NOTE: This article does not constitute professional tax advice. Please make sure you consult the latest regulations and if necessary a professional tax adviser.
If you are planning to work abroad, it is important that you know your financial position, especially what your liability for tax will be. In the directory of countries, page 87, we note any special requirements of local tax authorities – often, you will have to register with the local tax office before starting work. However, there are plenty of potential problems when declaring your earned income in your home country. Regulations differ for citizens of different countries. Here are some guidelines for teachers from some Commonwealth countries and from the USA.
Australian nationals
If you are an Australian national, you have to fill in your own tax return. If you work abroad for less than a full tax year, when you return you will need to declare your earnings and tax, and will either receive a tax credit for the excess tax you have paid or be taxed for the shortfall. If you are abroad for longer periods, there will be a break in your tax requirements in Australia for the period you are away. But check your social security arrangement as payments made overseas will not be credited.
Canadian nationals
If you are a Canadian national, you will need to consider what your residency status is while you are working abroad. If you work abroad for a short term but keep your ties with Canada, you are considered a factual resident and will be liable to pay federal taxes, etc. If you work abroad for a longer period, you can be considered a non-resident. In this case your tax position in Canada will change. You will need to check with the authorities or consult a financial advisor to confirm your position, however the following general advice applies to anyone who works abroad.
If you move abroad (therefore live abroad for a significant period), taxation is complex – especially if you retain assets in Canada. Double taxation is one major concern – however, most countries have taxation treaties with Canada so this is relatively straightforward to explain to the tax department.
If you plan to move abroad, you might consider the radical step of establishing non-resident status with Canada to be able to take advantage of the (often lower) tax rates in other countries. However, this has serious implications on your return to Canada, so you should talk through the implications with the tax office or a tax advisor. For the latest regulations, visit: www.cra-arc.gc.ca/tax/nonresidents
Lastly, if you work abroad for a period of time then move back to Canada, you could still reclaim some taxes (for up to six years’ absence) – again, visit the www.cra-arc.gc.ca for more details and forms.
UK nationals
It is most important to check whether or not the country you are going to has a reciprocal tax agreement with your home country.
If you are a UK national, you will get tax relief (even up to 100%) if you are out of the country for at least 365 days and do not stay in the UK for more than 62 consecutive days in the tax period. There is a difference between non-resident status and exemption from tax in the UK. If you are classed as a non-resident, you are not liable for tax on unearned income from abroad but you are still considered to be domiciled in the UK. To qualify as a non-resident you must work overseas for more than a full tax year without being in the UK for more than six months in that tax year or three months in each year if your stay abroad spans the tax year.
Many countries have agreements with the UK to prevent the double payment of tax. Credit against UK tax for payment already made abroad will be given if there is no such agreement. (See Inland Revenue form IR6 – Double Taxation Relief).
When you are teaching abroad, it is important that you think about maintaining your UK social security payments so that you qualify for the state pension. You should get form N139 from the Department of Social Security (form SA29 if you are working in the EU).
US Nationals
The U.S. income tax system (and forms) are well-known to be complex area – and for U.S. citizens working and travelling the world as teachers, this can be particularly difficult. As a U.S. citizen or resident alien, your worldwide income generally is subject to U.S. income tax regardless of where you are living. Also, you are subject to the same income tax filing requirements that apply to U.S. citizens or residents living in the United States. However, several income tax benefits might apply if you meet certain requirements while living abroad. You may be able to exclude from your income a limited amount of your foreign earned income. You also may be able either to exclude or to deduct from gross income your housing amount (more later). To claim these benefits, you must file a tax return and attach Form 2555, Foreign Earned Income. If you are claiming the foreign earned income exclusion only, you may be able to use the shorter Form 2555-EZ, Foreign Earned Income Exclusion, rather than Form 2555.
You may be able to claim a tax credit or an itemized deduction for foreign income taxes that you pay. Also, under tax treaties or conventions that the United States has with many foreign countries, you may be able to reduce your foreign tax liability.
Income Earned Abroad
You may qualify for an exclusion from tax of up to $70,000 in income earned while working abroad. However, you must file a tax return to claim the exclusion. In general, foreign earned income is income received from services you perform outside of the United States. When we use the term United States, that includes Puerto Rico, Northern Marina Islands, Republic of the Marshall Islands, Federated States of Micronesia, Guam and American Soma. While not all of these countries are part of the United States, they have special tax status. Excluded from gross earned income is your housing costs allowance which are over a certain base amount. Generally, you will qualify for these benefits if your tax home (defined below) is in a foreign country, or countries, throughout your period of bona-fide foreign residence or physical presence and you are one of the following:
1) A U.S. citizen who is a bona-fide resident of a foreign country or countries for an uninterrupted period that includes a complete tax year, or
2) A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona-fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
3) A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
Tax Home
Generally, your tax home is the area of your main place of business, employment, or post of duty where you are permanently or indefinitely engaged to work. You are not considered to have a tax home in a foreign country for any period during which your abode (the place where you regularly live) is in the United States. However, being temporarily present in the United States or maintaining a dwelling there does not necessarily mean that your abode is in the United States. For details, see Publication 54.
