"It looks as if my husband will work for an overseas contractor for either a 1 or 3 year contract. Can you provide us with current information that will help us understand the tax issues we might face? Thank you, Kathryn."Well, Kathryn, there's several tax and financial issues that you'll want to consider and plan for. Let's start with whether your husband will be an employee or an independent contractor. If he's treated as an independent contractor, he'll be subject to paying self-employment taxes in the US. This will generate credit towards Social Security and Medicare eligibility. If he's an employee, he won't have to pay these taxes. That also means he won't earn any credits toward future Social Security benefits. But depending on the country where he works, he may be able to transfer Social Security from the foreign country towards his US benefits under a Social Security totalization agreement. These are agreements that the US has negotiated with several countries to coordinate Social Security coverage for people who work in multiple countries.
Next, you'll want to keep receipts for all your moving expenses, which are tax-deductible.
You'll also want to investigate the tax breaks for working abroad. The most useful tax break is the foreign earned income exclusion, which provides for tax-free income up to $91,400 (for 2009) in foreign wages or net self-employment. This amount is indexed for inflation and is adjusted annually. There's restrictions on who qualifies for this exclusion. Basically he'll need to be out of the US for at least 330 "full days" to qualify. There's two ways to qualify for this exclusion: using either the bona fide resident or physical presence tests. You may want to plan out your travels so as to take full advantage of this tax exclusion. (A "full day" is a full twenty-four-hour period from midnight to midnight. Basically that means travel days where you are in the United States for part of the day won't be counted toward meeting the 330-day requirement.)
Generally the first and last years abroad you might not be outside the US for 330 full days. But you can take a prorated exclusion if you are outside of the US for 330 days in any consecutive twelve-month period, or if you qualify as a bona fide resident in the preceding or subsequent years.
Wages or net self-employment above the tax exclusion would qualify for a foreign tax credit. You'll prorate the taxes you paid to foreign governments so that you take the credit only on income that was not excluded from taxes. You can also take the foreign tax credit on other types of income such as interest and dividends, as these types of income are not excluded from US taxation. If you don't qualify for the foreign exclusion for your wages for a particular year, you can take a foreign tax credit based on all you foreign wages.
One final note about moving abroad. You will likely want or need to set up a bank account in one or more foreign countries to facilitate everyday banking transactions. The US Treasury requires special reporting of foreign accounts. You'll be required to file a foreign bank account report if you have $10,000 or more deposited in foreign bank or financial accounts at any time during the year. Review the details of this reporting, so that you can keep records. In particular, the Treasury requires that US citizens keep copies of the foreign bank statements for at least six years as supporting documentation for this report. Get in the habit of keeping copies of any bank statements in a safe place.
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