# Uncle Sam



## Medic84

So you have to pay taxes if your an overseas American, despite what your employer says about your salary being tax free?


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## Nononymous

Possibly yes, possibly no. Depends.

Your employer is generally not the authority on who you owe tax to.


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## Medic84

Nononymous said:


> Possibly yes, possibly no. Depends.
> 
> Your employer is generally not the authority on who you owe tax to.


Gotcha. I didn't know if they take taxes out or not. Thanks!


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## Bevdeforges

You ALWAYS have to file US returns no matter where in the world you live. And earned income is eligible for the FEIE (Foreign Earned Income Exclusion), which is done via form 2555 (filed with your regular form 1040).

If you are working in a country with no income tax, and your earned income is less than the FEIE limit (currently about $97,000) you will, indeed, pay no taxes on your salary.

Download and read IRS Publication 54 for details.
Cheers,
Bev


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## Medic84

Oh, ok. Well I heard that they make you pay taxes after a certain amount (now the $97k from what you're saying), but you pay taxes starting from $0 to whatever after the allotted amount, which is $97,000. Right?


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## FFMralph

After 30 years living and working abroad I also found out about my reporting requirement.

Unfortunately, it is not as easy as just taking the FEIE. Other incomes like interest, dividends, pension and retirements cannot be excluded. Here you have to take the FTC which gets very complicated. 

Additionaly you have to report your bank accounts etc. to the IRS and the Dept of Treasury.


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## Medic84

:-( 

Phooey! I was hoping it would still remain tax free.


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## Nononymous

Medic84 said:


> :-(
> 
> Phooey! I was hoping it would still remain tax free.


I think you've rather missed the point. If all you have is earned income (i.e. salary) the first $97k is tax free under the FEIE. It gets more complicated if you have unearned (i.e. investment) income. 

Read the IRS document.

Whether or not your employer withholds income tax has no bearing on your tax obligations to the US.


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## Medic84

No, I think understand. So, after the 97k you have to pay taxes, like if I earned 100k then I would pay taxes just on $3k......right?


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## Nononymous

I believe so, yes.

Doubtless there might be other complications and things but in principle that's how it works.


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## Medic84

Well, that's no too bad.
Thanks for the info.


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## Bevdeforges

Just understand that if you are earning $100K and "exclude" the first $97K with the FEIE, the tax you pay on the $3K is the difference between the full tax on $100K and the tax on $97K. It's not just the tax on $3K.
Cheers,
Bev


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## Medic84

Ah! ok


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## FFMralph

@Medic84. You can take a foreign tax credit FTC on the 3k. Since the tax rate is higher here than in the US you should remain tax free. If you have savings and receive interest on this Money you can only use the FTC to Keep from paying US tax. Starting July 2014, most European banks will report your interests directly to the IRS. This is due to the FACT agreement.


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## BBCWatcher

Let's be precise. If you are a U.S. citizen living and working full time overseas you may owe U.S. income taxes only if all of the following three conditions are true:

1. You live in a comparatively low income tax jurisdiction;
2. You have nontrivial unearned income (interest, dividends, and/or capital gains) and/or a weighty amount of earned income (about double or more than U.S. median household income);
3. You cannot avail yourself to a sufficient degree of the various tax breaks in the U.S. tax code.

-OR- if the following condition is true:

4. You have nontrivial U.S. source income.

The U.S. Foreign Earned Income Exclusion is optional -- another important point to emphasize.


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## Bevdeforges

The OP can correct me if I am wrong, but I did go back and check other posts - and we're talking about working in one of those Middle Eastern countries that has no income tax at all. To use the FTC, you have to be paying an income tax to your country of residence. 

FEIE is the way to go under these circumstances.

Just FYI, some jobs in tax-free countries are advertised in the international press as being "tax-free." This is fine, except for the Americans interested in the positions, who always have to consider the US tax side of these "tax-free" posts.
Cheers,
Bev


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## RandallSamaritan

While you may not have any tax due as a result of the foreign earned income exclusion (FEIE) or use of the foreign tax credit, as long as you meet the filing requirements to file a tax return (which is based on income before any deductions or exclusions), you must file a tax return.


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## BBCWatcher

Bevdeforges said:


> ...we're talking about working in one of those Middle Eastern countries that has no income tax at all. To use the FTC, you have to be paying an income tax to your country of residence. FEIE is the way to go under these circumstances.


Absolutely.

There are narrow exceptions for those with modest earned income (and modest income in general), particularly for those with U.S. citizen-children in their care who can take the Additional Child Tax Credit. A pre-tax U.S. IRA contribution -- something that cannot be done easily (or at all) if taking the FEIE -- can also help reduce or eliminate U.S. taxable income. I might have just described a fair number of U.S. spouses working part time who are married to non-resident alien spouses -- they might fit into this situation. Once your income rises above your personal exemption, standard deduction, child credits, IRA contribution, and perhaps a couple other things then the FEIE works really well in those zero income tax Middle Eastern countries.

