Job Discussion Forums

[08mansoor]

Hello,
I know that if we work abroad and make less than 80k we are not required to pay taxes, however, what if we reside in the US for 2 months on a vacation. Do we have to pay taxes then? I heard some say 30 days and some have even recently said 2 weeks. Any info would be appreciated.
Thanks,
Mansoor

[plumpy nut]

You have to be outside of the USA for 330 days out of one full year. 365 - 61 is less than 330. So you will not be able to take that tax credit unless you can show that circumstances forced you to come back.

[veiledsentiments]

This is only true for the first year abroad until you have achieved "bona fide" overseas residence. After that first year, you can spend even three months in the US and as long as you aren't employed there, you are fine.

Read the rules on the IRS website. The first year will be a bit complicated with new forms and rules for those who have never done this before, but from there on, it is relatively easy.

VS

[SENTINEL33]

1. For 2013, the “tax exlusion”, applies to incomes of under $97,600…not $80,000. (However, you STILL have to file a return even if you earn less than $97,600). Don't fall into the trap of saying "Oh, I don't have to pay taxes so I'm not going to bother filing a return." You still have to send one in, taxes owed or not.

The only time you don’t have to do this is if you had no income (of any kind) that year or if your income was so low (something like $3000) that you don’t have to file according to IRS rules.

2. When you go overseas on a job, you basically have to choose between 2 different ways to be taxed. A…..you can choose the “number of days overseas” route (see plumpy nut above) or B…..you can choose the “residency test” route (see VS above).

Generally speaking, you choose the “number of days overseas” route if your job overseas will be of short duration….1 or 2 years. Under this rule, you have to be overseas a certain number of days per year (which must include a full taxable year……this means, for example, you have to be overseas not just from June to June, but from June to December of the next year.)

On my first job overseas, I took this route. My job (which began in January) lasted only 10 months so technically, I couldn’t take the exclusion of income if I returned to the USA in Oct. when my job ended.

However, the tax rule is based on “number of days overseas”, but it doesn’t specify WHERE overseas you have to be or that you have to be working. So, I took a 2 month vacation in Europe/Canada and on the 366th day overseas (which included the full previous year - Jan - Dec), I re-entered the US via Canada and was eligible for the exclusion.

This route is the more complicated of the two routes since you have to watch number of days, how long you can be in the US on vacations, etc.

In general, you choose the second route - the “residency test” - if you plan to be overseas more than 1year. Under this route, you simply “declare” your “intention” of becoming a resident of another country. You don’t have to worry about “number of days” (so technically, you can take a 3 month vacation in the US – or more – so long as you eventually return to your “tax residence” to continue working.).

VS above seems to suggest that you can opt for this route only after your 1st year overseas but I believe you can declare your overseas residency immediately since the rule is based on your “intention” of making a certain overseas location your bona fide residence “indefinitely” and you can do that
as soon as you depart for your overseas locaton.

I always advise colleagues to have a professional tax preparer do their taxes for the first year or two overseas not because they’re hard to do, but because you are dealing with new forms and have to attack the project from a different perspective than what you’re used to. I'm always amazed how reluctant people are to do this - they'd rather go through the hassle than pay someone $100 or so to get their taxes done.

Notes:

1. Try to get a preparer familiar with overseas tax filing. This generally means finding someone in your immediate overseas location who's had experience in this field. I’ve tried US based tax preparers and they usually are way over their heads when it comes to overseas taxes and make all kinds of errors.

2. Don’t forget about STATE taxes and residency. Are you going to have to pay state taxes? Do you lose your state residency by “declaring” your overseas residency? How does that affect you? Some states allow the Federal tax exclusion, others don’t. Again you really need a professional to ascertain these tricky questions since you're dealing with 50 different tax codes. (Some states, of course, have no income tax so you’re clear there).

[veiledsentiments]

The first year can be very confusing, especially since most of us arrive at that first job in August or September. You can't just "declare" your intention to avoid paying on the income for that 4 months. There is a special form that needs to be completed... Form 2350... and your filing will be delayed. Fortunately for me, my first year was in a graduate program with a puny income, so I just declared it on my taxes and paid like $10 extra tax dollars and was then easily a bona fide overseas resident the next year because I wasn't home at all. The easiest way to avoid having to answer letters and questions to uncle is to just use the 330 day thing that year. Then you are pretty much bona fide the next year without triggering any questions from the folks at IRS. Having worked in Public Accounting and helping people field questions from the IRS, you really do want to avoid this at all costs.

