Session II Working Overseas: Individual Tax Impacts. InsideNGO s Taxation Management of US Expats. Kate Fisken, Principal International Tax Specialist

Transcription

1 Session II Working Overseas: Individual Tax Impacts InsideNGO s Taxation Management of US Expats Kate Fisken, Principal International Tax Specialist December 6, 2012

2 Kate Curtis Fisken, EA, LPA, ATA International Tax Specialist and Principal of Client Services 25 years of experience working with expatriates, nonprofits and government contractors Highly knowledgeable about the experiences of Americans overseas Lived and worked in Central and South America and India Member of: National Society of Accountants Maryland Society of Accountants Virginia Society of Accountants National Society of Enrolled Agents 2

3 I. Definitions II. Agenda Long-term expatriate staff vs. short term business travelers Expat Compensation Package Qualifying exclusions, 2012 exclusions, tax impact III. 9 Steps to Manage Employer s Risk IV. Special Expat Issues State Tax Withholding Issues V. HR Process for W-2/1099 Forms 3

4 I. Definition Long-Term Expatriate Assignment Employee s principal place of employment moves to or is in an overseas location for more than one year Expectation at the start of the assignment is key to the initial determination 4

5 I. Definition Long-Term Expatriate Assignment An assignment that was not expected to last more than one year but is extended to more than one year will become a longterm assignment going forward Documentation supporting assignment length is important 5

6 I. Definition Short-Term Overseas Business Travelers Overseas assignment lasts less than one year Organizations differ in levels of support and treatment of short-term overseas business travelers depending on HR policy May become a long-term assignee if on location for more than one year May be subject to host country taxes 6

7 II. Expat Compensation Package Overseas Employee s Typical Salary and Allowances Base Salary Cost of Living Allowances Housing Allowance Security Allowance Danger Pay Education Allowance Separate Maintenance Allowance Other Allowances FMV of Property of Facilities 7

8 II. How to Qualify for Exclusions Eligible long-term expat employee US citizen/us resident alien Tax home is in a foreign country Foreign earned income 8

9 II. How to Qualify for Exclusions (cont.) Meet Residency Requirements Meet Physical Presence Test 330 days in a foreign country out of 365 Bona Fide Residency Test Established tax home in a foreign country Residency is a full calendar year Based on intent and facts 9

10 II. How to Qualify for Exclusions (cont.) Eligible Contract Duration as employee or contractor more than one year, or indefinite Services performed in foreign country 10

11 II. How to Qualify for Exclusions (cont.) Eligible Earned Income Compensation, wages, commissions, bonuses Allowances Education pay Danger pay COL Separate Maintenance Security Fair market value or property or facilities received by employee or contractor 11

12 II. What are the 2012 Exclusions? Foreign Earned Income Exclusion (FEIE) 2012 amount is $95,100 for full calendar year First and last year FEIE may be prorated 12

13 II. What are the 2012 Exclusions? Foreign Housing Exclusion Limit (FHE) 2012 maximum housing exclusion is limited to $28,530 (30% x $95,100) full calendar year, less base amount of $15,216 (16% x 95,100) = $13,314 In high-cost areas (Mumbai, Abuja, etc.), FHE will be more First and last year FHE may be prorated 13

14 II. Overseas vs. Domestic Typical Salary, Allowance and Tax Impact Description Domestic Expat Salary $85,000 $85,000 Housing N/A $31,200 Post Diff N/A $ 9,010 Danger Pay N/A $ 6,500 Total Compensation $85,000 $132,710 14

15 II. Overseas vs. Domestic Typical Salary, Allowance and Tax Impact Description Domestic Expat Compensation $85,000 $132,710 Less: HCT N/A ($25,500) Less: US Tax ($15,106) ($ 8,662) Less: Housing N/A Non Cash Net Cash Available $69,894 $98,548 15

16 III. 9 Steps to Manage Employer Risk HR Checklist Handout #1 1) Provide compensation summary initial year, current year and final year (Handout #2) 2) Provide expat personnel policies and procedures handbook 3) Overseas day tracking calendar (Handout #3) 4) Insurance coverage information 16

17 III. 9 Steps to Manage Employer Risk (cont.) 5) IRS for 673 and instructions (Handout #3A) Purpose: Who, when and why US citizen or resident alien Completed and signed annually Expects to meet PPT or BFRT Form kept in employee s HR or payroll file State treatment for form 673 Withholding on salaries over FEIE 17

18 III. 9 Steps to Manage Employer Risk 6) IRS form 2555 and instructions 7) IRS publication 54, FBAR & FR ) Restricted travel Eliminates FEIE and FHE 9) References for tax professionals 18

19 IV.Special Expat Tax Issues Evacuation Waiver of Time : war, civil unrest, etc. (Handout #4) Second Foreign Household Allowable under certain conditions Group Living Residences Allocation of housing allowances 19

20 IV.Special Expat Tax Issues Transfer to New Country Effects on compensation package (Handout #5) Early Termination of Contract Possible remedies? High Cost Verse Low Cost Housing Issues What are the tax impacts between low cost and high cost housing assignments? (Handout #6) 20

21 IV.Special Expat Tax Issues IRS Extension Forms If an employee cannot file tax returns by April 15, they can file Form 4868 and/or Form Expats receive an automatic extension until June 15 If an employer cannot file by the due date, they can file Form

22 BREAK TIME! 15 Minutes 22

23 IV.Special Expat Tax Issues Documentation for state withholding Employer s options: Withhold in state Employee pays state estimated payments If employee insists they do NOT have a state domiciliary: What are the employer s remedies? 23

24 IV.Special Expat Tax Issues State Tax Withholding Factors for determining state domicile Voter registration and voting history Driver s license Prior state income tax filing history Home leave & departure post Familial ties Property ownership Burial plot Bank and investment accounts Library cards, club dues, memberships, community involvement Utility payments Rental income from property owned in state Auto registration and licenses 24

25 IV.Special Expat Tax Issues State Tax Withholding State and Domicile Rules Aggressive domicile rules: CA, VA, MD, MA and SC Recognize non-residency after meeting certain tests: IL, NJ, NY No income tax: AL, WA, NV, SD, WY, TX, FL Tax interest and dividends: TN, NH Adequate resources Inexperienced/unqualified staff Accounting and industry training programs and seminars 25

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27 V W-2 Exercise Base salary or sub-contractor compensation Rent, housing, utilities and storage Post differential and danger pay Separate maintenance Settling in flat payment, no accounting 27

28 V W-2 Exercise See Handouts 8, 8A, 8B and 9 Base salary Rent, housing and security Post differential and danger pay Settling in flat payment, no accounting Education allowance Per diem reimbursement, with accounting Initial air ticket for overseas move Moving expenses paid to company R & R home leave 28

29 Conclusion Expat qualifications Expat HR checklist Special expat issues W-2 preparation issues 29

30 4550 Montgomery Avenue, Suite 650N Bethesda, MD Questions & Answers Kate Fisken, Principal Telephone: (301) Website: Visit: