See the world! Stop at exciting destinations! Soak up the local culture!
While it may seem as if being an expatriate is glamorous and a lot like a travel brochure, there are pros and cons to a U.S. person living and working outside the United States in terms of tax liability, work environment, and even short- and long-term opportunities. Whether spending a semester in college working overseas whetted your appetite for international travel, or your firm or company wants to relocate you for a specified amount of time, you don’t want to be cut short in terms of understanding your tax situation.
“The best advice we can give young CPAs is to do your homework on any tax or cultural issue,” says Helen Li, CPA, a tax supervisor for Freed Maxick CPAs, P.C. in Rochester, New York. Along with Tom Chiavetta, CPA, partner-in-charge of the firm’s Global Mobility Practice, and an entire team of accountants and consultants, Helen helps clients understand the ins and outs of being an expat.
Young CPAs who work in business and industry may be more likely to come across an opportunity to leave the United States to work in Canada, Mexico, or really anywhere outside the U.S. border. If you work for a firm, perhaps one of the Big 4, you may find the same opportunities.
“Back in the 80s and 90s, it was a burden for employees to relocate overseas, sometimes to places with a standard of living lower than what they were accustomed to in the U.S., so these companies had to pay as much as three times the base salary to encourage their employees to expatriate,” says Helen. “Thanks to the global economy we have today and the rise in the standard of living worldwide compared to 20 years ago, extra benefits paid to work elsewhere are not nearly as large because more and more people want the experience of working abroad. Large companies invest in their employees while they are working overseas, but the employee still must be aware of tax considerations in order to avoid pitfalls at tax time.”
CPAs, of course, can research the tax code on their own, or consult with colleagues in their firms or companies for some of the finer points. To help begin the conversation, Helen and Tom offer their top five points for consideration:
#1: Pay Attention to Worldwide Reporting Responsibility
U.S. tax is configured on a worldwide income basis for all of its citizens, green-card holders, and residents (U.S. persons), which is different from the way the rest of the world pays its tax. As long as you are a U.S. person, you will have U.S. tax filing responsibilities.
“In addition, some people think that just because they make under the amount of the Foreign Earned Income Exclusion, they don’t have to file a U.S. tax return,” says Tom. “However, you have to file the return to actually claim the exclusion.”
#2: Be Aware of FBAR and FATCA
The IRS has ramped up its focus on Foreign Bank Account Reporting (FBAR) and, more recently, began scrutinizing the impact of the Foreign Account Tax Compliance Act (FATCA) on all U.S. persons, whether living and working in the United States or abroad.
“Unfortunately, many citizens, including retirees and people with low income who have foreign bank or investment accounts, are caught in a trap essentially intended by the government to catch terrorists and criminals,” says Helen. “Anyone with a combined balance of more than U.S. $10,000 in a foreign bank account will have to file Form TDF 90-22.1 to report their accounts to the U.S. Department of the Treasury.”
FATCA, on the other hand, is reported on Form 8938 as part of the Form 1040 individual income tax return and is a step above the FBAR. Here, financial assets such as direct ownership of stocks in a foreign company and other specified foreign financial assets, not covered by the FBAR, are required to be reported. The only saving grace is that the reporting threshold for FATCA is much higher than FBAR and differs significantly, depending whether you are living in the U.S. or abroad.
#3: Avoid Double Taxation
No one wants to pay more tax than they owe, especially if they make the mistake of paying the tax twice. Helen and Tom explain that expats need to know if there are treaties between the United States and the destination country.
For example, if an employee is working on a short-term project in Canada, there is an article in the U.S.-Canada treaty that allows an exemption of Canadian source income from taxation for a period of presence in Canada under 183 days. However, in order to get the exemption, the employer cannot have the remuneration paid out of Canada, which is considered the “host” country.
#4: Consider All Exclusions
While there are short-term projects similar to the Canadian example, there are, naturally, longer-term assignments that we think of as the traditional expat timeframe. Once you have satisfied certain out-of-the-country presence tests, usually at the one-year mark, the expat can take a foreign earned income exclusion (Form 2555) in conjunction with the foreign tax credits (Form 1116) to reduce his or her tax liability and reduce the chances of being double-taxed.
“There are also exclusions based on housing expenses available on the Form 2555,” says Helen. “If you paid or accrued foreign taxes, you can take the credits on Form 1116, or as a Schedule A itemized deduction, whether you were abroad long-term or short-term.”
#5: Make Sure all Living and Working Details are Documented
Large companies, who regularly place their employees overseas to work, are well versed in providing employees with a letter or correspondence that states, in writing, all of the details related to how much the company will pay for living essentials. This includes housing, an allowance on top of a salary, and spouse and child benefits, such as the cost of education.
In addition, addressing tax equalization is an important consideration. For example, some companies may tax equalize their employee to their home country, paying the home country rates as if the employee never went on assignment.
“Young CPA expats working for smaller companies who aren’t as well-versed in addressing these details in writing will want to make sure they secure this kind of information before moving overseas,” says Helen. “You’ll also want to know if your employer is helping with cultural training or paying for tax compliance assistance while you’re working abroad.”
Immerse Yourself in the Culture
It’s best to learn all you can before making the move, advises Tom and Helen. There are many facets to the tax code to understand, including bilateral treaty agreements that address Social Security, and the issue of breaking state residency for long-term assignees. If you are able to break state residency, it can save you and the company a lot of money by not having to pay state income tax, says Helen.
“The bottom line is that being an expat definitely offers opportunities, especially if the young CPA is in a career-building process,” she says. “However, you need to be prepared for your assignment to minimize your tax liability, as well as adapt to a foreign location. It’s always helpful to try to learn the local language because it will help you to better understand the local culture.”