Expat Tax Questions


H

Hank Youngerman

I've been offered a job in Bermuda. A few (well more than a few) questions. The salary will be in 6 figures.

1) Assuming I take the Foreign Earned Income Exclusion, does this basically mean that I just reduce my taxes by the amount of tax I would pay on the first $92,000 of taxable income?

1a) My wife also works abroad, making about $80,000. Could we both take the FEIE and exclude $172,000? This would seem to make it more valuable since the $80,000 she would exclude would be in a higher tax bracket.

2) The company has a defined contribution retirement plan. Normally I think of a plan like this as being taxable when the money is taken out, but not on the contributions or investment earnings. But how would this work for a company in Bermuda?

3) My compensation includes a housing allowance. This will just be taxable income like other compensation?

4) I don't think I get an earnings statement. Do I just report whatever they pay me? Presumably since nothing will be withheld, I have to make estimated tax payments? How (if at all) will IRS verify what my taxable compensation is?

5) I have a small consulting business (annual revenues in low 5 figures). In the past, since I was making the FICA maximum at my day job, I only had to pay 2.9% self-employment tax. Will I now have to pay the full 15.3%?

Any other particular items I should be thinking of?
 
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A

Alan

I've been offered a job in Bermuda. A few (well more than a few) questions. The salary will be in 6 figures.

1) Assuming I take the Foreign Earned Income Exclusion, does this basically mean that I just reduce my taxes by the amount of tax I would pay on the first $92,000 of taxable income?
No. The law was changed a few years ago. You can exclude your FEI
($95,100 in 2012), but your tax is computed using the rate you would
have paid had you not taken the exclusion. See the Foreign Earned Income
Tax Worksheet for Line 44 of the 1040.
1a) My wife also works abroad, making about $80,000. Could we both take the FEIE and exclude $172,000? This would seem to make it more valuable since the $80,000 she would exclude would be in a higher tax bracket.
You each are entitled to exclude a max of $95,100.
2) The company has a defined contribution retirement plan. Normally I think of a plan like this as being taxable when the money is taken out, but not on the contributions or investment earnings. But how would this work for a company in Bermuda?
Assuming you are asking about a foreign corporation with a foreign plan,
then there is no exclusion from income. Your US return would include all
your wages before any contribution to a foreign plan. You would not get
any deduction for an employee contribution. However, you would have a
cost basis in that plan. An employer contribution would also have to be
included in income if it was vested immediately.
3) My compensation includes a housing allowance. This will just be taxable income like other compensation?
Yes, but you may be eligible for the foreign housing exclusion which is
in addition to the FEIE. It gets a little complicated so see IRS Pub 54.
4) I don't think I get an earnings statement. Do I just report whatever they pay me? Presumably since nothing will be withheld, I have to make estimated tax payments? How (if at all) will IRS verify what my taxable compensation is?
Bermuda and the US have a Tax Information Exchange Agreement. It is
practically impossile to hide the fact that you have been paid for
services in Bermuda. You are responsible for making any currency
conversion and ensuring that all taxable compensation is included. This
may not be a problem because I believe Bermuda pegs its dollar (BMD) to
the US dollar (USD) at the rate of 1:1. And.... yes as a US citizen the
estimated tax penalties would apply to you.
5) I have a small consulting business (annual revenues in low 5 figures). In the past, since I was making the FICA maximum at my day job, I only had to pay 2.9% self-employment tax. Will I now have to pay the full 15.3%?
Yes, you pay the full rate. Your FEI is not subject to US social
security & medicare taxes and the US does not have a bilateral social
security agreement with Bermuda.
Any other particular items I should be thinking of?
Oh yeah.... under the new rules for reporting foreign assets, you may
be subject to both FBAR and FATCA reporting. For more info on this see:
http://taxtopics.net/foreign.htm#fatca
 
B

Bob Sandler

No. The law was changed a few years ago. You can exclude your FEI
($95,100 in 2012), but your tax is computed using the rate you would
have paid had you not taken the exclusion. See the Foreign Earned Income
Tax Worksheet for Line 44 of the 1040.
I think Hank's statement is correct. He's saying the same
thing that you are saying, but from a different point of
view. The reduction in total tax from the FEIE is the tax on
the FIRST $95,100 - in the lowest brackets. The other,
non-excluded income is taxed in the brackets above $95,100.
On line 5 of the worksheet you subtract the tax on the
excluded income, calculated as if it were the only income.
So that's the amount of tax on the FIRST $95,100 (for one
person, taking the maximum exclusion).
Oh yeah.... under the new rules for reporting foreign assets, you may
be subject to both FBAR and FATCA reporting. For more info on this see:
http://taxtopics.net/foreign.htm#fatca
That link doesn't work for me.

Bob Sandler
 
S

Stuart A. Bronstein

Yes, but you may be eligible for the foreign housing exclusion
which is in addition to the FEIE. It gets a little complicated
so see IRS Pub 54.
Housing is normally taxed, unless the employee is required to live in
the provided housing as a condition of his employment, in which case
it is not taxed. At least that used to be the rule.