A foreign country, for this purpose, means any territory under the sovereignty of a government other than that of the United States, including territorial waters (determined under U.S. laws) and air space.
Waiver of time requirements: You may not have to meet the minimum time requirements for bona-fide residence or physical presence if you have to leave the foreign country because war, civil unrest, or similar adverse conditions in the country prevented you from conducting normal business. You must, however, be able to show that you reasonably could have expected to meet the minimum time requirements if the adverse conditions had not occurred. See Publication 54 for a list of foreign countries that individuals have had to leave due to these conditions.
Travel Restrictions
If you violate U.S. travel restrictions, you will not be treated as being a bona-fide resident of, or physically present in, a foreign country for any day during which you are present in a country in violation of the restrictions. (These restrictions generally prohibit U.S. citizens and residents from engaging in transactions related to travel to, from, or within certain countries.) Also, income that you earn from sources within such a country for services performed during a period of travel restrictions does not qualify as foreign earned income, and housing expenses that you incur within that country (or outside that country for housing your spouse or dependents) while you are present in that country in violation of travel restrictions cannot be included in figuring your foreign housing amount.
Currently, these travel restrictions apply to: Cuba, Libya, and Iraq.
Exclusion Of Foreign Earned Income
If your tax home is in a foreign country and you meet either the bona fide residence test or the physical presence test, you can choose to exclude from gross income a limited amount of your foreign earned income. Your income must be for services performed in a foreign country during your period of foreign residence or presence, whichever applies. You cannot, however, exclude the pay you receive as an employee of the U.S. Government or its agencies. You cannot exclude pay you receive for services abroad for Armed Forces exchanges, officers’ mess, exchange services, etc., operated by the U.S. Army, Navy, or Air Force.
Foreign Credits And Deductions
If you claim the exclusion, you cannot claim any credits or deductions that are related to the excluded income. You cannot claim a foreign tax credit or deduction for any foreign income tax paid on the excluded income. Nor can you claim the earned income credit if you claim the exclusion. Also, for IRA purposes, the excluded income is not considered compensation and, for figuring deductible contributions when you are covered by an employer retirement plan, is included in your modified adjusted gross income.
Foreign Amount Excludable
If your tax home is in a foreign country and you qualify under either the bona fide residence test or physical presence test for a tax year, you can exclude your foreign income earned during the year up to $70,000. However, if you qualify under either test for only part of the year, you must reduce ratably the $70,000 maximum based on the number of days within the tax year you qualified under one of the two tests.
Foreign Income Taxes
A limited amount of the foreign income tax you pay can be credited against your U.S. tax liability or deducted in figuring taxable income on your U.S. income tax return. It is usually to your advantage to claim a credit for foreign taxes rather than to deduct them. A credit reduces your U.S. tax liability, and any excess may be carried back and carried forward to other years. A deduction only reduces your taxable income and may be taken only in the current year. You must treat all foreign income taxes in the same way. You generally cannot deduct some foreign income taxes and take a credit for others.
Foreign Tax Credit
If you choose to credit foreign taxes against your tax liability, complete Form 1116, Foreign Tax Credit, (Individual, Estate, Trust, or Nonresident Alien Individual), and attach it to your U.S. income tax return.
Do not include the foreign taxes paid or accrued as withheld income taxes on line 55 of Form 1040.
Foreign Tax Limit
Your credit cannot be more than the part of your U.S. income tax liability allocable to your taxable income from sources outside the United States. So, if you have no U.S. income tax liability, or if all your foreign income is exempt from U.S. tax, you will not be able to claim a foreign tax credit.
If the foreign taxes you paid or incurred during the year exceed the limit on your credit for the current year, you can carry back the unused foreign taxes as credits to 2 prior tax years and then carry forward any remaining unused foreign taxes to 5 later tax years.
Foreign taxes paid on excluded income. You cannot claim a credit for foreign taxes paid on amounts excluded from gross income under the foreign earned income exclusion or the housing amount exclusion, discussed earlier.
Foreign Tax Deduction
If you choose to deduct all foreign income taxes on your U.S. income tax return, itemize the deduction on Schedule A (Form 1040). You cannot deduct foreign taxes paid on income you exclude from your U.S. income tax return.
More information. The foreign tax credit and deduction, their limits, and the carryback and carryover provisions are discussed in detail in Publication 514, Foreign Tax Credit for Individuals. For more information and to download publications and forms mentioned, visit www.irs.ustreas.gov/forms_pubs/index.html