Teaching Overseas & Staying Clear of the Tax Man

Unfortunately, many expatriates are not well-versed in how the “overseas tax thing” really works. Given fairly moderate salaries, teachers tend to turn to one of three options: blunder through it alone with mass-market tax software; go to a one-stop-shop tax office during vacation; or procrastinate for years on end, not filing at all, and dreading the day the IRS notices their lapse. The difficulty is that tax software doesn’t explain all the overseas issues very clearly, leaving you unsure whether everything is done correctly. And local tax offices in the States are usually very unfamiliar with the details of overseas tax issues, potentially costing you a lot of money both in fees and in errors resulting in extra tax. Long-term procrastination, meanwhile, is hard on your blood pressure and may lead to problems with the IRS sooner or later. None of these is a very attractive choice!

There are, however, tax preparers such as myself who specialize in overseas issues. We make it our business to master the intricacies of how the tax laws apply to expatriates. We can help you stay in Uncle Sam’s good graces, while making sure you don’t pay taxes unnecessarily. Whether you hire such a specialist or go it alone, make sure you understand the basic rules to avoid getting into trouble. Learn what you must know by reading the main IRS publication for Americans living overseas, Publication 54.

Following are a few useful points to keep in mind, regardless of who will be preparing your taxes:

• US citizens and residents living and working outside the US are allowed an automatic two-month extension to file (to June 15), plus additional time depending on circumstances. But any tax owed is still due on April 15; you’ll owe some interest if you pay later.

• Your first year living overseas you will often need an extension beyond June 15 if you expect to qualify for the Foreign Earned Income Exclusion. The extension request should be filed by the regular deadline.

• If the school grants you a tuition break to allow your kids to go to the school where you teach, the tuition amount is generally not considered taxable income.

• Housing benefits, on the other hand—even school-provided housing—are taxable in most cases.

I can’t tell you how many clients I’ve had who, in fear and trepidation, contact me with the embarrassed news that they haven’t filed in two, four, even ten years and want to know what should they do and how much will it cost. In most cases, to their great relief, I’m able to tell them that getting back in Uncle Sam’s good graces is not nearly as onerous as they fear. In a few cases, however, I’ve had clients who have already received letters from the IRS and are now scrambling to figure out what to do.

One gentleman had filed a tax return which he had prepared himself by hand. The IRS had written him saying he did not qualify for the Foreign Earned Income Exclusion as he had claimed and that they would seize his assets if the tax was not paid immediately. Once I saw his tax return, I understood why. It looked like he had spent about five minutes on it, many questions were left unanswered, and he clearly had not taken the time to learn how to fill out the form properly. We filed an amendment correcting the problems and all was well.

Another client had lived in Europe for many years, never filed, but recently inherited some investments in the US which generated some US income for her. The IRS noticed that no tax return was filed reporting that income and contacted her for the missing returns. Ironically, she had actually contacted a lawyer in the US when she received the inheritance but was told, incorrectly, that she had no obligation to file because she was overseas. It took several months to round up all the necessary documentation, but we were eventually able to file the returns the IRS had requested, showing that she did not in fact owe any taxes.

Yet another client came to me with slightly complicated situation of self-employment income and a variety of US investments. In looking at the client’s previous return, I discovered that her previous tax preparer had failed to claim the Foreign Earned Income Exclusion that year, even though she was eligible for it. True, she needed to pay self-employment tax, but we were able to file an amendment and get several thousand dollars of income tax refunded.

If you decide to prepare your own taxes, make sure you do your homework. You need to learn the system before diving into the paperwork, even with tax software. Take the time to do a careful job; the IRS isn’t going to forgo all that tax money if you don’t justify your right to claim the exclusion. And you want to be sure you aren’t paying more tax than is required. If you decide to get help, make sure to hire someone who knows the overseas issues.