Foreign
Assignment: What About Taxes
Taxes On Overseas Jobs
~ By Steven Kang
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most countries, if you spend more than six months working for the local
country, you will be subject to local country taxation. However,
as a US citizen or a US resident alien, you are also subject to US income
taxation on your worldwide income. The result is dual taxation or
being taxed by both countries.
Fortunately,
the US government allows foreign tax credit on local country income taxes
that you have paid. Let’s say that you have earned $150,000 in the
local country. For simplicity, let’s assume that there is no foreign
earned income exclusion on the $150,000. You have paid $50,000 in
local country income taxes. Since you also must file and pay US income
taxes, the same $150,000 would also be taxed in the US. By taking
the benefits of foreign tax credit, you may offset or reduce your US income
taxes by $50,000 of local country taxes.
However, not
all local country taxes may be used for foreign tax credit. Only
the local country taxes which are based on your income qualify for the
foreign tax credit. Some countries impose social security taxes on
income earned. Such social security taxes do not qualify for foreign
tax credit.
In general,
US social security and Medicare taxes do not apply to wages for services
you perform as an employee outside of the United States unless one of the
following exceptions applies.
1) You
are working for American vessel of aircraft under certain contracts
2)
You are working in one of the countries with which the United States has
entered into a binational social security agreement
3)
You are working for an American employer
4)
You are working for a foreign affiliate of an American employer under a
voluntary agreement entered into between the American employer and the
US Treasury Department. |
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What if you
are self-employed? The US self employment taxes (equivalent to US
social security and Medicare taxes for self employed) must be paid, whether
you are living in the United or abroad. In some cases, you may be
subject to social security taxes in both local country and in the US.
As a general rule, self-employed persons who are subject to dual taxation
will only be covered by the social security system of the country where
they reside.
What if you
want to return to the US and claim social security benefits in your later
years? You may request to be exempt from foreign social security
tax and subject only to US self-employment tax.
Paying the
self employment or social security/Medicare taxes become important, if
you want to set up a tax free (qualified )retirement plan for yourself.
The US tax law allows deduction from your taxable income, the contribution
you are making to your retirement plan (as much as $40,000 per year).
The benefit of setting up a qualified retirement plan is that the contribution
is tax free and subsequent appreciation of your retirement is also tax
free, until you take it out in your later years. As most first year
finance students would tell you, the compounding factor would be greater
if you let your investment grow tax free.
As you can
see, foreign assignments are fraught with tax traps for unwary. With
clever tax planning, you may claim all of the benefits allowed by the US
government, while lowering your local country tax burden.
Thought
of the Day
What is the
mark of a true professional?
The ability
to bring down the most complex concepts to laymen terms.
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| Steven
Y.C. Kang, CPA & Associates offers extensive online services, including
financial calculators, tax return reviews, and a large library of informative
articles. To learn more about these services - Click
Here - |
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