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Global Mobility Services United States: Taxation of employees working abroad (outbound)
People and Organisation
United States: Taxation of employees working abroad Folio
March 2019
Last Updated: March 2019 This content is for general information purposes only and should not be used as a substitute for consultation with professional advisors.
Contents: United States
Introduction: US citizens and residents working abroad 4 Step 1: Understanding basic principles 5 Step 2: Understanding the US tax system 6 Step 3: What to do before departing the United States 21 Step 4: What to do while you work abroad 26 Step 5: What to do before you return to the 28 United States Step 6: Other matters requiring consideration 29 Appendix A: Individual key US federal rate and limits 34 Appendix B: Individual US federal income tax rates 38 Appendix C: Totalization agreements 40 Appendix D: US contacts and offices 41
Additional Country folios can be located at the following website: Global Mobility Country Guides
Global Mobility Country Guide (Folio) 3
Introduction: US citizens and residents working abroad
This folio is intended to provide an rules, including Internal Revenue Refining Social overview of the US taxation system as Service (IRS) announcements and Security; it affects US citizens and resident court decisions, should always be aliens working abroad. In addition, it reviewed before implementing tax- Structuring provides tax-planning techniques that planning strategies. Professional foreign-assignment enable individuals on foreign advice should always be sought prior policies; assignment to take advantage of to making any decisions. For both Choosing an various exclusions and credits. After home and host countries, the advice employment structure; reading this folio, it should be should include a discussion of various apparent that tax planning is essential topics. Pensions; in minimizing US tax liability before, during, and after a foreign assignment. Among others, the following matters Corporate tax are not covered in this folio: implications. The material contained in this guide was updated in March 2019 and Planning tax-effective Further information or reflects the tax laws and regulations in remuneration including dual or assistance may be obtained effect at that date, including those multiple employments, pre- and from any of the PwC contacts changes made by the Tax Cuts and post-assignment planning, listed in the back of this folio. Jobs Act enacted on December 22, stock options and other 2017. Users are reminded that specific tax-efficient benefits;
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Step 1: Understanding basic principles
US citizen’s tax liability in the foreign (host) tax jurisdiction. However, the US 1. US citizens living and tax system allows certain working abroad are often special exclusions and foreign surprised to learn that they tax credits (covered later in will continue to be liable for this folio) that minimize the US federal and, sometimes, possibility of incurring a state and local individual double-tax burden and help income taxes. This rule also put Americans on equal applies to most resident footing with foreign aliens with green cards. counterparts. Consequently, US citizens and resident aliens working 4. The term expatriate is abroad must continue to file primarily used in the folio to US tax returns. refer to a US citizen or resident alien (e.g., green Tax rules for the card holder) who is working United States on an assignment outside the 2. US citizens and resident United States. The term may also refer to a former US aliens living abroad remain citizen or former long-term taxable on their worldwide income for federal income tax lawful permanent resident who may be subject to special purposes. The calculation of tax provisions under Sections the US individual income tax liability is essentially the 877A and 2801 as a result of ‘expatriation’. same whether the US citizen or resident resides in the United States or abroad, with certain exceptions. There are complicating factors, however, such as additional forms to be filed and difficult calculations to be performed.
3. Many US citizens and residents working abroad are also likely to be liable for tax
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Step 2: Understanding the US tax system
General be permitted in determining surviving spouses, head of the adjusted gross income household, and single. There 5. The starting point in (AGI) of an expatriate for US may be circumstances in calculating the US individual tax purposes. Examples of which a taxpayer may be income tax liability is such items are capital losses entitled to elect a different determining the individual's (up to $3,000 per year in filing status while living gross income. As with excess of capital gains) abroad. For example, an domestic US taxpayers, an allowable rental losses expatriate married to a expatriate's gross income (subject to limitations) and nonresident alien may find it includes income from all allowable IRA deductions. beneficial to file as married sources, unless specifically filing separately or head of excluded by the US Internal In addition, moving expenses household to avoid reporting Revenue Code (IRC) or historically have been and paying US tax on the treaty. Thus, income includes deducted to calculate AGI. nonresident alien spouse's compensation received in the However, for tax years 2018 non-US source income. form of cash, property or the through 2025, an employee’s Personal exemptions have reimbursement by an deduction of unreimbursed been eliminated. employer of personal moving expenses, and the expenses. favorable income exclusion Itemized deductions for qualified moving expenses 6. Expatriates living overseas 9. Itemized deductions that are may receive additional types have been eliminated. This subtracted from AGI in suspension relates to of income, such as foreign computing taxable income employee moves in 2018 and premiums and allowances in typically include investment connection with their foreign later years. Certain states and mortgage interest may still provide a tax benefit assignments, and non-US expense, charitable for moving expenses, investment income such as contributions, and qualifying interest, dividends or capital however. medical expenses. Certain gains. Whether or not such Filing status itemized deductions are income is included in gross limited to an aggregate of income for US tax purposes is 8. In general, an individual's $10,000, including state and determined by the filing status depends on local income tax, domestic application of US tax law, not whether he or she is single or real property tax, and foreign tax laws. married. Four types of filing personal property taxes. No status are available for deduction is allowed for 7. Normal deductions, losses, federal income tax purposes: foreign real property taxes. exclusions and adjustments Married filing jointly, to gross income continue to married filing separately or
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In addition, certain itemized in a foreign country to though deductions previously subject exclude from US taxation one qualifies. to the two percent of the amounts earned for services adjusted gross income (AGI) performed outside of the Tax home floor are no longer United States. In order to be 15. In general, an individual's tax deductible. No interest a ‘qualified individual’ home for US tax purposes is deduction on home equity eligible for the benefits located at his or her principal loans is allowed if such debt allowed under these place of business. The does not meet the definition provisions, specific tax home location of one's tax home is of acquisition indebtedness. and residence or physical not affected by short, Casualty losses are not presence requirements must temporary absences from the deductible, except in the case be met. A qualified individual principal place of of losses attributable to eligible for the foreign earned employment. For example, federally declared disaster income and housing business trips to the United areas. exclusions is one who meets States or the maintenance of either a ‘bona-fide residence’ a dwelling unit in the United 10. US individual taxpayers may or ‘physical presence’ test claim the standard deduction States would not typically while maintaining a tax home result in a change in tax home if that amount is greater than in a foreign country or from the foreign location of their itemized deductions. countries. Special rules apply For 2019, the standard principal employment to the for the election and United States. However, a tax deduction is $24,400 for revocation of the exclusion. home for Section 911 married filing jointly, For 2019, the maximum $12,200 for single and purposes cannot be in a income exclusion is foreign country for any married filing separately $105,900, which can be period during which an taxpayers, and $18,350 for further combined with the head of household filers. individual maintains an foreign housing exclusion abode (i.e., the place where that varies by country. 11. Following the deductions, tax the person is actually living) is calculated using graduated 14. The foreign earned income in the United States. rates (including some flat and housing exclusions do 16. An individual may have a tax rates such as long-term not apply to US expatriates home separate from that of capital gain rates.) working in Puerto Rico, his or her spouse. Therefore, 12. There are a number of Guam, the Commonwealth of a spouse and family the Northern Mariana adjustments allowed after the remaining in the United Islands, the US Virgin Islands basic tax calculation to arrive States during an individual's at the final tax liability. or US possessions, such as foreign assignment do not American Samoa. Special tax necessarily affect rules apply to these Foreign earned income and qualification of a foreign housing exclusions jurisdictions. Note that location as the expatriate's there are commonly tax home. 13. US tax laws contain special situations in which it is provisions (under Section not beneficial to claim 17. The IRS has taken a position 911) that allow certain US the exclusions even that, in general, the tax home citizens or residents residing of an individual will not be
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deemed to have shifted to a home and an election is intention was to remain in new location unless the in place.) France for only a short time, length of the business he would not be considered assignment is intended to be 19. Example: Andrew (a US to have established bona-fide for more than one year. citizen) began his overseas residence in France. Therefore, only individuals assignment to Hong Kong on Therefore, the ability to whose international September 1, 2018, and qualify for the foreign earned assignments are expected to returned to the United States income exclusion under the be for more than one year can permanently on August 1, bona-fide residence test qualify for the foreign earned 2020. He qualifies as a bona- would not begin at least until income exclusion under fide resident during all of his his arrival in Hong Kong. either of the specified tests. assignment period in 2018, 2019, and 2020 because his 22. Whether an individual is Bona-fide residence test uninterrupted period of classified as a bona-fide foreign residence included foreign resident depends on 18. To be considered a bona-fide the entire 2019 tax year. the facts and circumstances resident of a foreign country of each case. These include for Section 911 purposes, a 20. The foreign earned income the following: taxpayer must generally be a exclusions cannot be claimed US citizen1 and reside in a for income from any period – Intentions regarding foreign country or countries before the taxpayer's length of time and for an uninterrupted period qualified period begins. Thus, purpose in the foreign that includes one full the qualifying foreign location are considered calendar year (January 1 residency period does not as well as integration through December 31). generally include any pre- into society; assignment trips or trips to Temporary absences are foreign countries while en- – Payment of income tax permitted (e.g., business route to the final destination. to the host country is a trips, vacations, etc.). Once This rule also applies when positive factor, bona-fide residence is an individual departs from a although the fact that established, the foreign foreign tax home at the end of no foreign income tax earned income exclusion is an assignment and intends to is paid (for example, available for all days during return to the United States. because the expatriate the period of foreign The intention not to return to lives and works in a residence. Under this test, an a foreign residence country with no individual can qualify as a terminates the bona-fide income tax) is not bona-fide resident in the year residence in such location. necessarily a negative of transfer to or from a factor. However, if the foreign assignment as long as 21. Example: Bill stopped in expatriate submits a the assignment includes an France for several days before statement to that entire tax year (assuming the arriving in Hong Kong, his country's government person had a foreign tax new principal place of claiming that he or she employment. Since his is a nonresident for
1 Certain exceptions may apply for resident aliens who are citizens of countries with which the United States has a bilateral treaty.
