Job Discussion Forums

[Volodiya]

What possible reason would someone living abroad and working as an English teacher, for a foreign employer; or earning money teaching private lessons, abroad, have for filing a U.S. tax return, and paying the taxes due, based on that return?

Here it is, for those American citizens who would like to know-

Time to file:
June 15, for taxpayers living abroad. Income tax returns can be filed electronically, so it's not too late to take care of it. www.irs.gov

Who is required to file:
1) single taxpayers, under age 65, who earned more than the equivalent of $7,950 USD; and,
2) married taxpayers, both under 65, filing jointly, whose combined earnings were more than $15,900;
3) taxpayers who earned more than the equivalent of $400 USD in "self-employment" income. [Monies earned from private teaching would be an example of self-employment income.]

If you are living abroad, aren't you exempt from filing?
No, but you may include with your tax return a Form 2555, Exclusion of Foreign Earned Income, which will allow most teachers of English to avoid income tax on all earnings received for work abroad (even if it was paid to your account in the U.S.)

If you had self-employment income which exceeded $400 USD, then you will owe self-employment taxes. These amount to 15.3% of your net earnings from self-employment. Self-employment earnings are reported on Schedule C; self-employment taxes are calculated and reported on Form SE.

What possible reason would someone living and working as an English teacher, for a foreign employer; or earning money teaching private lessons, abroad, have for filing a U.S. tax return, and paying the taxes due, based on that return? There're just two that I know of. First, U.S. law requires it, when the earnings exceed the sums mentioned above. Second, and perhaps important to some people, it keeps you involved in the U.S. system of social security, guaranteeing you a place at the trough when you reach retirement age (currently, at least 62).

How much will this cost me? As I mentioned, your earnings as a teacher will in all likelihood be 100% exempt from income taxes, if you file, and claim the exclusion for foreign earned income. The amount of earnings you report as self-employment income (from private teaching you may do) will determine the amount of tax you pay, each year.

Suppose you had $2,000 USD net earnings last year from self-employment: the first $400 is exempt, leaving you with taxes to pay on $1600. At 15.3%, well, you figure it (in round numbers, it's $240). That would be the cost of your continued participation in Social Security. Even the minimum guaranteed social security benefit (which President Bush promises to protect) makes participation well worth it in retirement benefits. Your check will be wired to an account designated by you, almost anywhere in the world, beginning when you reach retirement age.

I've filed every year since I went abroad. Because of the generous exemptions, I've never owed any income tax, but I've owed, and paid, depending on my earnings, self-employment taxes, every year.

There is no other retirement plan that I know of which pays off like this one for FTs, with modest incomes.

For those who would like to know more about what you could expect at retirement age, please have a look at- www.ssa.gov

[thelmadatter]

I personally do not believe Social Security will be around by the time I reach 62, 72 or whatever the retirement age is in the years 2025-2035. Even so, I do file my taxes. Like Volodiya says, as long as you live 330 days in the country (and its not one of the "bad ones" like North Korea, Cuba etc (interestingly enough Libya was taken off the list this year)) you pay no taxes on foreign-earned income. But Volo, are you sure about your self-employment income? I assume your private teaching income is foreign-earned, why isnt it exempt too? I lived in Germany and did day-care in my home but didnt have to pay tax on that, it was excluded. That was back in 1988-92 I must admit.

Be careful about a number of things. If you have investments or anything like that... find out what might change tax-wise with them by working overseas. I totally forgot that unless I have US-taxable income, I cannot contribute to a Roth IRA. I had to withdraw my contribution this year or face a really ridiculous fine that compounded every year I have to put that money into another kind of account, if Im going to have any kind of retirement at all. ( I also found out that some investment companies do not accept travelers checks ... thank YOU Patriot Act! Like terrorists want to put money in my retirement account... I couldnt get THAT lucky!)

