American possibly moving to Dubai (tax question):

[Going2Dubai]

Tell me if I understand this correctly:

Is all income earned there tax exempt or is it dependant on how long I'm there or how much I make total...?

If I'm gone for 5 years, for example, and had $250,000 saved up before I returned to the US, do I have to pay taxes on it when I return?

How about Social Security (since US employers pay 1/2), do I have to pay it all?

[Bevdeforges]

Hi, and welcome to the forum.

As an American, you are subject to US income taxes wherever you live in the world. As an overseas resident, you are eligible for the Overseas Earned Income Exclusion - which is something in the area of $87,000 (it changes year to year) you can exclude from your income each year (using form 2555 - you still have to report your worldwide income). Anything above that you apply Foreign Tax Credits, but since there is no income tax in Dubai (or so I hear), you have no tax to credit against your US tax liability, so you actually pay taxes on it.

Social security depends on your situation. If you are working for a US employer and the employer withholds it for you, there is nothing further to do. (In the case of a temporary assignment overseas, some employers will continue to withhold US SS in order to keep you in the system while you are overseas.) If your employer doesn't do this, you just lose those years in the US SS system.

For details, see IRS Publication 54.
Cheers,
Bev

[Going2Dubai]

Hi there, and thanks for your reply:

I would be working for Emirates Airlines, if I get the job.

Do you know if I have to place a value on provided housing (and count it as income)?

Also, let's say I made $100,000. Am I taxed as if I made $13,000 in the United States (ie: I can take my standard deductions, etc, against the $13,000) or I'm I taxed at the tax bracket associated with someone who made $100K, but only on the last $13,000 with no deductions or credits for my wife and children?

I know this may really start to get deep, but do I have to file for state as well?

[Bevdeforges]

Ok, working for Emirates Airline means that you won't have the option to stay with US Social Security - though that's not a real problem.

If the employer is providing housing, yes you have to declare the value of it as income for the US tax return - but there is (on top of the overseas earned income exemption) a housing exclusion. (Explained in greater detail in pub 54.)

Now for the bad news <g> - they recently changed the tax calculation for those of us taking the overseas earned income exclusion. (Complicated it a bit, of course.) You have to take all your "usual" deductions against you whole worldwide income and then allocate them between the part of your income that is exempted (including the housing allowance) and the part that is left over.

Vastly simplified, if you made, say $100,000 and exempted the full $87,000 (forget the housing allowance for the moment), you'd calculate the tax on the $100,000 with all your usual deductions as if you were still back home. Then, you'd calculate the tax on the $87,000 with 87% of your usual deductions and allowances and subtract that from the tax on the full amount.

In practice it's a bit more complicated, and chances are you'll run up against the AMT (alternative minimum tax) calculation, too, in the process. But the net result is basically that you pay tax only on that $13,000 "excess" but at the rates for someone with $100,000 of income.

Again, that's only a very general overview of how it works. But to end on a positive note, no you shouldn't have to file a state return once you are resident overseas and qualify for the overseas earned income exemption (unless you have business interests of some sort back in the States that require you to file a state return on a non-resident basis).

It sounds horribly complicated, but once you go through the forms once or twice, they become fairly easy to fill out. Filing electronically may not be possible from overseas, due to the restrictions some of the software vendors put on their e-filing, but that's nothing you can't resolve with a postage stamp. Oh, and if you are resident overseas, you automatically get a two month extension for filing. Overseas returns are due June 15th each year. The first year is the killer because of the transition rules, but once you get through that it becomes much easier.
Cheers,
Bev

[cairogal]

Bevdeforges,

Just to clarify, when I move in August of this year I will have to pay taxes next April on the money earned between August-December 2008, correct?

How long does it take to establish bonafide residence? 365 days w/o returning to the US?

So the housing is figured into the total taxable income?

[Bevdeforges]

Originally Posted by cairogal

Just to clarify, when I move in August of this year I will have to pay taxes next April on the money earned between August-December 2008, correct?

How long does it take to establish bonafide residence? 365 days w/o returning to the US?

So the housing is figured into the total taxable income?

If you move in August, you have two options for filing for 2008:

One, you file by April 15th like usual, with no credit claimed for living overseas (i.e. because you will not have established residency in Dubai for US tax purposes at 31 December). Then, after August, 2009, you file an amended return, applying your overseas earned income exemption to your earnings from August to December, 2008 and wait for your refund.

