One of the biggest topics of discussion, and sometimes heated debate, among expats is how to handle taxes. Many would like to move out of the United States and just forget about any tax responsibilities they may have. The IRS, however, feels a little differently about the subject.
As an expat living abroad in several countries for over 5 years now, and traveling for many more prior to that, I am proud to say that I file my taxes yearly. A wise man once said, “Pay Caesar’s things to Caesar,” and I have found that a good motto to live by.
Does that mean you should expect to get hit hard by taxes? Not necessarily. Many foreigners fall under the “foreign earned income exclusion,” meaning that they don’t actually owe taxes
unless they have earned over US $87,500 (working for someone else or a corporation). This is how I have filed the past several years.
Prior to that I owned my own business, which falls under a different set of rules. (Fun!) Self-employment income is subject to Social Security and Medicare tax (15.3 per cent) on every dollar earned above $400, even if you qualify for the “foreign earned income exclusion.”
What some do is take their personal business, turn it into a corporation, have all payments made to the corporation and then cut yourself a check. That makes you fall under the waged worker category, meaning you don’t have to pay the Social Security or Medicare taxes you would if you filed as self-employed.
Oh, and if you didn’t know you are entitled to an automatic 3 month extension if you live out of the country, although I wouldn’t try it. (Actually, I have already tried it… twice. The first time I wrote a letter and had it in by April 15th stating that my taxes would be late… no problems there. The second time I sent in my taxes late with the letter attached and the IRS wasn’t too happy about it. I actually got fined, and had to appeal. Later I was forgiven for my offense and the charges were dropped.)
All of the information needed to see if you apply for the “foreign earned income exclusion” can be found on the IRS official web-site.
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