Stuart Borise has done many things in his 30-year career. He’s been a salesman, a flight engineer, a realtor, a teacher--he’s even worked in the entertainment industry. But his savviest career move ever was a fairly miserable seven-year stint in Saudi Arabia, he says.
David Glickman worked in Argentina for a year. Financially, the situation was “fabulous,” says the 29-year-old telephone industry executive.
The main reason for the two men’s happy memories? Taxes.
U.S. tax breaks for expatriates, coupled with low income tax rates in some foreign countries, can allow Americans working overseas to reap a bonanza.
Thanks to America’s white-collar recession and the increasing internationalization of business, more and more Americans are living and working abroad. The State Department estimates that upward of 2.5 million non-military Americans are living overseas, compared to less than 2 million five years ago and less than 800,000 in 1966.
While living abroad can prove an emotional hardship, many Americans find it immensely rewarding financially. Companies often provide expatriates with housing allowances, hardship pay, additional vacation time and other financial perks. Meanwhile, the U.S. government often kicks in the most generous benefit of all: tax breaks that can save some citizens tens of thousands of dollars annually.
“I purchased three houses, paid all my debts, traveled around the world, gave Mom some money and bought an Alfa Romeo Spyder,” says Borise, who now teaches in Palm Springs. “I tell all my students: ‘When you graduate, try to get a job overseas. Everybody deserves a chance to make a lot of money at one time in their life.’ ”
Companies provide financial benefits for overseas work for a simple reason: It’s hard to convince people to leave friends and family behind to work in an unknown land. Moreover, living conditions in some countries are not exactly luxurious.
Borise, for example, wasn’t able to drink alcohol, dance, attend church, wear shorts in public or talk to women while in Saudi Arabia. American women had it worse, he adds. Despite enduring sometimes sweltering heat, they had to wear Muslim garb that covered their bodies from head to toe, they weren’t allowed to drive, and those who took public transit were forced to sit in the back of the bus.
“Clearly, if you made the same money there as you did here, you wouldn’t do it,” Borise says. “You have to put up with too much.”
Because of such hardships, companies typically pay premium wages that are 10% to 20% higher than what they pay domestic workers. In addition, they might provide free housing, transportation and extra vacation time, says Edward Watson, a partner in the international executive tax practice at KPMG Peat Marwick in Los Angeles.
The tax rewards of overseas work are a little harder to explain.
That’s because you get these breaks only in certain countries. And even then, they may be taken away through a complicated company compensation strategy.
The way the tax situation works is this: If you live and work overseas for 11 months out of 12, U.S. taxes generally are not taken out of your wages. Assuming you maintain your U.S. citizenship, you will need to file a U.S. tax return. But the tax code allows U.S. citizens who live abroad to exclude up to $70,000 of their foreign-source wages from income. For most people, that means they won’t owe any U.S. tax.
In addition, those who earn more than $70,000 annually can take advantage of so-called foreign tax credits, which permit write-offs for foreign taxes you may be paying.
However, expatriates are subject to taxes in the countries where they reside, and in some cases, the rates are far worse overseas, says Keith Dolabson, a tax manager at Arthur Andersen & Co. In most of Western Europe, income tax rates exceed those in the United States.
But those who work in the Middle East and many less-developed countries can cash in. Income taxes in these countries are low or nonexistent. Earning $50,000 in Saudi Arabia, for example, where there are no income taxes, is roughly equivalent to taking home $80,000 in the 28% tax bracket in the United States.
The catch to all this is that many companies essentially take the tax breaks away, Watson says. A compensation strategy called tax equalization is now employed by the vast majority of multinational firms that transfer workers overseas.
Companies that employ tax-equalization strategies can’t withhold U.S. taxes from an expatriate’s wages. However, they can and do withhold an amount approximately equivalent to what the worker would have paid in U.S. taxes if the employee had been working here.
The money essentially goes into a pot that is used to help defray the additional taxes that workers in high-tax countries would have had to pay if the company didn’t have tax-equalization programs. Companies like tax equalization because it makes it easier to transfer workers from one country to another.
However, some workers have been so disgruntled about paying a faux tax that they’ve sued. So far, the courts have sided with companies, Watson says, ruling that tax equalization is an allowable part of a company’s compensation program.
For some executives, tax breaks are a negotiable item. In addition, those who are hired overseas are often considered foreign workers. That means they’re exempted from equalization programs, but they may also lose expatriate perks--such as the free transportation and premium pay.
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How the Tax Rules Work
Here’s how U.S. tax breaks for expatriates work:
* U.S. taxes generally are not taken out of your wages if you live and work overseas for 11 months out of 12. As a U.S. citizen, you still need to file a U.S. tax return, but Americans abroad can exclude up to $70,000 of their foreign wages.
* Those who earn more than $70,000 annually can take advantage of tax credits that permit write-offs for any foreign taxes paid.
* Now for the bad news: Expatriates are subject to taxes in the countries where they reside, and in some cases, the rates are far worse overseas.