It’s tax time, and for many people, this isn’t their favorite time of the year. We understand that it can be especially challenging for American teachers who have been teaching overseas to navigate their income taxes for the year. Understanding Expat Tax isn’t an easy feat. And as one of the few countries in the world that actively pursues taxes, Americans won’t be able to avoid a US tax debt while living and teaching overseas.
One thing to note is that the United States has tax treaties with more than 42 countries, which means that the IRS and the tax agencies in these foreign countries exchange tax data on American citizens abroad. All US citizens are obliged to file and pay US income taxes, regardless of where they live in the world. This is unique to the United States - it is the only industrialized nation where overseas citizens must pay taxes, even if they are also paying overseas taxes.
Your best best is to review the tax guide for American citizens living abroad, put together by the IRS. But we’re sharing some general information below for your reference and some ways that you can minimize the impact of income tax laws on your earnings.
Tips for reducing your income tax liability
As we stated above, all American citizens are expected to file a tax return, there are several tax benefits that American teachers heading overseas may benefit from in order to reduce the amount of taxes that they owe. Those interested in taking advantage of these tax benefits, however, must satisfy either the physical presence test or bona fide residence test.
Foreign Earned Income Exclusion (FEIE)
If you were living in a foreign country for the year and you were physically present there for at least 330 days during the 12 months, a significant portion of your income can be excluded from your US taxable income. There are also partial-rear exclusions for those teachers who move halfway through a calendar year.
You are eligible to deduct your moving expenses from your tax return if you maintain employment overseas for 39 weeks in the new location. What can be included in your moving expenses? Anything reasonable, says the IRS. This means transportation like flights, lodgings like hotels, household goods and personal effects, and storage for your things.
Foreign housing allowance
If your employer has included your accommodations in your overseas teaching contract, it may be tax-free if it meets all of the necessary requirements, according to the IRS:
• It is provided on the employer's business premise.
• It is furnished for the convenience of the employer.
• You are required to accept the lodging as a condition of employment.
Foreign tax credit
Generally, citizens are protected from paying tax on the same income in two different countries. Consequently, the foreign tax credit provides Americans with a dollar-for-dollar credit for any taxes that they have paid on their foreign-earned income in foreign countries.
For more detailed information, American citizens should consult the IRS website. The information we’ve included here is not exhaustive nor complete, but includes a few important details for American teachers teaching overseas who are looking to file their taxes for 2014. We encourage teachers to consider seeking a tax professional’s advice, and especially one who is experienced with expatriate returns.