So you heard the call and are heading out to be a missionary? After your education and training the time has come to leave overseas and go to a foreign country. The airline tickets are purchased. Contributions and pledges are coming in.
Now, before leaving, is the time to make sure that your financial situation is in order and that you understand what you will need to have prepared come tax time.
The following tips should give you some things to consider and help you prepare your finances before leaving for a foreign country.
1. As a missionary you are not exempt from US taxes. You must understand that US citizens need to file an annual tax return even when residing in a foreign country.
U. S. citizens are taxed on worldwide income. Don’t believe other missionaries who tell you that you are exempt from taxes. This is only partially true and depends on how much you earn during the year and whether or not you file the foreign earned income exemption on IRS form 2555. Regardless of whether or not you file the exemption, the majority of the missionaries must pay social security or self-employment tax on their net earnings. Improper planning in this area alone has caused many missionaries to return to the US and look for regular employment so that they can pay their accumulated tax debt.
2. Missionaries need to track their income and expenses for proper tax reporting.
As a missionary, you are basically operating a business, and as all businesses must keep track of how much they make and spend on the business, so must you. This made even more complicated because the expenditures are usually in a foreign currency and must be converted into US dollars for tax reporting.
3. Before packing up and moving overseas it is wise to line up financial and legal counsel
It is much more difficult to find good competent financial and legal help after you have moved to the middle of nowhere. You should seek counsel from the legal profession in areas such as setting up a will or living trust. What should be done if you are killed or injured in the foreign country? From a tax perspective you should find a tax preparer who understands the foreign earned income credit (form 2555) and the foreign tax credit (form 1116). If you are an ordained member of the clergy you may want to explore opting out of Social Security or receiving a housing allowance.
If you are not ordained you may want to consider becoming so before leaving for the field. If you are an independent missionary and not part of a large sending organization you may need to consider setting up a non-profit entity before you leave. This will allow contributors to receive tax deductions on their donations, resulting in a higher likelihood that you receive higher support for your mission endeavors.