Working Overseas: Individual Tax Impacts

Session IIWorking Overseas:

Individual Tax Impacts

InsideNGO’s Taxation Management of US Expats

Kate Fisken, PrincipalInternational Tax Specialist

December 6, 2012

Working Overseas : Individual Tax ImpactsInternational NGO’s Taxation Management of US Expats

Kate Curtis Fisken, EA, LPA, ATA • [email protected]

25 years of experience working with expatriates, nonprofits and government contractors

Highly knowledgeable about the experiences of Americans overseas– Lived and worked in Central and South America and India

Member of:– National Society of Accountants– Maryland Society of Accountants– Virginia Society of Accountants– National Society of Enrolled Agents

Kate Curtis Fisken, EA, LPA, ATAInternational Tax Specialist and Principal of Client Services

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AgendaI. Definitions

– Long-term expatriate staff vs. short term business travelers

II. Expat Compensation Package– Qualifying exclusions, 2012 exclusions, tax

impactIII. 9 Steps to Manage Employer’s RiskIV. Special Expat Issues

– State Tax Withholding IssuesV. HR Process for W-2/1099 Forms

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I. Definition – Long-Term Expatriate Assignment

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Employee’s principal place of employment moves to or is in an overseas location for morethan one year

Expectation at the start of the assignment is key to the initial determination


Kate Curtis Fisken, EA, LPA, ATA • [email protected] 5

I. Definition – Long-Term Expatriate Assignment

An assignment that was not expected to last more than one year but is extended to more than one year will become a long-term assignment going forward

Documentation supporting assignment length is important



I. Definition – Short-Term Overseas Business Travelers

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Overseas assignment lasts less than one year

Organizations differ in levels of support and

treatment of short-term overseas business travelers

depending on HR policy

May become a long-term assignee if on location for

more than one year

May be subject to host country taxes



Overseas Employee’s Typical Salary and Allowances

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II. Expat Compensation Package

Base Salary Cost of Living

Allowances Housing Allowance Security Allowance Danger Pay

Education Allowance Separate Maintenance

Allowance Other Allowances –

FMV of Property of Facilities



II. How to Qualify for Exclusions

Eligible long-term expat employee

US citizen/US resident alien

Tax home is in a foreign country

Foreign earned income

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II. How to Qualify for Exclusions (cont.)Meet Residency Requirements Meet Physical Presence Test

– 330 days in a foreign country out of 365

Bona Fide Residency Test

Established tax home in a foreign country– Residency is a full calendar

year– Based on intent and facts

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II. How to Qualify for Exclusions (cont.)

Eligible Contract Duration as employee or

contractor more than one year, or indefinite

Services performed in foreign country

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Eligible Earned Income Compensation, wages, commissions, bonuses

Allowances– Education pay– Danger pay– COL– Separate Maintenance– Security

Fair market value or property or facilities received by employee or contractor

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II. How to Qualify for Exclusions (cont.)



II. What are the 2012 Exclusions?

Foreign Earned Income Exclusion (FEIE)2012 amount is $95,100 for full calendar

year

First and last year FEIE may be prorated

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II. What are the 2012 Exclusions? Foreign Housing Exclusion Limit (FHE)2012 maximum housing exclusion is limited

to $28,530 (30% x $95,100) full calendar year, less base amount of $15,216 (16% x 95,100) = $13,314 − In high-cost areas (Mumbai, Abuja, etc.), FHE

will be more

First and last year FHE may be prorated



II. Overseas vs. Domestic Typical Salary, Allowance and Tax Impact

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Description Domestic Expat

Salary $85,000 $85,000Housing N/A $31,200Post Diff N/A $ 9,010Danger Pay N/A $ 6,500Total Compensation $85,000 $132,710



II. Overseas vs. Domestic Typical Salary, Allowance and Tax Impact

Description Domestic Expat

Compensation $85,000 $132,710Less: HCT N/A ($25,500)Less: US Tax ($15,106) ($ 8,662)Less: Housing N/A Non CashNet Cash Available $69,894 $98,548



III. 9 Steps to Manage Employer Risk

HR Checklist – Handout #11) Provide compensation summary – initial year,

current year and final year (Handout #2)

2) Provide expat personnel policies and procedures handbook

3) Overseas day tracking calendar (Handout #3)

4) Insurance coverage information

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5) IRS for 673 and instructions (Handout #3A)− Purpose: Who, when and why

• US citizen or resident alien• Completed and signed annually• Expects to meet PPT or BFRT• Form kept in employee’s HR or payroll file

− State treatment for form 673− Withholding on salaries over FEIE

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III. 9 Steps to Manage Employer Risk (cont.)



6) IRS form 2555 and instructions

7) IRS publication 54, FBAR & FR 8938

8) Restricted travel – Eliminates FEIE and FHE

9) References for tax professionals

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III. 9 Steps to Manage Employer Risk



IV.Special Expat Tax Issues

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Evacuation “Waiver of Time”: war, civil

unrest, etc. (Handout #4)

Second Foreign Household Allowable under certain

conditions

Group Living Residences Allocation of housing allowances



Transfer to New CountryEffects on compensation package (Handout

#5)

Early Termination of ContractPossible remedies?

High Cost Verse Low Cost Housing IssuesWhat are the tax impacts between low cost

and high cost housing assignments? (Handout #6)

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IRS Extension FormsIf an employee cannot file tax returns by

April 15, they can file Form 4868 and/or Form 2350. −Expats receive an automatic extension until June 15

If an employer cannot file by the due date, they can file Form 8809−www.irs.gov

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Documentation for state withholding

Employer’s options:−Withhold in state−Employee pays state estimated payments−If employee insists they do NOT have a state domiciliary: What are the employer’s remedies?


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IV.Special Expat Tax IssuesState Tax Withholding

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Voter registration and voting history

Driver’s license Prior state income tax filing

history Home leave & departure post Familial ties Property ownership Burial plot

Bank and investment accounts

Library cards, club dues, memberships, community involvement

Utility payments Rental income from property

owned in state Auto registration and licenses

Factors for determining state domicile



State and Domicile Rules Aggressive domicile rules: CA, VA, MD, MA and SC Recognize non-residency after meeting certain tests: IL,

NJ, NY No income tax: AL, WA, NV, SD, WY, TX, FL Tax interest and dividends: TN, NH

Adequate resources

Inexperienced/unqualified staff Accounting and industry training programs and seminars

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IV.Special Expat Tax IssuesState Tax Withholding





V. 2012 W-2 Exercise

Base salary or sub-contractor compensation

Rent, housing, utilities and storagePost differential and danger paySeparate maintenanceSettling in – flat payment, no

accounting



V. 2012 W-2 Exercise

Base salary Rent, housing and

security Post differential and

danger pay Settling in – flat

payment, no accounting Education allowance

Per diem reimbursement, with accounting

Initial air ticket for overseas move

Moving expenses paid to company

R & R – home leave

See Handouts 8, 8A, 8B and 9

Documents

Working Overseas: Individual Tax Impacts