US Tax Planning for American Expatriate Employees
Working abroad is a great opportunity to experience another country and culture, however thanks to America’s Citizenship Based Taxation system, Americans on assignments abroad have to continue filing US taxes, as well as meeting the tax filing requirements in their host country.
Furthermore, Americans living abroad are subject to extra US tax filing rules that only apply to expatriates. Navigating these as well as avoiding double taxation and understanding where and how the two tax systems overlap can be complex, however ta x compliance shouldn’t overshadow the experience of working abroad of course. In this article, I’ll be outlining the main tax compliance issues that American expatriate employees need to consider
US tax filing, and strategies to avoid double taxation
Americans living abroad still have to file US taxes, however they have until June 15th to file, with a further extension available until October 15th.
There are several IRS exemptions available to help expats avoid paying taxes on their income to both the US and their host country, which can be claimed depending on the expat’s circumstances (including their income and host country) when they file their US federal return.
The two primary IRS exemptions for expats are the Foreign Tax Credit, which allows expats to claim a $1 US tax credit for every dollar of tax that they’ve paid abroad, and the Foreign Earned Income Exclusion, which allows expats to exclude the first around $100,000 of their income from US tax. Expats who pay more income tax abroad that they owe to the IRS are often better off claiming just the Foreign Tax Credit, as this not only cancels out their US tax liability but leaves them with excess credits that can saved for future use.
FBAR and FATCA reporting
American expats with over $10,000 in total in foreign bank and investment accounts at any time during the year are required to file an FBAR (Foreign Bank Account Report) to FinCEN to report all of their foreign accounts.
Most foreign banks and other financial firms are reporting these balances to the IRS directly nowadays, so it’s important to understand that the IRS has global reach, and not to neglect this requirement.
Expats with foreign financial assets worth over $200,000 at any time during the year are also required by FATCA (the Foreign Account Tax Compliance Act) to file form 8938 with their federal return to report them.
Trusts, corporations, and state taxes
In general, foreign trusts and corporations must be reported to the IRS. The IRS reporting rules for foreign LLCs can be different to US registered LLCs, so expats who have a foreign registered LLC should consult an expat tax specialist regarding filing requirements and tax efficiency.
State tax filing requirements for expats vary depending on the state. If you’re only abroad on a short contract, and so you have retained close ties to the state and intend to return to live there in the future, many states will require you to continue paying state taxes on your income while you’re abroad. It’s worth contacting your state however to find out exactly what their rules are.
Tax Treaty and Social Security planning
Most US tax treaties don’t benefit Americans living abroad, unless they are abroad to teach, study, or research.
There are a different set of treaties called ‘Totalization Agreements’ though that the US has with most European countries, Australia, Japan, Chile and South Korea, that determine that if an American is only posted abroad for 3-5 years, they will continue paying US social security taxes and not pay them in their host country.
US expats in other countries may have to pay both US and host country social security taxes.
Many US firms that send employees on assignments abroad run a tax equalization program, which is to say they compensate employees who will pay more tax abroad on their salary that they would on the same salary in the US. As such, expatriate employees may need to calculate this difference so their American employer can compensate them.
Host country registration and compliance
Working abroad, it’s important to comply with local tax laws. The first steps towards host country compliance are registering to pay taxes, and understanding the tax dates and rates. Before employing a local accountant, it’s important to do due diligence too, checking their credentials and areas of expertise and ideally seeking a trusted recommendation.
Taxes for Americans living and working abroad can be complex, and we recommend that both expatriate employees and American firms sending employees abroad consult with an expat tax specialist firm to ensure both compliance and maximum tax efficiency.
Bright!Tax (brighttax.com) is a leading provider of US expat tax services, and was recently crowned Expat Tax Provider of the Year at the 2017 FEM EMMA awards in Denver. If you have any questions regarding taxes for US expats, don't hesitate to get in touch and we'll be happy to help.