Responsibilities of American Taxpayers Working Abroad
American taxpayers with tax homes in the U.S. and who are living or working abroad, still have responsibility for paying taxes on their worldwide income, according to the IRS. The good news is that they may also exclude all or part of their foreign salary, wages or other income, up to the maximum annual exclusion, by meeting the bona fide residence test or physical residence test.
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Social Security and Medicare taxes remain all American employees’ tax obligation, working outside of the U.S. or not. According to the IRS, working for the U.S. Government, an American company or an affiliate of an American employer with a voluntary agreement with the Treasury Department, ensures that U.S. Social Security and Medicare taxes apply to your wages. If working for a country with a binational social security or Totalization agreement, you still have the obligation. More information is available at the Social Security International Program web site.
You will want to prevent double payment of your Social Security taxes also, according to the IRS. To ensure that your pay in a foreign country is subject only to U.S. Social Security tax and exempt from foreign social security tax, your employer should write the U.S. Social Security Administration with your information. Review information provided by the IRS concerning this and other Social Security topics to ensure your compliance.
The IRS provides further information concerning the tax treatment of your worldwide income, portfolios and property held in the U.S. in these IRS frequently asked questions The IRS publications, tax topics and forms referenced in these FAQs are shown below:
- Publication 54,Tax Guide for U.S. Citizens and Resident Aliens Abroad
- Publication 514, Foreign Tax Credit for Individuals
- Publication 463, Travel, Entertainment and Car Expenses
- Tax Topic 514, Employee Business Expenses
- Tax Topic 853, Foreign Earned Income Exclusion – General
- Tax Topic 854, Foreign Earned Income Exclusion – Who Qualifies
- Tax Topic 855, Foreign Earned Income Exclusion – What Qualifies
- Tax Topic 856, Foreign Tax Credit
- Tax Topic 857, Individual Taxpayer Identification Number
- Form 1040NR (PDF), U.S. Nonresident Alien Income Tax Return
- Form 1040 (PDF), U.S. Individual Income Tax Return
- Form 1040 Schedule A, U.S. Individual Income Tax Return, Schedule A
- Form 1116 (PDF), Foreign Tax Credit
- Form 2032 (PDF), Contract Coverage Under Title II of the Social Security Act
- Form 2555 (PDF), Foreign Earned Income
- Form 2555EZ (PDF), Foreign Earned Income Exclusion
- Form W-7 (PDF), Application for IRS Individual Taxpayer Identification Number
The IRS maintains full-time staff at three European embassies in Frankfurt, Germany; London, England; and Paris, France, offering taxpayers the most commonly used tax forms, publications and answers to questions about your account, tax notices and bills, according to the IRS. Taxpayers can also contact the full-time staff of the International Taxpayer Advocate located in the U.S. Embassy in Puerto Rico.
Taxes are surely an important consideration, but there are other considerations such as shipping your household goods and furniture when relocating abroad. Expatexchange.com recommends you approach this task as a three-step process, first, packing for the flight to your new home. Stick to two checked bags, weighing not more than 70 pounds each and two carry-ons that stow properly.
In your second step, you can pack your essential items yourself and send them UPS at a reasonable cost based on size and weight, while Mailboxes, Etc. and other similar businesses provide a pricier alternative. They will come to your home, pack up these items, take them away, arrange for shipment and delivery, according to Expatexchange.com.
The third and most difficult step is your furniture and other household items. Expatexchange.com sees organization as the most time-consuming part of this step, starting with calling shipping/freight-forwarding companies. You will need to find a company that performs all the pick-up, packing, customs clearance, delivery and unpacking functions. Companies will need to come to your home to prepare estimates.
Organizing your financial services may be more important than the other items leading to your working abroad. You should find out whether your current financial institution has an international division, such as Wells Fargo Bank. If not, Expatexchange.com recommends you switch institutions or consider opening new accounts in your new location. This should lead you to do research on banks in your new locale.
It is important to find out if they offer online services. It is more important not to fully cut all financial ties with your home country, according to Expatexchange.com.
You should also look into the functionality of your ATM and debit card. Ensure that you have access to all your accounts to allow easy transfers between them while you out of the U.S., according to Expatexchange.com.
Expatexchange.com recommends that knowing your daily withdrawal limit is a good idea, as well as the basis of that limit. Is it based on calendar days, generally Saturday through Sunday, or business days, generally Monday through Friday? Knowing any daily limits on your Point-of-Sale transactions will also help you in setting up your new home in a foreign country.