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purposes of its income Physical presence test beginning with midnight and tax law, in many cases ending with the following he or she may be 23. A US citizen or resident alien midnight. Therefore, for denied bona-fide meets the physical presence travel to and from the United foreign residence test by being physically States, days of arrival in and status for Section present in a foreign country departure from a foreign 911 purposes; (or countries) for at least 330 country do not always count full days during any period of as qualifying days of – The decision of an 12 consecutive months. In presence. However, travel expatriate not to sell a applying the physical days between foreign US home or move his presence test, any period of countries (without US or her family abroad is 12 consecutive months may presence of 24 hours or not, in itself, sufficient be used. The months need more) after having reason to deny not be full calendar months established residence in a bona-fide foreign as long as they are foreign country count as residence status; consecutive. qualifying days of physical presence. – Absentee voting in US 24. When counting days elections is not a physically present in a foreign 25. As mentioned, individuals disqualifying factor. country, only whole days are whose assignments exceed 12 considered. A day is defined months but do not as a full 24-hour period encompass an entire tax year
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will not qualify for the foreign Potential for expense 30. A listing of the countries for earned income and housing deduction which the waiver is available exclusions under the bona- is published in the Internal fide residence test. However, 28. For 2018 and later years, an Revenue Bulletin, available at qualification may occur if the individual whose tax home www.irs.gov. physical presence test is remains in the United States satisfied. may no longer deduct certain Ineligible countries ‘ordinary and necessary’ 26. Example: Frank arrived to unreimbursed work-related 31. Presence in certain foreign begin his foreign assignment expenses as itemized countries will not count for on March 1, 2018. He moved deductions. Examples the physical presence test or back to the United States on include travel expenses, bona-fide residence test if the March 31, 2019. He certain transportation costs, expatriate is present in the established a tax home in the or other items required for country in violation of certain foreign country and had no the taxpayer’s job. These US travel restrictions. The trips back to the United expenses, however, may still Treasury Department and the States during his assignment. qualify as excludible from IRS have the authority to Frank satisfies the 330-day income if paid by an issue rules allowing the physical presence test for the employer. foreign earned income period that he was abroad in benefits for individuals doing the 2018 and 2019 tax years Waiver of eligibility tests ‘necessary work,’ such as because he was present in, for certain countries research or news reporting, and had a tax home in, a in restricted countries. 29. The normal rules for foreign country for at least qualification under the bona- Foreign earned income 330 days during a fide residence or physical exclusion consecutive 12-month presence test are waived if period. residence in a foreign country 32. If an individual's tax home is is disrupted because of war, in a foreign country and he or * Note that in the above she meets either the bona- example, the bona-fide civil unrest or similar adverse fide residence test or the residence test could not be conditions, and the IRS has documented such country as physical presence test, he or met because the period of she may elect to exclude foreign residency did not qualifying. In such instances, qualified foreign earned encompass an entire tax year. an individual is allowed a pro-rata portion of the income up to a maximum 27. Because the requirements of exclusions, based on the annual amount of $105,900 the physical presence test are period of actual residence or for 2019. rigid, detailed records of presence, provided the 33. Foreign earned income travel to and from the United requirements for consists of income that is States are necessary to qualification could earned as compensation for prevent unintentional reasonably have been services performed in a disqualification, and they are expected to be met had the foreign country or countries helpful in the event of an adverse conditions not during the period that an IRS examination. existed. individual has a foreign tax home and meets either the
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bona-fide residence or nonexempt employee year may only be offset to the physical presence tests. benefits trust. extent of any unused Earned income includes: exclusion from that prior 35. Compensation attributable to year. – Wages, salaries, business days worked in the commissions, bonuses United States is US source 38. The maximum allowable or professional fees; income and does not qualify exclusion is computed on a as foreign earned income. daily basis. – The fair market value of noncash 36. Example: Assume that, Example: Assume an compensation provided during 2018, a qualifying expatriate's qualifying period by an employer (such expatriate under the bona- begins on September 15, as the rent-free use of a fide residence test, earning a 2018. The exclusion could be home or company car); base salary of $60,000 and claimed for 108 days allowances of $20,000, (September 15 to December – Expatriate allowances spends 45 workdays in the or reimbursements 31). The maximum exclusion United States. A days-basis would amount to $30,754 (e.g., cost-of-living allocation of compensation (108/365 or 29.6% of allowance, overseas often provides the clearest $103,900 for 2018). differential, education, reflection of the source of the home leave and particular expatriate's 39. If the individual's spouse also moving expenses.) earnings. Assuming that works in the foreign country, 34. Foreign earned income does there are 240 workdays in the the amount of the foreign year, 45/240 of earned income exclusion is not include amounts which compensation is attributable computed separately for are: to services performed in the each individual. – Excluded from an United States. US source 40. Example: Donald and his individual's income compensation is $15,000 wife were each eligible for the under other provisions (45/240 of $80,000) and of the Code; foreign source compensation foreign earned income is $65,000 ($80,000 - exclusion and elected it in – Received as a pension $15,000). Only the $65,000 2018 for the entire tax year. or annuity; foreign source compensation Donald earned $120,000 and may be excluded under his wife earned $80,000. – Paid by the US Section 911. Donald is permitted to government or any of exclude the maximum its agencies; 37. In general, foreign earned exclusion allowed for 2018 income is considered to be ($103,900) and his wife can – Received after the end earned in the year in which exclude her entire $80,000. of the tax year the individual performed the However, his wife's excess following the year in services rather than the exclusion of $23,900 cannot which the services that period during which it was be used to exclude any of generated the income received. Only current year Donald's income. were performed; income is eligible for the
– From an employer's current year exclusion. contributions to a Income earned in the prior
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Foreign housing the foreign housing cost labor, such as maids and exclusion in 2019 is gardeners, telephone charges, 41. In addition to the foreign (assuming foreign residence pay-television subscriptions, earned income exclusion, a or presence on all days in the purchased furniture, or separate exclusion is year) $14,826 [($105,900 x improvements that prolong available for ‘excess’ foreign 30%) - ($105,900 x 16%)]. the life of property. In housing costs. The rules for addition, if the expatriate qualifying are the same as for 44. Treasury and the IRS issue owns his or her home the general exclusion (i.e., notices to provide certain overseas, housing expenses having a foreign tax home adjustments based on a do not include deductible and meeting either the bona- taxpayer's geographical mortgage interest expense, fide residence or physical location (i.e., countries with a property taxes or presence tests). high cost of living depreciation. Housing adjustment), to the annual expenses also do not include 42. An individual may exclude housing expenses that may be principal mortgage payments. reasonable foreign housing considered in calculating the expenses in excess of a base foreign housing exclusion 47. Temporary lodging expenses housing amount, but the described above. The in a foreign country can be amount of the exclusion is adjustments act in place of treated as housing costs generally limited to 30% of the general limitation eligible for the housing the maximum amount of a described above and are exclusion as long as they are taxpayer's foreign earned updated each year via reasonable and incurred income exclusion. For 2019, administrative while the individual is a the maximum housing pronouncement. Adjusted qualified individual. exclusion is $31,770 (30% of limitations on housing 105,900) – however certain expenses are available on the 48. Example: Joe had the countries deemed to have a IRS website. following for 2019: high cost of living may have higher maximum exclusion 45. Housing expenses are the Rent $14,000 amounts as set by the IRS. expenses paid or incurred by Heating $1,500 The base housing amount is an individual (or on his or her set as a percentage – 16% – of behalf) for living Electricity $1,200 the foreign earned income accommodations while the Repairs and $450 exclusion limitation. Thus, taxpayer is a qualified insurance the 2019 base housing individual. They include rent Total housing $17,150 amount is equal to $16,944. If and related expenses, such as expenses you qualify for less than a full utilities, personal property The housing exclusion is calculated year under the bona-fide insurance, repairs, occupancy as follows: residence or physical taxes not otherwise presence tests, the base deductible, nonrefundable Housing expenses $17,150 housing amount is fees paid to secure leasehold, determined on a daily basis. rental fees for furniture, and Less: base housing $16,944 amount residential parking. 43. Under the 30 percent rule Housing exclusion $206 described above, the 46. Housing expenses do not maximum, general amount of include the cost of domestic
