Expat Taxes

Tax Tips for Teachers Living Abroad

Tax Tips for Teachers Living Abroad

Teaching is a wonderful profession, and teachers get neither the credit nor the compensation that they deserve. They do, however, get the intrinsic rewards that come with expanding the minds and inspiring the imaginations of their students, and for those who choose to teach abroad, there is the additional reward of exposure to a new culture. If you are a teacher and you choose to take advantage of one of the many opportunities to teach outside of the United States, you do need to have a good understanding of the specific tax rules that will apply to your situation. The United States’ tax laws differ from those of many other countries in that they are citizenship-based: that means that as a U.S. citizen, you will owe tax on your worldwide income, and that’s true whether you are working at home or abroad. 

The Foreign Earned Income Exclusion

There are several tax advantages available to you when you’re teaching abroad, with the foreign earned income exclusion being the most notable. This exclusion permits teachers who are earning income abroad to lower their U.S. taxable income by an inflation-adjusted amount up to your actual foreign earnings. For the tax year 2018, that exclusion is $104,100 per year, and you can also take further deductions or exclusions via the foreign housing exclusion if you are paying for housing abroad. If you are married and your spouse is also working overseas, you each for the exclusion.

The fact that this large exclusion exists has lulled many Americans into mistakenly assuming that because their income is below the foreign earned income exclusion, they don’t have to file income taxes. This is not correct, and failure to file – even when you owe no taxes – can get you into trouble. What you need to do is file a U.S. expat tax return, which will provide you the ability to document the fact that you are entitled to the foreign earned income exclusion. If you aren’t sure whether you qualify for this exclusion, the IRS website has information regarding two different tests: the physical presence test and the bona fide resident test.

If I’m Paying Foreign Taxes, Do I Have to Pay U.S. Taxes Too?

Though not all foreign countries will tax the income of U.S. teachers who are teaching in their country, there are many that do. Rather than have teachers subject to double taxation, there is a foreign tax credit available that can be used as an offset and to keep you from having a burdensome tax liability. However, you cannot claim foreign income exclusion and the foreign tax credit for the same income.  The 2017 tax law changes increase the benefit of the Foreign Tax Credit by increasing the income limitation of the Additional Child Tax Credit.

If You’ve Opened a Bank Account in the Country Where You Are Teaching, You are Required to Report It  

The U. S. tax code requires what is known as an FBAR disclosure, which means that any foreign financial account that has more than $10,000 in aggregate over the course of a tax year must be reported electronically using FinCEN Form 114 on or before April 15th of the subsequent year. However, if the due date falls on a weekend or holiday, the due date is the next business day and for 2018 that is April 17. Filing by the deadline (which was automatically extended to October 15th is essential, as failure to fill the form out accurately and submit it on time will result in penalties that are substantial.) Make sure when completing the form that you report your highest account balances and convert the currency correctly.

You may also be required and attach to your 1040 for the year Form 8938 which is required

Any individual who is living abroad and during the tax year, and holds any interest in a “specified foreign financial asset” may also be required to include Form 8938 – Statement of Foreign Assets to their tax return for that tax year.  If you are living abroad and filing a joint return, Form 8938 is required if the “year-end value” your assets exceeds $400,000 or if the “during the year value” exceeds $600,000. Those thresholds are cut in half for other filing statuses. If in doubt, please give the office a call. 

What About My State Taxes? Do I Owe Those Too?

Every state has different tax rules and all cases are very fact dependent.   All states are hurting for money so they want you to be a resident so they can tax your foreign earnings.  State tax rules generally look to where you live, work, sleep, maintain a home, abode or domicile as well as your intention to return to your former tax home.  To determine intent states, look at many different factors, such as the address on the federal 1040, voter registration, driver’s license, rent, and utilities.  The best way to avoid paying taxes in your former state is to pay income tax in your new home. No one item in and of itself is determinative but when taken together they form a picture that is used to determine tax home.   

Does the Retirement Plan Offered by My Foreign Employer Count as a Qualified Plan?

The U.S. tax code makes many accommodations for teachers earning income abroad, but those accommodations do not include considering foreign pensions and other retirement plans as “qualified” for tax deferral after making pre-tax contributions. Each specific type of plan, whether it is employer or private, as well as whether contributions and income will be subject to tax, may be treated differently and bears investigation before you choose to get involved. Investment in foreign mutual funds, ETFs or REITS through either a pension plan or retirement plan may put you at a disadvantage, and possibly liable for penalties or punitive taxes on passive foreign investment companies. Doing so is likely best avoided entirely.

Before choosing a teaching position abroad, you’d be wise to make sure that you have a solid understanding of the ins and outs of the rules regarding your state, the country you are considering, and more. The rules are complex, and it’s probably a good idea to ask for assistance from a tax professional that has experience in expat income tax returns. 

The Three Most Common Tax Errors Int’l Educators  

Most American teachers take a new position outside the US in September.  They assume that because they have not been outside the US for 330 days they can not take the Foreign Earned Income Exclusion.  This is not true.  They must file an extension on form 2350 by June 15th. Then, file form 2555  using the Physical Presence Test.

It is not uncommon for an overseas teaching assignment to include both trips back to the US and employer-provided housing.  Both are taxable income.  It does not matter if the employer gives you cash or provides your housing and gives you an airplane ticket back to the US.  The value of non-cash benefits should be included as compensation. Employer-provided housing MAY be excluded if it is a condition of employment and required by the employer or by taking the Housing Exclusion.

The tax strategy for many overseas Educators is to generate additional income since they have unused benefits such as the standard deduction and the Additional Child Tax Credit.  An overlooked opportunity is to convert Traditional 403(b) or Traditional IRA’s to Roth IRA’s.  The benefit is that the conversion is being done when the taxpayer is in a low or no income tax rate.  The interest, dividends, capital gains and appreciation will never ever be taxed after the conversion under current tax law.

Bret Willoughby writes for TaxBuzz, a tax news and advice website. Reach him at [email protected].

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Bret Willoughby

Bret Willoughby

Bret Willoughby is a practicing tax preparer for expats throughout the world. He created Providence Payroll to meet the needs of Churches, not-for-profit organizations and businesses with remote workers. His web-based payroll processing service benefits both employers and remote workers with an easy way to access payroll information. Clergy have unique payroll and tax-related issues, one that Providence Payroll is qualified to manage.

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