GLOBAL MOBILITY SERVICES - UNITED STATES: TAXATION OF EMPLOYEES WORKING ABROAD (OUTBOUND) - PWC
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Global Mobility
Services
United States: Taxation of
employees working abroad
(outbound)
People and
Organisation
United States:
Taxation of employees
working abroad Folio
March 2019
Last Updated: March 2019 This content is for general information purposes only and should not be used as a substitute for consultation with professional advisors.
Contents:
United States
Introduction: US citizens and residents working abroad 4
Step 1: Understanding basic principles 5
Step 2: Understanding the US tax system 6
Step 3: What to do before departing the United States 21
Step 4: What to do while you work abroad 26
Step 5: What to do before you return to the 28
United States
Step 6: Other matters requiring consideration 29
Appendix A: Individual key US federal rate and limits 34
Appendix B: Individual US federal income tax rates 38
Appendix C: Totalization agreements 40
Appendix D: US contacts and offices 41
Additional Country folios can be located at the following website:
Global Mobility Country Guides
Global Mobility Country Guide (Folio) 3
Introduction:
US citizens and residents
working abroad
This folio is intended to provide an rules, including Internal Revenue Refining Social
overview of the US taxation system as Service (IRS) announcements and Security;
it affects US citizens and resident court decisions, should always be
aliens working abroad. In addition, it reviewed before implementing tax- Structuring
provides tax-planning techniques that planning strategies. Professional foreign-assignment
enable individuals on foreign advice should always be sought prior policies;
assignment to take advantage of to making any decisions. For both
Choosing an
various exclusions and credits. After home and host countries, the advice employment structure;
reading this folio, it should be should include a discussion of various
apparent that tax planning is essential topics. Pensions;
in minimizing US tax liability before,
during, and after a foreign assignment. Among others, the following matters Corporate tax
are not covered in this folio: implications.
The material contained in this guide
was updated in March 2019 and Planning tax-effective Further information or
reflects the tax laws and regulations in remuneration including dual or assistance may be obtained
effect at that date, including those multiple employments, pre- and from any of the PwC contacts
changes made by the Tax Cuts and post-assignment planning, listed in the back of this folio.
Jobs Act enacted on December 22, stock options and other
2017. Users are reminded that specific tax-efficient benefits;
4 People and Organisation
Step 1:
Understanding basic principles
US citizen’s tax liability in the foreign (host) tax
jurisdiction. However, the US
1. US citizens living and tax system allows certain
working abroad are often special exclusions and foreign
surprised to learn that they tax credits (covered later in
will continue to be liable for this folio) that minimize the
US federal and, sometimes, possibility of incurring a
state and local individual double-tax burden and help
income taxes. This rule also put Americans on equal
applies to most resident footing with foreign
aliens with green cards. counterparts.
Consequently, US citizens
and resident aliens working 4. The term expatriate is
abroad must continue to file primarily used in the folio to
US tax returns. refer to a US citizen or
resident alien (e.g., green
Tax rules for the card holder) who is working
United States on an assignment outside the
2. US citizens and resident United States. The term may
also refer to a former US
aliens living abroad remain
citizen or former long-term
taxable on their worldwide
income for federal income tax lawful permanent resident
who may be subject to special
purposes. The calculation of
tax provisions under Sections
the US individual income tax
liability is essentially the 877A and 2801 as a result
of ‘expatriation’.
same whether the US citizen
or resident resides in the
United States or abroad, with
certain exceptions. There are
complicating factors,
however, such as additional
forms to be filed and difficult
calculations to be performed.
3. Many US citizens and
residents working abroad are
also likely to be liable for tax
Global Mobility Country Guide (Folio) 5
Step 2:
Understanding the US tax system
General be permitted in determining surviving spouses, head of
the adjusted gross income household, and single. There
5. The starting point in (AGI) of an expatriate for US may be circumstances in
calculating the US individual tax purposes. Examples of which a taxpayer may be
income tax liability is such items are capital losses entitled to elect a different
determining the individual's (up to $3,000 per year in filing status while living
gross income. As with excess of capital gains) abroad. For example, an
domestic US taxpayers, an allowable rental losses expatriate married to a
expatriate's gross income (subject to limitations) and nonresident alien may find it
includes income from all allowable IRA deductions. beneficial to file as married
sources, unless specifically filing separately or head of
excluded by the US Internal In addition, moving expenses household to avoid reporting
Revenue Code (IRC) or historically have been and paying US tax on the
treaty. Thus, income includes deducted to calculate AGI. nonresident alien spouse's
compensation received in the However, for tax years 2018 non-US source income.
form of cash, property or the through 2025, an employee’s Personal exemptions have
reimbursement by an deduction of unreimbursed been eliminated.
employer of personal moving expenses, and the
expenses. favorable income exclusion Itemized deductions
for qualified moving expenses
6. Expatriates living overseas 9. Itemized deductions that are
may receive additional types have been eliminated. This subtracted from AGI in
suspension relates to
of income, such as foreign computing taxable income
employee moves in 2018 and
premiums and allowances in typically include investment
connection with their foreign later years. Certain states and mortgage interest
may still provide a tax benefit
assignments, and non-US expense, charitable
for moving expenses,
investment income such as contributions, and qualifying
interest, dividends or capital however. medical expenses. Certain
gains. Whether or not such Filing status itemized deductions are
income is included in gross limited to an aggregate of
income for US tax purposes is 8. In general, an individual's $10,000, including state and
determined by the filing status depends on local income tax, domestic
application of US tax law, not whether he or she is single or real property tax, and
foreign tax laws. married. Four types of filing personal property taxes. No
status are available for deduction is allowed for
7. Normal deductions, losses, federal income tax purposes: foreign real property taxes.
exclusions and adjustments Married filing jointly,
to gross income continue to married filing separately or
6 People and Organisation
In addition, certain itemized in a foreign country to though
deductions previously subject exclude from US taxation one qualifies.
