Items to Consider When Working Abroad
Although working abroad is a tremendous opportunity, moving to a new location – especially a different country – requires attention to many details, both personal and professional. Your move is much more than just the physical shipment of your household goods. If you’re a citizen or resident of the United States who lives or works abroad, this article will help you understand your U.S. income tax obligations.
U.S. citizens or resident aliens are taxed on their worldwide income, regardless of where they reside. If you’re a U.S. citizen or resident alien, the rules for filing income tax returns are generally the same, whether you’re in the United States or abroad. Many of the procedural rules regarding filing your tax return are different when you live abroad, however. If you live outside the United States, you may be required to mail your tax return to a different address than you used previously.
U.S. citizens and residents must generally file their tax returns by April 15, but if you reside abroad on that date, you’ll get an automatic two-month extension to June 15. A special extension is available if you need more time and to claim relief from double taxation.
When you live and work in a foreign country, you may be subject to that country’s income taxes because you’re a resident. Even if you don’t meet your host country’s definition of a resident, you may still be taxed on the income you earn in that country. As a U.S. citizen or green card holder, you’ll also be subject to U.S. income tax on your worldwide income, which means that while you’re working abroad, some or all of your income will be subject to income tax in both countries. To reduce the possibility of being taxed twice on the same income, the United States allows taxpayers to claim a foreign earned income exclusion or a credit for foreign tax paid.
Foreign Earned Income Exclusion
If you’re a U.S. citizen or resident who lives and works outside the United States, you may qualify to exclude some or all of your foreign earned income from U.S. taxation. The foreign earned income exclusion, often referred to as the “section 911 exclusion” in reference to its place in the Internal Revenue Code, allows an exclusion from income up to $105,900 in 2019 (the amount is adjusted annually for inflation).
To qualify for the foreign earned income exclusion, you must have foreign earned income, your “tax home” must be in a foreign country, and you must meet one of two tests:
- The “bona fide residence test,” which requires that you be a bona fide resident of a foreign country or countries for an uninterrupted period that includes a full tax year; or
- The “physical presence test,” which requires that you be present in a foreign country or countries at least 330 full days during any period of 12 consecutive months.
Foreign Tax Credit
To reduce the possibility of being taxed twice on the same income, the United States allows a credit for foreign tax paid on foreign source income. The amount of foreign tax credit that the United States will allow is the lesser of the amount of foreign tax paid or the amount of U.S. tax on the foreign source income. As an alternative to claiming a foreign tax credit, you may claim an itemized deduction for the foreign tax paid, which, in some situations, may be more beneficial than claiming the foreign tax credit. You can’t, however, claim both a foreign tax credit and an itemized deduction for foreign taxes in the same year. If you’re a U.S. citizen or resident who has a foreign bank account or a foreign financial asset, you may have to report these accounts.
Foreign Bank and Financial Asset Reporting
You must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), if you had a financial interest in, or signature authority over a foreign bank, securities, or other financial accounts – both business and personal – that exceed U.S. $10,000 in aggregate value at any time during the calendar year. The report is filed separately from your income tax return, can only be filed electronically, and generally must be completed by Oct. 15 of the year following the tax year. (Formally, the due date is April 15, but all taxpayers are allowed an extension to Oct. 15 without any requirements to request it). You may face significant penalties if you don’t file.
In addition, you must attach a special report to your tax return if the value of your foreign financial assets exceeds certain thresholds that vary, depending on marital status and whether you live in the United States or abroad. Foreign financial assets include, but are not limited to, bank accounts, investments and pensions. This report, Form 8938, Statement of Specified Foreign Financial Assets, is required, in addition to the FBAR mentioned above.
If you’re a U.S. citizen or resident who lives and works outside the United States, you may have to file a state tax return, in addition to the federal income tax return. Depending on which state you most recently lived in before your move, you may need to file a resident or nonresident state income tax return. Each state has its own set of rules about whom it considers a resident and their own minimum filing requirements. Most states, but not all, also allow the foreign earned income exclusion or a foreign tax credit.
It’s advisable to seek tax advice before you move, if possible, thereby helping to prevent tax “surprises.”