Country Article / Postcards

KEEPING UP WITH THE TAX MAN

Date: 05/26/2003

Dear International Living Reader,

"All this [that is, all the material International Living publishes about living and investing around the world] is great, but you don't often mention taxes. Just how much tax does an American living outside the United States have to pay? Spanish taxes plus American taxes, for example? New Zealand taxes plus American taxes? Mexican taxes plus American taxes?"

Funny you should ask, dear reader.

The short answer is yes...and no. You are liable for taxes in both the U.S. and the country where you're residing...but that doesn't mean you owe taxes in both jurisdictions.

First, the good news: The earned-income exemption for Americans residing abroad will stand. As we've been reporting in recent weeks, there was talk of doing away with this exemption. Indeed, the Senate voted in favor of its elimination. But that plan was thwarted in the House.

So, what are you liable for? As an American living outside the States...you still have a tax obligation to Uncle Sam...but your first $80,000 of earned income each year is tax-exempt. This is $80,000 per person--$160,000 per year for a married couple.

You still must file your taxes annually. (By the way, if you're not physically present in the U.S. on tax day, you're eligible for an automatic extension of your filing date, to Aug. 15.) But you can apply the earned-income exemption...

and you can also take into consideration any double-taxation treaty that may exist between the United States and the country where you're residing. Plus you may still be eligible for all the usual deductions.

That's your U.S. obligation. You also have an obligation in your country of residence--or not, if you're living in a country that does not tax income--according to the tax laws of that jurisdiction.

In Ireland, income is taxed on a remittance basis--which means you pay tax on money you bring into the country, not only on money you earn in the country, and not at all on money you earn elsewhere and never bring into Ireland. We remit what we need to live on.

This is a complicated subject, and I'm no expert. My strong recommendation to any reader who asks is that you seek advice from two people who are: one in the United States...a tax attorney or accountant experienced working with Americans residing abroad...and one in the jurisdiction where you're residing. You have two obligations, and no one I've ever met would be capable of effectively managing both.

If you're not yet resident abroad, but intending to be, seek this expert advice in advance of your move. Sometimes, opportunities to minimize your tax burden are lost once you've made your change of address.

Good luck.

Kathleen Peddicord