to the two percent of the amounts earned for services
adjusted gross income (AGI) performed outside of the Tax home
floor are no longer United States. In order to be
15. In general, an individual's tax
deductible. No interest a ‘qualified individual’ home for US tax purposes is
deduction on home equity eligible for the benefits
located at his or her principal
loans is allowed if such debt allowed under these
place of business. The
does not meet the definition provisions, specific tax home location of one's tax home is
of acquisition indebtedness. and residence or physical
not affected by short,
Casualty losses are not presence requirements must
temporary absences from the
deductible, except in the case be met. A qualified individual principal place of
of losses attributable to eligible for the foreign earned
employment. For example,
federally declared disaster income and housing
business trips to the United
areas. exclusions is one who meets States or the maintenance of
either a ‘bona-fide residence’
10. US individual taxpayers may a dwelling unit in the United
or ‘physical presence’ test
claim the standard deduction States would not typically
while maintaining a tax home result in a change in tax home
if that amount is greater than in a foreign country or
their itemized deductions. from the foreign location of
countries. Special rules apply
For 2019, the standard principal employment to the
for the election and United States. However, a tax
deduction is $24,400 for revocation of the exclusion.
married filing jointly, home for Section 911
For 2019, the maximum
$12,200 for single and purposes cannot be in a
income exclusion is foreign country for any
married filing separately $105,900, which can be
taxpayers, and $18,350 for period during which an
further combined with the
head of household filers. individual maintains an
foreign housing exclusion abode (i.e., the place where
that varies by country.
11. Following the deductions, tax the person is actually living)
is calculated using graduated 14. The foreign earned income in the United States.
rates (including some flat and housing exclusions do
rates such as long-term 16. An individual may have a tax
not apply to US expatriates
capital gain rates.) home separate from that of
working in Puerto Rico,
his or her spouse. Therefore,
12. There are a number of Guam, the Commonwealth of a spouse and family
the Northern Mariana
adjustments allowed after the remaining in the United
Islands, the US Virgin Islands
basic tax calculation to arrive States during an individual's
at the final tax liability. or US possessions, such as foreign assignment do not
American Samoa. Special tax
necessarily affect
Foreign earned income and rules apply to these
qualification of a foreign
housing exclusions jurisdictions. Note that location as the expatriate's
there are commonly
13. US tax laws contain special tax home.
situations in which it is
provisions (under Section not beneficial to claim 17. The IRS has taken a position
911) that allow certain US the exclusions even that, in general, the tax home
citizens or residents residing of an individual will not be
Global Mobility Country Guide (Folio) 7deemed to have shifted to a home and an election is intention was to remain in
new location unless the in place.) France for only a short time,
length of the business he would not be considered
assignment is intended to be 19. Example: Andrew (a US to have established bona-fide
for more than one year. citizen) began his overseas residence in France.
Therefore, only individuals assignment to Hong Kong on Therefore, the ability to
whose international September 1, 2018, and qualify for the foreign earned
assignments are expected to returned to the United States income exclusion under the
be for more than one year can permanently on August 1, bona-fide residence test
qualify for the foreign earned 2020. He qualifies as a bona- would not begin at least until
income exclusion under fide resident during all of his his arrival in Hong Kong.
either of the specified tests. assignment period in 2018,
2019, and 2020 because his 22. Whether an individual is
Bona-fide residence test uninterrupted period of classified as a bona-fide
foreign residence included foreign resident depends on
18. To be considered a bona-fide the entire 2019 tax year. the facts and circumstances
resident of a foreign country of each case. These include
for Section 911 purposes, a 20. The foreign earned income the following:
taxpayer must generally be a exclusions cannot be claimed
US citizen1 and reside in a for income from any period – Intentions regarding
foreign country or countries before the taxpayer's length of time and
for an uninterrupted period qualified period begins. Thus, purpose in the foreign
that includes one full the qualifying foreign location are considered
calendar year (January 1 residency period does not as well as integration
through December 31). generally include any pre- into society;
assignment trips or trips to
Temporary absences are foreign countries while en- – Payment of income tax
permitted (e.g., business route to the final destination. to the host country is a
trips, vacations, etc.). Once This rule also applies when positive factor,
bona-fide residence is an individual departs from a although the fact that
established, the foreign foreign tax home at the end of no foreign income tax
earned income exclusion is an assignment and intends to is paid (for example,
available for all days during return to the United States. because the expatriate
the period of foreign The intention not to return to lives and works in a
residence. Under this test, an a foreign residence country with no
individual can qualify as a terminates the bona-fide income tax) is not
bona-fide resident in the year residence in such location. necessarily a negative
of transfer to or from a factor. However, if the
foreign assignment as long as 21. Example: Bill stopped in expatriate submits a
the assignment includes an France for several days before statement to that
entire tax year (assuming the arriving in Hong Kong, his country's government
person had a foreign tax new principal place of claiming that he or she
employment. Since his is a nonresident for
1Certain exceptions may apply for resident
aliens who are citizens of countries with
which the United States has a bilateral treaty.
8 People and Organisationpurposes of its income Physical presence test beginning with midnight and
tax law, in many cases ending with the following
he or she may be 23. A US citizen or resident alien midnight. Therefore, for
denied bona-fide meets the physical presence travel to and from the United
foreign residence test by being physically States, days of arrival in and
status for Section present in a foreign country departure from a foreign
911 purposes; (or countries) for at least 330 country do not always count
full days during any period of as qualifying days of
– The decision of an 12 consecutive months. In presence. However, travel
expatriate not to sell a applying the physical days between foreign
US home or move his presence test, any period of countries (without US
or her family abroad is 12 consecutive months may presence of 24 hours or
not, in itself, sufficient be used. The months need more) after having
reason to deny not be full calendar months established residence in a
bona-fide foreign as long as they are foreign country count as
residence status; consecutive. qualifying days of
physical presence.