There are normally people overseas (ask the embassy) who can help you with your taxes for a fee. I agree with Sentinel that it is best to avoid your local H&R Block back in the US. Most of them haven't a clue on the forms and rules for expats... you might as well just buy the program and do your own guessing.

VS

[SENTINEL33]

As VS says above, the 1st year can be very confusing. Her suggestion in this regard should be heeded. She's obviously had some professional experience in the field.

I still continue to suggest that for the 1st couple of years you get competent professional help with your tax returns until you're familiar with the forms and how to approach them.

(I realize most people nowadays have their tax returns done by professionals anyway, so I'm not suggesting something so unusual).

[PeterParvo]

What about your first year back in the States after being abroad for several years? Do people get nailed because their end-of-contract bonus pushes them over the $93,000 (or what ever it is) limit? Someone told me that you should take the bonus over the last two years of employment to avoid this issue. Any truth to it?

[veiledsentiments]

If the bonus pushes you over the limit, the excess will be taxable. Legally, you don't have the option of taking it over the last two years unless the employer will pay it out to you that way... which few of them will do.

VS

[SENTINEL33]

There’s another consideration vis a vis the “final year”. I’m not sure of the answer. But…..

It seems to me that you (generic you) also have to consider THE DATE your residency overseas ends. Does it end when your contract ends? Or does it end when you re-enter the US?

The reason this is important is that the percentage of the $90,000 +- deduction that you can apply towards your final paycheck (which would include the bonus), is directly proportional to the amount of time you remain overseas. (See Form 2555 where it asks you to figure the days you were present overseas).

For example, let’s say your last month was February and your final paycheck included $5000 salary for Feb plus $50,000 bonus for a total final check of $55,000.

If you left your job at the end of Feb and returned to the USA right away, you could not use the entire $90,000 deduction for that year. You could only use 1/6th of the 90 thou because you only spent 1/6 of the year overseas.

1/6 of 90 is 15. That means your deduction for that year would be $15,000. You received $50,000 total so you could take 15 thou off that, giving you $35,000 THAT WOULD BE TAXABLE AT NORMAL RATES.

Conclusion and recommendation: It’s better to end your job later in the year so that you can use as much of the yearly $90 thou deduction on your final paycheck and bonus.

OR (here’s where I’m not sure)….you could remain overseas FOR THE REMAINDER OF THE YEAR SOMEWHERE CHEAP until the year was over so as to be able to use all of the 90 thou available deduction.

But maybe you can’t do that. Maybe you can only be a “resident” (for tax purposes) of the country you worked in. If you were to “travel” after that, your tax residency would be lost the minute your contract ended and you departed from your work location and you’d just be a normal US citizen on vacation overseas with no tax benefits at all.

As I said, I don’t know the answer to that one. In short, do you keep your “residency” while overseas regardless of location and only lose it when you re-enter the USA? Or do you lose it the minute your contract is over in the country you declared you were a resident in which you declared on Form 2555.?

For a readable and understandable summary of how the IRS treats Bonuses, see:

http://blog.turbotax.intuit.com/2011/12/09/bonus-time-how-bonuses-are-taxed-and-treated-by-the-irs/

[veiledsentiments]

I would say that one could argue that the end of your expat tax status is when you officially move back to the US... so you have every right to travel for a few months... hanging out on a beach in Thailand perhaps. I don't recall ever having to provide the IRS with the date of the end of my contract. All the teachers that I knew just added the bonus to their final salary... and went on from there using the law as they understood it... or as their computer program (Turbo Tax or Tax Cut or whatever) calculated it.

Interesting article from Turbo Tax, but it refers mainly to those giant corporate bonuses that we sadly never have to cope with...

VS

[plumpy nut]

Here is the IRS website:

http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion-Can-I-Claim-the-Exclusion-or-Deduction

For Option 1:

You have to be a bona fide resident of a country for a non-interrupted time period that includes one taxable year.

For Option 2:

You have to be present in a foreign country for 330 days out of 12 full months.

Option 1 Allows you to be out of the country longer than Option 2. However your first tax year will not be completely inside your bona fide overseas residency, so you will have to file additional forms to compensate for that.

to be a bona fide resident during the time period you are claiming the Option 1 exclusion, which means you would have to be on an Iqama.

[SENTINEL33]

[plumpy nut]

I noticed that you took out your misinformation the same as I did.

[SENTINEL33]

[plumpy nut]