The second option (and frankly, the one most people go for) is to file for an extension in April, 2009 for filing your 2008 returns. The reason you give is that you are in the process of establishing your overseas residency and after August, you will be eligible to take the earned income exemption. You then file your 2008 return within 2 months (I think it is, might be 3) of the date you have resided in Dubai for a full year.

The actual requirement is something like 330 days (check pub 54 or form 2555 instructions) - which means in that first year, you can actually be back in the US for 30 days or so for business or visiting. Or you can wait until you have spent an entire calendar year (without home visits) overseas - just apply for extensions on the time to file until you have fulfilled the requirement. (You do have to apportion your income for the split year, and you are supposed to send in a check for what you think you owe when you request the extension. You pay interest on any unpaid balance from April 15th, the original filing date.)

Any housing in kind or housing allowance must be included in gross income for US tax purposes. You then have to decide between taking the housing exclusion or the foreign housing deduction against this income. Again, the instructions for form 2555 provide more details on this.
Cheers,
Bev

[cairogal]

Great help, Bev!

[CRJDOG]

I too am also looking into Emirates . I have applied and I attended the road show in Denver CO. on may 20th. I have been really interested in this tax thing as well. I have a few rental properties as well as my current house that would become a rental if I left for Dubai. I am just trying to figure out if I could shelter my income further by setting up my rentals as a buisness and depriciating them. 87,000 just isn't going to be enough to cover the base pay,bonus , and housing. Especially in a few years when you upgrade and get a raise. It looks like if you stayed there for 7 or more years you could be taxed in a tax bracket like you made 200000 plus. this could really change the appeal of moving to Dubai for Emirates if you take that into account along with the issue of inflation in Dubai somewhere in the 10% range. Anyone have any ideas how to shelter income from taxes back in the US beyond the 87,000? How helpfull is rental property tax write offs? Will this pose a problem with residency? What about claiming less on my w2? How does the IRS know what I make if my employer is from Dubai? Also did you get the job or are you just interested? Where are you from? Airline? I work for SkyWest based in Denver.

[Bevdeforges]

Originally Posted by CRJDOG

I have a few rental properties as well as my current house that would become a rental if I left for Dubai. I am just trying to figure out if I could shelter my income further by setting up my rentals as a buisness and depriciating them. ... How helpfull is rental property tax write offs? Will this pose a problem with residency? What about claiming less on my w2? How does the IRS know what I make if my employer is from Dubai?

One of the great disadvantages to US citizenship is that you remain subject to US taxation your entire life. And not to spook you further, but every few years Congress threatens to do away with the overseas earned income exemption - section 911 of the tax code. The only recompense we get is that we are allowed to vote in federal elections (president, US senate, US congress) from overseas indefinitely - and of course we don't have to go through the visa hassle when we want to visit back home.

Rental property is not a great tax dodge. Yes, you can take depreciation, which will help - however depreciation will lower the basis of the property so that your gain is just that much higher when you sell. And if you later move back to the property you have been renting out, it can complicate the whole issue of using it as your primary residence (at least for tax purposes). Putting your property into a corporation might help somewhat - but be careful how you withdraw money from the corporation, what with double taxation of dividends and what not. You may want to check with a lawyer or property management company to see what they can do for you in that regard. (Obviously, their services aren't free.)

If you're working in Dubai, you won't have a W2. Granted, what you declare on your tax return as income is pretty much up to you - BUT the IRS does have ways of checking and comparing what you declare with sources overseas. Don't know about Dubai, but many European countries do share tax and bank records with the IRS. And there is the practical matter of the statute of limitations - normally the IRS has a limited period of time (I think it's 4 or 6 years now) to contest anything you have declared on your return. For income not reported, there is no statute of limitations - which means they can come back at you at any time, even after your death (usually when your inheritance tax return or final income tax return is filed by your estate).

There is the possibility of renouncing your US citizenship, but there are penalties for doing so "for tax purposes." The most recently enacted of these is that they will require you to file one "final" tax return whereby you recognize a hypothetical sale of all your worldly assets so you can pay capital gains on everything. There's also the little matter that, having renounced your US citizenship they "may" deny you any form of visa to enter the US ever again. (Not that they will, just that they have that threat to hang over you any time you want to return.)

Bottom line is that, for US citizens, you aren't going to be able to enjoy tax free income no matter where you live in the world. This hits those who work for the "international civil service" too - organizations like the UN where salaries are normally tax free in the country the agency is located.
Cheers,
Bev

[CRJDOG]

Thanks Bev,
Wow kinda a dissapointment! I was hoping to shelter some of it. Any ideas? Anyone else out there doing anything to shelter their wages?