– Absentee voting in US 24. When counting days
elections is not a physically present in a foreign 25. As mentioned, individuals
disqualifying factor. country, only whole days are whose assignments exceed 12
considered. A day is defined months but do not
as a full 24-hour period encompass an entire tax year
Global Mobility Country Guide (Folio) 9will not qualify for the foreign Potential for expense 30. A listing of the countries for
earned income and housing deduction which the waiver is available
exclusions under the bona- is published in the Internal
fide residence test. However, 28. For 2018 and later years, an Revenue Bulletin, available at
qualification may occur if the individual whose tax home www.irs.gov.
physical presence test is remains in the United States
satisfied. may no longer deduct certain Ineligible countries
‘ordinary and necessary’
26. Example: Frank arrived to unreimbursed work-related 31. Presence in certain foreign
begin his foreign assignment expenses as itemized countries will not count for
on March 1, 2018. He moved deductions. Examples the physical presence test or
back to the United States on include travel expenses, bona-fide residence test if the
March 31, 2019. He certain transportation costs, expatriate is present in the
established a tax home in the or other items required for country in violation of certain
foreign country and had no the taxpayer’s job. These US travel restrictions. The
trips back to the United expenses, however, may still Treasury Department and the
States during his assignment. qualify as excludible from IRS have the authority to
Frank satisfies the 330-day income if paid by an issue rules allowing the
physical presence test for the employer. foreign earned income
period that he was abroad in benefits for individuals doing
the 2018 and 2019 tax years Waiver of eligibility tests ‘necessary work,’ such as
because he was present in, for certain countries research or news reporting,
and had a tax home in, a in restricted countries.
29. The normal rules for
foreign country for at least Foreign earned income
qualification under the bona-
330 days during a fide residence or physical exclusion
consecutive 12-month
presence test are waived if
period. 32. If an individual's tax home is
residence in a foreign country
is disrupted because of war, in a foreign country and he or
* Note that in the above she meets either the bona-
example, the bona-fide civil unrest or similar adverse
conditions, and the IRS has fide residence test or the
residence test could not be
documented such country as physical presence test, he or
met because the period of she may elect to exclude
foreign residency did not qualifying. In such instances,
an individual is allowed a qualified foreign earned
encompass an entire tax year.
pro-rata portion of the income up to a maximum
27. Because the requirements of exclusions, based on the annual amount of $105,900
the physical presence test are period of actual residence or for 2019.
rigid, detailed records of presence, provided the
33. Foreign earned income
travel to and from the United requirements for consists of income that is
States are necessary to qualification could
earned as compensation for
prevent unintentional reasonably have been
services performed in a
disqualification, and they are expected to be met had the foreign country or countries
helpful in the event of an adverse conditions not
during the period that an
IRS examination. existed.
individual has a foreign tax
home and meets either the
10 People and Organisationbona-fide residence or nonexempt employee year may only be offset to the
physical presence tests. benefits trust. extent of any unused
Earned income includes: exclusion from that prior
35. Compensation attributable to year.
– Wages, salaries, business days worked in the
commissions, bonuses United States is US source 38. The maximum allowable
or professional fees; income and does not qualify exclusion is computed on a
as foreign earned income. daily basis.
– The fair market value
of noncash 36. Example: Assume that, Example: Assume an
compensation provided during 2018, a qualifying expatriate's qualifying period
by an employer (such expatriate under the bona- begins on September 15,
as the rent-free use of a fide residence test, earning a 2018. The exclusion could be
home or company car); base salary of $60,000 and claimed for 108 days
allowances of $20,000, (September 15 to December
– Expatriate allowances spends 45 workdays in the
or reimbursements 31). The maximum exclusion
United States. A days-basis would amount to $30,754
(e.g., cost-of-living allocation of compensation (108/365 or 29.6% of
allowance, overseas often provides the clearest
differential, education, $103,900 for 2018).
reflection of the source of the
home leave and particular expatriate's 39. If the individual's spouse also
moving expenses.) earnings. Assuming that works in the foreign country,
34. Foreign earned income does there are 240 workdays in the the amount of the foreign
year, 45/240 of earned income exclusion is
not include amounts which
compensation is attributable computed separately for
are:
to services performed in the each individual.
– Excluded from an United States. US source
compensation is $15,000 40. Example: Donald and his
individual's income
(45/240 of $80,000) and wife were each eligible for the
under other provisions
of the Code; foreign source compensation foreign earned income
is $65,000 ($80,000 - exclusion and elected it in
– Received as a pension $15,000). Only the $65,000 2018 for the entire tax year.
or annuity; foreign source compensation Donald earned $120,000 and
may be excluded under his wife earned $80,000.
– Paid by the US Donald is permitted to
Section 911.
government or any of exclude the maximum
its agencies; 37. In general, foreign earned exclusion allowed for 2018
income is considered to be ($103,900) and his wife can
– Received after the end
earned in the year in which exclude her entire $80,000.
of the tax year
the individual performed the However, his wife's excess
following the year in
services rather than the exclusion of $23,900 cannot
which the services that
period during which it was be used to exclude any of
generated the income
received. Only current year Donald's income.
were performed;
income is eligible for the
– From an employer's current year exclusion.
contributions to a Income earned in the prior
Global Mobility Country Guide (Folio) 11Foreign housing the foreign housing cost labor, such as maids and
exclusion in 2019 is gardeners, telephone charges,
41. In addition to the foreign (assuming foreign residence pay-television subscriptions,
earned income exclusion, a or presence on all days in the purchased furniture, or
separate exclusion is year) $14,826 [($105,900 x improvements that prolong
available for ‘excess’ foreign 30%) - ($105,900 x 16%)]. the life of property. In
housing costs. The rules for addition, if the expatriate
qualifying are the same as for 44. Treasury and the IRS issue owns his or her home
the general exclusion (i.e., notices to provide certain overseas, housing expenses
having a foreign tax home adjustments based on a do not include deductible
and meeting either the bona- taxpayer's geographical mortgage interest expense,
fide residence or physical location (i.e., countries with a property taxes or
presence tests). high cost of living depreciation. Housing
adjustment), to the annual expenses also do not include
42. An individual may exclude housing expenses that may be
reasonable foreign housing principal mortgage payments.
