Top 5 Negotiation Tips for an Overseas Contract
Ines Zemelman, EANov-25-2015
Moving overseas to advance in your career can be financially advantageous. It can also be a life-changing venture. When negotiating an overseas contract, however, you need to be cautious and consider how this may impact your US expat taxes. Here are the top 5 tips for negotiating an overseas contract from a tax-wise perspective.
Tip Number 1: Find out if you will be required to make any trips back to the United States.
There are a variety of tax breaks which enable you to lower your US income tax liability as a US Citizen earning foreign income. Among these is the FEIE (Foreign Earned Income Exclusion) which allows you to claim up to $100, 800 (for 2015; the exclusion amount for income earned in 2014 is $99,200, and these amounts are for individuals – they are doubled for married couples filing a joint return). In order to qualify for the FEIE, you must meet the conditions of either the Bona Fide Residence Test or the Physical Presence Test. The majority of US Expats use the Physical Presence Test which requires you to have lived in a foreign country for a period of 330 days out of a 365 day period. That means that you can only spend 35 days in the United States in order to meet the qualifying guidelines of this test. If you spend more than 35 days in the US, you will not qualify for the Physical Presence Test and will therefore not be eligible to offset your foreign income with the FEIE. If you are ineligible for the FEIE, you will be taxed on your entire foreign income and will pay taxes accordingly.
We strongly suggest that you keep track of the days in which you are in the United States to make sure you don’t spend too much time outside of your country of residence. If you will be required to travel to the United States frequently and plan on being in the US for more than 35 days out of the year, you may be inclined to request additional compensation on your foreign contract. Be aware that even travel purely for business purposes, required by your employer, is counted towards the notorious 35 days limit.
If you are planning to move out of the United States for the extended period of time, you will may meet the conditions of the Bona Fide Residence Test. You can meet qualification for the Bona Fide Residence test not earlier than you spend a full calendar year, January through December, and have no intention of moving back to the United States any time soon.
Tip Number 2: Find out who will be paying your foreign taxes.
This is a vital question that often isn’t asked. If you are going to be responsible for paying your foreign taxes, you will be eligible to claim the Foreign Tax Credit (FTC) on your US expat tax return. By using the FTC, you will be able to make a dollar-for-dollar deduction and offset your total US tax liability. Keep in mind that you cannot claim the FTC for taxes you pay on income which was excluded under the FEIE.
If your foreign employer is planning on paying your foreign taxes, you will not qualify for the FTC. The downside of having your employer pay your foreign taxes is that you will be showing a higher salary, which may increase your US tax liability. This will mean that you are actually making less in the long run. If your foreign employer plans on paying your foreign tax liability, try to negotiate a higher gross salary to compensate for the potential increase on your US expat tax liability.
Tip Number 3: Find out where your Social Security contributions will be paid.
If your foreign country of residence has an active Totalization Agreement with the United States, this question will be fairly easy to answer. A Totalization Agreement between a foreign country and the United States stipulates the country to which you will be required to make Social Security contributions. This prevents you from having to pay Social Security to two countries. If there is not a Totalization Agreement in place between your host country and the United States, you may wind up having to make Social Security contributions to both countries – even though you will only be retiring in one. Take a look at this Social Security Administration list of Totalization Agreements to see if your host country is among the countries that have an active agreement with the United States. If your host country is not on this list, try to persuade your employer to give you a higher salary to compensate for the amount of Social Security contributions you will be making to two separate countries.
Tip Number 4: Find out if your moving expenses will be reimbursed by your foreign employer.
Relocating to a foreign country can be very expensive. The IRS allows you to claim moving expenses as a deduction on your US expat tax return. If your company will be paying for your moving expenses, you will not be able to deduct these expenses on your US income tax return. If your employer is going to be reimbursing you for your moving expenses, make sure that it’s listed as a reimbursement. If your employer offers you a one-time bonus to compensate you for your moving costs, this will be counted as income and you will be required to report it as such and pay taxes accordingly.
Tip Number 5: Find out who will be paying for your housing expenses.
Foreign housing expenses will most likely be your greatest financial liability overseas. In consideration of this, it will be beneficial for you to find out if you will be responsible for your housing expenses or if your employer will be paying for or compensating you for this cost. If you are going to be paying for your own housing expenses, you will be able to offset your US expat tax liability by claiming the Foreign Housing Exclusion. The IRS sets a maximum exclusion for each tax year, and the maximum exclusion amount depends on where in the world you are living. For example, housing expenses in Sydney Australia are only eligible for a deduction of no more than $32,782 while housing expenses in Hong Kong are eligible for a deduction of up to $114,300.
The types of housing expenses you’re able to deduct under the Foreign Housing Exclusion include:
●Cost of rent
●Personal and real property insurance
●Rented furniture and accessories (this does not include purchased furniture or accessories)
When negotiating your overseas contract, make sure that your salary and/or reimbursements are sufficient enough to cover your housing expenses. Keep in mind, though, that you will be able to deduct a good portion of them on your US expat tax return. Keep in mind, also, that if your employer is paying for your foreign housing expenses, this could be viewed by the IRS as additional income and you may be obligated to pay more taxes than you would have if you were to cover them yourself.
Ines Zemelman, EA is the founder of Taxes for Expats