Expat's Manual

One of your first questions from a financial standpoint is how will your relocation affect your tax status and payments. Unfortunately, America is one of a handful of countries that vigorously pursues taxes worldwide – so don’t expect to avoid a U.S. tax debt by moving overseas. As a matter of fact, you’re not even allowed to give up your U.S. citizenship to eliminate a tax obligation.

Be aware that America has tax treaties with over 42 countries where the IRS and the foreign tax agencies exchange tax data on their residents. Many Americans think because they’re earning money in another country – and paying that country’s taxes – they have no liability when it comes to their home country. That’s totally not the case. You still should file a return with the U.S. every year, whether you have income or not. You are not legally required to do so if you don’t owe U.S. taxes, but it’s an important preventative measure as there is a Statute of Limitations on tax disputes. If there is a dispute over back taxes, you start running out the clock on the Statute of Limitations if you file. If you don’t, the IRS can conduct a personal audit at any time in the future and you’ll be liable if they decide against you.

The IRS provides a tax guide for citizens living abroad, this can be found here.  There are also some basic facts you need to know about taxation in 2010.

Exclusions

Earnings thresholds-

The latest threshold for tax-free earnings for US citizens is $91,400 of earned income for 2009. If you are married and both of you earn income abroad you can exclude up to $91,400 of your partner’s income too. This means that a couple claiming jointly can claim up to $182,800. In order to qualify for the exclusions you need to live abroad permanently or have been out of the United States for at least 330 days of any consecutive 12-month period.

Housing limits-

In addition to earnings exclusions, some expatriates may be eligible for tax breaks based upon their housing costs. It is possible for US citizens to exclude a portion of the money they spend on rental or property costs. In 2009 the maximum that can possibly be excluded from taxable earnings as a result of housing costs can be $27,420. The way in which the deductions should be applied and whom they are applicable to is provided in full detail here.

Claiming Exclusions

You need to claim these exclusions on your Form 1040 for that year – they are not automatic – and the exclusions only apply to earned income, not rental income, interest or dividends or any income that’s not a result of your work efforts. You will need to fill out and attach IRS Form 2555 (which you can access here) to your 1040 to take advantage of these exclusions – the instructions at http://www.irs.gov/instructions/i2555/index.html are very helpful in this regard. The form will also help you to determine what you do and do not qualify for in terms of being eligible for the exclusions. Year-to-year, Form 2555 will also provide what the latest caps on what those exclusions are.

Calculating your Tax Payments

Any income that is over and above the exclusion amount, after housing allowances have been applied, will be taxed. The tax rates and breaks are as follows:

• Earnings between $91,000 and $171,550 ($208,850 couples) will be taxed at 28%.
• Earnings between $171,550 and $372,950 will be taxed at 33%.
• Earnings above $372,950 will be taxed at 35%.

Self-Employment Tax

Another important aspect to be aware of when it comes to Federal taxes is the U.S Self-Employment Tax. If you’re an employee of a foreign company (which could, in fact, be your own foreign corporation) and have payroll taxes from that country taken out of your pay, you don’t have to also pay social security taxes to the U.S. If you are self-employed, however, acting as an independent contractor, then you must file a Schedule C with your U.S. Tax return and pay the appropriate U.S. payroll taxes on your net earnings. The self-employment tax rate is 15.3% and the foreign income exclusion mentioned before does not reduce this liability.

If you do have your own foreign corporation, or have more than a 10% interest in one, you must file a special form, Form 5471, reporting that ownership stake. If that foreign corporation is making profits, you may owe taxes on its earnings. Find out more about the form at http://www.irs.gov/pub/irs-pdf/i5471.pdf. Basically foreign income from any source must be reported to the IRS, including trusts, capital gains, royalties, etc.

If you are still living abroad as of April 15th of any year, the IRS grants you an automatic extension until June 15 to file your return for the previous calendar year. You can, as you could in America, file more extensions to push your filing date forward all the way to October 15th – just know that, just like if you were still living in America, you are still liable to interest and penalties if you haven’t paid all your estimated taxes by the original April 15th deadline. These extensions are completely necessary if the country you’re living in has a different financial year. New Zealand, for example, closes out its financial year on April 30th instead of December 31st, which means you won’t have your final tax information until after the initial U.S. filing deadline of April 15th!