If you have an adventurous spirit, you may have decided that working overseas was the right step for you. You applied for and accepted a job outside the United States. You may have compiled a list of items you need to take with you and tasks you need to complete before you leave California.
Did you consider your taxes? The rules aren't as simple (and little is simple in the U.S. Tax Code) as when you resided and worked here in the United States. You might have thought you wouldn't have to pay taxes here once you moved. Surprise! You may still owe taxes here, and if you remain a citizen, you will still have to file a tax return.
How does the system change?
Well, let's talk about what doesn't change first. You must still report income from the following sources:
- Consulting fees
- Foreign or U.S. Social Security benefits
- Pension fund
- Farm income
- Capital gains
Even if you derive your income from 100 percent foreign sources, pay taxes to a foreign country, or your spouse earned income, you may owe taxes to the IRS. As would be the case if you lived in the country, you must file a tax return if your income exceeds a certain amount based on your filing status and age.
Calculating taxable income while living abroad
For U.S. tax purposes, you may use the Foreign Earned Income Exclusion to calculate your taxable income. For the 2016 tax year, the IRS allowed a direct deduction of $101,300 off your earned income only. This would substantially reduce your taxable income.
You may also use the foreign tax credit. This allows you to deduct a portion of any tax you pay to the foreign country in which you reside. However, you can only use the credit on the taxable income you calculated under the FEIE. Therefore, you may only take a credit for the foreign tax you paid on the U.S. taxable income you calculated using the above.
Other items to consider for U.S. tax purposes
You may also want to consider how you will deal with the following tangential tax issues:
- Passive income
- Earnings of a non-U.S. citizen spouse
- Itemizing deductions
- Foreign housing exclusion
Depending on your situation, there may be other tax considerations relating to your working and living abroad. Taxes are often complicated enough without the added complexities involved with your situation. Few people want to risk entanglements with the IRS, so it may be worthwhile to involve a California tax attorney who understands your needs.