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Red Flags that Can Get You an IRS Audit Notice

August 11, 2011 By

It is almost impossible to be completely proof of an IRS audit. However, people with simple and straightforward tax returns, withheld employment income, standard deductions, and no special credits will be least likely to be audited by the IRS. This is because the IRS will generally place emphasis on taxpayers with various income, credits, and tax deductions that are known to be prone to fraud or erroneous claims (which are considered red flags). Therefore, the way you file your tax return can increase the chances of being selected for an IRS audit. Here is a list of some of the known IRS red flags for audits:

Professions That Deal a Lot with Cash

One of the red flag areas is professions that deal a lot with cash transactions. Most of these transactions make tax evasion or fraud easier since auditing or keeping track of the trail (or record) of money in cash is quite difficult most of the time. These professions include house gardeners, taxi drivers, bartenders, painters, casinos, hair dressers, and other similar vocations. These jobs will usually have a lot of unreported or underreported incomes. The IRS will therefore, ardently scrutinize the returns of such taxpayers, whose chances of facing an IRS audit are higher.

Erroneous Entries and Additions

Another area that can easily lead to an IRS audit is erroneous entries and addition errors. If you add or exclude a zero at the end of a given figure, it makes all the difference when it comes to taxes due. Therefore, the IRS quickly isolates such returns and takes investigative actions. If they are simple addition errors with no tax consequences, the IRS will make corrections with no follow-up audit. On the other hand, if the error leads to erroneous tax payments, then an IRS audit is almost inevitable. Therefore, double check the figures you claim and check your math before submitting your returns.

Contractors and Consultants

Contractors and consultants including lawyers, dentists, IT consultants, motivational speakers, accountants, and such-like professions, also fall in the “red flag” category of income earners. The deductions and credits for these professionals are usually slightly complicated, and thus, they are prone to a lot of IRS reviews and examinations. Furthermore, there are generally a sizable amount of incomes made by these professions that goes unreported. Therefore, the IRS scrutinizes the returns of these taxpayers. If you fall in this category, ensure that you keep good record of incomes made, business expenses, and any other deductions that you seek to claim.

Large Cash Transactions

Another red flag for the IRS is a tax return with large cash transactions. Transactions that exceed $10,000.00 will normally be flagged as suspicious transactions. These transactions include gambling earnings or losses, funds transfers, foreign currency exchanges, or even charitable donations. Therefore, if your tax return has some high-value transactions, ensure that you have proper support documentation, in case of an IRS audit.

Offshore Incomes

Offshore incomes are one of the areas that have been identified as a major source of unpaid taxes and has therefore, will be marked for extra scrutinizing by the IRS. Hence, if you have foreign income, ensure that your documentation is accurate. Also, ensure that you file the FBAR Form by the due date to avoid any penalties and audits. If it is your first time reporting foreign income, be sure that the IRS is notified of when your offshore accounts were opened and the nature of the business. Furthermore, it is always encouraged (and required) to have all the documentation ready for review.

Losses under Schedule C

Business losses, losses due to hobbies, and any other losses you wish to include under Section C of your tax returns is another red flag item. If it is a hobby or new business, the IRS will need to see an “intent for profit” to allow a loss deduction.

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IRS Tax Qualification Guidelines for the EITC

August 8, 2011 By

The Earned Income Tax Credit (EITC) is a tax credit that is available for most low income earning taxpayers. It was introduced into the tax code to promote and encourage people to work and earn income. The credit is refundable in that if a taxpayer has no outstanding taxes or if the taxes due are less than the qualifying credit, the taxpayer receives a refund check from the IRS. This is unlike traditional tax credits, which do not warrant a tax refund check, even if an outstanding credit remains. Though it is one of the most accessible tax credits for taxpayers who earn low incomes, the guidelines of qualifications and the amounts that one is entitled to is not straightforward for the regular taxpayer. However, given that many of the qualifying taxpayers are low income earners and may not be able to afford professional tax help, many are unable to properly claim this credit. For this reason, the IRS has placed on its website, software that assists taxpayers to determine if they qualify for the credit and how much they qualify for. Some of the qualifying guidelines for this tax credit are discussed below:

Income Caps

To qualify for the EITC, there are various income maximums and they are higher for taxpayers with more qualifying children. For taxpayers with no qualifying child, the income cap is $13,460.00 for singles and $18,470.00 for married couples filing jointly. Taxpayers with one qualifying child have an income cap of $35,535.00 and $40,545.00 for those that file jointly. For taxpayers with two qualifying children, the caps are $40,363.00 for singles and $45,373.00 for married couples filing jointly. Finally, for taxpayers with three or more children, the income cap is $43,350.00 for singles and $48,362.00 for couples filing jointly.

