Last Updated: August 1, 2008
The globalization of the world economy has led employees of all ages to consider working abroad. But as much as overseas employment is a major personal and professional decision, it's also a huge financial consideration.
First of all, just because you're skipping off to work full-time in another country, don't think you've cut ties with Uncle Sam. As long as you are an American citizen or a resident alien, you will be responsible for filing a return with the Internal Revenue Service every year, and the paperwork can be complex.
That's why if you are considering an overseas opportunity, it's a very good idea to meet with a tax professional who has experience working with Americans working abroad to handle their foreign, federal and state tax matters. It's also a good idea to work with a financial planning professional with similar experience to keep up with your spending, saving and retirement planning issues while you're focusing on your career in foreign lands.
Here is some general information to consider if you're considering an overseas move:
You may qualify for a tax break: The Internal Revenue Service has rules that prevent U.S. citizens from paying taxes in the United States and the foreign country where the citizen works. The foreign earned income exclusion addresses the most common risk of double taxation on wages and self-employment income earned abroad.
To qualify for the exclusion, there are three tests: you must be able to prove you work in a foreign country, you must be able to prove that foreign income, and you must pass either the "bona fide" or the "physical presence" residency tests in that foreign country. The "bona fide" test is passed if you live in the country for at least one uninterrupted tax year (between January 1-December 31). The physical presence test is usually the one people pick – it's passed if the taxpayer was present in that foreign country for any 330 days which don't have to be consecutive or part of a particular tax year. For tax year 2008, the amount of the exclusion will be $87,600.
If you work in a country that charges no income tax, the exclusion becomes particularly valuable because once the first $87,600 is removed the first dollar of taxable income is taxed in the lowest income bracket. That means there's a chance you might pay less tax if you had stayed home and earned all that money in the United States.
You may also qualify for separate housing cost tax credits and deductions that will bring down that overall income deduction.
Meanwhile, the foreign tax credit covers the amount of foreign tax paid on income subject to U.S. taxes after accounting for all your exclusions and deductions.
Why sometimes it's better to work for someone else: Some countries have special laws that govern taxation for self-employed individuals that may result in U.S. expatriates paying special taxes for the self-employed – there may be reciprocal agreements between countries governing such agreements. Self-employed people in particular should seek out help on how best to manage taxes and overall spending issues abroad.
Meanwhile, many multinationals create "tax equalization" packages for employees working abroad that charges employees the tax amounts they would have paid in the states while picking up the entire tax bill in the U.S. and the overseas location. It's important to make sure, however, that employers are figuring in all the potential taxes you'd pay for benefits like an overseas housing and school allowance, relocation fees and other perks related to expatriate work.
Even if you're working for one of the most employee-friendly companies on the planet, it's important that you bring your own tax advisor into the process to make sure all your bases are covered.
Get advice on record-keeping: If you've been lackluster at keeping track of your financial activities while working in the States, it's time to change your ways. Get advice from your tax and financial planning experts on the best ways to sort and keep financial records either physically or on computer. And since you might be tempted to ask more questions about the care and feeding of your finances while you're abroad, ask your professionals what it will cost to have these discussions and whether there's anyone you can talk to where you're going.