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CASE STUDY: Clarifying Tax Complexities that Result from a Long-Term Overseas Assignment
“Ben” found out his company was sending him overseas to work in the London branch office for four years. Given the length of the assignment, Ben planned to take his wife “Hanah” and their two children. Ben’s employer planned to increase his salary and provided certain allowances for housing and to cover the cost of the local private school. Ben would have his income tax from the United Kingdom withheld from his pay. Ben was excited about the overseas opportunity but had many questions about how these new allowances and foreign withholding would affect his tax situation and that of his wife’s home-based consulting business. He wasn’t sure if he had to file a return in the United States while overseas given that he would be paying taxes in the United Kingdom. Fortunately, Ben mentioned his impending move to a colleague who had just returned from an overseas assignment and she suggested he contact Gelman, Rosenberg & Freedman, a firm she had used for advice and to help her prepare her tax returns while she lived and worked overseas.
Ben met with one of Gelman, Rosenberg & Freedman’s international tax specialists who explained to him how living and working in the United Kingdom would affect his U.S. income taxes. Ben learned that U.S. citizens were required to report their worldwide income on a U.S. income tax return regardless of their country of residence and that Ben and his family’s home state of Maryland would also require Ben and Hanah to continue to file as residents under Maryland’s domicile rules. He also learned that the allowances provided by his company for housing and private school were considered taxable wages and that he could qualify for the foreign earned income exclusion under the physical presence test if he kept his U.S. presence to no more than 35 days per year. There was even the potential for a foreign housing exclusion if foreign housing costs were high enough.
The Gelman, Rosenberg & Freedman tax professional also noted that the United States allowed a foreign tax credit to eliminate double taxation if Ben’s total compensation package was above the foreign earned income and housing exclusion limits, but Maryland did not. Hanah also learned that the same foreign earned income exclusion and foreign tax credit rules applied to her consulting income and that a Social Security agreement between the United States and the United Kingdom stipulated that she only pay into the U.K. system on her net self-employment income. Finally, the Gelman, Rosenberg & Freedman tax specialist calculated an estimate of Ben and Hanah’s current year tax liabilities to determine if they needed to pay estimated tax payments to the IRS or to Maryland, and referred them a to a London-based accountant to advise them on their U.K. tax filing requirements.
When it came time to file Ben and Hanah’s tax returns, Gelman, Rosenberg & Freedman’s tax professionals ensured that the income exclusions mentioned above were appropriately taken on their tax returns. Gelman, Rosenberg & Freedman also worked directly with their U.K. accountant to ensure they utilized the foreign tax credit to mitigate double taxation. Finally, Gelman, Rosenberg & Freedman prepared a projection of the couple’s current year tax situation and set them up to make the appropriate estimated tax payments for the current year. To make things easier on the clients, their tax returns were filed electronically and most communication was handled via e-mail.
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