Monday, February 14, 2011

Questions for the Tax Lady: February 14th, 2011

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question: I'm thinking about moving to Pakistan for a new job opportunity, and I've been told that my wages will not be subject to federal taxes. Is that true?

Answer: This is a really common misperception. According to the IRS, “United States citizens and resident aliens are taxed on their worldwide income, whether the person lives inside or outside the United States.”

Now, that being said, some people may qualify for a Foreign Earned Income Exclusion. There are very specific rules to qualify, with all the normal IRS confusion. In order to avoid paying federal income taxes on your foreign earned income, you must:

  • Have a foreign earned income (meaning your money must actually be earned and received for working in a foreign country);
  • Have a tax home in a foreign country (meaning, the general area of your main place of business, employment or post of duty, regardless of where your family home is); and
  • Meet the bona fide residence test or the physical presence test

As you can see, it is not as simple as just moving to a different country. There are a lot of rules and regulations, and you will likely still have to pay taxes in the country you move to. If you are seriously considering moving to a new country, speak with a qualified tax and finance professional, who is well versed in international tax laws. Relocating to a new country can be an exciting and rewarding experience, just don’t do it only for the hope of a tax break.

Question: Roni, I got divorced in October, will we still need to file a joint return since we were married for most of the year?

Answer: The way the IRS sees it, whatever your marital status as on December 31, that’s your marital status for the entire year. Since it sounds like your divorce was finalized in October, you would file single, or head of household if you qualify.

I’d like to add a word of caution: since you may have had some joint expenses and combined finances during 2010, I would highly recommend you work with a qualified tax professional to file your 2010 tax return. Splitting finances equitably after a divorce is difficult, so the guidance of a professional can be incredibly helpful.

Best of luck to you in your new life, and here’s wishing you a stress-free tax season!

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