When planning a move back home after an assignment abroad, there are many things to consider–and your US expatriate tax return is a big one! Here are seven important expatriate tax issues to consider when planning a move back home.
#1 Foreign Social Security System
Many countries require those residing and working within the country to contribute to their own Social Security system. Upon departure, it may be possible to have those contributions refunded, depending on the departure circumstances: Is it a permanent departure? Do you hold citizenship within the foreign country? Several months before departure, contact the tax authority or the Social Security agency to figure out what is required to receive the refund, if even possible.
For United States purposes, the contributions to the plan are nondeductible, and as such, should have already been taxed. The same goes for the employer contributions. In fact, earnings should have been included on an annual basis on the US individual expatriate tax return as well. However, in certain situations it may have been difficult to do so, and it is important to know exactly what has been taxed on the US side, and what has not.
Social Security contributions to a foreign country’s system are often tax deductible, so make sure to understand the taxability of the refund. Include whatever needs to be included on the departure return. If an accountant is handling the filing, make sure to inform the expatriate tax professional of any receipts you have or expect to receive.
#2 Departure Year Filings for Employee and Employer
In the case that the employer is not aware of your plans (i.e. resignation), make sure they have filed appropriate forms indicating that you are planning to depart the foreign country. The foreign country may have special filings for departure cases that differ from cases with pure resignation. In certain countries this may trigger an exit tax, or the paperwork may need to be provided at immigration control.
For those individuals who had tax payments made on their behalf by the company, ensure the departure year return has all these items grossed-up—meaning, the tax on the tax that is paid in full. Without grossing-up employer paid-for income items, a future filing may be required.
#3 Deferred Compensation
Most countries of the world require filing and tax payment upon receipt of deferred compensation items earned while working within the foreign jurisdiction. This category of income includes restricted stock options, stock options, bonuses, severance pay, etc. When the deferred item vests or is paid out to the individual, a foreign tax filing is required. As such, it is important to keep track of the deferred income earned during the foreign stay so it may be allocated properly. In cases where an accountant prepares the returns, ensure that they are aware of the future filing obligations, and also the interactions with the US expatriate tax side, as foreign tax credits may be claimed.
#4 Basis of Property for Non-Resident Aliens
When an individual decides to move to the United States, they may not necessarily be considered a US resident at the time. It is important to note that once US residence is established, the individual is treated as any other US citizen or Green Card holder and is taxed on worldwide income. One item of consideration is the basis of any investment property held. US law indicates that upon sale, the sales price less the basis is to be included in taxable income. However, the basis would be the original purchase value. Individuals who become residents in the United States will be paying tax on the portion of the appreciation of the property that was not associated with the US residence. This stands true for stocks, property, grant options, etc.
It is important to discuss any investment holdings with an accountant to evaluate various options available (sell/buy back, hold, sell), as the ideal solution will depend on the overall tax circumstances.
#5 Foreign Holdings in Companies, Trusts, and Banks
The US in recent years has increased its vigilance over US taxpayer ownership of foreign companies, accounts, and financial instruments. There are various reporting requirements for those holding foreign corporations, partnerships, bank accounts, and trusts. To simplify matters, ensure that only accounts that need to remain open actually remain open. Go through the extra procedures to legally shutdown any bank accounts, companies, and the likes that will no longer be used.
It is important to note that leaving an account open in a foreign country may sometimes be beneficial – especially if payments are to be made post-departure. This would be another important item to discuss with your accountant. But beware: if you leave an account open with a balance of $10,000 or more, you will be required to file FBAR for each year that account remains open!
#6 State Residency Rules
Each state in the United States has its own tax guidelines – from no individual income tax in Texas, to strict domicile rules in New York. For example, a taxpayer was on a short-term assignment (1-2 years), and returns to New Jersey (last state of residence), and filed nonresident returns during the period. He/she may find that the state claims resident status from the individual for the duration of the assignment (due to New Jersey’s stringent domicile rules). Other states count days on foreign assignment in addition to looking at domicile (California). To ensure that one does not end up paying state taxes for the time abroad, it is important to research the details of state taxation and residency.
#7 IRS Tax Concessions for Double Taxation
While residing abroad, taxpayers are offered the chance to exclude income under the Foreign Earned Income Exclusion (FEIE), take a Foreign Tax Credit (FTC) or utilize provisions from foreign tax treaties. Individuals repatriating should be aware of what concession was primarily utilized, and ensure that at least partial qualification is incorporated into the return for the year of departure. Even if not residing abroad for the entire year, individuals are still eligible for a partial FEIE. Furthermore, FTCs should be tracked, as they may be utilized against income earned on future business trips abroad, or even future receipt of deferred compensation.
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