US Tax Advice When Teaching Abroad
Teaching abroad can be a very exciting and immersive experience to a new culture and is a tempting opportunity for a lot of U.S. teachers. As an American teacher working abroad, the rules for filing an income tax return are generally the same whether you are in the United States or abroad. With taxation of worldwide income, your U.S. and foreign income is subject to U.S. income tax, regardless of where you reside. It is known as a citizenship-based income tax. Elsewhere in the world, the basic rule is that taxes are based on residency and not on taxation of worldwide income based on citizenship.
Taxation On Worldwide Income For Teaching Abroad
If you are a U.S. citizen or a resident alien of the United States and you are teaching abroad, you are taxed on your worldwide income and as such must file a U.S. return for all the years that you are residing abroad.
Tips To Reduce U.S. Income Tax Liability When Teaching Abroad
Teaching Abroad And The Foreign Earned Income Exclusion
Perhaps the biggest advantage you have when you work overseas is the foreign earned income exclusion. As a an overseas teacher you may qualify to reduce your U.S. taxable income up to an amount of your foreign earnings that is adjusted annually for inflation ($101,300 for tax year 2016). In addition, you can exclude or deduct certain foreign housing amounts. This is known as the foreign earned income exclusion and foreign housing exclusion.
A common misconception is the belief that a US tax return is not required when income is below the exclusion amount and there is zero tax due. However, that is a myth and not true. While tax liability may be zero when applying the exclusion, it is not zero until the exclusion is formally claimed on a tax return. Thus, a timely claim for the foreign earned income exclusion by filing a US expat tax return must be made in order to benefit from this tax savings.
What About Double Taxation As A Teacher?
While living abroad, your foreign country may also tax any income earned as a teacher within their borders. To offset this potential for double taxation, the US tax code provides a foreign tax credit that can be used to offset expat taxes as a teacher assessed by a foreign country on the income earned there. The purpose of the foreign tax credit is to minimize your combined foreign and U.S. tax obligations.
Click on the hyperlink to learn more about the foreign tax credit.
If You Have Foreign Bank Accounts Be Sure To Report Them On The FinCEN Form 114 (FBAR)
An FBAR disclosure must be filed for each year that you have a financial interest in or authority over foreign financial accounts that exceed $10,000 in the aggregate. The FBAR must be filed on or before April 15 each calendar year and must be filed electronically on the FinCEN Form 114. However, for tax year 2016, an automatic extension till October 15 is available to all taxpayers. It’s critical to be sure to file on time, accurately (reporting based on the correct high balances and required currency conversion rate) and completely as the potential penalties are draconian.
Click on the hyperlink to learn more about the FBAR.
As An American Teacher Abroad You May Still Need To File A State Tax Return
Unless you resided in one of the states that does not have a state income tax prior to your move overseas, it is possible that you will have teacher expat taxes applicable to your state tax return for one or more years. Filing requirements and residency rules vary from state to state with some states more aggressive in their rules in deeming an overseas taxpayer a state tax resident even when residing overseas for years. Before moving overseas, U.S. teachers should consider transferring their legal residence to a state with no income tax.
Foreign Retirement Plan Pitfalls For U.S. Teachers
Unfortunately, most foreign retirement plans (including foreign pensions) are not considered to be “qualified” plans. Meaning they are not eligible for pre-tax contributions and tax deferral on earnings in the plan. Depending on the type of retirement plan, such as a private pension vs. an employer pension, the taxation of contributions, income and additional information reporting requirements may apply and will vary.
If you have a private or personal foreign pension plan or retirement plan, you should avoid any investment in foreign mutual fund or similar funds, such as REITs and ETFs. Such investments are subject to a very punitive U.S. tax and reporting treatment known as a PFIC (passive foreign investment company).
Many teaching jobs overseas can provide a tremendous opportunity to save a lot of money, but be sure to do so smartly and cognizant of the impact it may have on your U.S. tax liability and reporting requirements.
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Tax Samaritan is a team of Enrolled Agents with over 25 years of experience focusing on US tax preparation and representation. We maintain this tax blog where all articles are written by Enrolled Agents. Our main objective is to educate US taxpayers on their tax responsibilities and the selection of a tax professional. Our articles are also designed to help taxpayers looking to self prepare, providing specific tips and pitfalls to avoid.
When looking for a tax professional, choose carefully. We recommend that you hire a credentialed tax professional such as Tax Samaritan that is an Enrolled Agent (America’s Tax Experts). If you are a US taxpayer overseas, we further recommend that you seek a professional who is experienced in expat tax preparation, like Tax Samaritan (most tax professionals have limited to no experience with the unique tax issues of expat taxpayers).
Randall Brody is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals. To attain the enrolled agent designation, candidates must demonstrate expertise in taxation, fulfill continuing education credits and adhere to a stringent code of ethics.
Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.