considered in calculating the
expenses in excess of a base foreign housing exclusion 47. Temporary lodging expenses
housing amount, but the described above. The in a foreign country can be
amount of the exclusion is adjustments act in place of treated as housing costs
generally limited to 30% of the general limitation eligible for the housing
the maximum amount of a described above and are exclusion as long as they are
taxpayer's foreign earned updated each year via reasonable and incurred
income exclusion. For 2019, administrative while the individual is a
the maximum housing pronouncement. Adjusted qualified individual.
exclusion is $31,770 (30% of limitations on housing
105,900) – however certain expenses are available on the 48. Example: Joe had the
countries deemed to have a IRS website. following for 2019:
high cost of living may have
higher maximum exclusion 45. Housing expenses are the Rent $14,000
amounts as set by the IRS. expenses paid or incurred by Heating $1,500
The base housing amount is an individual (or on his or her
set as a percentage – 16% – of behalf) for living Electricity $1,200
the foreign earned income accommodations while the Repairs and $450
exclusion limitation. Thus, taxpayer is a qualified insurance
the 2019 base housing individual. They include rent Total housing $17,150
amount is equal to $16,944. If and related expenses, such as expenses
you qualify for less than a full utilities, personal property
The housing exclusion is calculated
year under the bona-fide insurance, repairs, occupancy
as follows:
residence or physical taxes not otherwise
presence tests, the base deductible, nonrefundable Housing expenses $17,150
housing amount is fees paid to secure leasehold,
determined on a daily basis. rental fees for furniture, and Less: base housing $16,944
amount
residential parking.
43. Under the 30 percent rule Housing exclusion $206
described above, the 46. Housing expenses do not
maximum, general amount of include the cost of domestic
12 People and Organisation49. The sum of the foreign amount of foreign earned – The potential for a
housing exclusion plus the income. In many cases, the lower tax liability if
foreign earned income practical effect is the same as foreign tax credits
exclusion is limited each year claiming an exclusion. If the alone are used without
to foreign earned income. individual is both an the exclusion
employee and a self-
50. Example: If, in the above employed individual during – Probability of using
example, Joe had foreign the same year, the IRS excess foreign tax
earned income of exactly applies special rules that credits (see paragraphs
$70,000 during the year, he allocate the foreign housing 62-78) in prior or
may exclude only a maximum amount to the two types of future years;
of $70,000, even though the foreign earned income.
exclusion limit for 2019 is – The expected location
$105,900. The excess of the Electing the foreign of the individual's
exclusions over foreign exclusions foreign assignment in
earned income does not carry future years;
over to offset income earned 53. The elections for the foreign
earned income exclusion and – The amount of the
in future years. However, the
the housing exclusion are individual's unearned
excess of the maximum income (such as
foreign earned income made on the individual's
Form 1040, US Individual dividends, interest
exclusions can be used to
Income Tax Return. Once and capital gains) that
offset income earned in the does not qualify for
current year but received in elected, they must generally
be claimed in all future years the exclusion;
the subsequent year (as
discussed in above paragraph in which the individual
– The amount of an
37). qualifies. A taxpayer may individual’s income
revoke this election for any
that does not qualify
51. If he had $120,000 of foreign tax year after the tax year for
for exclusion (see the
earned income, Joe would be which the election was made. so-called stacking rule
entitled to exclude $106,106, However, once revoked, the
in paragraph
equal to the $105,900 individual will not be allowed
60 below).
maximum foreign earned to make the election for the
income exclusion amount next five years without the 54. Previously, if the foreign
plus a $206 housing permission of the IRS. exclusions were elected, the
exclusion using Form 2555. taxpayer's US source earned
As a result, his AGI for the Expatriates should consider and unearned income would
year (assuming that he has no carefully whether to elect or possibly be subject to a lower
other income) will be $13,894 revoke the foreign earned US tax rate because the tax
($120,000 less $106,106). income exclusion, the foreign was calculated on taxable
housing exclusion, or both. income net of the foreign
52. Self-employed individuals are The following factors should exclusions. However,
eligible to deduct their be taken into consideration in important changes during
foreign housing expenses in making this decision: 2006 require that the foreign
excess of the base amount in
exclusions are added back to
calculating AGI instead of determine the taxpayer's
excluding an equivalent
Global Mobility Country Guide (Folio) 13marginal tax rate (please see general exclusion and the allocable to rental
paragraph 60 for a detailed housing exclusion). Ray also income on Schedule E
discussion). claimed $10,000 of (rather than as
deductions (a combination of itemized deductions on
55. A partial or total disallowance an IRA deduction and foreign Schedule A); some of
of foreign tax credits and income taxes claimed on these Schedule E
deductions will result to the Schedule A). Under the expenses if an overall
extent that they relate to the disallowance rules, $7,500 of loss on the rental
taxpayer's excluded foreign Ray's deductions are activity, could be
income. disallowed as being allocable suspended as passive
Disallowance of to excluded income as activity loss
double benefits follows: carryforwards.
