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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: genselecus on November 14, 2014, 06:22:00 AM

Title: Taxes for US Expat Living Abroad
Post by: genselecus on November 14, 2014, 06:22:00 AM
Hi all,

I'm considering a year long gig in a foreign country for the consulting company that I work for. I don't particularly want to work abroad, but for the right amount I would be willing to consider it. The financial incentives for the place that I'm staying are pretty nice, but there are costs associated with living abroad and putting my life on hold. So, I have a few questions:

1. I have done some reading on the Foreign Tax Credit and I have  rudimentary understanding. Does anyone have a spreadsheet available that summarizes the two alternatives (living abroad under the "physical residence test" vs. living in the US)? Ideally I am trying to understand the benefits of living abroad, given a certain salary and a certain amount of living stipend (per diem and the like) versus living in the US and paying standard taxes. I know that some of the taxes are consistent (like SS and Medicare) and that the Federal income tax changes. I don't exactly understand how the buckets work.
2. Does anyone have any detailed information on what should be considered for this? Alternatively what sort of options may exist for handling income vs. per diem vs. housing stipend / per diem. Is there an option to continue paying income tax but not pay tax on per diem?

Thanks for all the help and please let me know if more info is required!
Title: Re: Taxes for US Expat Living Abroad
Post by: COlady on November 14, 2014, 09:05:22 AM
I would suggest that you speak to a CPA that specializes in foreign tax issues for individuals.  Don't just go to any old CPA firm - go to someone who specializes in foreign tax specifically.  I think it would be worth your time and money.

I'm a CPA (tax) and I don't know much about foreign tax issues so can't help you out much. But what I do know is that the rules are very complicated and open to interpretation and you think you might be interpreting them right and you could be totally off base.....
Title: Re: Taxes for US Expat Living Abroad
Post by: JoJo on November 14, 2014, 09:39:16 AM
I recently considered a foreign offer and ultimately turned it down partially due to the FATCA aspects of it.   Ultimately I decided to finish my career in the US, retire early, and go live abroad off of my savings.

In my case, it was a high cost of living so high income so 33% tax bracket..  If the COL & income is lower it might be different.

You probably already know that you will pay tax in the foreign country plus tax in the US on income above a threshold if the US tax is higher.

Pensions in other countries are not qualified so not only can you not deduct them from your AGI, you pay tax on the way in + on the annual gain + it will be a foreign account under FATCA.

You will lose your US SS contributions and likely will never get a dime out of any other country's SS plan you pay into.

A big accounting firm did the US vs. foreign tax calcs based on my current & proposed salary but I don't think they did a good job - they totally ignored 401(k), HSA and way overstated my tax base in the US, thus not making it a very useful comparison.

Agree with COlady to get info specific to your case.

Title: Re: Taxes for US Expat Living Abroad
Post by: n2 on November 14, 2014, 10:15:03 AM
I did this a while ago, so my knowledge is a bit out of date. But my recollection is,

If you earn less than the foreign earned income exclusion, taxes are pretty simple.

If you earn more, they are not. TurboTax does a good job of calculating the taxes but won't give you advice on lowering your taxes (e.g. changing when you pay your foreign taxes can matter a lot to your US tax liability).

There are some limitations on the foreign tax credit (maybe just under the AMT). You may well end up paying more total tax between the two countries than you would in the US, even if the foreign country has a lower tax rate.

Depending on which US state you move from, you may need to pay state tax while abroad. I don't know what the rule is for California.

Finally, FATCA. Make sure you can get a bank account before you go. Citibank used to offer foreign currency bank accounts so that might be an option.
Title: Re: Taxes for US Expat Living Abroad
Post by: ZiziPB on November 14, 2014, 11:29:29 AM
This article may have some helpful information for you:
Title: Re: Taxes for US Expat Living Abroad
Post by: genselecus on November 14, 2014, 10:04:14 PM
Thanks for all the replies. Yes, I agree the situation is pretty odd and I don't want to get into trouble when it comes time to pay the taxman. Right now I'm just figuring out what the approximate difference would be. I'm hesitant to pay an accountant at this point because I haven't made a decision to move forward with living abroad. I'm trying to decide if I should. A little more information may help to explain where I'm coming from (and may perhaps change the tax situation?).

I'm currently working for a company based in the US, but I'm working on a project in Abu Dhabi. I'm currently paying US Federal taxes and California state taxes. I'm also currently getting a modest per diem which I'm not paying taxes on and am not planning to (is this correct?).

I'm in the position that our project may get extended through 2015, which means if I stay on I will be able to pass the physical presence test (330 days outside the US) for 2015. This makes things really interesting because the UAE doesn't have an income tax, meaning my first ~100k earned will be mostly tax free, I still pay social security and medicare. I would still be getting a per diem and potentially a housing stipend, so I think that is also taxable (after a certain deduction). I know this will result in a large boost financially, I'm just trying to estimate what the value might be because I don't really want to live in the UAE for a year.

Thanks for all the help.
Title: Re: Taxes for US Expat Living Abroad
Post by: SnackDog on November 15, 2014, 04:00:36 AM
It is not clear if you will be completely local payroll in Abu Dhabi or continue to get paid in the US in dollars. Makes a huge difference. If you are US payroll you will continue to to accrue SS and other benefits. If you go local, all the US benefits vanish.  If you have any UAE tax exposure I would ask your employer to cover it since you will owe US tax.  I would read the IRS rules carefully on per diem as they are quite specific about what is allowed.
Title: Re: Taxes for US Expat Living Abroad
Post by: CongoKid on November 25, 2014, 06:41:34 AM
I'm not sure whether the per diem is taxable or not, but in my 12 years of working abroad I've never seen it reported by any of my employers as taxable income.  However, if you receive a cost-of-living adjustment, that is typically a taxed benefit.  Other taxable fringe benefits include home leave, rest & recovery (R&R), and education allowances.  You should give it a try.  UAE is a pretty comfortable place, and you should be able to put away quite a bit in savings.