Tax Credit Amounts

For the 2010 and 2011 tax years, the qualifying tax credit is a maximum of $457.00 for taxpayers with qualifying no children, $3,050.00 for taxpayers with one qualifying child, a maximum of $5,036.00 for those who have two qualifying children, and a maximum of $5,666.00 for those with three children and above.

Qualifying Children

For children to qualify for consideration under The Earned Income Tax Credit, they have to be 19 years and below. However, taxpayers with full-time-student children can claim the credit against them up to the age of 23. Permanently disabled children qualify, irrespective of their age. The children have to be dependents of the taxpayer who live together with the taxpayer at least for 6 months within the tax year. This especially applies for divorced couples with shared child custody. The children may be natural children, adopted children, foster children, grandchildren, or step-children. Siblings may also qualify under special circumstances.

Applying for the Credit

If you qualify for the EITC, you can claim the credit on your tax returns with Form 1040EZ, 1040A, or 1040, in the tax credits section. There are special rules that affect military personnel who apply for this credit. Further details on the qualification and application of the EITC can be found in IRS Publication 596 – Earned Income Credit. Besides the IRS, 23 U.S. states also provide the EITC to their residents and you will need to check if your particular state provides this tax credit.

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How to Make Corrections on Your Tax Returns and Avoid IRS Problems

August 2, 2011 By

Making an error on one’s tax return is common, understandable, and even inevitable. You may have entered the wrong values in your tax return, omitted some incomes, made erroneous claims, or even forgot to claim a deduction. If you make an error, the IRS kindly provides an avenue to allow you to make the necessary amendments. The tips below will help you in case you ever make an error in your tax returns.

Mathematical Errors

For simple math errors and some uncomplicated omission errors here and there, the IRS advises the taxpayer not to file an amendment as it is not necessary. The IRS will make the basic corrections without getting back to you. Errors that need amendments are those that impact on ones tax liability.

Having said that, it is important to note that mathematical errors and other simple errors can trigger extra scrutiny on your form and so, you want to avoid such probability. Therefore, ensure that you counter check and do the math a second time to ensure that there are no such simple errors. Furthermore, with e-filing, small errors such as omissions and addition errors are eliminated, as the software does the additions automatically and reminds you of areas that you have not entered information. It also helps with other simple errors.

Other Significant Errors

For substantial errors (such as understated incomes or overstated deductions or credits), the IRS advises the taxpayer to file an amendment as early as possible. With the increased sophistication of the tax reviewing system, the IRS can now much more easily catch mistakes. Therefore, the chances of being identified and audited by the IRS because of such errors are higher now than they were before. The IRS system is able to compare and check off entries from corresponding taxpayers’ returns and so, if the amounts conflict, it may be a matter of time before your get an audit notice.

Filing an amendment to alert the IRS of an error may also get your tax penalties waved. The IRS waives penalties if the taxpayer is deemed to have been genuinely unaware of the liability (and it is not an issue of fraud or negligence).

To file an amendment, you need to fill out Form 1040X, “Amended Return Form” with the correct information.

Details at the Narrative Section of Amendment

The amendment Form 1040X has a narrative section that enables the taxpayer explain the reason of the error or the nature of the error. It is best for the taxpayer to provide as detailed information as possible so that the case will be clear to the person reviewing the form. Unclear corrections with scanty explanations can be a direct route to an IRS audit. Therefore, ensure that whoever gets a hold of the return will easily understand the error being corrected and the reasons for the error. Clarity at this section can also contribute to the IRS waiving any tax penalties for unpaid taxes.

