Dealing with Foreign Wages

This week we've heard from not just one, but two About.com readers on the forum who are dealing with foreign wages. One is living in Australia, and the other reader is working in the US for a Canadian employer. Both asked a question I hear frequently: do you need to file returns in the USA if all your income is earned abroad?

The answer, not surprisingly, is yes. But US citizens working abroad have several tax breaks available to them to ease the burden of filing in two countries. In the US they may be able to exempt some or all of their foreign wages from US income taxes, up to $87,600 for 2008. This tax break is called the foreign earned income exclusion, and it applies only to foreign wages or self-employment income.

Another benefit available is the foreign tax credit. This is a credit against US income taxes for taxes paid to foreign governments. The credit applies to any type of foreign income, such as wages, interest or dividends. The foreign tax credit is a handy tax break for investors too, who might have paid foreign taxes on stocks or mutual funds with foreign holdings.

In addition to these two basic tax breaks for taxpayers with foreign income, the US also has tax treaties with various countries around to world. These treaties specify how certain types of income are going to be taxed. In the case of the reader working for a Canadian employer, that treaty specifies conditions under which wages will be taxed only in one country.

People working, living, or doing business abroad have one final consideration, and that's reporting any bank accounts they have outside the United States. This is an annual report submitted to the Treasury Department. The Treasury uses these reports as part of its ongoing efforts to combat money laundering. US citizens must file this report if their total balance in all foreign bank accounts is $10,000 or greater at any time during the year.