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49. The sum of the foreign amount of foreign earned – The potential for a housing exclusion plus the income. In many cases, the lower tax liability if foreign earned income practical effect is the same as foreign tax credits exclusion is limited each year claiming an exclusion. If the alone are used without to foreign earned income. individual is both an the exclusion employee and a self- 50. Example: If, in the above employed individual during – Probability of using example, Joe had foreign the same year, the IRS excess foreign tax earned income of exactly applies special rules that credits (see paragraphs $70,000 during the year, he allocate the foreign housing 62-78) in prior or may exclude only a maximum amount to the two types of future years; of $70,000, even though the foreign earned income. exclusion limit for 2019 is – The expected location $105,900. The excess of the Electing the foreign of the individual's exclusions over foreign exclusions foreign assignment in earned income does not carry future years; over to offset income earned 53. The elections for the foreign – The amount of the in future years. However, the earned income exclusion and the housing exclusion are individual's unearned excess of the maximum income (such as foreign earned income made on the individual's dividends, interest exclusions can be used to Form 1040, US Individual Income Tax Return. Once and capital gains) that offset income earned in the does not qualify for current year but received in elected, they must generally the exclusion; the subsequent year (as be claimed in all future years in which the individual discussed in above paragraph – The amount of an 37). qualifies. A taxpayer may individual’s income revoke this election for any that does not qualify 51. If he had $120,000 of foreign tax year after the tax year for for exclusion (see the earned income, Joe would be which the election was made. so-called stacking rule entitled to exclude $106,106, However, once revoked, the in paragraph equal to the $105,900 individual will not be allowed 60 below). maximum foreign earned to make the election for the income exclusion amount next five years without the 54. Previously, if the foreign plus a $206 housing permission of the IRS. exclusions were elected, the exclusion using Form 2555. taxpayer's US source earned As a result, his AGI for the Expatriates should consider and unearned income would year (assuming that he has no carefully whether to elect or possibly be subject to a lower other income) will be $13,894 revoke the foreign earned US tax rate because the tax ($120,000 less $106,106). income exclusion, the foreign was calculated on taxable housing exclusion, or both. income net of the foreign 52. Self-employed individuals are The following factors should exclusions. However, eligible to deduct their be taken into consideration in important changes during foreign housing expenses in making this decision: 2006 require that the foreign excess of the base amount in exclusions are added back to calculating AGI instead of determine the taxpayer's excluding an equivalent
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marginal tax rate (please see general exclusion and the allocable to rental paragraph 60 for a detailed housing exclusion). Ray also income on Schedule E discussion). claimed $10,000 of (rather than as deductions (a combination of itemized deductions on 55. A partial or total disallowance an IRA deduction and foreign Schedule A); some of of foreign tax credits and income taxes claimed on these Schedule E deductions will result to the Schedule A). Under the expenses if an overall extent that they relate to the disallowance rules, $7,500 of loss on the rental taxpayer's excluded foreign Ray's deductions are activity, could be income. disallowed as being allocable suspended as passive Disallowance of to excluded income as activity loss double benefits follows: carryforwards.
– Contributions to 56. To avoid a double benefit, the $90,000 x $10,000 = $7,500 foreign charities (with IRS disallows deductions to $120,000 the exception of the extent that they are charities from certain directly related to excluded countries where income. Examples of directly Reduction in itemized related amounts are IRA deductions and provided by treaty) are generally not deductions, some state computation of tax liability deductible. income taxes, and foreign 59. Generally, the total amount taxes that are claimed as a of an individual's itemized If the sum of allowable deduction rather than as a deductions will be reduced itemized deductions for the credit. Also, see paragraphs significantly during a foreign year is less than the standard 62-78 regarding foreign assignment because: deduction (see paragraph 10), tax credits. no tax benefit is generated by – State or local income 57. The disallowance formula is the itemized deductions tax may not be paid as follows: (though a state benefit may while abroad; be available). In such cases, deductible expenses should – If the US home was Foreign be prepaid, to the extent earned deductions sold without income directly possible, in the year of a exclus. x related to = disallowed repurchasing a new x = move out of the United States total foreign deductions one, the taxpayer may foreign earned and postponed until the year income have no mortgage earned of a move back to the United income interest expense or States. property taxes; Those planning to take – If the US home is advantage of this idea should 58. Example: Ray had rented out during the consult with their tax $120,000 of foreign earned assignment, the advisors. income in 2018, of which interest and taxes $90,000 was excluded generally will be shown (through the use of both the as business expenses
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Other itemized deductions taxable income in the range may be allowed that are not of $80,000 to $100,000. directly related to excluded foreign earned income (if 61. In addition to the foreign elected). These deductions earned income and housing include medical expenses, exclusions, another difference mortgage interest on a between determining an personal residence, US real expatriate's US tax liability property taxes, US charitable versus that of an individual contributions, and living in the United States is investment interest expense that the US income tax (all subject to limitations.) liability of an expatriate is more likely to be reduced by a 60. Once taxable income has foreign tax credit. been determined, the federal income tax liability is Foreign tax credits computed using the tax tables 62. Compensation paid to or tax rate schedules expatriates will often be appropriate for the taxpayer's taxable in both the United filing status. Under special States and in the foreign rules, if an individual country in which they live excludes an amount from and/or work. In order to income under Section 911, avoid double taxation in this any income in excess of the situation, US law permits exclusion amount determined such individuals to claim a under Section 911 is taxed dollar-for-dollar credit (under the regular tax and against their US income tax alternative minimum tax) by liabilities, subject to applying to that income the limitation, for foreign income tax rates that would have taxes paid or accrued to the been applicable had the foreign jurisdiction. individual not elected the Section 911 exclusion (also A credit may generally be known as the stacking rule). claimed for only foreign income taxes, including For example, an individual foreign social security taxes with $80,000 of foreign structured as income taxes earned income that is (unless there is a Totalization excluded under section 911 agreement.) Other foreign and with $20,000 in other taxes, such as foreign sales taxable income (after tax, value-added tax, excise deductions) would be subject tax, property tax, and wealth to tax on that $20,000 at the taxes are generally not rate or rates applicable to creditable, but may be deductible.