State and Federal Corrections

One of the important notes for making a correction on the Form 1040X is to ensure that you make any relating state tax corrections. The Federal and State tax authorities do a lot of information sharing. The State Tax administrations usually get alerted to the corrections made on Federal taxes and therefore, if you do not file a corresponding amendment for the State taxes, you will be setting yourself up for an audit. Therefore, ensure that all related taxes are filed for a given error.

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IRS Problems Survey Reveals: Tax Cheats Mainly Single Men Under 45

August 1, 2011 By

Most taxpayers do not like paying taxes, as they reduce their spending allowance. However, though a majority of Americans will honestly pay their taxes irrespective of their sentiments towards it, there are some taxpayers who outright cheat on their tax returns to pay less in taxes or avoid paying taxes at all. Tax cheats account for a huge percentage of the tax gap every year. The IRS is constantly making audits and reviewing tax returns to catch the tax cheats to collect the due taxes, penalties, and interests from them, among doling out other punitive consequences. Tax cheats will provide understated incomes, will not disclose all incomes, or will make fictions claims on their tax returns. The extent of tax cheats ranges with some just avoiding paying a few dollars of a Use Tax on an item purchased online, while others falsify information to get thousands of dollars in tax refunds.

A survey carried out by the DDB Worldwide Communications Group has shed some light as to who are the tax cheats and why they swindle Uncle Sam. The survey was not done on actual tax defrauders as verified through the IRS but rather, through interviewing people to seek self-confessed tax cheats. The survey attempted to gather and determine any similar characteristics of those who cheat on their taxes and are willing to confess that they actually do so.

Out of those surveyed, 15% owned up to having cheated in their tax returns and about 64% of those who owned up to their actions were men. 55% of them were below 45 years of age and 35% of them were single. According to the survey, most of those who confessed to being tax cheats justified their act by stating that they were “special” and that they “deserved” to be treated as such when it came to taxation. They also felt that they were good people overall. Although the results could give an indication as to what “types” of individuals who are more prone to cheating on their taxes, it would be interesting to compare the survey results with a sample of actual tax cheats caught by the IRS audits. Whether a majority of tax cheats are willing to confess that they indeed cheat on their taxes is worth noting as well.

However, from those that confessed that they are tax cheats, many of them also admitted that they were willing to cheat on a wide range of other non-tax issues. 73% of those who confessed to being tax cheats also said that they would do a “deal below the table.” A majority of them also confessed that they would be okay with keeping change from a cashier who overpaid them, picking and keeping cash dropped by a passerby, lie about their income to qualify for government aid, or make fraudulent insurance claims. About 28% of them said that they would be okay taking cash from their child’s piggy bank and keeping quiet about it. This is in contrast to only 3% of those who said that they do not cheat on taxes but could steal money from their child’s piggy bank. The survey statistics did not draw any correlation between tax cheats and income levels.

Various conclusions can be drawn from the survey. However, one of the more perceptible conclusions is that it appears that tax cheats will cheat more because of their value systems than that for any other underlying reasons.

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IRS Tax Implications on Dependents

July 26, 2011 By


Children and other dependents can choose to either have their guardians or parents file a return on their behalf or file a tax return for themselves. However, there are various rules that apply to the taxation of dependents. Some of these rules are provided below:

