Working Overseas: Individual Tax Impacts for Expats

Session II
Working Overseas:
Individual Tax
Impacts
InsideNGO’s Taxation
Management of US Expats
Kate Fisken, Principal
International Tax Specialist

December 6, 2012

Working Overseas : Individual Tax Impacts
International NGO’s Taxation Management of US Expats

Kate Curtis Fisken, EA, LPA, ATA
International Tax Specialist and Principal of Client Services

 25 years of experience working with expatriates, nonprofits and
government contractors
 Highly knowledgeable about the experiences of Americans overseas
– Lived and worked in Central and South America and India
 Member of:
– National Society of Accountants
– Maryland Society of Accountants
– Virginia Society of Accountants
– National Society of Enrolled Agents

Kate Curtis Fisken, EA, LPA, ATA • kfisken@grfcpa.com 2


Agenda
I. Definitions
– Long-term expatriate staff vs. short term
business travelers
II. Expat Compensation Package
– Qualifying exclusions, 2012 exclusions, tax
impact
III. 9 Steps to Manage Employer’s Risk
IV. Special Expat Issues
– State Tax Withholding Issues
V. HR Process for W-2/1099 Forms



I. Definition – Long-Term Expatriate
Assignment
 Employee’s principal place of
employment moves to or is in
an overseas location for more
than one year

 Expectation at the start of
the assignment is key to the
initial determination



I. Definition – Long-Term Expatriate
Assignment

 An assignment that was not expected to
last more than one year but is extended to
more than one year will become a long-
term assignment going forward

 Documentation supporting assignment
length is important



I. Definition – Short-Term Overseas
Business Travelers
 Overseas assignment lasts less than one year

 Organizations differ in levels of support and
treatment of short-term overseas business travelers
depending on HR policy

 May become a long-term assignee if on location for
more than one year

 May be subject to host country taxes


II. Expat Compensation Package
Overseas Employee’s Typical Salary and Allowances

 Base Salary  Education Allowance
 Cost of Living  Separate Maintenance
Allowances Allowance
 Housing Allowance  Other Allowances –
 Security Allowance FMV of Property of
 Danger Pay Facilities



II. How to Qualify for Exclusions

Eligible long-term expat
employee
 US citizen/US resident alien

 Tax home is in a foreign country

 Foreign earned income



II. How to Qualify for Exclusions (cont.)
Meet Residency Requirements
 Meet Physical Presence Test
– 330 days in a foreign country
out of 365

 Bona Fide Residency Test

 Established tax home in a foreign
country
– Residency is a full calendar
year
– Based on intent and facts




Eligible Contract
 Duration as employee or
contractor more than
one year, or indefinite

 Services performed in
foreign country



Eligible Earned Income
 Compensation, wages, commissions, bonuses

 Allowances
– Education pay
– Danger pay
– COL
– Separate Maintenance
– Security

 Fair market value or property or facilities received by employee
or contractor



II. What are the 2012 Exclusions?

Foreign Earned Income Exclusion (FEIE)
 2012 amount is $95,100 for full calendar
year

 First and last year FEIE may be prorated



II. What are the 2012 Exclusions?
 Foreign Housing Exclusion Limit (FHE)
2012 maximum housing exclusion is limited
to $28,530 (30% x $95,100) full calendar
year, less base amount of $15,216 (16% x
95,100) = $13,314
− In high-cost areas (Mumbai, Abuja, etc.), FHE
will be more

First and last year FHE may be prorated



II. Overseas vs. Domestic Typical Salary,
Allowance and Tax Impact

Description Domestic Expat
Salary $85,000 $85,000
Housing N/A $31,200
Post Diff N/A $ 9,010
Danger Pay N/A $ 6,500
Total Compensation $85,000 $132,710



II. Overseas vs. Domestic Typical Salary,
Allowance and Tax Impact
Description Domestic Expat
Compensation $85,000 $132,710
Less: HCT N/A ($25,500)
Less: US Tax ($15,106) ($ 8,662)
Less: Housing N/A Non Cash
Net Cash Available $69,894 $98,548



III. 9 Steps to Manage Employer Risk
HR Checklist – Handout #1
1) Provide compensation summary – initial year,
current year and final year (Handout #2)

2) Provide expat personnel policies and
procedures handbook

3) Overseas day tracking calendar (Handout
#3)

4) Insurance coverage information



(cont.)
5) IRS for 673 and instructions (Handout #3A)
− Purpose: Who, when and why
• US citizen or resident alien
• Completed and signed annually
• Expects to meet PPT or BFRT
• Form kept in employee’s HR or payroll file
− State treatment for form 673
− Withholding on salaries over FEIE




6) IRS form 2555 and instructions
7) IRS publication 54, FBAR & FR 8938
8) Restricted travel – Eliminates FEIE
and FHE
9) References for tax professionals



IV.Special Expat Tax Issues
Evacuation
 “Waiver of Time”: war, civil
unrest, etc. (Handout #4)

Second Foreign Household
 Allowable under certain
conditions

Group Living Residences
 Allocation of housing allowances



Transfer to New Country
 Effects on compensation package (Handout
#5)

Early Termination of Contract
 Possible remedies?

High Cost Verse Low Cost Housing Issues
 What are the tax impacts between low cost
and high cost housing assignments? (Handout
#6)



IRS Extension Forms
If an employee cannot file tax returns by
April 15, they can file Form 4868 and/or
Form 2350.
−Expats receive an automatic extension
until June 15

If an employer cannot file by the due
date, they can file Form 8809
−www.irs.gov


Documentation for state withholding

Employer’s options:
−Withhold in state
−Employee pays state estimated
payments
−If employee insists they do NOT have a
state domiciliary: What are the
employer’s remedies?



State Tax Withholding
Factors for determining state domicile
 Voter registration and voting  Bank and investment
history accounts
 Driver’s license  Library cards, club dues,
 Prior state income tax filing memberships, community
history involvement
 Home leave & departure post  Utility payments
 Familial ties  Rental income from property
 Property ownership owned in state
 Burial plot  Auto registration and licenses



State Tax Withholding
State and Domicile Rules
 Aggressive domicile rules: CA, VA, MD, MA and SC
 Recognize non-residency after meeting certain tests: IL,
NJ, NY
 No income tax: AL, WA, NV, SD, WY, TX, FL
 Tax interest and dividends: TN, NH

Adequate resources

 Inexperienced/unqualified staff
 Accounting and industry training programs and seminars



V. 2012 W-2 Exercise

 Base salary or sub-contractor
compensation
 Rent, housing, utilities and storage
 Post differential and danger pay
 Separate maintenance
 Settling in – flat payment, no
accounting



V. 2012 W-2 Exercise
See Handouts 8, 8A, 8B and 9
 Base salary  Per diem
 Rent, housing and reimbursement, with
security accounting
 Post differential and  Initial air ticket for
danger pay overseas move
 Settling in – flat  Moving expenses paid
payment, no accounting to company
 Education allowance  R & R – home leave


Working Overseas: Individual Tax Impacts for Expats

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