Work Abroad but earn in USD

Tuesday, March 08, 2005

US Tax Rules For Expatriates

Yesterday, I met with my accountant to explore the tax benefits of expatriating. This post will only be relevant to US readers, so others may one to skip this one.

Standard Disclaimer

Let me preface this entry by saying that I am not a lawyer, an accountant, nor am I trying to give advice in any way. I am simply stating what is my own understanding of the rules and regulations regarding expatriate tax status. I could be totally mistaken. You should by no means rely on what I'm posting here to prepare your tax return. I take no responsibility should you get in to trouble by relying on what I state here.

Foreign Income Exclusion

Now that we're done with the disclaimer, let's get on to the good stuff. The first and biggest benefit to expatriate tax status is an $80,000 income tax exclusion. What this means is that you get to take the first $80,000 you earn and wipe it off your return, as if you didn't earn it. Assuming we're talking 2004 numbers, that's worth $17,027 in income taxes you won't be paying. NICE!

Are there caveats, rules, and exceptions? You bet! That's way beyond the scope of this blog post, though. The best way to get yourself up to speed is to talk to an accountant who's familar with expatriate tax preparation or do what I did -- download and read Publication 54 from the IRS website. It won't be fun, but it will be informative. You owe it to yourself to be fully informed. Here's the short version:

  • Your can only get the exclusion on income earned as a result of being an expatriate. Moving out of the country doesn't mean you get to exclude $80,000 of stock dividends, for example.
  • You have to live outside the country for 330 days of the year or its a no-go.
  • Your primary residence has to be outside the country and you have to have established local community connections in your new home.
  • You're still going to owe Social Security & Medicare on the $80,000 under most circumstances.

Moving Expenses

You're also going to get to deduct moving expenses from the USA to Argentina. This means that if you ship your furniture/car/family down there, Uncle Sam will let you deduct that. I decided to sell everything in the USA and re-buy everything from scratch when I arrived. So, too bad for me. I'll still get to deduct the plane tickets, though.

Housing Exclusion

Under certain circumstances, you can deduct all or a portion of your housing costs while you are overseas. The rules regarding this are so complex that my accountant couldn't even come to a determination as to whether or not I qualify for it -- I'm in a sort-of gray area. She is writing a letter to the IRS on my behalf to obtain a ruling as to whether or not I qualify. So, I'm not really able to explain whether or not you can get this deduction, since I don't even know if I can get it. I can only say that it is available and that you might be able to get it. Check with your tax professional or the IRS.

As you can see, the possibility does exist for you to save a significant amount of money. Its a little tricky to figure out at first, but well worth the effort. I know for sure that I'll be saving at least $17,000 a year (and perhaps more) just on Federal Income Tax. We're not even talking cost-of-living savings yet. For me, that's worth 2-3 international vacations each year -- money that I would otherwise be paying to Uncle Sam.

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Anonymous Anonymous said...

Don' forget the crucial step of paying you taxes in argentina, which are much higher than the US. Good Luck

5/03/2005 02:22:00 AM  
Blogger said...

Anonymous is exactly correct. If you thought the tax laws were complicated in the USA, you are in for a rude awakening here in Argentina. First of all, many locals don't pay taxes. Part of the reason the country has so many problems is it seems everyone and their brother is evading taxes.

Even when people purchase property here, there is supposed to be a 21% vat tax on the realtor's commission. Most of the locals ask the realtor to waive this. I paid this 21% tax on every single purchase that I have made here. At times, some realtors have told me if I didn't need an official receipt, I didn't have to pay it. I feel it's an obligation to pay taxes.

I sat down with a local accounting firm and they explained the tax laws here. They are much more complicated than in the USA.

As far as the $80,000 exemption you are correct. Honestly, if you can make $80,000 here in Argentina that is significant. It doesn't sound like too much in the USA but here in Argentina that is over 230,000 pesos per year or 19,200 pesos per month which is more money than you would spend here.

I live a pretty good lifestyle here. I eat out in nice restaurants usually at least once or twice per day, I take on average about 15-20 taxis a day almost every single day (lots of meetings), I go out on lots of dates and I travel on average every 6 weeks to places like Punta del Este, Rio, Montevideo, etc. I still find it difficult to spend more than u$s 3,500 per month only on personal expenses.

Business expenses are incredibly high for me with salaries, Rent in a very expensive area and other general office expenses.

If you can make u$s 80,000+ per year here it will allow you to live a great life here and also bank money for your retirement fund.

Make sure you meet with a good accountant once you move here and start your business. Best of luck.


5/15/2005 01:46:00 AM  
Blogger arp said...

i have to say that you have one the most useful and informative blogs i have found anywhere. thanks for sharing your experiences with the world.

this tax exception sounds great for the ex-pat. you have mentioned incorporating in the US. does the US govt differentiate betweens the sources of income, ie whether the client is from the US or elsewhere? or is the only criteria that you live and work outside the US for 330 days per year?

10/27/2005 10:43:00 PM  

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