  • Claims on Personal Exemptions – In 2010, the personal exemption for all taxpayers was $3,650.00. However, dependents cannot claim personal exemptions on their tax return. Instead, their parents or guardian claim the exemptions on their tax returns on behalf of their dependents.
  • Age Limit for Dependent – There is no age limit to being a dependent – there is no bottom or top limit. A child can file a return as a dependents as early as possible and people even beyond the age of 18 can continue to be dependents in qualifying circumstances.
  • Earned Income Cap – If a dependent’s income is only comprised of earned income, they are expected to file a return if the amount is more than $5,700.00. However, if they had withheld income and received W2 forms, it may be in their interest to file a return as they may be eligible for various tax breaks. Earned income includes income made from personal labor such as wages, salaries, tips, and fees and commission earned from services provided.
  • Unearned Income Cap – Unearned income on the other hand, are incomes that are made without providing personal labor. This includes incomes such as dividends, capital gains, interest, and distribution from a trust. If a child or dependent received unearned income above $950.00, they are expected to file a tax return.
  • Cap on Income Mix – If a child or dependent has both earned and unearned incomes, they will be expected to file a return if their total income is more than $950.00 or if their earned income is at least $5,400.00 and the unearned income is more than $300.00, whichever is higher.
  • Circumstances that Dependent Must file return – There are circumstances in which a dependent is required to file a return, even if their income is below the aforementioned minimum incomes. These circumstances include when the dependent owes taxes for Social Security and Medicare. If the dependent receives any Earned Income Credit paid in advance, they will also file a return, regardless of one’s incomes. Dependents who earn more than $108.00 from religious organizations that do not withhold Medicare and Social Security and dependents that make more than $400.00 from self employment are also required to file tax returns.
  • Tax Credits for Dependents – A child or dependent can claim various tax credits, including Making Work Pay tax credit available in the 2011 tax year and education related tax credits and deductions.
  • Standard Deductions for Dependents – Dependents who choose to file their own returns can claim standard IRS tax deductions to whichever has the higher value: between $950.00 or earned income plus $300.00, to a cap of $5,700.00.
  • Children’s Tax Returns – Children can file their own tax returns. However, any penalties and audits will be addressed to the child. If the child is very young, the IRS expects that the guardian provides his or her signature next to that of the child and indicate that they are the parent or guardian. This way, in case of any recourse, the parent can take responsibility. When children file their own taxes, they get an early start to knowing about taxation and personal financing.

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Lower your Tax Debt by Deducting Qualifying Medical Expenses

July 21, 2011 By

Medical expenses, including mileage for medical travel, are an allowable IRS tax deduction. There are however, various rules that apply to this qualification. Firstly, the IRS provides a list of the medical expenses that qualify for the deduction. You can get this list from the IRS website. However, because the list keeps changing every now and then with new inclusions and exclusions, it is wise to check the website every so often to keep updated on these changes. Secondly, the medical expense deduction is an itemized tax deduction and can therefore, be claimed by a taxpayer who chooses to itemize their deductions. The amount of medical expense that is deductible is the excess of 7.5% of one’s Adjusted Gross Income (AGI).

History of Deductible Medical Expense

Tax deduction for medical expense was introduced into the tax code in 1942 under the United States Revenue Act, which began in President Franklin Delano Roosevelt’s regime. The initial deductible medical expenses were expenses that were termed as “extraordinary.” The law was passed during World War II and was more of a relief for those (namely the veterans of the war) who had gotten into medical complications and incurred medical expenses in relation to the battles. In fact, the law was ideally passed as a temporary law to cater for the war period. However, the deduction outlasted the war and was adjusted in both 1944 and 1954 to make it more of a general medical deduction claim as opposed to a war-related claim. In 1954, the deduction was also moved to Section 213 of the tax code, thus giving it a permanent status. Over the years, the lower limit of the medical expense that one can deduct has changed between 3% to the current 7.5% of the Adjusted Gross Income (AGI). Other changes that have occurred over the years affecting the medical expense deduction are what kinds of medical expenses “qualify” or are allowable for deductions.

Limitations of Deductible Medical Expenses

Only a small portion of taxpayers claim the medical expense deduction. There are various reasons for this. Firstly, there are few taxpayers who opt to itemize their tax deductions as opposed to having standard deductions; in the 2010 tax season, only 30% of those who filed returns choose to itemize their deductions. For you to itemize deductions on Section A of the tax returns on Form 1040, you will need to claim the amount that exceeds 7.5% of your AGI. This amount is set to be increased to 10% in 2013. Therefore, if your itemized deductions add up to less than the rate of the standard deduction, it is financially better to go for the standard deduction. For the 2010 tax year, the standard deduction was $5,700.00 for individuals, $11,400.00 for married filing jointly, and $8,400.00 for head of household. Many taxpayers’ itemized deductible expenses are less than that of the standard deduction thus, explains the reason for less people opting for itemizing.