– Contributions to
56. To avoid a double benefit, the $90,000
x $10,000 = $7,500 foreign charities (with
IRS disallows deductions to $120,000
the extent that they are the exception of
charities from certain
directly related to excluded
income. Examples of directly Reduction in itemized countries where
related amounts are IRA deductions and provided by treaty)
deductions, some state computation of tax liability are generally not
deductible.
income taxes, and foreign 59. Generally, the total amount
taxes that are claimed as a of an individual's itemized If the sum of allowable
deduction rather than as a deductions will be reduced itemized deductions for the
credit. Also, see paragraphs significantly during a foreign year is less than the standard
62-78 regarding foreign assignment because: deduction (see paragraph 10),
tax credits. no tax benefit is generated by
– State or local income the itemized deductions
57. The disallowance formula is
tax may not be paid (though a state benefit may
as follows:
while abroad; be available). In such cases,
deductible expenses should
Foreign
– If the US home was
be prepaid, to the extent
earned deductions sold without
income directly possible, in the year of a
exclus. x related to = disallowed
repurchasing a new
x = move out of the United States
total foreign deductions one, the taxpayer may
foreign earned and postponed until the year
earned income have no mortgage
of a move back to the United
income interest expense or
States.
property taxes;
Those planning to take
– If the US home is
advantage of this idea should
58. Example: Ray had rented out during the
consult with their tax
$120,000 of foreign earned assignment, the
advisors.
income in 2018, of which interest and taxes
$90,000 was excluded generally will be shown
(through the use of both the as business expenses
14 People and OrganisationOther itemized deductions taxable income in the range
may be allowed that are not of $80,000 to $100,000.
directly related to excluded
foreign earned income (if 61. In addition to the foreign
elected). These deductions earned income and housing
include medical expenses, exclusions, another difference
mortgage interest on a between determining an
personal residence, US real expatriate's US tax liability
property taxes, US charitable versus that of an individual
contributions, and living in the United States is
investment interest expense that the US income tax
(all subject to limitations.) liability of an expatriate is
more likely to be reduced by a
60. Once taxable income has foreign tax credit.
been determined, the federal
income tax liability is Foreign tax credits
computed using the tax tables
62. Compensation paid to
or tax rate schedules
expatriates will often be
appropriate for the taxpayer's taxable in both the United
filing status. Under special
States and in the foreign
rules, if an individual
country in which they live
excludes an amount from and/or work. In order to
income under Section 911,
avoid double taxation in this
any income in excess of the
situation, US law permits
exclusion amount determined such individuals to claim a
under Section 911 is taxed
dollar-for-dollar credit
(under the regular tax and
against their US income tax
alternative minimum tax) by liabilities, subject to
applying to that income the
limitation, for foreign income
tax rates that would have
taxes paid or accrued to the
been applicable had the foreign jurisdiction.
individual not elected the
Section 911 exclusion (also A credit may generally be
known as the stacking rule). claimed for only foreign
income taxes, including
For example, an individual foreign social security taxes
with $80,000 of foreign structured as income taxes
earned income that is (unless there is a Totalization
excluded under section 911 agreement.) Other foreign
and with $20,000 in other taxes, such as foreign sales
taxable income (after tax, value-added tax, excise
deductions) would be subject tax, property tax, and wealth
to tax on that $20,000 at the taxes are generally not
rate or rates applicable to creditable, but may be
deductible.
International Assignment Taxation Folio 1563. The foreign tax credit (also section below for more on generally be preferable to
referred to as FTC) is limited sourcing rules. elect the credit.
to the portion of US tax
related to foreign source 65. Example: Ben has taxable 68. Foreign income taxes
income (sourcing rules are income of $50,000, of which imposed on income that is
discussed in the next section.) $5,000 is from foreign bank excluded from US tax under
To determine the current- interest income. The foreign the foreign earned income
year foreign tax credits country withheld the and/or housing exclusion
allowed, a separate equivalent of $1,250 of may not be claimed as a
calculation must be made for foreign tax on the interest credit or a deduction. This is
each class (basket) of income income. If Ben's US liability is referred to as a ‘scaledown’ of
(e.g., foreign taxes paid or $10,000, the maximum FTC foreign taxes.
accrued on wages versus allowed (the limitation)
passive income such as would be $1,000 Example: If Max earned
interest, dividends, etc.) ($5,000/50,000 x $10,000). $70,000 which was fully
There are two limitations, excluded using the foreign
Ben's final US liability would earned income exclusion, he
with the maximum foreign
be $9,000 ($10,000 less the may not claim a credit for
tax credit allowed for each FTC of $1,000).
basket for a year being the any foreign taxes paid on
lesser of: the $70,000.
66. If more foreign income taxes
are paid or accrued than are 69. The allocation of foreign
– The sum of foreign allowed to be credited against
taxes paid or accrued income taxes to excluded
an individual's US tax for the foreign earned income is
for the year (including
year, the resulting amount of generally based on the
carryovers), or excess foreign tax credits may following ratio:
– An amount determined be carried back to the
foreign
under the preceding year (if it can be earned
following formula: used). It can then be carried income and
housing
forward for use in the exclusion
foreign
subsequent 10 years and is (net of
source
US tax allocated foreign
taxable foreign
income (generally commonly referred to as expenses) income tax disallowed
x = tax credit x on foreign = income
before
worldwide credits)
limitation foreign tax credit carryover. total foreign earned tax
taxable earned income
income income (net
67. Individuals must elect the of allocated
64. Worldwide taxable income foreign tax credit annually on expenses)
(the denominator in the their US income tax return
fraction) is taxable income for the year. If the credit is
shown on the US tax return. This formula assumes that
not elected, the foreign taxes
Foreign source taxable foreign taxes on foreign
may instead be allowed as an
income (the numerator in the earned income can be
itemized deduction in the
fraction) is the portion of segregated from income that
year paid. However, because
worldwide taxable income is not foreign earned income.
