Living and working abroad is an incredibly interesting opportunity. However, because U.S. taxes are based on citizenship, Americans living in a foreign country must continue to file a U.S. federal income tax return abroad. At the same time, most are also sometimes subject to foreign tax treatment in the country they live in.
To avoid double taxation, when expatriates file their income tax returns in the United States, they must also claim.
One or more exemptions that the Internal Revenue Service has made available for this purpose, such as a foreign tax credit or the exclusion of income earned abroad, depending on the circumstances. Expatriates often have additional U.S. filing requirements, such as reporting any foreign financial account they might open when sending an FBAR (foreign bank account report).
Foreign tax rules and rates can vary widely. Many U.S. companies that send employees abroad recognize that foreign taxes can make a significant difference in the wages of their employees, which in turn can affect the decision-making of the company to accept an assignment abroad. To mitigate the influence of foreign taxes, many companies are implementing an equalization or tax protection program. Read on to learn more below.
What is Tax Equalization?
When you move abroad, your expatriate tax preparation situation varies depending on where you live due to taxes, laws, and tax treaties. Often, when an employer has to send a worker abroad to work, they want to make sure that the change is not disadvantageous for the employee in terms of finances. This is where fiscal equalization comes in.
Usually, the employer requests tax advisers' help to prepare tax affairs, payment of tax and social security problems that may arise due to moving an employee abroad. The objective of tax equalization is to ensure that individuals travelling abroad are not subject to additional tax charges due to their moving abroad as an expatriate.
How is tax equalization determined?
The employer will ask their tax advisers to do a calculation to determine what the U.S. tax liability would be for wages, benefits, bonuses, stock options, etc. This amount does not include benefits for expatriates, such as education, home leave, or local accommodation.
For example, if a person moves to a new country to work, a hypothetical income tax will be deducted each month, comparable to what they should pay in the non-expatriate parts of their salary package in their home country.
What is the Purpose?
The aim is to ensure that the employee does not suffer a personal tax burden upon emigration at the employer's request. The only tax paid by the individual is the hypothetical tax withheld at the source, which reflects the country of origin's taxes and social charges.
The individual bears the costs of taxes and social security, which would be incurred by a part of his non-expatriate salary (as if he had not moved abroad).
The employer covers the costs and exemptions from personal taxes and social security obligations resulting from residence abroad in the host country.
Tax preparation considerations for expatriates
Tax equalization can be a useful tool in away. However, if you, the employee, become a non-resident of your home country, you probably will not have much responsibility in preparing expatriate taxes. In any case, the main goal is to avoid worsening taxes when you move abroad to work.
Many companies will provide the resources and information necessary to make such a monumental decision to take you abroad. Still, it is good to consult an expatriate tax specialist to understand better the implications of preparing tax returns. Establishing a professional tax connection before you move can help you understand your situation long before you have to file your U.S. tax return.
Tax Protection
Tax protection is a system similar to tax equalization, but only employees benefit from tax protection. Therefore, if the employee travels to a country where he would pay more tax than the United States, the company will compensate him for the additional tax he pays. However, if you go to a country where taxes are lower, you keep more wages.
Equalization and tax protection calculations can be quite complicated, as any additional compensation in lieu of foreign taxes paid is taxable. Consequently, companies generally hire an expatriate tax company to perform these calculations.
United States Taxes for Expats
U.S. taxes on expatriates can be complex. To avoid double taxation of the same income by the United States and another country, the IRS has introduced several measures necessary to reduce the federal tax liability for expatriates in the United States. An external tax credit, which allows expatriates to claim a tax credit of $ 1 for each tax dollar paid abroad, and the exclusion of income earned abroad allow expatriates to exclude the first $ 100,000 of their taxes. Income if they meet one of the two criteria that try to prove that they live abroad.
U.S. ex-pats must report income received and taxes paid in another country on the U.S. tax return, so currency conversions are another consideration.
In general, the role of IRS exemptions granted to expatriates is to ensure that expatriates no longer pay the maximum rate of the two tax regimes to which they are subject. However, if foreign tax rates are higher, this can leave expatriates out of pockets compared to those of the United States, hence the need for tax equalization to reverse this possible disadvantage of foreign allocation.
Although the United States has tax treaties with 100 other countries, this generally does not prevent Americans from paying American taxes, except for professors, students, and research and development personnel who are temporarily out of the country abroad, so some expatriates may wish to request tax provisions for tax treaties when filing the U.S. tax return.
Also, there are other reporting requirements in the United States for expatriates, such as completing an FBAR for expatriates with a total of at least $ 10,000 in foreign banks or bank accounts.
Social Security Taxes for Expatriate Employees
The United States has concluded treaties called Totalization Agreements with 26 other countries.
These agreements generally provide that if an employee works in this country for a short period, usually no more than three to five years, he or she may continue to pay security taxes before returning to the United States. And will not pay social security taxes in the host country. However, if the assignment lasts longer, you will only pay foreign social security taxes; however, under treaties, they generally count for your right to social security in the United States.
Americans working in one of the twenty-six countries with which the United States has totalization agreements do not require double taxation compensation for social security taxes. In contrast, expatriates working in other countries with which the United States does not have an agreement.
Flynn Financial Group Inc