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Teaching Abroad: How taxes work for a US Expat

The US isn't particularly generous when it comes to expat taxes however most teachers will be ok

American taxes are notoriously complicated and it’s not much different for American expats.

Even more so than with other countries things get complicated quickly with American taxes and we’re not tax professional’s so we’ll be keeping this down to the basics. (i.e. you only earn income from your job, you don’t have money coming in from abroad etc.)

Unlike many countries, all US citizens and green cards holders have to pay taxes at home wherever they are.

There are two main options to lowering your tax commitments, double tax treaties and Foreign Earned Income Exclusion:

First the USA has a lot of double tax treaties so if you pay tax somewhere else you’ll usually be able to get credit to avoid paying double in the US and secondly Foreign Earned Income Exclusion, allows you to exclude paying tax on your income abroad up to a point.

It’s this second one we’ll focus on, because it’ll cover most teachers and will save us from having to work with tax credits.

Foreign Earned Income Exclusion

Foreign Earned Income Exclusion (FEIE) allows you to get the first $97,600 of your salary earned abroad without tax.

We’re going to make the assumption that you’re earning below that. (Reasonable for the first part of your career at least.)

A brief note if you do earn more than $97,600. The FEIE counts as income for the tax brackets. So if you earn $100,000 you’ll have to pay 25% or 28% tax on the remaining $2,400 rather than starting at the first tax bracket.

Great so how do we qualify for it? There are 3 possible conditions for qualifying:

  1. You’re a US citizen. You’re also a bona fide resident of a foreign country (or countries) over an entire tax year (see below). This can’t be interrupted.
  2. You’re a US resident alien, and a citizen of a country with which the US has an income tax treaty. You’re also a bona fide resident of a foreign country (or countries) over an entire tax year. This can’t be interrupted.
  3. You’re a US citizen or resident alien who’s in a foreign country (or countries) for 330 full days during any consecutive 12 months. This can be interrupted.

The easiest way to pass this test is with the third condition also called the physical presence test.

This is because even if you do pass the bona fide resident test (see below, it's a bit of a black box) then there’s no guarantee that your trip will line up conveniently with the US tax year. That means contracts which keep you abroad for 11 months of the year are great for you as a teacher.

330 Full Days Abroad (The physical presence test)

This criteria is pretty self-explanatory but there are a couple minor questions you might have like, what day do I start to count on? If I fly in at 12:30am, does that count as my first day?

Thankfully the IRS actually has quite a clear and useful article on all the subtle clarifications. You can find it here.

Bona fide resident test

You qualify as a bona fide resident by passing the Bona Fide Residence test. It’s an IRS test, decided on a case by case basis.

They give two fairly clear cut examples on their website. A tourist fails it; someone going on an indefinite work assignment passes it.

They give one actual condition, if you declare yourself as a non-resident in the foreign country and the country says you don’t have to pay income tax like a resident you can’t pass it.

There’s another article on Taxes for Expats which provides a couple more examples for the test. The main problem with passing it, is unlike the British tests for example, there's no exact guidelines on how it's decided. That means in you'll need to get some professional tax advice on whether or not you can pass this test as there's no way to work it out by yourself (well unless your case is very clear cut like above).

Do I still have to file a return?

Yep unfortunately so. Even if you’re paying no tax you’ve still got to file your tax return if you earn over $9000 a year.

You’ll need to file for the Foreign Earned Income Exclusion and provide a normal tax return as well.

Foreign Housing Exclusion or Deduction

For completeness we’ll briefly mention the other large partner exclusion for FEIE, although it won’t be relevant for most teachers. It’s called Foreign Housing Exclusion or Deduction.

Foreign House Exclusion, it allows you to treat your housing expenses (non-extravagant) as tax deductible.

The tests to qualify for it are exactly the same as those for FEIE, so if you get that one, then you get this one.

How much does it cover?

It applies to all of your housing expenses (non-extravagant), minus a base amount.

The base amount: Take 16% of the FEIE limit, so 97,600*0.16, divided into an amount per day (divide by 365).

This is then multiplied by the number of days you qualify for it (in the tax year).

Again most teachers won’t need to worry about it and if you do then congratulations on earning enough for it to matter.

Here's a really standard tax disclaimer: We're not tax lawyers, this isn't official tax advice. You're responsible for what you do, if you're unsure of anything you'll need to talk to a proper tax lawyer and all that good stuff. I'm sure you knew all this anyway.

Image Attribution:

"Income Tax" by Alan Cleaver is licensed under CC BY 2.0.