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63. The foreign tax credit (also section below for more on generally be preferable to referred to as FTC) is limited sourcing rules. elect the credit. to the portion of US tax related to foreign source 65. Example: Ben has taxable 68. Foreign income taxes income (sourcing rules are income of $50,000, of which imposed on income that is discussed in the next section.) $5,000 is from foreign bank excluded from US tax under To determine the current- interest income. The foreign the foreign earned income year foreign tax credits country withheld the and/or housing exclusion allowed, a separate equivalent of $1,250 of may not be claimed as a calculation must be made for foreign tax on the interest credit or a deduction. This is each class (basket) of income income. If Ben's US liability is referred to as a ‘scaledown’ of (e.g., foreign taxes paid or $10,000, the maximum FTC foreign taxes. accrued on wages versus allowed (the limitation) passive income such as would be $1,000 Example: If Max earned interest, dividends, etc.) ($5,000/50,000 x $10,000). $70,000 which was fully There are two limitations, excluded using the foreign Ben's final US liability would with the maximum foreign earned income exclusion, he be $9,000 ($10,000 less the may not claim a credit for tax credit allowed for each FTC of $1,000). basket for a year being the any foreign taxes paid on the $70,000. lesser of: 66. If more foreign income taxes are paid or accrued than are – 69. The allocation of foreign The sum of foreign allowed to be credited against taxes paid or accrued income taxes to excluded an individual's US tax for the for the year (including foreign earned income is year, the resulting amount of carryovers), or generally based on the excess foreign tax credits may following ratio: – An amount determined be carried back to the foreign under the preceding year (if it can be earned following formula: used). It can then be carried income and housing forward for use in the exclusion foreign (net of source subsequent 10 years and is US tax allocated foreign taxable foreign (generally commonly referred to as expenses) income tax disallowed income x = tax credit before x on foreign = income limitation worldwide credits) foreign tax credit carryover. total foreign earned tax taxable earned income income income (net 67. Individuals must elect the of allocated 64. Worldwide taxable income foreign tax credit annually on expenses) (the denominator in the their US income tax return
fraction) is taxable income for the year. If the credit is This formula assumes that shown on the US tax return. not elected, the foreign taxes foreign taxes on foreign Foreign source taxable may instead be allowed as an earned income can be income (the numerator in the itemized deduction in the segregated from income that fraction) is the portion of year paid. However, because is not foreign earned income. worldwide taxable income US income tax is usually that is derived from foreign reduced more by a credit than rather than US sources. See by a deduction, it will
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70. Example: Assume that Jane $20,000, which gets paid in benefit of the foreign tax has $26,000 of creditable 2019. The foreign tax year credit could be lost entirely foreign taxes relating to ends 12/31. If a foreign tax without further action. foreign earned income. If credit is claimed using the total foreign earnings are paid method, the credit may 77. If the paid basis is utilized for $125,000 and her foreign only be claimed in 2019. a year, a taxpayer may switch exclusions are $95,000, Using the accrued method, to the accrual method in a creditable foreign income the credit may be claimed in subsequent year. However, taxes must be reduced by 2018. once the accrual method is $19,760, computed as elected, it must be used for all follows: 74. As shown above, if foreign tax future years. credits are claimed under the $ 95,000 78. The accrued foreign liability x $26,000 = $19,760 paid method, a delay or loss $125,000 of credit may be incurred. In is typically translated into US dollars using the average the example above, the exchange rate for the tax Her foreign taxes available individual would incur a year. This accrual translation for credit are $6,240 cash-flow issue because the rule does not apply to foreign ($26,000-$19,760). income would be reported in 2018, while the credit would income taxes paid more than 71. The final credit is the lesser of only be available in 2019. two years after the close of foreign taxes available for Assuming that the individual the tax year or to foreign credit after disallowance and has excess foreign tax credits taxes denominated in an the limitation discussed in 2019, the excess could be inflationary currency. These above. carried back to 2018. foreign taxes are required to However, the individual may be translated to US dollars 72. A foreign tax credit may be experience a cash-flow issue using the exchange rate in claimed using either the paid for that first year due to the effect on the date paid. or the accrued method. need to pay the tax on the Sourcing of income rules Under the paid method, income without an offsetting credits are claimed in the credit. 79. Broadly speaking, year of payment, regardless classification of income as US of the year to which the taxes 75. Excess credits may be carried or foreign source is made in relate. With the accrued back for only one year. Taxes accordance with the rules method, a credit is claimed paid beyond the end of the indicated below (it should be for tax liabilities accrued calendar year following the noted that the place of during the year, even if year the income is reported payment or receipt of income not paid (with certain on the US return will not be is generally irrelevant for limitations related to timing). able to be matched with the purposes of determining the Accrued taxes generally income if the paid method is source of income): match the tax liability from used. the foreign country’s tax – Compensation —
return for the matching tax 76. To the extent that the sourced to the location individual is in an excess year. where the services credit position (i.e., has more which gave rise to 73. Example: An expatriate has foreign tax credits than he or a 2018 foreign tax liability of she can use in any year), the
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the compensation aliens). Otherwise, the gain their standard deductions in are performed; will be entirely US source. the same manner. Under these source rules, the – Dividends and location of the property (or 83. Computation of the foreign interest — generally, place of incorporation of the tax credit limitation can be the place of residence corporation that issues the complex. An illustration is or organization of the stock) and the place of sale contained at paragraph 88 as payer determines the has no bearing on the source part of a more comprehensive source (however, the of gain from the sale. example. rules vary depending upon the type of 81. Treaties may alter the source Limitation on passive interest/dividend and of income from that under US income the payer's amount of domestic law if the benefits of 84. The law requires that the income-earning the treaty are chosen. foreign tax credit limitation activity within the US); Allocation and be calculated separately for – Rent and royalties — apportionment of passive income, such as sourced to the location deductions interest on a foreign bank where the property account, foreign dividends is used; 82. In calculating foreign source and other income from taxable income, deductions foreign investment sources. – Gains from real that are directly related to The foreign tax credit property sales — producing a particular type of limitation is calculated sourced to the location income must be allocated to separately for each basket of where the real property that income. For example, a income, making it impossible is located; deduction for foreign income to use excess foreign tax taxes would be allocated credits generated on foreign – Gains from personal based on the ratio of US and compensation against US tax property sales — foreign workdays. Similarly, on foreign passive income. generally, sourcing is most expenses connected Thus, any foreign tax based on the residency with rental of an expatriate's imposed on foreign source of the seller. US home are allocated to US passive income generally may 80. Special rules apply for rental income. To the extent be credited only against US that a deduction cannot be tax on passive income, and sourcing capital gains from directly allocated to the foreign tax on foreign source sales of stock or securities or other personal property. For earning of gross income, compensation may be however, it must be allocated credited only against US a US citizen or resident, such based on the ratio of foreign tax on income in the same gain will be considered foreign source provided the gross income to total gross basket. income. This would usually individual's tax home is in a be true of adjustments and 85. Other categories may apply foreign country and a foreign based on particular facts and income tax of at least 10% of itemized deductions such as home mortgage interest and circumstances. the gain is paid to a foreign property taxes. Individuals country (separate special rules apply to nonresident who do not itemize deductions would allocate
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Maximizing the foreign preparing her 2019 tax return FTC Limitation amount is tax credit calculating foreign tax credits determined under the following on the ‘paid’ method, Kathy formula: 86. As excess foreign tax credits discovered that she had foreign may be carried forward for up source excess foreign taxes paid of taxable to 10 years, individuals may US tax $3,300 for 2019 (because of income foreign tax (generally be able to use some or all of x = credit the high rate of foreign tax in before worldwide limitation any excess foreign tax credits Kathy's country of residence, taxable credits) income in years following a foreign her foreign taxes paid
assignment, provided that exceeded the amount that she foreign source income is could claim as a credit on her $53,823 x $ 13,057 C = $ 7,245 D generated during the relevant 2019 US return by $3,300). $97,000 carryover period (e.g., via Kathy was able to carry back business trips to foreign these excess taxes to 2018 locations). Excess foreign tax and claim a refund of $1,500 Notes: credits accumulated during (the amount of her 2018 * A days-basis allocation of the first year of a foreign limitation) via an amended compensation is typically assignment would first be return (Form 1040x). The appropriate under the facts and carried back for one year and remaining $1,800 of excess circumstances. used in the same way if 2019 taxes may be carried foreign source income was forward and potentially used A. No foreign earned income or generated during the year against any excess limitation housing exclusion is elected. prior to a move abroad. for the next 10 years. B. Itemized deductions consist 87. Example: Kathy spent 22 88. Foreign tax credit of $26,000 of mortgage days in 2018 on business calculation example interest and property taxes trips to several of her not related specifically to any company's foreign locations. Compensation Foreign US ($) Total ($) ($) category of taxable income Of her total 2018 salary of and thus allocable based on $72,000, approximately Pre-move US 50,000 50,000 the ratio of foreign source $6,000 (one month's salary Post-move US 1,750 1,750 based on US and US source gross income based on 22 working days) workdays* to total gross income. This is represented foreign source Post-move US 68,250 68,250 allocated on the basis of all income. Kathy paid no based on foreign workdays* gross income. Thus it is foreign tax in 2018, but Total 68,250 51,750 120,000 allocated on the basis of calculated a foreign tax credit compensation $68,250 total foreign source limitation of $1,500 for the Interest and 3,000 3,000 income and $54,750 total US year (the amount of her US dividends source income. The allocation tax liability that was Gross income 68,250 54,750 123,000 is $14,427 to foreign source generated by foreign Itemized (14,427) (11,573) (26,000) income and $11,573 to US source income in the general deductions source income. limitation category). Basis for foreign 53,823 43,177 97,000 tax credit limitation C. Based on 2019 rates for a In 2019, she was transferred married couple filing a joint overseas and paid foreign tax on her earnings. After
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return US federal income tax forward 10 years to the extent preference’ or exclusion items is as follows: it cannot be used in the prior that are tax-exempt or tax- year. deferred for regular income Adjusted gross $123,000 tax purposes (such as the income per Alternative minimum tax bargain element of an above 89. The alternative minimum tax incentive stock option as of Itemized $(26,000) the date the option is (AMT) is a US federal income deductions exercised) as well as certain tax that is calculated in a Taxable $97,000 manner similar to the regular itemized deductions. An exemption is allowed (e.g., income federal income tax, but with a $111,700 if married filing Federal income $13,057 number of special jointly for 2019), but is tax adjustments. phased out for certain higher-
90. If the AMT results in a higher income individuals. The D. If $12,000 in foreign income level of US tax than the phase-out threshold is ($1,020,600 for joint filers tax was paid, $7,245 (the regular income tax for 2019. AMT is then limitation) may be used to calculation, as the additional offset US income tax and amount must be paid. calculated using flat rates of 26% and 28%. $4,755 may be carried back 91. The AMT calculation one year and then carried disallows certain items of ‘tax
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Step 3: What to do before departing the United States
