Dilemma, Should You Take Your Foreign Tax Credit?

There are many questions that arise when you move abroad. What is it the new culture going to be like? Where are my children going to attend school? One of the last things that people consider is tax planning, often neglecting it until they get that first tax bill. There are several options that need to be considered when tax planning for US Citizens working overseas.

Even when you move overseas, you are still obligated to pay US taxes on income earned abroad. This is because the United States taxes its citizens on their worldwide income. To account for this, the US Tax Code and tax treaties entered into between the United States and many foreign countries allow for a credit given for foreign taxes paid. This means that a taxpayer receives a tax credit for foreign income tax paid, up to their US tax rate. Since many developed countries have tax rates that are higher than the United States, it may make sense to utilize this provision of the tax code.

Even though the US offers a tax credit for foreign taxes paid, a taxpayer may choose to exclude the first $99,200 of earned income from US taxes. This amount applies to each individual, meaning a husband and wife are both able to exclude their first $99,200 from US tax. This election also allows taxpayers exclude up to 30% of certain qualified housing expenses from US income, subject to a 16% floor. Although §911 allows the taxpayer to exclude their first $99,200 of income from US tax, any income that is received in excess of this amount (including the qualified housing exemption) will be taxed at the taxpayer’s marginal tax rate. Once a §911 election has been made, there is no foreign tax credit on taxable income over the exemption amount.

Before you move abroad, a thorough analysis needs to be completed, including your expected income while abroad, your housing costs, and whether or not they are excluded, how long you intend to live and work abroad, if you have any other sources of earned income. Our tax professionals will be able to plan and design a plan custom tailored to your needs that we will continue to update as your situation changes.