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tax time for Americans working in the Gulf

 
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Noelle



Joined: 26 Mar 2005
Posts: 293
Location: USA

PostPosted: Mon Feb 11, 2013 1:54 pm    Post subject: tax time for Americans working in the Gulf Reply with quote

This question is for Americans who file each year (I know many don't bother) and specifically for those who have broken a contract and then reported their Gulf earnings to the IRS.

A friend of mine left Dubai in November after having worked in her school for about 4 months. She's a licensed public school teacher and worked the rest of the 2012 in the States. Her CPA told her she would have been eligible for a good refund this year were it not for those 4 months she spent in Dubai.

She broke her contract and lost her last month's salary there and then paid her own airfare home. I did something similar in China back in 2004 after having spent most of the tax year earning money in the U.S. as well. When I filed, I did not owe anything and ended up with a refund of over $1000. Her report is now showing that she owes money and will not be getting anything back.

Just wondering if anyone out there could address this? I know that we have to be working abroad for 330 days or more, but I was under the impression that if we terminated our overseas employment and were penalized by the employer, we would not have to pay in to the IRS. Not sure where I got that notion as I'm quite hopeless when it comes to taxes.

She's wondering if this is happening because her UAE income was tax-free on that side. I don't remember paying any foreign tax on my earnings in China either though...

Anyone with a bit more understanding of this (which is most likely every U.S. expat on this forum) care to chime in?
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veiledsentiments



Joined: 20 Feb 2003
Posts: 15998
Location: USA

PostPosted: Mon Feb 11, 2013 3:29 pm    Post subject: Re: tax time for Americans working in the Gulf Reply with quote

Noelle wrote:
Just wondering if anyone out there could address this? I know that we have to be working abroad for 330 days or more, but I was under the impression that if we terminated our overseas employment and were penalized by the employer, we would not have to pay in to the IRS. Not sure where I got that notion as I'm quite hopeless when it comes to taxes.


Using a generic "you" here...

I haven't researched this specific situation, but it could probably be done on the IRS page. That said, based on my past tax experience, it is possible (even probably) that any costs deducted could be deducted from your overseas income. But the remaining income would be taxable... and if you had worked the first half of the year in the US, it is added to your US income. And it is highly likely that you will end up with a tax liability for the year.

So, if you earned $20,000 for the 4 months (ignoring benefits for the moment). If they penalized you for the last month's salary of $5,000, that could be deducted. The free ticket that you get to arrive is taxable income... so paying your own way back would not be deductible. So, there is taxable income of $15,000 to be included on your 1040. (along with benefits like housing and allowances)

There are so many variables here... how much a person had earned in the US and how many deductions they had used on their W-4. (for instance, I NEVER had a refund on my taxes because I estimated ahead and made sure that I didn't give the govt any more money than necessary since they pay no interest... and I preferred not to "invest" my money with them for free.) Some people use this as a forced savings program to get that nice refund check.

Depending on those questions will decide whether you lost your "refund" or have to pay taxes for the money earned overseas. Again, this is rather general... and any variables would have to be checked.

VS
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