Q: My husband is planning to work overseas soon, maybe for a total of 2 years. How will this impact our income taxes?
A: Without knowing the details about your situation, it’s very hard to say the impact that working overseas will have on your income taxes. It depends on several factors, not the least of which are: the exact country in which your husband will be working, how he is compensated, and whether or not he is deemed to be an employee or an independent contractor. Regardless of these considerations, U.S. citizens are legally required to pay taxes on all income, no matter where it is derived or generated (i.e. either domestically or overseas).
Lowering Your Tax Bill
To potentially lower your tax bill, find out three things:
• Is There a Reciprocal Tax Agreement With the U.S.?
Some nations have reciprocal tax treaties and agreements with the United States; other countries do not. If a U.S. worker is employed overseas in a country that does have a reciprocal tax agreement with American, then that worker may be eligible to get a tax credit for taxes paid to that foreign country.
• Is His Pay Grossed Up?
Many employers will “gross up” an employee’s pay when that person is working overseas, relocating, or doing something else to benefit the employer – which in turn, may negatively impact the employee, from a tax standpoint. So it’s important to know whether your husband’s pay will include added compensation to essentially cover his income tax bill.
• Is He Considered an Employee or an Independent Contractor?
Your husband’s taxes will also be determined by his employment status as either an “employee” or an “independent contractor.” Each has its pros and cons form a tax standpoint. And each may be afford certain tax benefits and deductions not provided to the other. For instance, an employee may get a deduction for relocation or moving expenses; whereas an independent contractor may be able to write off some of the same business expenses as entrepreneurs and self-employed individuals.
Once you find out the answers to these three important questions, then you can begin to do some appropriate tax planning. Also, since this situation involves a far more complicated set of financial and tax considerations than normal, I would strongly advise you to also consult a qualified tax professional.