an experienced tax accountant or tax attorney who understands how the IRS defines income for internationally based taxpayers. Some of the issues you must address are found in the tips below.
Make Sure Your Passport Is Not Under FAST Control
“FAST” is an acronym for the Fixing America’s Surface Transportation Act. One of the goals of this legislation is catching tax evaders who live outside of the U.S. Anyone who owes the IRS more than $50,000 in back taxes is subject to having their passport revoked. If you don’t have a passport yet and owe more than this amount, your passport application may be denied.
If you’re overseas when your passport is revoked, FAST authorizes a one-time return trip to the U.S. on a temporary passport. But you’re stuck in the U.S. once you return. You must clear up your IRS issues before your passport will be returned to you.
Prior to heading overseas, clear up all of your IRS discrepancies and make certain that you’ve filed returns for every year you’ve worked. Also check that all members of your household are in good standing with the IRS. If not, you or one of your family members may be separated from your group and stuck in the U.S., unable to join family overseas.
Understand the Foreign Earned Income Exclusion
The IRS expects you to claim all income that you earn, no matter where in the world you earn it. However, you can exclude a large chunk of foreign-earned income from U.S. taxes using the foreign earned income exclusion.
The foreign earned income exclusion is an amount of your income representing “expected cost of living.” The amount of the exclusion is adjusted yearly for inflation and is considered non-taxable. In 2015, the amount was $100,800.
You deduct the allowed foreign earned income amount from your gross wages and pay U.S. federal taxes on only the remainder of your income. However, you still pay taxes based on your gross income bracket.
Certain housing and food provided by your employer may also be excluded from being counted as income. Generally, you must prove that the room and board were provided for the convenience of the employer if you wish to have these fringe benefits not counted as income.
These exclusions only count against actual earned income as defined by the IRS. Many types of payments are not considered foreign earned income, including government employee earnings, combat pay, or military compensation from the U.S. government.
Pay earned in international waters, pensions, social security benefits, and annuity payments are also not considered earned income for the purposes of this exclusion.
Understand the Foreign Income Tax Credit
One of the trickiest parts about working in another country is juggling all of the tax requirements of your home and host countries. You have to report your earnings to both nations in many cases, and you should expect to pay taxes to both governments.
The IRS realizes that it’s unfair to be doubly taxed on one income, so they allow people working outside of the U.S. to claim a foreign tax credit or deduction for the non-U.S. income taxes they’ve paid. This deduction or credit may significantly reduce any U.S. taxes owed. Be aware that the rules are extremely complex, so an expert is always necessary to help you complete this step.
The taxes that qualify for the deduction or credit must be actual income taxes, and they must be imposed on you (for example, by taking the money out of your pay each week). If you’re in a country that offers reduced taxes for U.S. workers by treaty or other arrangement, you can claim only the actual reduced taxes, not the amount you would have paid without the discount.
Be aware that you can’t claim this tax credit on income that you exclude as foreign earned income (as described in the section above.) Even if you paid foreign taxes on the total amount you earned, you’re asking the IRS to not tax you on a big portion of that income. The foreign taxes paid or accrued on that portion of your income (that you want to be excluded from U.S. taxes) is not permitted as a deduction.
So, if you claim a $75,000 foreign earned income exclusion, but you made $100,000 all year, you can claim the foreign taxes on only $25,000 of your income. The taxes on the $75,000 excluded portion of your income are not eligible for deduction or credit.
Again, seek expert help with your international taxes. Be aware that there are tax implications in the actual international move itself. You may be able to deduct a significant portion of your moving expenses from your income depending on the reason for your overseas move.
Bekins Van Lines Inc partners with Crown Relocations to provide you with all of the services you need to make your international move as stress-free as possible. Call us today to arrange your exciting overseas relocation.