Tax saving steps will not be taken on the – Have available in the US tax return while foreign location 92. Certain tax-saving working abroad, information required opportunities should be consideration should to prepare future US considered prior to a move be given to paying as income tax returns, abroad. Examples include many deductible including: the following: expenses as possible in the year of the move o Copies of US – Review with employer federal (and pre-move steps that (subject to the limitations of the law); state) tax returns might reduce US or for the previous foreign taxes, such as – Consider arranging for three years, in accelerating or regular and order to provide deferring extraordinary complete data to compensation or other maintenance and US tax overseas allowances, repairs while the US consultant; increasing/decreasing home is a rental assignment length, property, in order to o Information on and/or accelerating or obtain possible US investments deferring the tax advantages for (including type, assignment start date; such expenditures; name, number of shares, cost and – Contact financial – Determine whether it date of advisors (such as a is possible to terminate acquisition) and broker, insurance state tax residency other pertinent agent, attorney, banker while working abroad; financial data; or accountant) to Review state rules on discuss the effects of the number of days o Documents that the pending move. It that you can spend in support US tax may be advisable to the state for return returns and review family wills, visits without other trusts, and other jeopardizing a informational important documents; potential nonresident filings for the status; previous six – If it is anticipated that itemized deductions
Global Mobility Country Guide (Folio) 21
years in case of such as deeds and Sale of a principal IRS audit; stock certificates. residence
o Information on – As a general matter, 94. Many expatriates who choose the US tax basis considerations for to sell their principal of personal green card holders may residences will realize a gain residence(s) if differ and thus more that may be excluded from the decision is specific analysis is income for US purposes in made to rent it highly recommended. whole or in part, depending while overseas on the facts. There is no tax (e.g., original Decision to sell or rent deduction allowed for a loss purchase US home on the sale of an individual's documents, 93. One of the most important principal residence (with the records of possible exception if also decisions expatriates must capital used for business purposes.) make before moving abroad improvements concerns their US homes. For and tax 95. Gain or loss on the sale of a many US taxpayers, the US documentation principal residence is home represents their single measured by the difference on any largest investment. previously between the adjusted sales Therefore, any decision to sell sold homes) as price and the adjusted tax it or keep it should be based basis of the home. The tax well as the fair not only on personal market value basis of a home is the cost of considerations but also on when first the home (including capital economic and tax improvements) less any gains available for considerations, including rent. that may have been deferred the following: on the sale of previous o Detailed records residences (under the – The appreciation that show dates potential of the home pre-May 1997 rules) and any and times of all depreciation that either was as opposed to that of foreign travel or could have been claimed an alternative and foreign and investment; on the home (if it was ever US working days rented out or otherwise used (by state) in the – The amount of for business). year of move and expected after-tax the preceding rental income as Exclusion of gain year (if there is opposed to the after- 96. In general, Section 121 long-term cash tax yield of other provides for an exclusion of or equity investments; up to $250,000 ($500,000 compensation, for married individuals filing – Any potential exposure records for jointly) of the gain on the sale additional years to state income tax as a of a home, if certain criteria may be needed.) result of continued are met. While some ownership/availability exceptions apply, this – Make arrangements for of the home. access to investment exclusion is available only if ownership documents, the home was owned and used (i.e., occupied) by the
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taxpayer as a principal – Both spouses meet the not treated as residence for periods of time two year use test; nonqualified use; aggregating two years or more during the five-year – Neither spouse is – Any period (not to period ending on the date of ineligible for the exceed an aggregate of sale. Some further details of exclusion due to a prior 10 years) during which this exclusion are listed exclusion claim within the taxpayer or the below: the last two years. taxpayer’s spouse is serving on qualified – The exclusion is Married individuals who official extended duty generally allowed for cannot meet the above is not treated as a one sale every requirements will be entitled nonqualified use; two years; to a maximum exclusion amount equivalent to the sum – Any period of – The exclusion applies of the exclusions to which temporary absence, not to all gain from the sale they would have been entitled to exceed two years, of a principal residence had they not been married. due to change in place (except to the extent of of employment, health any gain attributable to Nonqualified use conditions or an depreciation after May 98. Special rules apply where unforeseen 6, 1997), including gain circumstance (as may part of the gain is allocable to from a previous be specified by the nonqualified use that may principal residence have unintended negative Secretary) is not that was rolled over treated as nonqualified consequences for individuals tax-free under old use. with temporary absences regulations regarding from their home. the sale of a principal Although the ‘nonqualified use’ rules effectively target residence which were If a taxpayer has a period of investment-driven residential effective until May 6, nonqualified use, the portion 1997; of gain related to such period real estate purchases and sales, it can have significant cannot be excluded, and is – The law does not consequences for a taxpayer taxed as a capital gain. require any rollover or who vacates his/her principal reinvestment of the Nonqualified use is any residence while temporarily sales proceeds of the period after December 31, away on an international old home for the 2008, that the taxpayer does assignment. exclusion to apply. not occupy a residence as a As noted above, the law principal residence. 97. The maximum excludable contains a favorable Exceptions to this general gain amount of $500,000 for rule are as follows: exception to nonqualified use married filing joint taxpayers that allows for temporary applies if all of the three – During the five-year absences of up to two years, following requirements are qualification period and a further exception for met: ending on the date of periods of nonqualified use sale, any period after following use by the taxpayer – Either spouse meets the last day such as a principal residence. the two-year property is used as a However, if a taxpayer is ownership test; principal residence is absent for more than two Global Mobility Country Guide (Folio) 23
years, and reoccupies the If the ‘two-out-of-five-year’ determine the impact of the residence upon their return, occupancy requirement is not exclusion of gain rules. the entire period of absence met, the reduced exclusion may be treated as available is determined 101. The taxable portion of any nonqualified use (to the as follows: gain realized on the sale of a extent the absence occurs principal residence generally Exclusion Period of use & is long-term capital gain, after 2008.) amount ownership during the five years ($250,000 or x provided the home was Many international $500,000) Two years owned for longer than one assignments are for three-to- year at the time of sale. The The opportunity therefore five-year periods. Given this, maximum federal tax rate exists for an individual to many assignees will not meet imposed on such gains is qualify for a partial exclusion the two-year temporary generally 15%, though a 20% if the ‘two-out-of-five-year’ absence exception under the capital gains rate applies to test has not been met. The regulations. higher income taxpayers. exception exempting from The net investment income nonqualified use any period The use rule and period of tax of 3.8% may apply in that follows the last use as a nonqualified use could create addition to these general principal residence, is financial issues for federal rates. expatriates who choose to consistent with the favorable keep their homes while on treatment allowed under However, expatriates often international assignment. Section 121 for individuals rent their former principal The requirement that the failing to meet the ownership residence attempt to make a home be owned and used as a and use tests because of a profit or to help offset costs of principal residence for two change in place of owning the home during an out of the five previous years employment, health, or assignment, as well as to may cause expatriates who unforeseen circumstances. provide for its care and sell their home after a lengthy Therefore, as long as the maintenance. The current law assignment to be ineligible international assignee does provides that the exclusion for the exclusion (or a lesser not reoccupy the home prior does not apply to any gain exclusion), and thus subject to sale, a full or partial from the sale of a former to tax on any gain. exclusion may be claimed. principal residence that has been rented out or used for a 100. While the introduction of Relief from two year business purpose to the nonqualified use provisions requirements extent of any depreciation closed a loop-hole to property allowed or allowable after 99. The law provides for limited owners who intended to May 6, 1997. The portion of relief from the ‘two-out-of- convert their investment gain that is attributable to five-year’ ownership and use properties to principal depreciation generally would requirement and the ‘once- residences and utilize the be taxed at a 25% capital every-two-years’ exclusion, the opportunity to gains tax rate. The net requirement. A reduced convert and still retain investment income tax, if exclusion is available for substantial tax benefits applicable, would apply in taxpayers unable to satisfy remains. As the calculations addition to such rate. these requirements if the sale may be complex due to was due to a change in place varying facts and of employment, health or circumstances, professional unforeseen circumstances. advice should be sought to
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Rental of principal approving tenants, deciding Note that generally, residence while on rental terms or approving expatriates must make a assignment capital or repair decision whether to purchase expenditures. For purposes of or rent a foreign home. In 102. When an expatriate's former calculating the rental loss addition to personal and principal residence is rented deduction, adjusted gross economic considerations, tax out, the net rental income or income is determined issues related to such loss must be computed for US without regard to any passive decision should be tax purposes. In addition to losses and several other considered and are generally deductions for mortgage minor modifiers. different from those that interest and property taxes, might apply for purchases of deductions for costs related 105. If an individual satisfies the homes in the United States. to the rental property (such active participation test and For example, mortgage as maintenance, insurance, has an AGI that is between interest may be deductible repairs, property $100,000 and $150,000, the but not eligible for exclusion management fees and special exception is available under Section 911, foreign depreciation) may often be but the $25,000 amount is property taxes are not considered. phased out. It is not available deductible, gain or loss on at all to an individual with an sale may be impacted by 103. If the rental of the home AGI of $150,000 or more. exchange rate fluctuations, a results in a net loss, the loss The special exception also is may be limited because of the potential exchange-rate gain not available to any or loss may occur for US passive activity loss rules. individual who files a married mortgages denominated in These rules provide that separate tax return, unless losses from passive activities foreign currency (though the taxpayer and spouse live losses may not be (e.g., limited partnerships apart for the entire year. The deductible), and assignment and rental properties) cannot $25,000 exception then is be used to offset other types length may impact the extent reduced to $12,500 and the to which exclusions may of income, such as salary, phase-out limits are halved. apply upon sale. interest, dividends, or capital gains. 106. Those who do not qualify for Special rules also apply for the $25,000 loss because of determining ownership when 104. There is a special exception to the AGI limitation may a divorce and separation the passive activity loss rule nevertheless be able to agreement arises. which allows up to $25,000 deduct the loss in full or in of rental loss to be deducted part against other passive against any other income if activity income. In the event AGI is less than $100,000 that an individual's rental and if the taxpayer actively losses exceed the income participates in the rental and/or gains from passive activity and rental was activities, any loss that is not undertaken with a profit currently deductible may be motive. The active carried forward indefinitely participation rules will likely to offset future passive be satisfied by those who income or may be recognized make management decisions, in full in the year of disposal such as rejecting or of the activity.