These are pretty easy U.S. tax returns: no Foreign Tax Credit form. 



> ...some jobs in tax-free countries are advertised in the international press as being "tax-free." This is fine, except for the Americans interested in the positions, who always have to consider the US tax side of these "tax-free" posts.


Well, they are tax free to U.S. citizens up to the FEIE plus Foreign Housing Exclusion limits, which is still not bad -- and a lot better than, say, working in Texas at equal purchasing power gross earned incomes. But yes, that's an important point for those with moderately high (and above) salaries working in these jurisdictions.



RandallSamaritan said:


> ...as long as you meet the filing requirements to file a tax return (which is based on income before any deductions or exclusions), you must file a tax return.


Well, yes and no. If your net actual tax liability is zero or less than zero (i.e. you're owed a refund from the IRS), then there is no penalty for non-filing. Yes, you're _supposed_ to file if you're past the filing thresholds, but it's a penalty-free sin.

Even so, non-filing can be risky. The reason is that if you're wrong -- if you actually do have a net actual tax liability -- then you could be facing some significant interest and penalties.


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## RandallSamaritan

In most situations (there are exceptions), the filing requirement is based on your standard deduction + personal deduction (deduction for yourself and spouse only). If your gross income (before any deductions) exceeds this threshold, a return must be filed. Again, there are exceptions and different thresholds, for example, if you have self-employment income, unearned income (i.e. investment income), etc.


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## BBCWatcher

We agree, Randall, but there is no penalty for non-filing if your net actual tax liability is zero or negative. That's how Congress wrote the U.S. tax code.

An additional risk for non-filing, particularly if you have a high income that would in most cases generate a net U.S. tax obligation, is that you could get audited. And an audit is generally more work than simply filing.

In principle if you have zero or limited U.S. source income and if you live in a comparatively high income tax jurisdiction you can never file and have basically zero risk of facing any penalties or interest for non-filing.

I don't want to encourage people not to file, especially because some U.S. citizens living overseas may qualify to receive money from the IRS (refundable tax credits) and/or be able to offset future U.S. taxes (via excess Foreign Tax Credits). However, non-filing is nearly zero risk for some.

On edit: Another reason to file U.S. tax returns is that you cannot sponsor others for U.S. green cards unless you have a few years of tax returns to submit with the sponsorship application.


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## Bevdeforges

There are a few circumstances where, penalty or no penalty, you do need to file your US tax returns even if you have no taxes due.

As BBCWatcher has noted, if you are likely to want to sponsor someone for a Green Card (usually this is a spouse married overseas who would want to return to the US with you). And this applies even if the US citizen doing the sponsoring didn't have sufficient income in the last three or four years to have had to file at all!

Another is if you get sick of the whole US tax thing and decide to renounce. Though they can't actually refuse your renunciation for the lack of back tax returns, the process goes MUCH more smoothly if your last five years' returns are already done and sent in.

There are probably some other situations, too.
Cheers,
Bev


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## RandallSamaritan

I agree. That's true in most situations (specifically where there is no tax liability before any exclusion/deductions; with an unfilled return the IRS has no knowledge that an exclusion/deduction exists so from their perspective a liability exists if they have reported income) - however, if your situation encompasses certain required disclosure forms (which may be applicable depending on the filer's situation overseas) that are required to be filed as part of the individual return (such as the Form 5471 for certain shareholders in a foreign corporation), non-filing even with zero tax liability can result in an auto penalty of $10,000 for each year not filed. 

While ultimately, non filing may result in no penalties on the return itself. The tax liability exists until the exclusion, credits, etc are actually claimed (and in some cases, the right to claim the exclusion can be lost). 

Non filing can cause a mess of time and money to untangle. If you have reported income to the IRS and haven't claimed the exclusion and/or foreign tax credit, the IRS can and will file a substitute return on your behalf and will eventually assess and start collection actions on the liability including placing liens/levies on assets (or in some extreme cases flag your passport). Yes, it can be fixed. But it will be a costly fix...

Non-filing is not always clearcut. But the rules are for sure crazy and unfair from my perspective (some states are even far worse than the IRS). The safe bet - is file completely with full disclosure and remove any potential risks.


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## Bevdeforges

One other thing to consider is that if you file and, for example, declare some type of income in the "wrong" category, the statute of limitations starts running. If there is no question or complaint from the IRS after 3 or 4 years (I think it is these days), then you're ok.

If you fail to declare some income (even income subject to the exclusion or tax credits), there is no statute of limitations. And should the IRS find out about it 5, 10, 20 or 50 years later, they can go after you for it.
Cheers,
Bev


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## RandallSamaritan

Excellent point!


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