Filing U.S. Taxes with Foreign Income


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filing taxes foreign service, marriage tax changes, working abroad, foreign incomeI wrote last year about our first experience filing taxes in the Foreign Service. Tax year 2013 was a bit more complicated for us since I worked for a local (Salvadoran) NGO for about eight and a half months before starting my current job with the State Department. As such, we enlisted the help of a locally based American accountant who has worked with many Foreign Service and expat families living in El Salvador.We had to file U.S. federal income taxes, Virginia income taxes (since Virginia is the state we claim as “home”) and Salvadoran income taxes. We actually separately hired a local Salvadoran accountant to help with the Salvadoran taxes since, as a first-time taxpayer in the country, I could not file online and had to do things the old-fashioned way: on paper and in person. And I was not about to try to make a trip to the Ministerio de Hacienda to do this myself.In the eyes of the U.S. federal government, all the income I earned from my Salvadoran job was consulting income: I was self-employed. Normally if you are working in the U.S. (or for the U.S. government/a U.S. company), your employer pays half of the 15.3 percent tax for Social Security and Medicare, and you pay the other half. It’s withheld from your paycheck just like federal income taxes. In my case, I was on the hook for the entire 15.3 percent, which was not withheld from my paychecks throughout the year. So we Kail tried to be mindful of this when it came to our spending/saving throughout the year (thanks, Kail!).canada, kingston, ontario, lake ontario, sailing, harbor, thousand island cruise, 1000 island cruiseWe still traveled a bit though. Remember Canada?So there’s that.Separately, when it comes to avoiding being double-taxed on income (since my Salvadoran income was already taxed by El Salvador), there are a couple ways to go about it: the Foreign Income Tax Credit and the Foreign Earned Income Exclusion — basically applying taxes already paid to El Salvador against my U.S. federal tax bill or excluding all Salvadoran income earned from U.S. federal tax liability. Our accountant recommended the Foreign Earned Income Exclusion (Form 2555) because while the tax credit would help our federal tax bill, Virginia does not offer a similar tax credit, so my Salvadoran wages would have also been subjected to Virginia income taxes.Excluding foreign earned income from all U.S. tax liability — federal and state — sounds like a better deal, so why wouldn’t that be the default in all cases? From my understanding (which might be wrong — hence why we hired an accountant to deal with this), once you choose to exclude foreign income, that choice is in effect for that tax year and all future tax years unless you choose to revoke the exclusion. Once you revoke the exclusion, you cannot choose to use it again for five years without special IRS permission.So, for someone moving around the world who may or may not be working on the local economy in the future, it is somewhat of a risk. However, given the savings and the fact that at least next year (for tax year 2014 and most of 2015) I will be working for the U.S. government, it was worth it. And as long as we are domiciled in Virginia I don’t see how claiming the Foreign Income Tax Credit would result in a better situation for us.I won’t even get into the Salvadoran tax-filing process because … ugh. But, it’s all done: federal, Virginia, El Salvador. I imagine things are just going to get more complicated if property-owning, children and other factors are added into the mix.April 15 is around the corner. Have you filed your taxes yet?

Published by La Vie Overseas

I'm Natasha -- writer, runner and wife to a Foreign Service Officer with USAID. Current location: Frankfurt, Germany.

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