Global Mobility Country Guide (Folio) 25
Step 4: What to do while you work abroad
When to file US returns and nearest US embassy may be 30 of the year following the pay taxes contacted. normal April 15 deadline.
107. As mentioned previously, US 110. US individual income tax 112. As is true for all individuals, expatriates working abroad returns for US citizens and the extension of time to file generally must file and pay residents usually are due the return does not excuse an taxes to more than one tax April 15 (with the ability to expatriate from the jurisdiction. The following request extension to October requirement to make timely discussion describes some of 15.) If the taxpayer's tax payment of US federal these filing requirements. home and abode are outside income tax. the United States on April 15, 108. US tax returns for expatriates he or she will be granted an Payments may be made claiming the foreign earned automatic filing extension to through wage withholding or income or housing exclusions June 15. Those who file joint by quarterly voucher are filed with the Internal returns are granted the payments to the IRS. Any Revenue Service Center in automatic extension even if balances due at April 15 Austin or Charlotte (if not e- only one spouse qualifies. will begin to accrue interest filing.) For courier service and penalty charges. delivery, alternate filing 111. In many cases, however, addresses apply. expatriates choosing to claim Caution: If all an expatriate's the exclusion(s) will not have income is compensation that 109. During the filing period met the bona-fide foreign is excluded from gross (January to mid-June), residence or physical income under the foreign taxpayers can get the presence tests (necessary to earned income and housing necessary federal tax forms claim the foreign earned exclusions, he or she is still and publications online at income exclusions) by the required to file a US tax www.irs.gov or from US otherwise extended deadline return to claim the exclusion. embassies and consulates. for the year of the move Taxpayers can request If not elected on a timely filed abroad. However, such return, the foreign earned Publication 54 – Tax Guide individuals may apply for an income and housing for US Citizens and Resident extension of time to file until Aliens Abroad. Also during exclusions may be elected on 30 days after the applicable a valid amended return or on the filing season, the IRS test is likely to be met. a tax return filed within one conducts an overseas Therefore, those seeking to taxpayer assistance program. year of the original due date. qualify for the exclusions The exclusion may also be To find out if IRS personnel using the bona-fide residence elected on a delinquent tax will be in a taxpayers' area, test may obtain an extension return filed after that, but the consular office at the of time to file until January
Global Mobility Country Guide (Folio) 26
only if a) there is no tax Underpayment penalties balance due on the delinquent return or b) if 113. The IRS may assess an there is tax due with the underpayment penalty if the delinquent return but it is tax liability is not paid timely filed before the IRS discovers (including quarterly the delinquency. estimates due, if applicable.)
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Step 5: What to do before you return to the United States
Sale of US home United States (see paragraph the ‘general limitation’ 10), if possible, the individual category, a foreign tax credit 114. If an expatriate's US home should consider deferring may be claimed against the was rented during his or her payment of deductible items US tax on the portion of foreign assignment, it is not until the next year in order to compensation that is typically considered as used maximize the US tax benefits allocable to the foreign trips. as a principal residence of the deductions. Otherwise, For various reasons foreign during such time. Sale of a the payment of the expense countries may not tax home does not generally may be wasted for US tax compensation related to qualify for the maximum purposes. business trips by exclusion of gain unless the nonresidents (e.g., pursuant ‘two-out-of-five-year’ Using foreign tax credit to an income tax treaty), and ownership and use tests and carry forwards thus expatriates will be able one exclusion every two to obtain a net tax benefit. years’ tests, discussed earlier, 116. At the end of a foreign are met. Therefore, those who assignment, expatriates may 118. Excess foreign tax credits also relocate to a new area upon have unused foreign tax may be utilized after moving return to the United States credit carry forwards. These back to the United States without reoccupying their carry forwards are usually without taking foreign previous home may have a available to reduce US business trips by pursuing higher taxable gain on the income tax on future foreign other steps to generate sale of the home if such tests source income. foreign source income. For cannot be met. Similarly, re- example, if an individual 117. If, after moving back to the occupying a home can result were granted stock options United States, an expatriate in taxable gain occurring due makes foreign business trips while living abroad, he or she to ‘nonqualified use’. Please may be able to generate during the foreign tax credit refer to section 98 above. foreign source income by carryforward period (or receives deferred income exercising a nonqualified Timing of deductions stock option or by making a allocable to foreign workdays disqualifying disposition of 115. If an individual's itemized during the assignment), he or deductions do not equal or she may be able to utilize an incentive stock option. However, the position should exceed the standard some of his or her excess be reviewed for any deduction for the year that he foreign tax credits. If or she moves back to the carryforwards are available in potentially adverse foreign tax consequences.