Another reason why the medical expenses deduction is not common is that most of the higher-income earners with deductible expenses high enough for itemization will usually have their medical insurance provided by their employer and therefore, they cannot claim against the insurance premiums. However, for the individuals who pay for their own medical insurance, then the premiums can easily qualify as an itemized deduction under the medical expense deduction. The average health insurance premiums for 2009 for example, were at $13,375.00, which is much higher than the standard deduction rate.


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Ways of Avoiding an IRS Audit

July 20, 2011 By


The IRS has a legal right to audit any of your tax returns for up to three years after you have filed them. The time frame is also extendable for up to 6 years if the IRS determines that you understated your income by over 25%. The IRS can also audit any tax year with no time limitations in the case of a fraudulent tax return or if there was no tax return made. Therefore, if you are a taxpayer and have been filing returns, you are subject to an IRS audit at any point in time. IRS audits need not be gruesome. However, an audit is inconveniencing and can lead to new tax liabilities, including various penalties and interests, if the audit reveals that you made an error on your returns. Unfortunately, this applies even for errors that were not intentional. Therefore, it is best to do all you can to avoid an IRS audit.

The IRS conducts various different types of audits. Some audits are done to verify information that is not clear while other audits are conducted if the IRS suspects irregularities with your tax returns. The IRS also conducts random spot-check audits to various taxpayers every tax year. For the latter, there is very little you can do to avoid an audit since it is a random pick and you can always fall in the sample group. All you can do is ensure that your support documentation is always ready in case you are earmarked for such an audit. However, these random audits are much rarer, especially for individual tax returns and returns for lower income earners. However, for the other types of IRS audits, there are various steps that you can take to avoid them. Some of these steps are:

  • Carefully Include All Your Incomes – The IRS has a system that checks all the entries made by various tax returns. If you received a gambling winning or made some money from a sideline activity, the person or entity that paid for the income will report it as an expense on their end. Therefore, if you do not report such an income, you can be sure of an IRS audit or a letter requesting for explanation. If the IRS finds mismatching information in later years, you may need to pay for any interests and penalties that may have accrued from neglecting to include the income in your returns. Therefore, always keep a record of all your income and be sure to include them in your taxes.
  • Provide Full and Clear Information – The IRS will always seek further clarification, especially for incomes and deductions made on tax returns that are not clearly delineated. Therefore, ensure you provide proper information and put entries in the right places.
  • Avoid Red Flag Deductions – The IRS warns against claiming various red flag deductions but does not explain which deductions are considered “red flags.” Therefore, it is up to the taxpayer to deduce what a “red flag” deduction is. In other words, do not claim deductions that are obviously going to raise eyebrows, such as claiming a business expense that is noticeably a personal expense or deductions for rental income for property that is only partially used by the owner.
  • Crosscheck Your Returns – Errors of overstating or understating can cost you a lot in terms of penalties and interests. Therefore, ensure that you crosscheck the math, entries made, and the amounts indicated on your returns.
  • Scrutinize Your Preparer – If your tax preparer is found having filed returns for another client that were erroneous, and especially so if they claimed fictitious deductions, then you are most likely going to be audited. Therefore, verify the dependability and integrity of your tax preparer before taking up his or her services.
  • Consider Form Inclusions – Various forms, such as Form 5213 (filled when converting a hobby into a business to keep the IRS from conducting an audit in the first 5 years of business), may get you audited immediately after the 5 year audit break. Therefore, you should ensure that your tax claims are reasonable and provable. The IRS has a way of identifying returns that deviate from normally-expected numbers. If you earn a low income for example, making a large donation that does not correspond to your income will get you easily audited. Therefore, carefully examine the entries you make and forms you attach to your taxes.
  • Change Your Business Model – Operating as an S-type corporation highly reduces your chances of being audited as compared to filing returns for your business under individual returns under Section C. Therefore, consider changing your business to an S-Corporation to lower your chances of being audited.

