“But in this world, nothing can be said to be certain, except death and taxes.” Thanks, Benjamin Franklin, for stating this so obviously back in 1789. Americans quickly learn that this is true when they start their first job in high school. Or perhaps even younger when they realize that the toy they want says $4.99, but it’s going to cost more than the $5 bill in their hand.
When it comes to federal and state income tax, the common theme is that it’s complicated and necessary. From one state to another, rules change, and some states don’t even have an income tax. Federal income tax isn’t less confusing. It varies from year to year, from one type of employment to another, and even when you’re working abroad.
Disclaimer: We are not financial experts and are not providing legal advice. We highly recommend you consult with a tax accountant or international Certified Public Accountant (CPA) on your specific circumstance.
If I Work Abroad Do I Still Pay Taxes in the U.S.?
The short answer is: Yes! According to the Internal Revenue Service:
“If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside.”
Basically, it doesn't matter where you worked, if your income came from an international employer, or if you already paid taxes in another country, you still have to disclose that income to the IRS.
You also need to abide by the tax deadlines. But if you are living and working abroad on April 15th, you qualify for an automatic two-month extension. If you cannot meet the June 15th deadline, you can apply for an additional extension, making your new deadline October 15th.
It’s important to remember that even if you file (and are granted) an extension, taxes are due on April 15th, and any late payments are subject to interest.
How do I Report Income?
There are two types of income you must report as part of your work abroad taxes: gross income and foreign income.
Reporting your gross income means all of the income you received throughout the tax year. Note that this also includes goods, money, service, self-employment income, and property. Basically, anything that is not exempt from taxes, which means that you need to include foreign housing amounts and foreign earned income.
Earned income is considered from a foreign source based on where the work is being done, not where your bank account is. For example, if you do the work in Japan and the money is deposited from the U.S. headquarters of that company into your U.S. bank account, it is still foreign income.
All income reported to the IRS must be reported in U.S. dollars. So if any of your income is paid to you in another currency, you’ll need to translate that. There are two options here for converting your income. One is to use the yearly average exchange rate, which is what most taxpayers do. Another option is to translate each transaction based on the exchange rate on a specific day the transaction took place. Those foreign currency exchange rates are available online as well.
Do I Pay Estimated Taxes?
U.S. employers withhold taxes from your wages. But when they don’t, then you have to pay both “parts” of the taxes from your income. This situation is common when working as an independent contractor and often when working for a foreign employer. A foreign employer doesn’t usually withhold U.S. taxes.
The estimated tax is the total of your estimated income tax and self-employment for the year, with your expected withholding subtracted from it. These taxes are often paid quarterly, and there can be penalties if you overpay or overestimate your withholding and exemptions. (Another great reason to talk to a tax professional!)
What About Specific Overseas Exemptions?
The income tax world is reliant on understanding the exemptions available, in an effort to lower that adjusted gross income and your tax liability. And there are some ways that working overseas can reduce that taxable income.
Nontaxable allowances, such as travel allowance, should not be reported on your W2 or as taxable income. When working abroad, some of your living allowances for housing, utilities, clothes, food, and household supplies are also considered nontaxable allowances.
The foreign housing exclusion is another area that is worth a discussion with your tax professional. If you live and work outside the U.S., you may be able to exclude some of the things your employer pays for regarding your living situation. There are two options for meeting the requirements for these exclusions: the bona fide resident test or the physical presence test.
If you are eligible for the exclusions, certain housing expenses qualify. Those include rent, repairs, utilities outside of a telephone, property insurance, and nonrefundable deposits or lease payments. Things like home improvements, mortgage payments, and domestic labor do not qualify.
In addition to foreign housing exclusion, you may also qualify for foreign earned income exclusion. Similarly to foreign housing requirements, you will need to show proof that you spent 330 days of the last 12 months abroad where you earned the income. In this case, the United States will tax income that is over a certain threshold ($107,600 in 2020).
If you paid for health insurance abroad, you may also be qualified for deductions or an adjustment to your income.
As you can see, work abroad taxes can be even more confusing than regular taxes are. The best practice is to discuss your personal tax situation before taking a job working overseas and make sure to readjust each year as the tax law changes.