Tax Equalization and Expatriate Tax Preparation

Tax Equalization and Expatriate Tax Preparation
Updated on February 12, 2021

Perhaps your employer is thinking of sending you abroad, but you’re uncertain about many factors, including how your taxes for expatriates will be affected. If taxes crossed your mind early on in the process, congrats! Expatriate tax preparation is a necessary evil that is often overlooked when planning a move overseas, so the more you prepare, the better off you’ll be come tax time. One thing your employer might mention is ‘tax equalization,’ which is a process that ensures you won’t be disadvantaged when it comes to taxes while living abroad. Learn more below.


What is Tax Equalization?

When moving abroad, your expatriate tax preparation situation will vary depending on the particular location in which you live due to tax rates, tax laws and tax treaties. Often, when an employer has a need to send an employee abroad for work, they want to make sure the move isn’t disadvantageous to the employee when it comes to finances. That’s where tax equalization comes into play.

Typically, the employer will enlist the help of tax advisers to prepare tax affairs, payment of tax and Social Security (read more about Social Security here) that may be due as a result of moving an employee abroad. The goal of tax equalization is to ensure the individual moving abroad doesn’t face any additional tax burden due to moving abroad as an expat.

How is Tax Equalization Determined?

The employer will have its tax advisers make a calculation to determine what the US tax liability would be on the employee’s salary, benefits, bonuses, stock options, etc. This amount wouldn’t include expat benefits, like school fees, home leave, or local accommodation, among others.

For example, if an individual moves to a new country for work, they would have a hypothetical tax withheld from their earnings each month comparable with what they would expect to pay on non-expatriate parts of their salary package in their home country.

What is the Purpose?

The purpose of this is to ensure the employee doesn’t suffer a personal tax burden from expatriating at the employer’s request. The only tax the individual pays is the hypothetical tax withheld at the source, which reflects the home country’s tax and Social Security liability.

  • The individual bears the cost of tax and Social Security that would have been incurred on non-expat parts of their salary package (as if they hadn’t moved abroad).
  • The employer bears the cost and discharge of personal tax and Social Security liabilities resulting from living abroad in the host country.

Expatriate Tax Preparation Considerations to Make

Tax equalization can be a helpful tool up to a point. However, if you, the employee, become a non-resident in your home country, chances are you wouldn’t have a big expatriate tax preparation liability there anyways. In any event, the main purpose is to prevent you from being disadvantaged tax-wise when moving abroad for work. Learn more about tax considerations for employees and employers in this article.

Many companies will provide you with resources and information needed to make such a monumental decision of packing up and moving your life abroad, but it’s a good idea to consult with an expat tax professional to better understand the full expatriate tax preparation implications of such a move. Establishing a connection with a tax pro before your move can help you ensure you understand your tax situation well before you need to file your US Tax Return! Also, be sure to check out our tax guide for Americans working overseas for helpful tips and advice.

Need Help Understanding Your Tax Situation When Moving Abroad for Work?

Our team of expat-expert accountants have the expertise you’re looking for in a tax professional. Contact us today to discuss your individual expat tax situation and get the advice you need well before the next tax deadline.

Who doesn’t love a tax break? Use our handy calculator to learn what you can save using the FEIE.

Use our simple excel calculator to get an estimate of how the foreign earned income exclusion will save you money. It will make your day!

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