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Tax Relief for Summer Camps and Childcare

July 19, 2011 By

For most parents, summertime is an opportunity to allow their children to enjoy their favorite summer camps and childcare services. This can, however, be a hefty cost for the parents and guardians. However, there can be some tax relief. Thanks to the childcare tax deduction benefits, parents can deduct the cost of childcare for summer camp from their Adjusted Gross Incomes and therefore, not pay taxes for their childcare expenses. For the childcare expense to qualify for a deduction, some requirements must be met. Some of these qualifications are:

  • Payment Has to be Made – For the childcare cost to qualify for a deduction, actual payment has to be made to a summer camp or childcare organization. You cannot make your own camp for your children and deduct the expenses as childcare. The childcare must also not be run by your spouse or by your children, unless your child is over 19 years old and not your dependent.
  • Payment Has to be for Qualifying Dependents – To qualify for the deduction, the children of the taxpayer claiming it need to be dependents of the taxpayer. Therefore, you cannot claim deductions for your neighbor’s or friend’s children.
  • Overnight Camps Do Not Qualify – Overnight camps do not qualify for the deduction under childcare tax deductions.
  • Claim Costs of Childcare Only – You can only claim the costs of the actual childcare and not other expenses. Expenses such as food, clothing expenses, and self-incurred transport expenses to the camp cannot be claimed. However, if the childcare organizers transport the children from an agreed destination, they may include this in their bill to you, which would be deductible. Similarly, if the camp organizers do not separate the costs of food and other expenses with those of childcare and only provide a lump sum bill, then one may deduct the whole amount.
  • Include the Social Security Number of Your Children – To qualify for the deduction, you must include the Social Security numbers of the children or dependents that you are claiming for. Failing to include a Social Security number may lead to having the deduction being denied.
  • Must File IRS Form 2441 – To qualify for the childcare deduction, the taxpayer must file IRS Form 2441 and attach it to the Form 1040, 1040A, or 1040NR. You cannot claim the deduction if you have filed form 1040EZ or 1040NR-EZ.
  • Deduction Allowed After Actual Childcare – You can only claim the deduction if your child or dependents actually get to go to camp. If the camp is canceled for whatsoever reason and you have incurred fees such as booking deposits, you cannot deduct such costs, even if you did not get a refund. Furthermore, if you prepay for the summer camp, you cannot claim the deduction until your children have actually attended the camp.

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Derek Jeter’s 3000th Hit and the IRS Tax Debt Pitch

July 15, 2011 By

There is little as exciting for a sports fan as getting an autographed gift from your favorite star. You may be lucky to get a baseball bat, a golf club, basketball players’ shoes, or any other sports equipment signed by a top player in the game. On the other hand, if you are not as lucky, you can always go to a memorabilia website and bid for an autographed gift from some of these favorite athletes. Purchasing the item from a shop or website will attract the usual sales tax. However, if you are lucky to get the gifts from the celebrities directly, you should prepare for a tax bill from Uncle Sam. The tax code requires the receipts of such prizes to add the value of these gifts to his or her taxable income and pay the respective taxes. Given the high prices that such items go for in various memorabilia shops and websites, a person receiving such gifts from the celebrity players should be prepared to pay a significant tax bill to Uncle Sam.

Case in Point – The Yankees Game

A recent such case of a pricey memorabilia is that of Christian Lopez, a baseball fan, who was lucky enough to catch the ball that was the 3000th hit of Yankee’s Derek Jeter. This hit made Jeter the only Yankee player to have gotten to this 3,000 mark and one of only 28 baseball players who have ever gotten to this figure. This notable hit by Jeter projected the ball up into the colorful sky, over the wall, and into the left field stands, where Christian Lopez and his father, Raul Lopez, were seated. Christian was lucky to catch the ball, which immediately made him a star. One of the nearby guards ushered Lopez to the Yankee’s president’s office, as is customary for someone who gets to catch such a memorable relic. To celebrate this catch, Christian was awarded 4 Champions Suite tickets for all the remaining home games for the Yankees in the 2011 season. The president also awarded Lopez with 3 bats, 3 balls, and 2 jerseys, all autographed by Derek Jeter. What a gift for this 23 year old Yankee fan that played baseball for his college several years ago!

