What are the laws on paying U.S. income taxes for people working abroad? Do you pay at the same rate? Can you deduct taxes paid to the foreign country? How about state income texes? I currently live in California.
Depends upon a lot of things, including the amount of time spent abroad. In my case:
US January - August 1996
UK August 1996 - July 1997
US August 1997
Malaysia - September 1997 - May 1998
The UK operates on a different fiscal year system than we (don’t remember which is their first month of the new tax year but it isn’t January); Malaysia is on the same tax year system as we.
I paid a horrendous amount of taxes (covered fortunately by my company); the largest to the UK. Each country has a different standard for deductions; in Malaysia the only charitable deductions allowed were those to the Mosque and Islamic charities.
In 1997 I filed forms for two countries, in '98 for three. Each country has a totally different tax form of course – I complained to my company and they had Price Waterhouse do the work. As a California resident, state taxes had to be figured that included work in all three countries. PW was paid thousands of dollars.
I understand that spending 18 months or more abroad alleviates paying US taxes, but I can’t verify that. Imagine that it must depend somewhat upon where the money comes from - may be different working for a US company vs a foreign company (where is the paycheck written).
BTW, the UK requires you to total the number of working days within the country. If you take a vacation to France, for example, those days are deducted from your total working days. Better keep good records if you work there!
Hope this helps.
I work for a US company in the UK. My payroll address is in Texas, so the federal tax gets withdrawn as usual. But since I’ve been here more than 18 months, I have to pay UK taxes. There is an agreement between the US and UK to not double tax ex-pats, so every January when I file my tax return, I show my UK tax, and get a refund for ALL the US tax I paid. The UK tax year starts April 1st which complicates it a bit. Luckily the company pays an accountant to deal with it all, I just sign the forms and wait for the check. Starting in January I’ll switch to the UK payroll so the UK tax will be deducted automatically, and the IRS filing will be simpler.
A bit tangential, but working in Guam, I paid US Federal taxes, at the usual rate, with no other income tax. The monies transfer from the Fed to Guam.
Oddly, although I am a U.S. citizen, my period of residency in Guam disentitled [?] me to vote for President, until I returned to Hawaii. Military gets around that by having the payroll address as Hickam AFB, or Fort Huachuca, or such.
It depends on what country you go too and a lot of other variables. There is no way you can get a meaningful answer here. If you need a meaningful answer you are going to have to do some serious research or consult with a tax attorney.
Just to give an example: those who say if you pay taxes abroad you do not pay in the US are mistaken. That is NOT the rule. I believe the rule is more like, if you paid income taxes in a country which has a “no double taxation” treaty with the US, then you can deduct the amount you paid there from what you would pay the feds. This means you will not owe the feds anything if the tax rate is higher in your host country but you will still owe them if the tax rate is lower.
This is complicated by a number of requirements about number of days in that country etc.
You can call the IRS and they will send you a free publication which covers this in detail.
In my case (US citizen in Japan for the last 5 years), I file a 1040 tax return with the US every year, and another form (255, I think) for ex-pats. If my total income is less than a certain amount (US$75,000 I think, which it is) then I don’t owe the US government anything. Should my income go above the minimum, though, I’m not sure if I would pay taxes on the whole salary, or just on the amount beyond $75,000.
I pay full Japanese taxes, btw.
–sublight.
Sublight’s mostly right; last year the amount was $74k, this year it’s $76k. The way it works is as a deduction; if you were to go only slightly over that amount you’d pay little or no tax, as you also get your standard deduction(s) and tax brackets start low. I actually got a tax advantage in moving to Canada; I only had 4 months of US wages last year, which meant I paid little tax. This holds for nearly any country AFAIK, with exceptions for countries the US State department really doesn’t want US citizens in- (IIRC) Cuba, Libya, Iraq, and possibly Iran. There are even provisions for being paid in non-convertable currencies.
The above only applies if you are a resident (according to one or two of the IRS’ definitions) of a country other than the US. Their definitions aren’t especially intuitive, and all three require a minimum of a full year of ‘residence’. (I filed late, waiting until after I’d been in Canada for the required year. Non-US residents get an automatic 2-month extension.)
I didn’t pay any US taxes on my Canadian earnings, but paid full Canadian taxes on them. Canada scales down deductions and tax brackets for partial years of residency, unlike the US.
My US state tax deductions were scaled relative to total federal income after deductions, which since all my Canadian income was deductable meant I got a full year worth of deductions from them too. California law may not be as friendly.
The form is 2555, by the way. (Actually, for me it was 2555-EZ)
Do check out curwin’s link. I read through most of the linked publications at the time.
By the way, Jorge, I don’t know if this applies to you, but I was able to legally vote absentee in the state where I grew up, in spite of not ever voting there before and not having been resident there for a decade, by listing my parents’ residence. This was after I called the relevant state agency to specifically verify that this was legal. (Mostly, they wanted to be sure I was only voting once.)
As someone who has lived as an ex-pat in Panama and New Zealand, I can confirm some of the previous posts.
While resident in Panama, I pay no U.S. income taxes because of the $76,000 deduction mentioned by others. If, however, I were paid by the Federal Government, I would owe taxes at the normal rate. And I still pay Social Security. Since I work for an organization with International Mission status, I am also conveniently exempt from Panamanian taxes. So I pay no income taxes at all now, although I file a U.S. tax return to get my refund.
When I lived in New Zealand I filed U.S. tax returns but paid no U.S. taxes because the NZ rates were substantially higher than the U.S., and I could deduct my NZ taxes on my U.S. return.