Thanks to America's white-collar recession and the increasing internationalization of business, more and more Americans are living and working abroad. The State Department estimates that upward of 2.5 million Americans are currently living overseas, compared with less than 2 million five years ago and less than 800,000 non-military expatriates in 1966. While living abroad can prove an emotional hardship, many Americans find it immensely rewarding, financially. Companies often provide expatriates with housing allowances, hardship pay, additional vacation time and other financial perks. At the same time, the US government often kicks in the most generous benefit of all, tax breaks that can save some citizens tens of thousands of dollars annually. One expatriate working abroad purchased three houses, paid all his debts, traveled around the world, gave his mother some money and bought an absolutely fabulous Alpha Romeo Spider.
TAXES AND THE AMERICAN ABROAD
by
Marc M. Harris
Most companies provide financial benefits for overseas work for a simple reason that it is hard to persuade people to leave friends and family behind to work in an unknown land, especially if living conditions in the particular country are somewhat trying. Employers typically pay premium wages that are 10% to 20% higher than what they pay to domestic workers. In addition, they may provide free housing, transportation and extra paid vacation time as further incentives according to one international management consultant.
The tax rewards of overseas work are, due to the fact that they are linked to government bureaucracy, harder to explain. The reason is that you get these breaks only when you work in certain countries and, even then, they may be taken away through complicated company compensation strategies called tax equalization. Basically, if you work and live overseas for 11 months out of 12, US taxes generally are not taken out of your wages. That is the basic tax situation that you, as a worker abroad, face. Assuming you maintain your US citizenship, you need to file a US tax return. However, the tax code allows American citizens who live abroad to exclude up to $70,000 of their foreign-source wages from income. For most US citizens working overseas, that means they will not owe any US income tax. In addition, those who earn more than $70,000 annually can take advantage of foreign tax credits, which give write-offs for any foreign taxes you may be paying.
Expatriates, however, are subject to some taxes in the countries where they reside. In some cases, the tax rates can be far worse overseas. In most of Europe (especially England, Austria, Belgium, Finland, France, Germany, Italy, The Netherlands, Spain and Sweden) income tax rates exceed those in the United States. For those who work in the Middle East, Latin America, and many parts of Asia taxes tend to be much less than in the USA. Income taxes in these countries are low or nonexistent. For example, in dollars and cents, earning $50,000 in Saudi Arabia, where there are no income taxes, is roughly equivalent to taking home $80,000 for someone who pays 28% of his income in US income taxes.
US tax breaks for expatriates, coupled with low income-tax rates in some foreign countries, can permit Americans working overseas to reap a bonanza. You do not have to be extremely wealthy to reap the rewards of internationalizing your personal and business activities, or for that matter, yourself.
About the Author
Marc M. Harris is a certified public accountant and president of The Harris Organisation, a 150 person financial planning and investment management firm based in Panama.
Copyright © 1997 by Marc M. Harris
The Travel Careers Information Center has reprinted this article with the permission of the author.
A great deal of information on offshore opportunities and tax exemptions is available at The Offshore Entrepreneur.
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