US income tax is usually
that is derived from foreign reduced more by a credit than
rather than US sources. See by a deduction, it will
16 People and Organisation70. Example: Assume that Jane $20,000, which gets paid in benefit of the foreign tax
has $26,000 of creditable 2019. The foreign tax year credit could be lost entirely
foreign taxes relating to ends 12/31. If a foreign tax without further action.
foreign earned income. If credit is claimed using the
total foreign earnings are paid method, the credit may 77. If the paid basis is utilized for
$125,000 and her foreign only be claimed in 2019. a year, a taxpayer may switch
exclusions are $95,000, Using the accrued method, to the accrual method in a
creditable foreign income the credit may be claimed in subsequent year. However,
taxes must be reduced by 2018. once the accrual method is
$19,760, computed as elected, it must be used for all
follows: 74. As shown above, if foreign tax future years.
credits are claimed under the
$ 95,000 paid method, a delay or loss 78. The accrued foreign liability
x $26,000 = $19,760
$125,000 of credit may be incurred. In is typically translated into US
the example above, the dollars using the average
individual would incur a exchange rate for the tax
Her foreign taxes available
cash-flow issue because the year. This accrual translation
for credit are $6,240
income would be reported in rule does not apply to foreign
($26,000-$19,760).
2018, while the credit would income taxes paid more than
71. The final credit is the lesser of only be available in 2019. two years after the close of
foreign taxes available for Assuming that the individual the tax year or to foreign
credit after disallowance and has excess foreign tax credits taxes denominated in an
the limitation discussed in 2019, the excess could be inflationary currency. These
above. carried back to 2018. foreign taxes are required to
However, the individual may be translated to US dollars
72. A foreign tax credit may be experience a cash-flow issue using the exchange rate in
claimed using either the paid for that first year due to the effect on the date paid.
or the accrued method. need to pay the tax on the
Under the paid method, Sourcing of income rules
income without an offsetting
credits are claimed in the credit. 79. Broadly speaking,
year of payment, regardless
classification of income as US
of the year to which the taxes 75. Excess credits may be carried or foreign source is made in
relate. With the accrued back for only one year. Taxes
accordance with the rules
method, a credit is claimed paid beyond the end of the
indicated below (it should be
for tax liabilities accrued calendar year following the noted that the place of
during the year, even if year the income is reported
payment or receipt of income
not paid (with certain on the US return will not be
is generally irrelevant for
limitations related to timing). able to be matched with the purposes of determining the
Accrued taxes generally income if the paid method is
source of income):
match the tax liability from used.
the foreign country’s tax – Compensation —
return for the matching tax 76. To the extent that the sourced to the location
year. individual is in an excess
where the services
credit position (i.e., has more
which gave rise to
73. Example: An expatriate has foreign tax credits than he or
a 2018 foreign tax liability of she can use in any year), the
Global Mobility Country Guide (Folio) 17the compensation aliens). Otherwise, the gain their standard deductions in
are performed; will be entirely US source. the same manner.
Under these source rules, the
– Dividends and location of the property (or 83. Computation of the foreign
interest — generally, place of incorporation of the tax credit limitation can be
the place of residence corporation that issues the complex. An illustration is
or organization of the stock) and the place of sale contained at paragraph 88 as
payer determines the has no bearing on the source part of a more comprehensive
source (however, the of gain from the sale. example.
rules vary depending
upon the type of 81. Treaties may alter the source Limitation on passive
interest/dividend and of income from that under US income
the payer's amount of domestic law if the benefits of 84. The law requires that the
income-earning the treaty are chosen.
foreign tax credit limitation
activity within the US);
Allocation and be calculated separately for
– Rent and royalties — apportionment of passive income, such as
sourced to the location deductions interest on a foreign bank
where the property account, foreign dividends
is used; 82. In calculating foreign source and other income from
taxable income, deductions foreign investment sources.
– Gains from real that are directly related to The foreign tax credit
property sales — producing a particular type of limitation is calculated
sourced to the location income must be allocated to separately for each basket of
where the real property that income. For example, a income, making it impossible
is located; deduction for foreign income to use excess foreign tax
taxes would be allocated credits generated on foreign
– Gains from personal based on the ratio of US and compensation against US tax
property sales — foreign workdays. Similarly, on foreign passive income.
generally, sourcing is most expenses connected Thus, any foreign tax
based on the residency with rental of an expatriate's imposed on foreign source
of the seller. US home are allocated to US passive income generally may
80. Special rules apply for rental income. To the extent be credited only against US
that a deduction cannot be tax on passive income, and
sourcing capital gains from
directly allocated to the foreign tax on foreign source
sales of stock or securities or
other personal property. For earning of gross income, compensation may be
however, it must be allocated credited only against US
a US citizen or resident, such
based on the ratio of foreign tax on income in the same
gain will be considered
foreign source provided the gross income to total gross basket.
income. This would usually
individual's tax home is in a 85. Other categories may apply
be true of adjustments and
foreign country and a foreign based on particular facts and
income tax of at least 10% of itemized deductions such as
home mortgage interest and circumstances.
the gain is paid to a foreign
property taxes. Individuals
country (separate special
rules apply to nonresident who do not itemize
deductions would allocate
18 People and OrganisationMaximizing the foreign preparing her 2019 tax return FTC Limitation amount is
tax credit calculating foreign tax credits determined under the following
on the ‘paid’ method, Kathy formula:
86. As excess foreign tax credits discovered that she had foreign
may be carried forward for up excess foreign taxes paid of source
to 10 years, individuals may $3,300 for 2019 (because of
taxable
US tax
income foreign tax
be able to use some or all of the high rate of foreign tax in x
(generally
= credit
worldwide before
any excess foreign tax credits limitation
Kathy's country of residence, taxable credits)
income
in years following a foreign her foreign taxes paid
assignment, provided that exceeded the amount that she
foreign source income is could claim as a credit on her $53,823
generated during the relevant x $ 13,057 C = $ 7,245 D
2019 US return by $3,300). $97,000
carryover period (e.g., via Kathy was able to carry back
business trips to foreign these excess taxes to 2018
locations). Excess foreign tax and claim a refund of $1,500 Notes:
credits accumulated during (the amount of her 2018
the first year of a foreign * A days-basis allocation of
limitation) via an amended
assignment would first be compensation is typically
return (Form 1040x). The
carried back for one year and appropriate under the facts and
remaining $1,800 of excess
used in the same way if circumstances.
