Bringing home wages earned abroad

[The_Crustache]

Hello,

This is not a situation that I am currently in, but there is a small possibility I could be in the future.
Let's say I work in a foreign country earning pay, for a couple of years or so. Eventually I move back to the USA... but what do I do with the thousands of Sand Clams that I have earned abroad, to minimize taxing, etc?

Hard Mode: how would I invest my money long term while abroad, so it is accessible, low/free of tax upon my return/retirement?

[iknowiyam]

Investment abroad will highly depend on what country you are talking about and how likely you are to return. Also, citizenship/status in both countries may also impact decisions.

[thirtysomething]

If you are a U.S. Citizen, you have to pay US taxes on worldwide income. You can get tax relief for taxes paid in other jurisdictions. If you have foreign bank accounts (and are a U.S. Citizen) you also have to file a FBAR report. We have a small UK account - because we lived in UK, and plan to spend over time when vacationing in Europe. What's your nationality?

[Blackbeard]

I'm currently an Expat.  There are a lot of expat forums that talk about this topic.  There are a coup,e of questions that will help with the answers you are seeking.

Are you going to be working for a multinational company or are you going to go it alone?  There are major differences in how income is handled. 

As mentioned you will have to pay American Income tax as well as host country tax.  There is no deferring income tax, you can't shelter it in investments.  Most MNC cover the host country taxes and equalize your pay as if you didn't leave.

FBAR is more paperwork.

You've got to be real careful with investing abroad.  If you are in a high inflation country it could really affect your actual return and truthfully your pay.  We decided to transfer all money back to the U.S. And invest there.  Many reasons for that.  More control, higher transparency in the rules, more knowledge of the market forces.  Not saying it was right or wrong, just what we did. 

You also have to think about how your pay will be compensated vs an appreciating or depreciating currency.  MNC's try to keep you whole so they adjust your payment up or down according to the dollar vs host country pay.  Very important you understand this concept.  Use the Canadian dollar it lost 20% over the past year or so.  If you were living in Canada not a big deal, if you are moving your money back to the U.S. you just lost 20%.  That is why MNC's will adjust your pay to keep you even.  It's never perfect in my three plus years working outside the U.S. I've probably gotten a 2% gain on all of my salary because we moved money when it was beneficial, but this is also like timing the stock market!

Last piece of advice, depending on the country get a good accounting firm that does Expat and pay them to do your taxes!  Especially if you are in South East Asia.  My company covers it, I seriously couldn't have done it on my own.  Europe is probably easier but you don't really know, they are experts.

Living abroad is a fantastic life experience, but remember it is not like going on a vacation.  I've seen the most gung-ho people pull the plug and pack it in, I've also seen the most introverted people that i would bet would quit make it for the long haul.  It isn't just being in developing countries I've seen this other in developed countries as well.

I'd do it all over again, but I am also highly compensated for the hard ship. 

[NumberJohnny5]

If you live overseas long enough, you can exempt a certain amount of income from your US taxes (it's close to $100k). If the country you're working in has a low or no income tax, that's almost definitely the way to go (plus it makes US tax time that much easier). You don't have to take the exemption though, and can simply count the overseas income as regular taxed income. If the country you live/work in has an equal or higher tax rate to the US, look into doing this; you won't be double-taxed (so if you paid $20k in taxes to the country you work in, and the US says you owe $15k, the US gives you credit for what was already paid so you end up paying $0; if you paid $15k and the US said you owed them $20k, then you'd have to pay them the $5k difference). It's more of a hassle, makes taxes more complicated, etc. However, with earned income, you're now eligible to contribute to a Roth IRA (assuming you don't make more than the income threshold). Might be eligible for some tax credits too, I dunno.

Oh, and just know that when you transfer US funds overseas, the other country's currency will be at an all-time high. When you go to transfer the foreign currency back to the US, then the USD will be at an all-time high. At least that was the case for us.

[socalteacher]

My wife and I worked in Korea for two years and we paid no US taxes because we stayed out of the country for more than 330 days before traveling back to the states. I think the limit is around 90k single and 180k joint.

[cerebus]

On the same topic, and not to derail, but what is the tax situation if you live in one country and work remotely for an overseas company that pays you in their home currency, into your local account? It's something I've been looking at quite a lot recently as the exchange rate to local currency is so favourable that even an average US income translates to a very nice local amount.

[lovesasa]

As mentioned above, if you live outside of the US long enough you (330 days) you can claim the Foreign Earned Income Exemption for up to something like $98,000.

Keep in mind you DO have to file a tax return, even if you don't owe anything because of the exemption, but you get an automatic 2 month extension every year. If you do not claim the FEIE you may forfeit your ability to claim it for the next 5 years.

The downside to claiming FEIE is you have no taxable income in the US, so you are ineligible for tax advantaged accounts.

I live and work in China and have been dealing with the mess that is my tax life recently. If I could do anything differently, I would agree with the above poster and find a tax accountant in my hometown used to dealing with expats BEFORE I left. Undoing mistakes from advisors prior to leaving has been a huge PITA.

I can add more details later if you'd like but I need to get going to a dinner.