Taxed In Two Places

Disclaimer: I am not a tax expert, and make no claim that the information listed below is accurate.  Readers are strongly encouraged to consult with a certified tax accountant, or the revenue collection agency in their country of residence, and in the country where they hold citizenship, before making any tax decisions, or filing any documents.

Apologies for taking so long to get this out.  But let me just say that a fair amount of patience (and much of April) were required to ferret out the truth of our taxes this first year abroad.

Not only are we required to pay taxes in Ireland on money earned here, and file a report on that income in the U.S., but, thanks to a delightful provision in the U.S. tax code, we do in fact have to pay double tax on that income (in Ireland and the U.S.).  “Displeased” doesn’t begin to cover it.

In an effort to cut down on corporations sending employees abroad (to save on taxes), in 2006 the U.S. Internal Revenue Service enacted a provision that only affects you if you have income earned in both the U.S. and abroad.  It requires you to declare the amount of your foreign earned income, add it to one calculation on the tax form, and then deduct it a few lines later.  But, and here’s the crazy part, when you calculate your tax due, you are required to use the figure that includes the foreign income.  Effectively you are paying tax both abroad and in the U.S. Fortunately, for most folks, this is only a problem the first year you live overseas.

Once you live overseas for a minimum of 330 days in a given tax year, the income you earn is considered to be entirely foreign earned income (even if you are working for a U.S. company), and you need only declare it, and then take whatever deductions and credits you qualify for.  It is no longer “stacked” and double taxed in the same way.

The fact that it took four drafts of our return to come to that understanding had me spitting mad, and, of course, got me thinking about why we are taxed, and how.

Living abroad and using services outside your home country, you expect to contribute to the local tax pool.  That’s where you are consuming and availing yourself of public services. But if you are an American, there is no running way.  You still have to pay US taxes. Is that the American ego assuming that, “surely you’ll come back some day” and we’ll have to support you, or is the American passport so valuable that you should contribute in full just for the privilege of membership?

For anyone living abroad, is there still a value received back at home that warrants collection of taxes on income earned in your new home?

Taxes in Ireland, at times, seem fairly arbitrary.  Rather than actually working out a fair and balanced tax schedule, the powers that be will simply levy a one size fits all flat fee, regardless of income.  That’s the case with the current “household charge”.  It’s a €100 fee placed on every household as a precursor to a soon-to-be instituted property tax.

When Ireland received its financial bailout a while back, the funders of said largess were stunned to learn that Ireland had no property tax.  “This cannot stand”, wailed they.  The aforementioned household charge is Ireland’s way of putting together a registry of households and homeowners so that they can eventually start charging said property tax.  To date there is no registry of any sort.  It’s a fairly convoluted way of instituting taxes.  And the money collected (at least in this round) is not pinned to any particular expense.  Suffice it to say that the general fund is in a sorry state, so that’s probably okay (this time).

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The part that drives me nuts is not the handing over of money (in Ireland or the U.S.), but the fact that it’s not tied to concrete need. I expect to have to pay my fair share for running water, roads that are drivable, police and fire service, and schools that drag kids kicking and screaming to base literacy levels and beyond. But when I’m not there, actually using the services, can you cut me some slack?

For immigrants wading through this madness from abroad, here are a few handy tips on accountants and accounting practices:

1. Try to locate an accountant you trust back at home before you emigrate. It’s relatively easy to go online, or check the phone book (or stop in at the office with an “accountant” sign out front) in the new place where you live.  You’ll likely have no trouble finding local tax help that way.  But when you need an expert on tax matters back at “home”, good luck finding and feeling a sense of trust meeting an account when you are 5,000 miles and 6 hours distant.
2. When your tax season rolls around, give yourself plenty of time (several months is not too long) to do multiple drafts, and look at your tax situation from all angles.  Even if your accountant back at home is an “expert” on foreign tax issues, your case will be unique (or should be treated as such).
3. Remember that you are not their only client, and they are likely to be swamped during tax season.  It may take them a few weeks to get to your file.  Then they begin the research.
4. Just because you’ve filed a certain way at home in the past doesn’t mean that is the best way to proceed now that you’ve moved overseas.
   Example: If you’ve always filed jointly, that may not make sense if one of you has income both in the U.S. and in your new country.  One way to shelter income from the “stacking rule” may be to file separately.
5. Be prepared to deal with the time issue.  You may have to do the schedule hokey pokey a few times to catch your accountant at a time when you are both coherent enough to talk “tax”. Example: I kept trying to reach our accountant at the end of my day, and found him eternally “at lunch”.  And when he had time (between tax season client meetings) to call rather than email, it was 5p.m. his time, and I was brushing my teeth, locking doors, and checking email one last time.

Ultimately, I just want to know how long expats should expect/be obligated to contribute to the tax pool back at “home”? Until we ditch the passport for a new one?  What about dual citizenship?

I welcome your thoughts.

Disclaimer: I am not a tax expert, and make no claim that the information listed above is accurate.  Readers are strongly encouraged to consult with a certified tax account, or the revenue collection agency in their country of residence and in the country where they hold citizenship before making any tax decisions, or filing any documents.

Things to look forward to in upcoming posts:
Looking Back On the First Year