2019 taxes may be carried
foreign source income was forward and potentially used A. No foreign earned income or
generated during the year against any excess limitation housing exclusion is elected.
prior to a move abroad. for the next 10 years.
B. Itemized deductions consist
87. Example: Kathy spent 22 88. Foreign tax credit of $26,000 of mortgage
days in 2018 on business calculation example interest and property taxes
trips to several of her
not related specifically to any
company's foreign locations. Compensation Foreign US ($) Total ($)
($) category of taxable income
Of her total 2018 salary of
Pre-move US 50,000 50,000 and thus allocable based on
$72,000, approximately
the ratio of foreign source
$6,000 (one month's salary Post-move US 1,750 1,750
based on US and US source gross income
based on 22 working days) workdays*
to total gross income. This is
represented foreign source Post-move US 68,250 68,250
allocated on the basis of all
income. Kathy paid no based on foreign
workdays* gross income. Thus it is
foreign tax in 2018, but
Total 68,250 51,750 120,000 allocated on the basis of
calculated a foreign tax credit compensation
$68,250 total foreign source
limitation of $1,500 for the Interest and 3,000 3,000
income and $54,750 total US
year (the amount of her US dividends
source income. The allocation
tax liability that was Gross income 68,250 54,750 123,000
is $14,427 to foreign source
generated by foreign Itemized (14,427) (11,573) (26,000)
deductions income and $11,573 to US
source income in the general
source income.
limitation category). Basis for foreign 53,823 43,177 97,000
tax credit
limitation C. Based on 2019 rates for a
In 2019, she was transferred
married couple filing a joint
overseas and paid foreign tax
on her earnings. After
Global Mobility Country Guide (Folio) 19return US federal income tax forward 10 years to the extent preference’ or exclusion items
is as follows: it cannot be used in the prior that are tax-exempt or tax-
year. deferred for regular income
Adjusted gross $123,000 tax purposes (such as the
income per Alternative minimum tax bargain element of an
above
89. The alternative minimum tax incentive stock option as of
Itemized $(26,000) the date the option is
(AMT) is a US federal income
deductions exercised) as well as certain
tax that is calculated in a
Taxable $97,000 manner similar to the regular itemized deductions. An
income exemption is allowed (e.g.,
federal income tax, but with a
$111,700 if married filing
Federal income $13,057 number of special
adjustments. jointly for 2019), but is
tax
phased out for certain higher-
90. If the AMT results in a higher income individuals. The
D. If $12,000 in foreign income level of US tax than the phase-out threshold is
regular income tax ($1,020,600 for joint filers
tax was paid, $7,245 (the
calculation, as the additional for 2019. AMT is then
limitation) may be used to
offset US income tax and amount must be paid. calculated using flat rates of
26% and 28%.
$4,755 may be carried back 91. The AMT calculation
one year and then carried
disallows certain items of ‘tax
20 People and OrganisationStep 3:
What to do before departing the
United States
Tax saving steps will not be taken on the – Have available in the
US tax return while foreign location
92. Certain tax-saving working abroad, information required
opportunities should be consideration should to prepare future US
considered prior to a move be given to paying as income tax returns,
abroad. Examples include many deductible including:
the following: expenses as possible in
the year of the move o Copies of US
– Review with employer federal (and
pre-move steps that (subject to the
limitations of the law); state) tax returns
might reduce US or for the previous
foreign taxes, such as – Consider arranging for three years, in
accelerating or regular and order to provide
deferring extraordinary complete data to
compensation or other maintenance and US tax
overseas allowances, repairs while the US consultant;
increasing/decreasing home is a rental
assignment length, property, in order to o Information on
and/or accelerating or obtain possible US investments
deferring the tax advantages for (including type,
assignment start date; such expenditures; name, number of
shares, cost and
– Contact financial – Determine whether it date of
advisors (such as a is possible to terminate acquisition) and
broker, insurance state tax residency other pertinent
agent, attorney, banker while working abroad; financial data;
or accountant) to Review state rules on
discuss the effects of the number of days o Documents that
the pending move. It that you can spend in support US tax
may be advisable to the state for return returns and
review family wills, visits without other
trusts, and other jeopardizing a informational
important documents; potential nonresident filings for the
status; previous six
– If it is anticipated that
itemized deductions
Global Mobility Country Guide (Folio) 21years in case of such as deeds and Sale of a principal
IRS audit; stock certificates. residence
o Information on – As a general matter, 94. Many expatriates who choose
the US tax basis considerations for to sell their principal
of personal green card holders may residences will realize a gain
residence(s) if differ and thus more that may be excluded from
the decision is specific analysis is income for US purposes in
made to rent it highly recommended. whole or in part, depending
while overseas on the facts. There is no tax
(e.g., original Decision to sell or rent deduction allowed for a loss
purchase US home on the sale of an individual's
documents, 93. One of the most important principal residence (with the
records of possible exception if also
decisions expatriates must
capital used for business purposes.)
make before moving abroad
improvements concerns their US homes. For
and tax 95. Gain or loss on the sale of a
many US taxpayers, the US principal residence is
documentation
home represents their single measured by the difference
on any largest investment.
previously between the adjusted sales
Therefore, any decision to sell price and the adjusted tax
sold homes) as
it or keep it should be based basis of the home. The tax
well as the fair not only on personal
market value basis of a home is the cost of
considerations but also on the home (including capital
when first
economic and tax improvements) less any gains
available for considerations, including
rent. that may have been deferred
the following: on the sale of previous
o Detailed records residences (under the
– The appreciation
that show dates potential of the home pre-May 1997 rules) and any
and times of all depreciation that either was
as opposed to that of
foreign travel or could have been claimed
an alternative
and foreign and investment; on the home (if it was ever
US working days rented out or otherwise used
(by state) in the – The amount of for business).
