One of the big draws for the growing number of Americans moving abroad is tax savings – up to $10,000 or more per year – mainly due to the foreign earned income exclusion, which allows US expats up to $91,500 in earnings that is not subject to federal income tax.
For self-employed expats, however, their entire net income, including the excluded portion, is still subject to the federal self-employment tax (13.3% for 2011), unless they have a tax accountant savvy enough to advise them on legal ways to avoid it.
A tax accountant experienced in expat issues would explain that there are two ways for self-employed Americans overseas to avoid the self-employment tax, which funds Social Security and Medicare. One way is to live in a country with a totalization agreement with the United States (also called a tax treaty), which allows a US taxpayer abroad to opt out of the US Social Security system by paying into the social insurance system in their country of residence. An experienced international tax accountant can guide an expat through this process with relative ease.
In the absence of a tax treaty, a tax Tax Accountants accountant with broad international knowledge can assist a self-employed US expat in setting up a legal entity in the country where they live. By channeling income through this legal entity, such as a small corporation, the self-employed taxpayer is not subject to US self-employment tax but would still qualify for the foreign earned income exclusion.
A tax accountant with international experience can help an expat develop an overall tax strategy that takes advantage of every benefit contained in the complex tax code provisions that apply to overseas residents. Without a competent international tax accountant, an expat taxpayer runs the risk of misinterpreting one of these complicated regulations and possibly adding thousands of dollars to their tax bill.
Finding a US tax accountant with extensive knowledge and experience in expat tax preparation is much easier for Americans living abroad than it used to be, thanks to the Internet. One such firm is Tax Planner CPA, whose website allows readers of the site’s informative blog entries and articles to ask specific tax-related questions and have them answered by a specializing in expat tax issues.