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Step 6: Other matters requiring consideration
Employer's expatriate either tax protection or tax federal income taxes in the tax policies equalization. If a company hypothetical US tax amount. has a tax equalization policy, 119. Most US companies that send it will typically reimburse State taxation Americans to work overseas expatriates for the amount by have detailed personnel 123. Although an individual is which their total actual working and living abroad, he policies that describe the income taxes for the year or she still may be liable for types of overseas benefits to exceed their hypothetical US be paid. Included in many state income tax. This will tax (with many policy often occur if the individual policies are rules that require variations.) However, if an continues to be classified as a the employer to reimburse employee's total actual taxes the assignee for the amount resident of a state under the are less than his or her state's income tax law or of US and foreign taxes that hypothetical US obligation – continues to receive income exceed the US taxes that for example, if he or she would be imposed on base from sources within the works abroad in a low-tax state(s). Because state tax compensation if the country – the employee laws do not necessarily follow individual was not remains responsible for the US federal tax law, the fact transferred to work abroad hypothetical level of taxes. (or some variation thereof). that an individual may be a This theoretical ‘stay at home’ 121. If the company has a tax foreign resident for US tax amount is often referred protection policy, it may federal purposes will not to as a ‘hypothetical tax.’ reimburse the employee for necessarily mean that he or Policies for US expats may total actual taxes that exceed she will be classified as a differ from those for his or her hypothetical US nonresident in the state from assignees from other tax, but allow the individual which he or she moved. countries as the United States to keep the benefit if actual 124. If an individual moves abroad is one of the only countries in taxes are less than the from a state that imposes an the world to continue to hypothetical amount. income tax, he or she should subject citizens and residents determine under what to taxation on worldwide 122. In order to manage the costs of their expatriates' foreign circumstances that state income while residing might continue to classify the outside the country for assignments more efficiently, individual as a resident of the extended periods. many companies today have tax equalization policies. As state during the foreign 120. In designing such an part of these policies, many assignment or what income expatriate tax reimbursement companies include state and as a nonresident may be policy, a company typically local income taxes and Social subject to tax (including will apply the concept of Security taxes as well as US
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states other than the former foreign earned income and tax credit is increased by state of residency.) housing exclusions. the foreign earned income exclusion. 125. Under the income tax laws of 128. Even though an individual many states, it is usually may be classified as a Estate and gift tax issues necessary to consider nonresident of the state he or whether the individual has she moved from and has no 131. US citizens or resident aliens retained domicile in the state. other income from sources abroad may be subject to Domicile has been defined to within the state, if the federal estate and gift taxes, mean that place which an individual keeps his or her and perhaps foreign or state individual intends to be the home in that state and rents inheritance and gift taxes. true, fixed and permanent it out, he or she will usually These rules describe, for home to which the individual be required to file a example, the tax treatment of intends to return whenever nonresident tax return with gifts between individuals and absent. If an individual the state to report any rental the tax consequences of an moves abroad for an income. expatriate’s death. A detailed assignment that is expected discussion of these rules is to last no more than two or Child tax credits outside the scope of this folio. three years and if he or she 129. Taxpayers may claim a tax US wage withholding intends to move back to the credit in 2019 up to $2,000 same state at the end of the for each qualifying child 132. Employers are not required assignment, most states under age 17 who is a US to withhold federal income would consider that he or she citizen or resident of the tax from foreign source has retained domicile in United States and has been compensation paid to US that state. issued a social security citizens that is subject to foreign withholding 126. Some states will treat number (SSN). A separate requirements. In addition, individuals as income tax $500 credit may be available for qualifying relatives, as federal withholding is not residents of the state merely required for compensation because they retain their well as qualifying children paid to US citizens that is domicile there. However, who are not eligible for the $2,000 credit, such as expected to be excluded from many states classify a income under the foreign domiciled individual as a children ages 17 and 18 or earned income or housing nonresident if the individual those through age 23 who are full time students, and exclusion. Either exemption has only minimal contacts may apply to US residents with the state while abroad. children who have been issued an ITIN. who are not US citizens in 127. If an individual remains a tax certain consequences as resident of his or her home 130. The tax credit is phased out provided by treaty. state, the individual will by $50 for each $1,000 of usually be subject to that modified AGI in excess of In order to exempt excluded state's income tax on his or $400,000 for married income (i.e., based on her worldwide income. States taxpayers filing jointly, and expected foreign earned may or may not allow either a $200,000 for all others. As income and/or housing deduction or a credit for with IRA phase-out limits, exclusions) from withholding, foreign taxes imposed or the modified AGI for the child the employee must provide
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his or her employer with a thresholds include $250,000 ‘American employers’ statement indicating the for married filing jointly, (including foreign qualified period and the $125,000 for married filing branches of US amount of compensation separately, $200,000 for corporations) are expected to qualify for the single and head of household, subject to FICA on exclusions. The statement is and $250,000 for a wages received generally made by an qualifying widower with a regardless of where employee on IRS Form 673, dependent child. Net services are performed; Statement for Claiming investment income generally Exemption from Withholding includes, but is not limited to, – US citizens or resident on Foreign Earned Income interest, dividends, capital aliens employed by Eligible for the Exclusion(s) gains, rental and royalty foreign entities that are Provided by Section 911. As income, non-qualified 10 percent or more discussed previously, not all annuities, and income from owned by an American individuals who qualify to businesses that are passive employer (as claim an exclusion will find it activities to the taxpayer. specifically defined) beneficial to do so and thus also continue FICA Form 673 should only be **For NIIT purposes, the coverage on provided if the exclusion is term ‘modified adjusted gross compensation for expected to be claimed on the income’ or MAGI means services performed tax return. adjusted gross income outside the United increased by the excess of (i) States if the American Compensation not exempt the amount excluded from employer enters into a from withholding is subject to gross income under Section special agreement with normal US wage withholding 911(a)(1), over (ii) the amount the IRS to continue rules. Form W-4 (Employee’s of any deductions (taken into FICA coverage for all Withholding Allowance account in computing US citizen and resident Certificate) may be prepared adjusted gross income) or employees of the to ensure estimated exclusions disallowed under foreign entity. deductions and credits Section 911(d)(6) with (including foreign respect to the amounts As noted below, so called tax credits) are considered described in (i). Totalization agreements may for withholding purposes. alter these coverage Social Security coverage requirements. Tax on net investment and tax income 135. Expatriates are typically 134. US law contains two exempt from FICA coverage 133. The net investment income provisions that generally for compensation earned tax (NIIT), also known as the require US Social Security while working abroad if Unearned Income Medicare and Medicare (otherwise employed exclusively by a Contribution applies at a rate known as FICA) coverage to foreign corporation that is of 3.8% to the net investment continue while expatriates not covered by a FICA income of certain individuals, are working abroad: agreement with the IRS and if estates, and trusts that have they have no US business MAGI** above defined – US citizens or resident trips. No voluntary statutory thresholds. These aliens employed by participation is available.
Global Mobility Country Guide (Folio) 31
136. The United States has value of which is more than interests in SFFAs exceed negotiated social security $10,000 at any time in the certain thresholds. treaties (referred to as year, must file an Totalization agreements) informational report with the 141. Individuals that must file with a number of countries. US Treasury Department (not Form 8938 include, for Though agreements typically the IRS) on Form FinCen 114 example, US citizens, as well restrict coverage to the (formerly TD F 90-22.1). This as US residents for any part location the individual is form is commonly referred to of the tax year. Filing working, an exception may be as an ‘FBAR’, for foreign thresholds depend upon the available whereby FICA bank account reporting. The total value of the SFFAs held coverage may continue for an 2019 report is due April 15, either during the tax year or expatriate who is sent by an 2020 but is automatically at the end of the tax year and American employer (or extended to October 15. also whether the individual foreign affiliate subject to a FinCen does not require that lives in or outside of the FICA agreement) to work a specific extension request United States. They range temporarily in the host be filed. from $50,000 to $600,000. location (with certain 139. Individuals who have an 142. SFFAs include but are not exceptions.) Any social limited to financial accounts security tax paid to a foreign interest in other types of maintained by a foreign country that has a foreign financial accounts or who have signature authority financial institution. This Totalization agreement with could include a depositary the United States is not a over such account also may account at a foreign bank or creditable tax for US foreign be required to file this form. Failure to timely and properly foreign mutual fund. SFFAs tax credit purposes, provided can also include interests in such tax is of a type within file such forms may subject foreign entities (e.g., capital the scope of the agreement taxpayers to monetary and criminal penalties, as well as or profits interest in a foreign and imposed on services partnership) as well as an performed during the period a civil penalty for violation. interest in a foreign pension the agreement is in effect. 140. Individuals also may need to plan or foreign deferred 137. As of March 2019, the United file Form 8938, Statement of compensation plan. The IRS States has social security Specified Foreign Financial promulgated regulations Totalization agreements in Assets, in addition to the which provide greater detail effect with 30 different FBAR. The IRS promulgated on what constitutes a countries. For a complete this form to help implement reportable SFFA. Some detailed list, please see withholding rules and other overlap exists between Form Appendix C. enforcement measures under 8938 and FBAR reporting the Foreign Account Tax and thus individuals may Foreign financial asset/ Compliance Act (FATCA). need to report the same bank account reporting Individuals must report foreign asset on both forms. specified foreign financial 138. An expatriate (US citizen or assets (SFFAs) on Form 8938 143. Failure to file Form 8938 can resident) who owns a foreign if the person meets certain result in a $10,000 penalty. A bank account or accounts (or requirements and their failure to comply that lasts has signatory authority over more than 90 days after the such accounts), the aggregate date of an IRS notice of such
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failure will be subject to an compensation plans under tax as a result of the additional penalty not to Section 409A. expatriation. exceed $50,000. Miscellaneous issues Green card holders Income relating to embarking on foreign retirement plans 146. Special rules apply to matters assignment should seek relating to foreign currency specific tax and immigration 144. Expatriates covered by one or and translation of amounts advice as to potential more tax-qualified retirement denominated in foreign implications that may arise. A plans of their US employer currency. Among others, this further discussion of Section (such as a pension plan or topic is beyond the scope of 877A and green card holders 401(k) plan) will usually be this folio. is beyond the scope of this eligible to stay in those plans folio. while working abroad if they 147. Special rules under Section work directly for the US 877A apply where a US company (and often if citizen relinquishes his/her working for a related US citizenship (or a long- company, depending on the term resident terminates plan). However, lawful permanent residency) contributions by the and certain requirements are individual or by the satisfied, including a net employing US company to worth and average income those plans during an test. In effect, Section 877A assignment abroad (and deems this person to sell earnings within such plans) his/her property the day could be subject to income before he/she ‘expatriates.’ tax in the foreign country. Unless an exemption is made, Treaty provisions may tax must be paid on the gain mitigate such taxation. above the applicable exemption threshold amount 145. Before an expatriate becomes $725,000 for 2019.) a participant in a non-US retirement plan, the plan Additionally, distributions of should be examined to deferred compensation items, determine whether the specified tax deferred individual will be subject to accounts, and nongrantor US tax on contributions made trusts are deemed to occur on to the plan by either the the day before expatriation individual or the company (with certain exceptions.) and the related earnings of This is commonly referred to the plan. It is also crucial to as an ‘exit tax.’ US citizen determine whether the and resident recipients of person will attract penalties gifts and bequests from the for participation in individual after expatriation nonqualified deferred are also subject to a special
Global Mobility Country Guide (Folio) 33
Appendix A: Individual key US federal rates and limits
The following is a high-level summary of some key individual tax rates and applicable limits for 2019. For purposes of this document, the reference to '$' means US dollars. Further:
MFJ means married filing jointly MFS means married filing separately HOH means head of household.