However, before Lopez went out to celebrate the great gift for his memorable catch, he needed to remember that the IRS is expecting something from him. Such gifts would be priced highly, as the tickets alone were valued at $1,358.90 each. It was projected that Lopez’s tickets would be valued at between $44,800.00 and $73,600.00, depending on how the Yankees perform in the 2011 season. As for the autographed items, they would fetch between $600.00 to $1,000.00 an item at memorabilia websites. A rough estimate by a tax specialist valued these gifts at $50,000.00, of which Lopez would owe taxes of about $14,000.00. The Yankees have remained non-committal as to whether they will foot the IRS tax bill and Lopez is seeking to convince his parents to pay the tax so as to avoid him having to sell the memorabilia.

The Opera Winfrey Car Giveaway

This is not the only case in which lucky individuals received a gift only to come to realize that they were not all that lucky when the tax bill showed up. In 2004, Opera Winfrey surprised 276 of her television show audience with a gift of a free car for each of them. However, the recipients of these cars most likely experienced a shock when they discovered that they owed $7,000.00 in taxes for something that they thought would be “free.”

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Tax Help for Those Seeking Overseas Opportunities

July 14, 2011 By

Getting an opportunity to work in an overseas nation can be quite rewarding. An employee gets international exposure and at the same time, the compensation package for such expatriate employees is usually significantly high. However, before taking up the opportunity, there are certain factors that you will need to consider.

Income Tax Implications

Before taking up the job, ensure that you have thoroughly reviewed the income tax implications of the move. Incomes received in foreign nations are taxable by the U.S. as a rule. However, much of the employment income received abroad could be eligible for various tax relief, including credits, exclusions, and deductions. This ideally is set to avoid double taxation for U.S. citizens who are taxed by the local authority as well. Therefore, it is advisable that you consult with your tax preparer to review your specific situation and determine the tax implications of your move (so as to have this covered in your compensation package). Most employers will hire a tax consultant for you to calculate the tax implications of your overseas job relocation.

Inheritance Taxes

Another area of taxation you should consider before taking up a job overseas is the implication of inheritance for any property that you acquire in the foreign land. Different countries have differing rules as to the taxation process of assets acquired in their country by foreigners. You need to carefully review “the laws of the land” that you will be posted to so as to understand such regulations. Countries like the U.K. will have the property acquired in the nation by expatriates taxed in the country of the beneficiaries for inheritance purposes. In other words, if the beneficiaries are U.K. residents, the U.K. taxation on inheritance will apply. If the beneficiaries are in the U.S., they will have to adhere to the U.S. law in relation to the inheritance.

Retirement Savings and Investments

Another consideration that you will need to keep in mind is your savings and investments for your retirement or otherwise. This is an important area to remember, as many people take up such jobs away from home mainly to accumulate savings and investments. Some advisers say that it is best to keep savings and investments in U.S. accounts to avoid any foreign exchange losses and to avoid any confrontation with the IRS. If you prefer to have your savings and investments in the U.S., it is best to have the accounts opened while you are still in the U.S. (as some banks and brokerage companies may not open accounts for persons residing in certain states, even if they are U.S. citizens). However, if you choose to have your investments and savings in the foreign country, ensure that you comply with the Treasury and IRS’s rules for disclosure of foreign accounts.

Foreign Exchange

Another important aspect you should consider before taking an overseas job is the foreign exchange between the local currency and the dollar. You need to ensure that you are well shielded from any foreign currency fluctuations. Employment consultants advise the expatriate to get a portion of the employment consideration in U.S. dollars and the rest in the local currency. You can then have the portion in the local currency used for your regular expenses and then repatriate the dollar portion for your savings and investments. This will ensure that you do not lose in case the exchange rates become unfavorable.

Accommodations and Insurance

Other factors that you will need to consider include the insurance coverage and your accommodations. Ensure that the local insurance allows for foreigners to be sufficiently covered. You should especially be mindful about nations such as Canada, where health care is primarily provided to its local citizens by the government. You may need U.S. insurance coverage as local coverage may be limited in such cases. You also need to decide on whether to buy or rent your home in the foreign country; factors to consider include the real estate transfer taxes, whether you can deduct your rent expense, and how favorable mortgages are for foreigners in the country in which you will be working.

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