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Author: mcrochip Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121599  
Subject: Living overseas Date: 5/8/2003 8:12 AM
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Hi. I'm hoping to get some information, seeing as this is the only tax-related board I could find. Anyway...

First, a bit of background, since I expect that it would be asked:
I am a US citizen, and currently live and work in Maryland. My employer is a contractor to the US Army, and I am a civilian. Also, I currently have a mortgage on a house that I plan to keep while overseas.

I may be taking a long-term temporary position (18 months) in Germany, still with my US employer, and working on the same project as I work now. I've been advised that I would have to pay German tax while I'm there, but beyond that I have questions.

Would I still have to pay US Income Tax while I am living overseas, if I have to pay local taxes? Following that, would I still have to pay state tax to Maryland? I've been told I would still pay FICA, but I'm not overly concerned about that.

What other financial ramifications do I need to be concerned with regarding this project? As it stands right now, the details are still in the development phase, to be worked out over the next couple of weeks. I just want to get an idea.

Thank you for any assistance available here.
-Steve
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Author: mscusnret One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65314 of 121599
Subject: Re: Living overseas Date: 5/8/2003 10:57 AM
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You have to pay U.S. income taxes on any income earned overseas. You can use the foreign tax credit (FTC), which is a tax credit for foreign income taxes paid. The credit is a dollar-for-dollar reduction of your U.S. income tax liability. I don't know about state taxes. I hope this helps.

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Author: lorenzo2 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65315 of 121599
Subject: Re: Living overseas Date: 5/8/2003 11:03 AM
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Would I still have to pay US Income Tax while I am living overseas, if I have to pay local taxes? Following that, would I still have to pay state tax to Maryland?

Yes and yes.

You'll still be paying federal income tax, though you will get a tax credit for taxes paid to Germany. (There is something called foreign earned income exclusion, but I think you have to live abroad for the entire tax year to qualify for that...)

Maryland will definitely expect you to pay taxes on your income, especially since you clearly intend to return - you're keeping your house. (Been there, done that - I live in MD and spent some time overseas. MD is very aggressive at chasing down people in your position...).

As an aside, going overseas is a wonderful opportunity, for lots of reasons. You won't regret it for a minute, and you'll have a great time.

Lorenzo

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Author: wtam Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65316 of 121599
Subject: Re: Living overseas Date: 5/8/2003 12:01 PM
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i believe you can exclude the first $75k of earnings from US taxes, the test being you have to reside outside the US for 11 months of the year.

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Author: mcrochip Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65317 of 121599
Subject: Re: Living overseas Date: 5/8/2003 8:05 PM
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You'll still be paying federal income tax, though you will get a tax credit for taxes paid to Germany. (There is something called foreign earned income exclusion, but I think you have to live abroad for the entire tax year to qualify for that...)

So if it's for 18 months, and I leave in June/July, then I wouldn't be eligible for that tax credit until 2004? I'd most likely be overseas for most, if not all, of 2004.

I still hope they'll work out a SOFA for us, but as a civilian contractor, they're apparantly not obligated to do that. Any other info will be greatly appreciated.

Thanks.
-Steve

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Author: lorenzo2 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65318 of 121599
Subject: Re: Living overseas Date: 5/8/2003 9:00 PM
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So if it's for 18 months, and I leave in June/July, then I wouldn't be eligible for that tax credit until 2004?

That's my understanding. You might have a look here at an IRS FAQ on the subject of taxes and living/working overseas:

http://www.irs.gov/formspubs/page/0,,id=12236,00.html

Note that there are two ways to qualify for the foreign earned income exclusion: physical presence and bona fide residence. Since you're keeping your home in MD, only the first of these (physical presence) will apply to you. (But keep in mind that I'm not an expert on foreign earned income exclusion. Though I lived and worked overseas, I didn't qualify for it, and so didn't make any effort to learn about it.) But do have a close look at the FAQ above, as well as the instructions for IRS Form 2555, which deals with the exclusion.

I still hope they'll work out a SOFA for us, but as a civilian contractor, they're apparantly not obligated to do that. Any other info will be greatly appreciated.

I don't think a SOFA does you any good for income tax purposes - it simply establishes your legal status overseas, and gives you some privileges (coming and going without too much visa hassle, shopping at commissary, importing goods duty free, etc.) Anyway, I assume there's already a SOFA in place between the U.S. and Germany, and I would think you'd fall under that if you're working as a contractor for the U.S. govt in Germany...

Lorenzo

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Author: crre Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65326 of 121599
Subject: Re: Living overseas Date: 5/9/2003 2:35 AM
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steve,

see publication 54, "tax guide for u.s. citizens and resident aliens abroad", at:

http://www.irs.gov/pub/irs-pdf/p54.pdf

(the link doesn't seem to be working right now, but it does usually. so if you have problems, try again later.)

c.


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Author: torobravo2003 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65351 of 121599
Subject: Re: Living overseas Date: 5/11/2003 8:38 PM
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I have lived overseas for three years now. Maybe I can shed some light on these issues.

1. Yes, you have to live outside the U.S. for 11 of the 12 months, although the regulation breaks it down into days. You would be able to pro-rata the foreign income exclusion in 2003, even if you were out of the U.S. for, say, 3 months in 2003, as long as you are out of the U.S. for 11 of the 12 months. So when you file your 2003 tax return and you are 100% sure that you will be out of the U.S. to meet the 11 of the 12 months, take the deduction, although technically I think you are supposed to refile once you actually meet the test. Be sure you understand what the 11 of the 12 months means. That means that you cannot spend more than 30 days in the U.S. during the 12 months period. That includes vacations to the U.S. or its territories; business meetings in the U.S., or any other reason that would cause you to set your feet in the U.S.

2. Yes, you will have to pay state tax. But the exclusion on your Fed tax usually carries over to your state tax, at least in D.C. anyways.

3. You will also have a small exculsion for housing costs abroad, even if you maintain your resident in the U.S. It is not much but does help. For me it was US$3,000 deduction.

4. You should check with your company as they should be able to address all of these issues. Some U.S. governmental entites are not allowed the foreign income exclusioin. I know Embassy staff cannot take this exclusion.

5. FICA - For some reason I don't pay FICA but I cannot explain why. I was just told that I didn't have to pay it by my company (an international organization).

6. I assume you will be given some benefits for living overseas, say, a housing allowance, education allowance for your children, cost of living allowance, etc. All taxable, mind you.

And yes, you will love living overseas. You will learn to see American through the eyes of others and that is quite revealing. You will also learn patience and how others perceive you. Since I live in a Muslim country, I have also learned that American's perception of Muslims and the real life reality are far apart (fortunately, better than U.S. perceptions). It has been the best experience of my life.

Also, I'm sure 18-months sounds like a long time. I assure you it will pass like it is only 3-months and you will wonder where the time went. So make the best of your time while you are there.

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