This compilation is intended to serve as a handy reference guide for companies with globally mobile workforces. The list is not exhaustive and does not contain all the changes made by the 2017 US tax reform legislation (the TCJA) enacted December 22, 2017. It is important to note that most individual tax changes under the TCJA that are relevant for the 2019 tax year are scheduled to sunset after 2025. Note that many states that conformed to federal law for 2017 did not conform (in whole or in part) to changes made by the TCJA for the 2018 year and may not for 2019.
Specific tax levies and income tax withholding
FICA taxes 2019 Social security (SS) wage base $132,900
SS maximum – 6.2% $8,239.80
Medicare – 1.45%* No ceiling
*See below, under ‘Additional Medicare tax’, for details on an increase in the Medicare tax that applies to wages and other compensation only in excess of an applicable threshold amount.
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Additional Medicare tax 2019 A 0.9% tax is imposed on individual wages and other compensation in excess of the following threshold amounts: Single $200,000 MFJ $250,000 MFS $125,000 HOH $200,000
Tax on net investment income 2019 A 3.8% tax is imposed on the lesser of net investment income or the excess of modified adjusted gross income over Single $200,000 the following threshold amounts: MFJ $250,000 MFS $125,000 HOH $200,000
Supplemental withholding flat rates 2019 Supplemental wages up to $1,000,000 (optional)* 22% Supplemental wages greater than $1,000,000 37% *In lieu of regular tax withholding rates and available only if certain requirements are met.
Calculating individual taxable income
Personal exemptions (PE) 2019 Personal exemption 0
*The personal exemption was eliminated for tax years after 2017.
Standard deduction 2019 Standard deduction Single $12,200 MFJ $24,400 MFS $12,200 HOH $18,350
*The TCJA eliminated the PE and put in place larger standard deductions and child tax credits for tax years after 2017.
Itemized deductions 2019 Deduction for state and local taxes not accrued in a trade or business, or on property held for the production of May not exceed $10,000, income (this includes income, sales, real estate, and property taxes – foreign real property taxes are not MFS $5,000 deductible): AGI threshold that unreimbursed medical and dental expense deductions must reach before a deduction is 10% permitted for all taxpayers: Deduction for mortgage interest only for qualified indebtedness up to certain amounts: $1M (limited to $750,000 for ‘new debt’) (Note that interest on home equity debt is no longer deductible after 2017 unless the home equity loan proceeds are used for acquiring, constructing, or substantially improving any qualified residence and is secured by such residence. A qualified residence is defined as the principal residence and one other property used as a residence.)
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*The TCJA makes various other changes to itemized deductions. For example, the overall reduction in itemized (not standard) deductions by 3% of AGI in excess of certain amounts has been repealed. Other changes were made to items including, for example, state and local taxes, employee business expenses, tax preparation fees, other 2% miscellaneous items, alimony, and moving expenses. For more information, please see prior Global Mobility Insight (December 27, 2017).
Standard mileage rates 2019 Business $0.58 Charitable $0.14 Medical and moving $0.20
Section 911 2019 Annual exclusion $105,900 Base housing amount $16,944 Standard qualified housing expense limit* $31,770
*Adjustments to the limitation are provided for certain countries with high housing costs. See Notice 2019-24. See also Notice 2018-57 for 2019 foreign earned income exclusion amount.
Expatriation 2019 Five-year average annual net income tax in excess of the following amount: $168,000
Amount of net gain from mark-to-market tax regime includible in gross income of covered expatriate is reduced by (but not below zero): $725,000
Calculating individual income tax due
Alternative minimum tax 2019
Alternative minimum tax (AMT) exemption amounts (subject to phase-out described in the table $71,700 below): $111,700 $55,850 $71,700
Alternative minimum tax phase-out 2019 The phase-out of the AMT exemption amount begins when the alternative minimum taxable income $510,300 exceeds the following amounts: $1,020,600 $510,300 $510,300
Capital gains tax 2019 Long term: 15%/20% Lower-income taxpayers: 0% Short term: Ordinary rates
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*After 2017, the TCJA generally retains the 2017 maximum rates on net capital gains; however, certain so-called ‘breakpoints’ for determining what tax rate is used are indexed differently.
For 2019, the 20% long term capital gains tax rate applies when the lesser of adjusted net capital gain or taxable income is at least $488,850 (MFJ), $434,550 (single), $244,425 (MFS), and $461,700 (HOH).
Qualified dividends 2019 Qualified dividend rate: 15%/20% Lower-income taxpayers: 0% Nonqualified dividends: Ordinary rates
*After 2017, the TCJA generally retains the 2017 maximum rates on qualified dividends; however, certain so-called ‘breakpoints’ for determining what tax rate is used are indexed differently.
Qualified dividend income generally is taxed at the same rates and thresholds that apply to net capital gain (see above.)
Child tax credit 2019 Child tax credit (per $2,000 ($1,400 refundable) child)* $500 nonrefundable credit for dependents other than qualifying children and for qualifying children without social security numbers
*After 2017, the qualifying child must have a social security number by the due date of the taxpayer’s return in order to claim the credit (except for $500 nonrefundable credit, whereby dependent must have an individual taxpayer identification number (ITIN)). The credit is subject to phase-out for individuals with income over certain threshold amounts. Phase-out limitations are increased after 2017 and apply when taxpayers have modified adjusted gross income in excess of $400,000 for married filing jointly, and $200,000 for all others.
Other
Gift tax limits 2019 Annual exclusion from total amount of taxable gifts*: $15,000
Annual exclusion for gifts to non-US citizen spouses*: $155,000 *This amount is per donor and per donee and refers to gifts that are not future interests in property.
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Appendix B: Individual US federal income tax rates
Married filing jointly and surviving spouses
2019
Over Not over Tax % on excess
0 19,400 0 10%
19,400 78,950 1,940 12%
78,950 168,400 9,086 22%
168,400 321,450 28,765 24%
321,450 408,200 65,497 32%
408,200 612,350 93,257 35%
612,350 164,709.50 37%
Single
2019 Over Not over Tax % on excess 0 9,700 0 10% 9,700 39,475 970 12% 39,475 84,200 4,543 22% 84,200 160,725 14,382.50 24% 160,725 204,100 32,748.50 32% 204,100 510,300 46,628.50 35%
510,300 153,798.50 37%
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Married filing separately 2019 Over Not over Tax % on excess 0 9,700 0 10% 9,700 39,475 970 12% 39,475 84,200 4,543 22% 84,200 160,725 14,382.50 24% 160,725 204,100 32,748.50 32% 204,100 306,175 46,628.50 35%
306,175 82,354.75 37%
Head of household
2019 Over Not over Tax % on excess 0 13,850 0 10% 13,850 52,850 1,385 12% 52,850 84,200 6,065 22% 84,200 160,700 12,962 24% 160,700 204,100 31,322 32% 204,100 510,300 45,210 35%
510,300 152,380 37%
*2019 rate tables are provided by Rev. Proc. 2018-57.
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Appendix C: Totalization agreements
Countries with which the United States Australia Germany Poland currently has totalization Austria Greece Portugal agreements: Belgium Hungary Slovak Republic Iceland (as of Slovenia (as of Brazil 3/1/2019) 2/1/2019)
Canada Ireland South Korea Chile Italy Spain Czech Republic Japan Sweden Denmark Luxembourg Switzerland Finland Netherlands United Kingdom France Norway Uruguay
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Appendix D: US contacts and offices
Contacts
Peter Clarke, Global Leader John Shea, US Leader [1] 646-471-4743 [1] 310-809-9234 [email protected] [email protected]
Al Giardina Derek Nash [1] 203-539-4051 [1] 202-414-1702 [email protected] [email protected]
Clarissa Cole [1] 213-217-3164 [email protected]
Offices
A complete listing of PwC US offices can be found on pwc.com at the following weblink.
© 2019 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This proposal is protected under the copyright laws of the United States and other countries. This proposal contains information that is proprietary and confidential to PricewaterhouseCoopers LLP, and shall not be disclosed outside the recipient's company or duplicated, used or disclosed, in whole or in part, by the recipient for any purpose other than to evaluate this proposal. Any other use or disclosure, in whole or in part, of this information without the express written permission of PricewaterhouseCoopers LLP is prohibited.