These days, the corporate world has no boundaries! More and more employers are recognizing the value of a global workforce. The number of employees moving overseas for their job has increased exponentially. While moving abroad can be a personally, professionally and financially rewarding experience, it is important to fully evaluate your contract to ensure the best outcome for you. One of the most overlooked aspects of the overseas contract relates to US expat taxes. Let’s take a look at some of the most important tax considerations when negotiating an overseas contract.
1. Who will pay the foreign taxes?
This is an important question that many employees neglect to ask. If you are the one paying the taxes yourself to the foreign government, you are eligible to use the Foreign Tax Credit to help offset your US tax liability. The Foreign Tax Credit can be a dollar-for-dollar credit for any taxes you pay to a foreign country. However, if your employer is paying the taxes directly, then you aren’t going to be able to use the Foreign Tax Credit—your employer will. So it may appear that you have a higher salary, and in turn may actually increase your US expat tax liability, which means you take home less money than you expect. Look at this closely to determine who exactly is paying the taxes—if your employer is, discuss the possibility of grossing up your salary in order to offset any additional US tax you may incur.
2. Where will you pay Social Security?
Have you ever heard of a Totalization Agreement? Probably not! But it is a term you need to be familiar with. A Totalization Agreement often exists between the US and the country in which you are living, which determines where you will pay into Social Security. (A current list can be found here.) Basically, this agreement helps ensure that you aren’t forced into paying into two systems when clearly you will only retire under one! If your host country does not have an agreement with the US, you will likely be required to pay into Social Security in the US (and potentially your host country as well). Factor that added cost into your expat package to ensure you don’t take a hit there.
3. Moving Costs – will they be reimbursed?
International moves are NOT cheap. If your company is going to pay for your expenses, how is that handled? If your company will be reimbursing you for all of your costs, you will not be eligible to deduct those expenses on your US taxes. However, if your company offers to give you a one-time bonus to cover your relocation expenses, the IRS will view that as income and you will not only be taxed on it, it won’t be deductible the same way a direct reimbursement for moving expenses would be.
4. Who will be paying for housing costs?
Housing will likely be your biggest overseas cost, so it is important to pay special attention to how you will be compensated! Depending on where you move, your housing costs could be extremely high—say, in Hong Kong. Will your employer be paying for your housing directly? If you will be responsible for paying for your own housing, the Foreign Housing Exclusion will certainly be helpful to you. While the IRS sets a ‘maximum’ exclusion each year (which is tied to the Foreign Earned Income Exclusion amount), certain higher-cost cities receive higher allowances. For example, in Hong Kong you can exclude $114,300 in housing costs whereas in Sydney, Australia you can only deduct $32,782.
The types of expenses you can deduct include:
- Utilities (not phone or cable tv)
- Real and Personal Property Insurance
- Rental of Furniture and Accessories (not purchased furniture)
- Parking and Household Repairs
When you are negotiating your contract, ensure that your reimbursement or salary is sufficient to cover your housing costs, while keeping in mind that you may be able to offset some of them with the Foreign Housing Exclusion. One more thing to note: if your employer pays these costs, the IRS could view these as additional income to you, so it may be ‘safer’ to pay them yourselves and use applicable deductions and credits to reduce US tax liability.
5. Requirements for Travel back to the US
If your contract requires frequent trips back to the US, keep in mind that this could seriously impact your finances. Like the Foreign Tax Credit and Foreign Housing Exclusion, the Foreign Earned Income Exclusion was created to help offset US tax liability for those living abroad. To qualify for this, however, you must pass one of two residency tests: the Physical Presence test or the Bona Fide Residence test. Most expats use the Physical Presence test to qualify, which requires that you are inside a foreign country for 330 of any 365-day period. That basically means that you have 35 days a year to be in the US without ‘penalty’. If you spend more than 35 days in the States, you are ineligible for the Exclusion and you will be taxed on your full gross income. The amount adjusts each year for inflation, but in 2014 you can exclude up to the first $99,200 of income from US taxation (and $100,800 in 2015)—you can see how NOT qualifying for the Foreign Earned Income Exclusion can be a financial nightmare! You could end up paying taxes on your salary to both countries.
We suggest you keep a close watch on your US travel days to ensure you don’t forfeit your ability to use this valuable Exclusion. If you expect there to be a lot of US travel, you may want to ask your employer to include additional compensation to your package.
If you are moving permanently overseas, you will eventually be able to use the Bona Fide Residence test to qualify, as it requires that you live outside the US for a full year and have no intentions of moving back to the US.
Moving abroad for your career can be a life-changing experience and since many of us here at Greenback are expats ourselves, we encourage you to take advantage of this amazing opportunity! We just encourage you to look closely at your contract from an expat tax perspective to make sure you completely understand the tax impact of your expat package. No one likes unpleasant surprises at tax time!
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