General Tax Planning
Are my Social Security benefits subject to income tax?
Answer: A portion of your benefits may be subject to income tax if your modified adjusted gross income (MAGI), plus one-half your Social Security benefits, exceeds specific limits. Your MAGI equals:
- Adjusted gross income (or the adjusted gross income of you and your spouse if married and filing jointly), including wages, interest, dividends, taxable pensions, and other sources,
- Tax-exempt interest income (e.g., interest from municipal bonds and qualified U.S. savings bonds), and
- Amounts earned in a foreign country, U.S. possession, or Puerto Rico that are exempt from tax
Up to 50 percent of your Social Security benefits may be subject to income tax if your combined income (MAGI plus one-half your Social Security benefits) exceeds $25,000 for an individual filing single, unmarried head of household, or qualified widow(er) with dependent ($32,000 if married and filing jointly).
If your combined income exceeds $34,000 ($44,000 if married and filing jointly), up to 85 percent of your benefits is taxable. If you are married and filing separately, up to 85 percent of your benefits will be taxed unless you and your spouse live apart for the entire year.
Consult an accountant or other tax professional for more information. Or, contact the Internal Revenue Service at (800) 829-1040 or www.irs.gov. Ask for Publication 554, Tax Guide for Seniors, and Publication 915, Social Security and Equivalent Railroad Retirement Benefits.
Do I have to pay U.S. taxes when I work abroad?
Answer: If you are a U.S. citizen working abroad, you may be able to minimize what you owe in U.S. income tax if you qualify for the foreign income exclusion. If you qualify, you may exclude up to $91,500 in foreign income from U.S. income tax liability in 2010. If you are married, your spouse is allowed an additional $91,500 exclusion. To qualify, you and your spouse must satisfy the following requirements:
- You must reside in a foreign country for an entire tax year or for at least 330 days during a 12-month period
- Your salary must be paid by a company or agency in your country of residence or by a U.S. company operating in that country
Also, only earned income–salaries, wages, and fringe benefits, plus allowances and expenses for housing–qualifies for the exclusion. Dividends, interest, capital gains, pension or retirement distributions, and alimony do not qualify. If you are a member of the U.S. military or other government service and are living abroad, your income is not considered foreign income. You’ll have to pay taxes as if you were a taxpayer living in the United States.
Even if you avoid U.S. income tax, you will likely pay some form of income tax to the country in which you reside and earn a salary. Should you fail to meet its residency requirements, or if you receive income above the allowable exclusion, you’ll probably end up paying both foreign and U.S. income tax. If you do pay foreign income tax, you can apply for a separate U.S. tax credit (using Form 1116) in the amount of foreign income tax you are required to pay.
You’ll also owe U.S. Social Security taxes if your country of residence has no treaty to coordinate its social service coverage with the United States. However, if such a treaty is in force, you’ll pay foreign social service taxes to your host nation and will not be required to pay U.S. Social Security taxes. In addition, you may be subject to estate and gift taxes if you transfer property, no matter where that property is located. If you maintain a house in the United States, you may owe state income tax and local property tax. For more information, consult a tax advisor or contact the IRS at (800) 829-3676 or www.irs.gov and request Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.