Tax issues for missionaries living overseas
Living in another country has many challenges. Your daily life is completely different than what it was living in the United States. Everything from getting across town to shopping for vegetables can bring a new and unexpected adventure. Dealing with government agencies can be overwhelmingly frustrating. And then, on top of all that, the United States government wants you to file your taxes even when you no longer live there!
Overseas Tax Consequences
When heading overseas you may run into some tax consequences that you were unprepared for. For those on the lower income specter who have been used to collecting Earned Income Tax Credit (EITC or EIC), be ready for that money to disappear as living overseas disqualifies you from the tax credit. Additionally, In some countries you will be required to pay taxes to your host country and taxes to the United States.
Also, if you are used to contributing to IRA accounts for retirement, you can end up in situations where you are not able to contribute to them any longer and could be facing some large unexpected penalties.
Overseas Tax Breaks
The U.S. government understands that all these changes can be burdensome so they have provided some tax breaks for U.S. Citizens living overseas. The biggest and most common tax break is the Foreign Earned income exclusion (FEIE) (filed on form 2555). This exclusion allows for up to $104,100 in (2018) and $105,900 in (2019) of an individual's income earned in a foreign country to be exempt from federal taxes. notice that this is per individual, so if both spouses earn money overseas the amount can potentially double. Also note that this exclusion only applies to the Federal portion of taxes not the self-employment or social security taxes. Any money earned in excess of the exclusion amount is subject to taxes as if you lived in the United States.
You might think that there is no reason for you to file your taxes as you make less than the exclusion amount, after all, you are a missionary not a business executive. This could get you into a lot of trouble. First if you receive a W-2 from your employer then so did the IRS. They have no way of knowing that you earned the money overseas and plan to use the Foreign Earned Income Exclusion. If you don't file, the IRS can make up a return for you, and it will not be in your favor. If you are self employed, the Foreign Earned Income Exclusion does not apply to self-employment taxes and you will still owe those.
Also keep in mind that you do have to pass some residency tests in order to qualify to use the Foreign Earned Income Exclusion.
Recent changes in tax law now disqualify individuals who file the Foreign Earned Income Exclusion from receiving the Additional Child Tax Credit (ACTC). This change unfortunately has a negative effect on many missionaries who have children. In some cases other tax strategies are required in order to maximize the FEIE and still take advantage of the child tax credits in the same family.
Resource: Test to see if you may be eligible to claim the exclusion
For those who made more than the exclusion amount and had to pay taxes to a foreign government there is another tax break available. The Foreign Tax Credit (filed on form 1116) will reduce your taxes owed to the USA by taxes paid to a foreign government. If the tax credit is used in conjunction with the Foreign Earned Income Exclusion, then a formula is used to find the amount of tax credit you will be able to take.
Resource: Test to see if you are able to claim the credit
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