Last Updated: August 16, 2010
Working abroad is no longer something someone does during the course of a traditional career. College internships increasingly involve overseas appointments. Many college graduates seek work-abroad experiences before they even start their careers, and many retirees consider overseas work and volunteer assignments as part of an “encore” career.
For example, The Peace Corps reports that five percent of their volunteers are age 50 and older, and that’s a number that’s growing.
Whatever the reason you may be considering a work-abroad experience, remember there’s a necessary financial planning component that’s as individual as you are. A work-abroad assignment of as little as six months may have important ramifications for your overall financial planning, affecting everything from your current living space to tax, retirement and estate issues.
That’s why the first move you should make after making the big decision to pack up and go is a call to your tax, estate and financial advisers.
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 (IRS) every year, and the paperwork can be complex.
Here‘s some general information to consider if you’re thinking about an overseas move:
Uncle Sam might give you a break: The IRS 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 foreign earned income exclusion, a U.S. citizen or resident alien must have a tax home (your main place of business, employment, or post of duty, regardless of where you maintain your family home) in a foreign country and income received for working in a foreign country, otherwise known as foreign earned income. The taxpayer must also meet one of two tests: the bona fide residence test or the physical presence test. For tax year 2010, the maximum foreign earned income exclusion stands at $91,500, with a base housing allowance of $40.11 per day or $14,640 for an entire calendar year.
If you work in a country that charges no income tax, the exclusion becomes particularly valuable because once the first $91,500 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 than 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.
Many multinational corporations create “tax equalization” packages for employees working abroad that charge 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 like an overseas housing and your kids’ school allowance, relocation fees, childcare and other perks possibly 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 adviser into the process to make sure all your bases are covered.
Be wary if you’re self-employed: 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 tax issues, but that’s why self-employed people in particular should seek out help from qualified tax professionals on managing tax and spending issues abroad.
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.
Update your estate plans: Whether you’ll be stationed in the lap of luxury or a remote African village with no running water, it’s important to have an up-to-date will, health and financial powers of attorney and any country-specific legal documents to ensure proper care of your money and assets should you die or become incapacitated. This is why it might also be important to involve an estate attorney with international experience in this process.
Take time to review your real estate options: Given the continuing sad state of real estate in many U.S. communities, a quick sale of property before you pack up and go may not be possible. So explore the tax consequences and management responsibilities of renting out your property before you go. And by all means, make sure you have enough set aside to pay monthly mortgage, insurance and upkeep bills and a foolproof way to make sure those bills get paid on time in your absence. You don’t want to destroy your credit rating in your absence. Also discuss your overseas status with your insurance agent since renting out your property or leaving it empty could affect your premiums. Also, make a security plan for your property whether it’s occupied or not — an alarm system might help, but it’s important to inform trusted family members and neighbors as well.
Make a disaster plan and designate your point person back home: If you’ve done your homework on estate issues, this person might also be the executor of your will, but it’s important to have one trusted person back home as a central conduit if anything goes wrong for you abroad or if an emergency happens at home. In any event, this person should be an individual you trust to go through your mail, contact loved ones or possibly make health or money decisions on your behalf. Start by making a “worst-case scenario” list and work backward to prepare for such problems, including designating who might be your best representatives for health, property and money issues back home.