Seven Tax Tips You Need to Know Before you Move Back to the United States from Abroad
IJ Zemelman Jul-01-2015
When you are planning to move back to the United States after a stint overseas, there are a lot of things to take into consideration. Among these is the manner in which your US expat tax return will be affected. In this piece, we will take a look at the seven most important aspects of returning home to the US from having worked abroad.
Become Informed of Your Host Country’s Social Security System
Most countries require its residents who are working in the country to make contributions into their Social Security system. Once you leave the country, it’s a possibility that you could have those contributions refunded to you. This, of course, depends on the details of the departure. You must consider certain aspects such as whether or not you’re leaving country permanently and whether or not you have acquired citizenship in your host country. In your planning for your departure, take the time to contact the foreign Social Security office to find out what you need to do in order to get a refund (if one is available).
The Social Security contributions you made to a foreign country generally will be tax deductible, so look into the manner in which your refund of foreign Social Security contributions will be taxable in the United States. You will need to include accurate information in your departure tax return. If you are relying on a US expat tax expert, make sure to provide him/her with any receipts you’ve received or plan to receive.
When it comes to your tax liability and Social Security contributions in the United States, you have probably already paid taxes on your domestic Social Security contributions, as contributions to the US Social Security Administration are not tax-deductible. The same is true for employer contributions. All of these earnings should have been reported on your previous US expat tax returns. It’s possible, though, that you were unable to (or didn’t know you were required to) report this on your previous US expat tax returns. You may want to take the time to find out exactly what’s been taxed by the United States and what is still outstanding.
Consider the Possibility of Having to File a Special Foreign Departure Tax Return
You are encouraged to let your foreign employer know of your plans to move back to the United States. They may have to file appropriate forms which indicate that you are planning on leaving the foreign country in which you are residing and working. There may be special departure filing requirements of which you need to be aware. Depending on the foreign country in which you’ve been living and working, there may be an exit tax required. You also may be required to submit specific documentation to immigration control upon your departure.
If your foreign employer was making your tax payments on your behalf, make sure that your final departure tax return has all these payments grossed-up to include the tax on the taxes which were paid in full. Without taking this step, you may be required to file another return in the future.
Make Sure to Investigate How Your Deferred Compensation Items will Affect Your Foreign Tax Return
The majority of countries around the globe require their citizens and residents to file and pay taxes when deferred compensation items are paid out. This may include bonuses, severance pay, stock options, restricted stock options, or any retirement plans. Make sure to keep track of your deferred income items during your stay in a foreign country to ensure that they are paid out properly and you have fulfilled your filing and financial obligations. Also keep in mind that your foreign taxes will be deductible on your US expat tax return if the income you received is not deducted on your Foreign Earned Income Exclusion (explained in more detail at the end of this piece).
Make Sure You Know How You Will be Affected by Basis of Property Mandates for Non-Resident Aliens
When you move back to the United States, you may not yet be considered a resident. Once you establish residency, you will be treated just like any other citizen or Green Card holder of the United States. That means that you will be taxed on your worldwide income from both employment and investments. If you own any personal property (real estate, grant options, stocks, etc.) in a foreign country and sell the property, you will be taxed on the net income – meaning the basis of property (original purchase value) will be deducted from the total sale amount and you will be taxed on what is left. It will be important for you to discuss your personal property and/or investment holdings with an experienced US expat tax professional to determine which options are best for you from a tax perspective. For example, it may make more sense for you to hold the property rather than sell it right away.
Make Sure to Close all Foreign Accounts Which You will Not be Using and be Aware of Your Reporting Obligations for the Ones You Leave Open
Due to increased FATCA measures in recent years, the IRS and Department of Treasury are very aware of foreign accounts, companies (foreign corporations, foreign partnerships, etc.) and other financial instruments being held by US Citizens and Green Card Holders. In order to simplify your reporting requirements, make sure to close any accounts that you will no longer be using once you return to the United States. Remember, though, you will still be required to report foreign accounts on FinCEN Form 114 even if you closed them if the total value of your account(s) met or exceeded $10K. You may be interested in leaving at least one foreign financial account open – especially if you plan on receiving payments into that account. If you maintain a foreign financial account with a balance of $10K or more, you will continue to be responsible for filing FinCEN Form 114 every year even after you move back to the United States.
Be Aware of Any State Taxes that will be Due Upon Your Arrival to the United States
Each state is autonomous in its taxation of residents and each has its own set of tax guidelines. There are states like Texas in which there are no individual income taxes assessed. There are other states like New York and New Jersey where there are very stringent guidelines. There are strict domicile rules in some of these states that may require you to file a regular state income tax return even for the years in which you were living abroad. This may be true if you maintained a residence, had family living in the state while you were overseas, or there was any other indication that you were still a resident of the state. Make sure you investigate the residency guidelines in your home state as well as the details of state taxation.
Keep in Mind That There are Tax Breaks for the Income You Received Overseas
As a US Expat living and working overseas, there are a few tax concessions which make it possible for you to exclude income and avoid paying taxes to two separate countries. One of these concessions is in the form of the Foreign Earned Income Exclusion (FEIE). The FEIE allows you to deduct up to $99,200 for income earned in 2014 and $100,800 for income earned in 2015 of foreign income from your US expat tax return. Even if you didn’t live the entire year in your foreign country, you may still use a partial amount based on the amount of time you spent abroad.
If you paid foreign taxes on income and you choose not to include it with your FEIE or you made more than the FEIE limit, you may also use the Foreign Tax Credit (FTC), which will enable to you take a dollar-for-dollar deduction against the foreign taxes you paid. You should track your foreign tax credits diligently, as you may be able to use them in the future for business trips overseas or in receipt of receiving deferred compensation.
I.J. Zemelman, EA is the founder of Taxes for Expats