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Ed Johnson
Ed Johnson, Tax Preparer
Category: Tax
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Experience:  GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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I am currently working outside of the United States and unsure

Resolved Question:

I am currently working outside of the United States and unsure if I plan on staying in country for the recommended 330 days. My annual salary is estimated around 99K after FICA deduction. Does it make a difference in the amount of taxes that I would have to pay if I decided to have the government deduct taxes per pay period or during tax filing time? Also, If I decide to leave prior to the 330 days in country, how would like affect my taxable income?
Submitted: 5 years ago.
Category: Tax
Expert:  Ed Johnson replied 5 years ago.

Dear jroby,

 

Thanks for your question.

 

J, the 330 days is in reference to the special "Foreign Earned Income Exclusion" of 87,600 dollars.

 

This exclusion of earned income for personal services (does not apply to investment income) is only available to you is you live and work overseas for 330 days in any rolling 12 month period as of the date you file your tax return. You can extend your filing date to meet the requirement.

 

If you stay for the full 330 days, you exclude the 87,600 from taxes. But, this exclusion is from gross income. So for example: If your incomed before taxes (gross income) is 110,000 dollars, then you would subtract 87,600 making your adjusted gross is 22,400.

Then you get to subtract your filing personal exemptions and depending on your filing status the standard deduction. So based on an assumptin that you would be getting paid 110,000 gross income (befor taxes), your tax would approximate the following:

 

Taxable income 13,450 and and 1616 tax due. So if you had no income taxes withheld on the 110,000 income, you would owe 1616, if you qualified for the exclusion.

 

If you do not meet the foreign earned income exclusion requirement of 330 days in a 12 month period your income looks like this:

 

101.050 taxable income and tax liablity of 22,272

 

Now this is based on the following assumptions:

 

1. Filing status of single

2. Claiming yourself as an exemption (no dependents)

3. 110,000 before tax income

4. taking standard deduction

 

This does not take into account any itemized deductions, foreign tax credits for taxes paid to a foreign country, or deductble relocation, travel and employee business expenses, all of which can reduce your taxable income and tax liability.

 

 

 

Customer: replied 5 years ago.
The information was somewhat helpful but what I really wanted to know is will the amount of taxes beening deducted (by making over the $87, 600) does it equate to be the same if I decided to have my taxes taken out of my check per pay period. Or will I save by waiting until I have completed the full 330 days in country (I may have to file for an extension to qualify for that).
Expert:  Ed Johnson replied 5 years ago.

Dear jroby,

 

Thank you for getting back to me. You are entiteld to as many followups as it takes to gain understanding and clarity.

 

It is still unclear to me what you are asking. Are you a U.S. Citizen or Legal Permanent Resident (which one)?

 

Let me answser in this way, you let me know if I hit the mark:

 

1. You are allowed to submit a form W-4 based on the expected gross income and exemptions. which will take into account the income exclusions and exemptions to in effect, have the amount of income withheld that is appropriate for your circumstances. In your case that would be maybe 14 or more exemptions to take advantage of the exclusion. However,

 

2. Some American Employers overseas of U.S. Citizens, Legal Permanent Residents, or aliens considered permanent residents for tax purposes, will automatically apply the credit to adjuste income and will withhold at that rate or not withhold at all, depending on the persons circumstances. For example: if after the company subtracts the exclusion, the resulting taxable income is less than the personal exemptions and standard deduction, they will withhold zero taxes. If an employee for example were earning 87,600 before taxes, the company would only withhold SS and MC taxes and no income taxes.

 

3. Everyone is required to make estimated tax payments quarterly. Your employer does this by payroll deduction according to the W-4 form you turn in, or according to the default rate.

 

4. Since withholding of MC and SS taxes is based on gross income, having income taxes withheld will not change that. Your MC and SS withholding are always on before tax income.

 

5. Withholding income taxes during each pay period will not change the amount of MC and SS taxes withheld.

 

6. Withholding periodically, every pay period, is the normal way, but whether you do or not, will not change your final tax liability. Your final tax liability is based on your Year to date gross income as of December 31 of the tax year, adjusted by the foreign earned icome exclusion, further reduced by your standard or itemized deductions, personal exemptions, and any tax credidts you might be eligible for.

 

So withholding periodically or not at all will not change your tax liability. EXCEPT that:

 

If you do not have enough withheld, the IRS can assess penalties and interest for underwithholding. Under withholding would represent under payment of quarterly estimated taxes. (even if the reason for the underwithholding was the fault of the employer...the IRS considers that to be your responsibility and if the employer does not withhold you have to technially, make an estimated payment).

 

You can make about 8600 more than the 87,600 and still not pay any tax. So if you wait the 330 days, you would pay no taxes if your income was about 96,200. So in this situation you can have zero tax withheld.

 

If you EXPECT to remain in country for 330 days, then you can most likely in your situation not withhold. This would mean you can retain your earnings to use for your own needs instead of giving it to the government.

 

BUT, If you will not be remaining in country for the 330 days, then you should have with holding to avoid paying in at the end of the year, and to avoid any potential of penalties and interest for under withholding.

 

You save by waiting the 330 days because your tax liablity is less or zero depending on your total before tax income.

 

If you do not wait until the 330 days you will have a large tax liablity,and if you did not have withholding, then you may owe penalties and interest.

Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10760
Experience: GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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