year of move and expected after-tax
the preceding rental income as
Exclusion of gain
year (if there is opposed to the after- 96. In general, Section 121
long-term cash tax yield of other provides for an exclusion of
or equity investments; up to $250,000 ($500,000
compensation,
for married individuals filing
records for – Any potential exposure
jointly) of the gain on the sale
additional years to state income tax as a
result of continued of a home, if certain criteria
may be needed.)
are met. While some
ownership/availability
– Make arrangements for exceptions apply, this
of the home.
access to investment exclusion is available only if
ownership documents, the home was owned and
used (i.e., occupied) by the
22 People and Organisationtaxpayer as a principal – Both spouses meet the not treated as
residence for periods of time two year use test; nonqualified use;
aggregating two years or
more during the five-year – Neither spouse is – Any period (not to
period ending on the date of ineligible for the exceed an aggregate of
sale. Some further details of exclusion due to a prior 10 years) during which
this exclusion are listed exclusion claim within the taxpayer or the
below: the last two years. taxpayer’s spouse is
serving on qualified
– The exclusion is Married individuals who official extended duty
generally allowed for cannot meet the above is not treated as a
one sale every requirements will be entitled nonqualified use;
two years; to a maximum exclusion
amount equivalent to the sum – Any period of
– The exclusion applies of the exclusions to which temporary absence, not
to all gain from the sale they would have been entitled to exceed two years,
of a principal residence had they not been married. due to change in place
(except to the extent of of employment, health
any gain attributable to Nonqualified use conditions or an
depreciation after May 98. Special rules apply where unforeseen
6, 1997), including gain circumstance (as may
part of the gain is allocable to
from a previous be specified by the
nonqualified use that may
principal residence have unintended negative Secretary) is not
that was rolled over treated as nonqualified
consequences for individuals
tax-free under old use.
with temporary absences
regulations regarding from their home.
the sale of a principal Although the ‘nonqualified
residence which were use’ rules effectively target
If a taxpayer has a period of
effective until May 6, investment-driven residential
nonqualified use, the portion
1997; of gain related to such period real estate purchases and
sales, it can have significant
cannot be excluded, and is
– The law does not consequences for a taxpayer
taxed as a capital gain.
require any rollover or who vacates his/her principal
reinvestment of the Nonqualified use is any residence while temporarily
sales proceeds of the period after December 31, away on an international
old home for the 2008, that the taxpayer does assignment.
exclusion to apply. not occupy a residence as a
As noted above, the law
principal residence.
97. The maximum excludable contains a favorable
Exceptions to this general
gain amount of $500,000 for rule are as follows: exception to nonqualified use
married filing joint taxpayers that allows for temporary
applies if all of the three – During the five-year absences of up to two years,
following requirements are qualification period and a further exception for
met: ending on the date of periods of nonqualified use
sale, any period after following use by the taxpayer
– Either spouse meets as a principal residence.
the last day such
the two-year property is used as a However, if a taxpayer is
ownership test; absent for more than two
principal residence is
Global Mobility Country Guide (Folio) 23years, and reoccupies the If the ‘two-out-of-five-year’ determine the impact of the
residence upon their return, occupancy requirement is not exclusion of gain rules.
the entire period of absence met, the reduced exclusion
may be treated as available is determined 101. The taxable portion of any
nonqualified use (to the as follows: gain realized on the sale of a
extent the absence occurs principal residence generally
Period of use &
after 2008.) Exclusion
ownership during
is long-term capital gain,
amount
($250,000 or x
the five years provided the home was
Many international $500,000) Two years owned for longer than one
assignments are for three-to- year at the time of sale. The
The opportunity therefore
five-year periods. Given this, maximum federal tax rate
exists for an individual to
many assignees will not meet imposed on such gains is
qualify for a partial exclusion
the two-year temporary generally 15%, though a 20%
if the ‘two-out-of-five-year’
absence exception under the capital gains rate applies to
test has not been met. The
regulations. higher income taxpayers.
exception exempting from
The net investment income
The use rule and period of nonqualified use any period
tax of 3.8% may apply in
nonqualified use could create that follows the last use as a
addition to these general
financial issues for principal residence, is
federal rates.
expatriates who choose to consistent with the favorable
keep their homes while on treatment allowed under However, expatriates often
international assignment. Section 121 for individuals rent their former principal
The requirement that the failing to meet the ownership residence attempt to make a
home be owned and used as a and use tests because of a profit or to help offset costs of
principal residence for two change in place of owning the home during an
out of the five previous years employment, health, or assignment, as well as to
may cause expatriates who unforeseen circumstances. provide for its care and
sell their home after a lengthy Therefore, as long as the maintenance. The current law
assignment to be ineligible international assignee does provides that the exclusion
for the exclusion (or a lesser not reoccupy the home prior does not apply to any gain
exclusion), and thus subject to sale, a full or partial from the sale of a former
to tax on any gain. exclusion may be claimed. principal residence that has
been rented out or used for a
Relief from two year 100. While the introduction of
business purpose to the
requirements nonqualified use provisions
extent of any depreciation
closed a loop-hole to property
allowed or allowable after
99. The law provides for limited owners who intended to
May 6, 1997. The portion of
relief from the ‘two-out-of- convert their investment
five-year’ ownership and use gain that is attributable to
properties to principal
depreciation generally would
requirement and the ‘once- residences and utilize the
be taxed at a 25% capital
every-two-years’ exclusion, the opportunity to
requirement. A reduced gains tax rate. The net
convert and still retain
investment income tax, if
exclusion is available for substantial tax benefits
applicable, would apply in
taxpayers unable to satisfy remains. As the calculations
these requirements if the sale addition to such rate.
may be complex due to
was due to a change in place varying facts and
of employment, health or circumstances, professional
unforeseen circumstances. advice should be sought to
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