___
Stu
http://DownToEarthLawyer.com
 
A

Arthur Kamlet

I think Hank's statement is correct. He's saying the same
thing that you are saying, but from a different point of
view. The reduction in total tax from the FEIE is the tax on
the FIRST $95,100 - in the lowest brackets. The other,
non-excluded income is taxed in the brackets above $95,100.
On line 5 of the worksheet you subtract the tax on the
excluded income, calculated as if it were the only income.
So that's the amount of tax on the FIRST $95,100 (for one
person, taking the maximum exclusion).

This is another example of income stacking.

Look at income tacking up from floor to ceiling, and at the bottom
of the stack is the to-be-excluded foreign earned income.



Atop the stack is other stuff, say ordinary income from taxable
interest.

The tax rates start off low, near the bottom of the stack, and get
higher as you move up the stack. So excluding FEI excludes the
lowest taxed income, and that remaining income is taxed at the igher
rates,


If you've been involved with federal estate tax, and its (large)
exclusion, it too employs stacking.
 
A

Alan

Housing is normally taxed, unless the employee is required to live in

the provided housing as a condition of his employment, in which case

it is not taxed. At least that used to be the rule.



___

Stu

http://DownToEarthLawyer.com



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You may be confusing "employer-provided amounts" with "employer-provided housing.". There is no requirement to live in employer-provided housing. You are required to pay for your house with employer-provided income.
 
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H

Hank Youngerman

First of all - thanks to everyone in this group who is helping me now, and has helped me in the past couple of years when I married a foreigner. I try to do my homework before tossing questions to the group.

To provide more information on the retirement plan, the contributions are entirely from the employer, and they are vested after two years. I don't think I can take the money out until I leave the company.

Another question now. The housing exclusion. Bermuda is designated as a "high-cost location" (no kidding!) with a maximum housing expense of $90,000. Do I correctly understand the following:

There is a base housing amount, equal to 16% of the FEIE (which would now be about $15,200). My housing expenses as defined by IRS in excess of $15,200 are excludable from income. So if my rent is (say) $35,200 a year, and I have other allowed expenses (insurance, furniture rental, whatever) of $2,000, then I could exclude $22,000 from taxable income? (Assuming my income is high enough which it will be.)

Does this $22,000 come "off the top" or "off the bottom?" The FEIE comes "off the bottom" at the lowest tax rates.

When I go to look for an apartment, which I will be doing shortly, does this in effect mean that if I'm in the 33% tax bracket, that each marginal dollar of rent I pay in effect costs me only 67 cents?
 
S

Stuart A. Bronstein

Alan said:
You may be confusing "employer-provided amounts" with
"employer-provided housing.". There is no requirement to live in
employer-provided housing. You are required to pay for your
house with employer-provided income.
"There shall be excluded from gross income of an employee the value
of any meals or lodging furnished to him, his spouse, or any of his
dependents by or on behalf of his employer for the convenience of
the employer, but only if—

"(2)in the case of lodging, the employee is required to accept such
lodging on the business premises of his employer as a condition of
his employment. "

IRC §119(a)

___
Stu
http://DownToEarthLawyer.com
 
A

Alan

"There shall be excluded from gross income of an employee the value
of any meals or lodging furnished to him, his spouse, or any of his
dependents by or on behalf of his employer for the convenience of
the employer, but only if—

"(2)in the case of lodging, the employee is required to accept such
lodging on the business premises of his employer as a condition of
his employment. "

IRC §119(a)

___
Stu
http://DownToEarthLawyer.com
Sec 119 has absolutely nothing to do with with the foreign housing
exclusion. Sec 119 lets an employee exclude from income the value of
housing provided by the employer as long as it is a condtion of
employment. The foreign housing exclusion lets the taxpayer deduct (with
limits) on Line 21 of the 1040 the cost of housing oneself in the
foreign country as long as it is paid for with employer provided
amounts. Your pay is considered to be an employer provided amount.
 
A

Alan

Sec 119 has absolutely nothing to do with with the foreign housing
exclusion. Sec 119 lets an employee exclude from income the value of
housing provided by the employer as long as it is a condtion of
employment. The foreign housing exclusion lets the taxpayer deduct (with
limits) on Line 21 of the 1040 the cost of housing oneself in the
foreign country as long as it is paid for with employer provided
amounts. Your pay is considered to be an employer provided amount.
A more complete reply should have said, that sec. 119 is not relevant to
the case in question as it is not employer provided housing at no cost
that Mr. Youngerman will be receiving.
 
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A

Alan

First of all - thanks to everyone in this group who is helping me now, and has helped me in the past couple of years when I married a foreigner. I try to do my homework before tossing questions to the group.

To provide more information on the retirement plan, the contributions are entirely from the employer, and they are vested after two years. I don't think I can take the money out until I leave the company.
You don't have taxable income until the retrictions are removed. I.e.,
the funds vest.
Another question now. The housing exclusion. Bermuda is designated as a "high-cost location" (no kidding!) with a maximum housing expense of $90,000. Do I correctly understand the following:

There is a base housing amount, equal to 16% of the FEIE (which would now be about $15,200). My housing expenses as defined by IRS in excess of $15,200 are excludable from income. So if my rent is (say) $35,200 a year, and I have other allowed expenses (insurance, furniture rental, whatever) of $2,000, then I could exclude $22,000 from taxable income? (Assuming my income is high enough which it will be.) Yes.

Does this $22,000 come "off the top" or "off the bottom?" The FEIE comes "off the bottom" at the lowest tax rates.
The $22K gets added to your FEIE.
 
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