It is very common for residents of the Washington, D.C. metro area to be offered assignments overseas by their employers. If you do except an assignment overseas, make sure you pay attention to the tax consequences of your working in another country. Though the IRS taxes its citizens on their worldwide income, you may exclude approximately $100,000 in income from your taxes. In addition, you may be able to exclude amounts paid for overseas housing costs. The idea behind the exclusion being that you should not be taxed twice by two countries on your income. There are two basic ways to qualify for the foreign earned income exclusion.
The basic rule you need to know is that you must spend 330 days in a foreign country to qualify for the exclusion. That 330 day requirement does not have to be in a calendar year, and often taxpayers qualify in two years, however the exclusion must be prorated for the days that fall in the calendar year. Be very careful with how and where you spend your free days to make sure you do not spend more than 35 days in the United States. Often taxpayers qualify by the number of days method, then are able to convert to the more relaxed Bona Fide Residence Test, which does not require the counting of days.
As a sound business practice, most financial advisors, consultants and Tax Attorneys recommend that the tax be paid as income is earned. This avoids the business owner from having to shell out a large sum at the end of the year, in addition to having to pay underpayment penalties.
To qualify as a bona fide resident of your foreign country, you must reside in the country for a continuous period that included an entire year. Even though your domicile is the USA, where you intend to return, you still are considered a resident of your foreign country. As previously mentioned, many taxpayers use this test in year two, because you must have lived in the country for the entire year. Taxpayers must fill out IRS Form 2555 and attached it to their return in order the claim the exclusion.
Working overseas tax-free is a complex area of law requiring planning by a D.C. Tax Attorney familiar with the foreign income exclusion. Many, many other issues which include, moving expenses, estimated taxes, withholding, social security taxes state taxes, bank accounts, spouses and self employment tax need to be examined. I have seen many taxpayers either fill out the forms incorrectly or fail to do the proper planning resulting in double taxation. Don’t let this happen to you, call a District of Columbia Tax Attorney today!