If I stay long-term in Mexico, my contribution to Soc Sec is nothing, meaning the best I could get at retirement age is the so-called minimum benefit (what will that be ... like $50 a month? ). (I was a stay-at-home mom for much of my working years ... dont get me started on that!) If I am wrong, and there is Soc Sec, great... extra money for me (and salvation for many). But I think its best to plan for nothing.

The main reason I file my taxes is that I dont owe anything (so it doesnt cost much) and if/when I do decide to go back to the States, I dont have any problems. If/when I do go back, I plan to go back at the end of a year to meet the 330-day requirement. I had to pay taxes on my 2003 Mexican income because I didnt know about this!

[Volodiya]

Thelmadatter, refers to a period of 330 days, in country. He's talking about one aspect of qualifying for the Exclusion of Foreign Earned Income, from income taxes, under U.S. tax law.

To be eligible to exclude your foreign earned income from income taxes, you must have been physically present during 330 days out of any 365 day period of time; or, be a bona fide resident of a country, other than the U.S.

If you qualify under the first test, your earnings can be excluded from your taxable income for income tax purposes; likewise, if you meet the requirements of the second test.

There is one advantage to you to qualify as a bona fide resident. Then, if you travel to the U.S., you don't have to be so concerned how long you may be gone from your residence abroad. A person living abroad, long term, will generally be able to qualify as a bona fide resident, for U.S. tax purposes.

I, for example, am a bona fide resident of China. I have a Chinese residence permit and am liable to Chinese taxes. I can travel to the U.S. and stay for any reasonable amount of time without having to count the days I'm out of China. Say, for example, I'm in the U.S. for 45 days, then return to my foreign residence, this will not jeapordize my privilege of claiming the exclusion for foreign earned income.

To meet the minimum requirements for bona fide foreign residence, you must have been a resident of a foreign country for an entire calendar year.

[thelmadatter]

Thats good to know but I was thinking about tax year 2003, when I first came to Mexico. Only in-country 5 months, didnt pay taxes to Mexico yet or was I a resident so I was liable for the money I earned After that, its not really a problem, I think.

[Volodiya]

[tedkarma]

Don't forget - those of you who are not organzied - that you can apply for a 90-day extension - from the June 15th date. (my accountant is a do it at the last minute kind of guy)

[Brooks]

90 days?
I think it is only 60 days.

[jr1965]

Forgive me...I'm probably being slow and know that I should consult with an accountant, but did I read this correctly:

"If you had self-employment income which exceeded $400 USD, then you will owe self-employment taxes. These amount to 15.3% of your net earnings from self-employment. Self-employment earnings are reported on Schedule C; self-employment taxes are calculated and reported on Form SE. " and �The amount of earnings you report as self-employment income (from private teaching you may do) will determine the amount of tax you pay, each year.�

If I no longer reside in the US, I know that I still have to file a form 2555 annually. But, why would I have to pay self-employment taxes to the US govt? I did this when I lived in the States, but I see no reason to do it now that I live abroad and pay taxes on self-employment income earned here. Have I misunderstood something?

BTW, I no longer maintain a permanent residence in the US. I'm a legal resident of the country I'm currently living in (i.e., I have this country's version of a "green card") and am required to pay taxes here.

[Volodiya]

jr1965, you may be making a distinction that is not warranted, regarding the self-employment income. If you wanted to look into this very question, you could access the Social Security Administration website where they offer a discussion of this, and related subjects.

I feel less confident of this, than the other information I presented, but here goes: if you are employed abroad, and there is a tax treaty that speaks of the obligations regarding taxes for programs like Social Security in the two countries, you need not pay the U.S. FICA taxes on your wages. The years you work under a foreign system count towards the number of months of employment you must have to qualify for Social Security benefits, but the money you paid into the foreign system, does not.

Self-employment income is treated differently, and the obligation to pay this U.S. tax remains. I've never found an exception to this last statement so, if there is one, and someone can cite it for us, that'll be very interesting.... (I mean that!)