By Liz Zitzow - Welcome back from tax season! I hope you’ve all had a chance to put your feet up and give yourself a day off.
Today’s topic is “When disaster strikes ...” For our clients, it strikes when they move to another country and only get around to “getting their taxes done” around the due date. It’s bad enough for stateside people, but when you’ve moved to another country, this can cost you $10,000’s in lost tax deductions from not setting things up before you move.
Here’s a typical list of uh-ohs I see several times a year:
Client: I’ve got a two-year assignment in the UK, so I set up a bank account there ahead of time to deposit my paycheck. Smart, right?
Me: Wrong! By setting up your bank account in the UK, you’ve just turned 100% of your wages into UK taxable income. Had you set it up in Jersey, Guernsey, or the Isle of Man, you would have saved 40% in UK taxes for the pay you receive for each workday performed outside the UK.
Client: I heard UK tax rates are high, so I stayed on the US payroll and had US taxes withheld instead. Smart right?
Me: No can do. You did the work in the UK, so you actually owe tax in the UK, not the US. Now you’ll have to pay the UK tax and file for a refund of excess US tax paid. Tough luck for you that you won’t have the money to pay your UK tax until Uncle Sam releases your refund.
Client: My wages are £50,000, and I got a bonus of £200,000. I put the whole £200,000 ($400,000) into my UK pension and got an £80,000 ($160,000) tax credit on my UK tax return. Smart, right?
Me: Not really. The US/UK treaty only allows a deduction of the amount you could contribute to a similar US plan, which is usually a 401k plan and thus a measly $15,500. The rest of your income is all taxed in the US. And since you didn’t pay tax on it in the UK, you can’t take a tax credit to offset the US tax. Whammo! Big US tax bill, and no money left to pay it.
Disaster is easily avoidable when clients call first and act second. And if your client is moving to a foreign country – don’t forget to pressure them to get advice before they move on their new country’s taxation regime. Each country has its own bizarre little quirks which could save them $10,000’s by playing the home country’s quirks off against the host country’s.