Many Americans who choose to work in a country outside the US find their international adventure to be a positive experience. But it is a major change that warrants thorough thought and consideration. Prospective expats make careful calculations in order to understand how their bottom line will be affected by a move abroad. One of the important factors in those calculations is how your US expat taxes will be affected, which has much to do with where your employer is located.
The Basics of US Expat Taxes
The US requires that most citizens and green card holders continue to file US expat taxes, no matter where you live. All of your worldwide income has to be included on your US tax return. In addition, you may have to report this same income on a tax return in the country you work. To offset this “double taxation,” the US allows most of its expats to exclude some of their foreign earned income and/or a dollar for dollar credit for foreign taxes paid. There are three major exclusions and credits that are available to expats:
Location of Your Employer
You may wonder if it makes any difference where your income payments come from. As far as your US expat taxes are concerned, the location of your employer and the location of where your payments for work come from do not affect your Foreign Earned Income Exclusion or your Foreign Tax Credit. It should be noted, however, that you may need to have your W-2 adjusted if your employer is a US entity to ensure your withholding tax is correct. To qualify for the Foreign Earned Income Exclusion you must have earnings (for work you perform) and your tax home must be in a foreign country. To receive a benefit from the Foreign Tax Credit you have to pay a higher rate of income tax in the country outside the US than the rate of your US income tax. (Some additional limitations apply.)
Social Security Tax and Location of Employer
Although the location of your employer doesn’t affect your US income taxes when you work abroad, that is not the case when it comes to social security taxes. Generally you will continue to be covered by the US social security system when you work for a US employer, even if that work is performed outside the US. This can vary depending on tax treaties and these should be consulted before you move abroad.
If your employment will be for a company or entity located outside the US you should consider the social security rules of that country. Many countries have a social pension program similar to the US social security system. You will want to determine which country’s social security will cover you and your foreign earnings.
Beginning in the 1970’s the US social security administration began to enter into bilateral agreements with other countries in order to coordinate social security coverage. If the country where you will work and the US have a “totalization agreement” you should consider how you are affected by that agreement. You can go to http://www.socialsecurity.gov/international/agreement_descriptions.html for a link to the totalization agreements of 24 different countries and the US.
As an example, this chart from the Social Security Administration’s website shows which country’s social security system you would be under if you worked in Australia.
|Your employment status||You are subject only to the laws of:|
|You are working in Australia:|
|For a US employer who:|
|Sent you to work in Australia for 5 years||US|
|Sent you to work in Australia for more than 5 years||Australia|
|Hired you in Australia||Australia|
|For a US employer||Australia|
Questions about US Expat Taxes?
If you have additional questions about Social Security or how your employer’s location affects your expat taxes, please contact us.