As more American retirees are deciding to begin new lives overseas, these same retirees are finding that they’re not ready to stop working. Some find that they have too much energy for leisure pursuits alone, and want to direct some of that energy into paying activities; others never intended to “retire,” and have long had plans to open new retirement businesses. Still others may be inspired by their new overseas environments to take up new jobs, especially if they have particular skills that are in need in their adopted countries.
Whatever the circumstances, any paying activity of course involves the U.S. Internal Revenue Service. But if you work overseas, you may be taxed on that income by your local jurisdiction. What U.S. tax laws apply to work you do overseas? Can you be double taxed?
IRS Overseas Tax Exemption
Fortunately, the IRS provides an overseas tax exemption — or, using the IRS’s terminology, a foreign earned income exclusion. To be eligible for this income exclusion, you must (1) work and reside overseas; and (2) meet the “bona fide residence test” OR the “physical presence test.” You are considered a “bona fide resident” of a foreign country if you live there for “an uninterrupted period that includes an entire tax year” — a tax year being any calendar year. This requirement does not preclude you from taking trips outside your country of residence, even back to the United States, provided the trips are relatively short in duration and you clearly intend to return to your foreign country of residence.
Alternately, you can be eligible for the tax exclusion if you meet the “physical presence text” — meaning that you are physically present in your foreign country of residence for at least 330 full days (24-hour periods) during any consecutive twelve-month period of time. The 330 days can include days when you are working and days off, as long as you are physically present in that country.
The time requirements as specified by either the bona fide residence test or the physical presence test may be waived if you are forced to leave your country of residence because of war, civil unrest, or other adverse conditions. And you cannot exclude any income you may derive in Cuba. If you intend to work in any other country with which the United States maintains troubled relations, or no relations at all, check with the IRS.
$95,100 in Foreign Wages Tax Exempt
If you qualify for overseas tax exemption, you can exclude up to $95,100 in foreign wages (for tax year 2012). Any earnings above that amount will be taxed as income by the IRS, regardless of whether you’ve paid foreign taxes on the same income. This threshold amount rises from year to year; in 1992, for instance, the maximum excludable amount was only $72,000.
There are many other considerations regarding your foreign income. For instance, even if you can exclude most or all of your income and thus reduce your U.S. tax liability, you still may be liable for self-employment tax (for Social Security) on the full amount of your overseas earnings. Also, because you have to claim the full amount of your foreign earnings on your tax return (form 1040) before taking the deduction, the full earnings count toward your gross income, and may push you into a higher tax bracket, depending on your other sources of income.
Your particular situation may entail additional concerns, depending on the kind of work you’re doing, who’s paying you, and what country you’re living and working in. Download a copy of the IRS’s Publication 54, “Tax Guide for U.S. Citizens and Resident Aliens Abroad,” for additional advice. And, when you file your taxes, you’ll need to file Form 2555, “Foreign Earned Income,” for each tax year that you earn such income. If you’re in doubt, find help — many foreign capitals and large cities have accountants with expertise in U.S. tax law, who can help you file your taxes properly.
Hopefully, you can make good use of the overseas tax exemption, making your working experience in your adopted country that much more rewarding!
An income tax calculator is a great online calculator that can give you a rough estimate of how much money you will have to pay in taxes at the end of the year. While it will not give you the exact number that you will get from the IRS, it will get you close enough that you will be able to plan to make the payment. This can help you budget all year long so that paying your taxes is quick and easy.
Using The Calculator:
It is not difficult to use the income tax calculator. You will need to enter all of the requested information in the fields. In order to get the correct amounts for the required fields, make sure you take into account the details below. The number that this financial calculator gives you is then the amount of money that you should expect to pay.