GKM specializes in double taxation and this article specifically addresses that. A U.S. expatriate is a citizen or resident of the U.S. who lives outside the U.S. and Puerto Rico for more than one year and must report 100% of their worldwide income on their U.S. individual income tax return regardless of where they live and where income is received. In addition to U.S. tax filing, a U.S. expatriate will also have a tax filing requirement in the country of assignment. Overseas assignments can bring about increased tax obligations for the U.S. expatriate and in response to this, many employers have tax equalization policies in place to ensure that the expatriate is made tax neutral. Outlined in this article are tips to avoid some of the common financial mistakes made when transferred to another country.
As a U.S. citizen, all income, no matter where it is earned in the world, must be reported on your U.S. tax return. In 2015, if you are physically present in a foreign country for at least 330 full days in a consecutive 12-month period, you are eligible for a foreign income exclusion of up to $100,800 from your taxable income that still has to be reported.
Recognize that each country has its own income-tax laws and income-tax rates. Then assume you will have to pay that country’s taxes on all wages earned in that country.
Negotiate what amounts to the difference between your U.S. and foreign country tax payments in the form of a “tax-equalization package” from your employer. It works like this: The employee files returns and pays income tax due in both the foreign country and the U.S. Let’s call this step (A). Next, the amount of U.S. tax on the employee’s earnings is re-calculated as if his or her wages were earned exclusively in the U.S. We’ll call this step (B). Lastly, the employer would reimburse the employee the excess of taxes paid as a result of the foreign assignment, defined as (A) minus (B). Ask for a “gross-up.” The tax equalization package payment from your employer, as calculated above, is taxable at the federal level. For this reason, the employee may also want to request reimbursement for this additional U.S. income tax.
Make sure any CPA fees associated with your tax-equalization package are covered. In most instances, your company will pay for CPA fees related to preparing your tax returns and to calculating the equalization and gross up amounts.
Engage a CPA on your own behalf can help you accumulate the necessary tax-preparation information, review the equalization and gross up calculation, and address any other tax or logistical complexities your household may face as you move overseas. For example, there may be custodial or trading restrictions on your investment accounts or questions on whether the U.S. government allows Social Security credit on income earned in the particular country you’ll be working in.
Consider these recommendations before you accept any position overseas. They just might help you avoid some common mistakes that could have a negative impact on your personal financial health.
Tax equalization is a complex process and will be different based on coverage decisions made by each employer, one should always consult a tax advisor on both the U.S. and host side to help guide and advise on the process.