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International Tax Planning

Do I pay double tax if my income exceeds the Foreign Earned Income Exclusion?

I frequently get questions about what happens when your wages exceed the amount of the Foreign Earned Income Exclusion ($87,600 for 2008). A common misconception is that you will then need to pay "double" tax - to the US and also to the country where you are living.

If you had a foreign bank account or any combination of foreign bank accounts in 2007 that exceeded $10,000 (in total) at any point in the year, you need to submit Form TDF 90-22.1, Report of Foreign Bank Accounts.

One of the most common issues I see (and probably the one with the most impact) is the taxation on the sale of a foreign personal residence.

U.S. tax treatment of gains or losses from exchanging U.S. currency for non U.S. currency (and back) is that the gain or loss on the currency exchange will be taxed the same as the underlying transaction.

On Oct. 3, 2008, the President signed into law the Emergency Economic Stabilization Act of 2008. Although virtually all of the press coverage of this law has concentrated on its hotly debated $700 billion financial industry bailout plan, the legislation also contains scores of tax changes, mostly beneficial, for individuals and businesses alike.

Real Estate: Tax Deferred Exchanges

When your tax deferred investments reach the point where there is a need to sell them, you may be able to defer taxes even longer with a tax deferred exchange. This tax benefit does not apply to all types of investments, but it's worth considering if you own real estate, life insurance contracts or some types of hard assets.

Taxation of Foreign Mutual Funds

One of the most confusing aspects of foreign investing is the difference in the treatment of foreign investment companies, mutual funds and unit investment trusts as compared to U.S. based mutual funds. To understand the problem, it helps to begin with a basic explanation of the tax treatment of U.S. shareholders of a mutual fund in the U.S.

The TIPRA Act of 2005 changed the rules regarding the claim of the Foreign Earned Income and Housing Exclusions for expats. The Housing Exclusion claim has been scaled back, and the housing cost limits are now customized by location. We have found that given these new rules, there are situations where the taxpayer is better off without claiming any exclusion tax relief at all.

The 2008 Housing and Economic Recovery Act (HERA), H.R. 3221, included a provision that modifies the application of the $250,000/ $500,000 exclusion, but ONLY in situations in which an individual who owns a second home or rental home converts it to use it as his/her principal residence. When the former second/rental home is sold, some portion of the gain may be taxable, even when the owner has lived in the home for the required two of the previous five years.

If you go on overseas assignment and stay in the host country for less than 183 days, you don't have to pay tax in that country, right? Well, actually the answer is: sometimes.

Many folks will remember the 183-day rule, but often they do not quite know why or how. But it sure lulls many international short-term business assignees (and their managers) into a false sense of security that as long as they are in the other country for less than that magic number of days, thinking they will be exempt from that country's tax.