Tips for Making the Most Money when Working Overseas

Recently a reader left this comment on one of my career-related posts:

One option I rarely see on Financial Blogs is to work abroad. I have worked in the Persian Gulf for the last 20 years and I am close to hitting my 2 million dollar goal (2012). I have saved all this since 1991 and paid my taxes too. My companies have paid 100% of my living costs and I save at a 70% of my take home salary. Go work overseas is my advice.

I emailed the author and asked him to write a piece on this subject for FMF, but didn't hear back from him. I also emailed frequent FMF commentator Mike Hunt. He works overseas and from his comments here I know Mike and I have a similar philosophy on work and personal finances. Mike was gracious enough to write the following for us, giving us a first-hand perspective on working overseas.

So you are considering taking an assignment to work overseas?  Good for you.  From my own experience, your best bet would be to move over with a multi-national corporation as most companies have experience with a foreign assignment. 

The most important starting point is understanding what is expected of you in this role.  Often an overseas assignment is required because a process, customer, or product is being moved from the US to an Overseas location.  There may be a need to lead an established team or set up a team in a country close to a new market, manufacturing location, or a key source of supply (be it components or raw material).   Usually the assignment is for a set period of time, usually 1-3 years.  I know I am going into detail on this but it’s important you are in alignment with the expectations of your employer.  The following questions will need to be asked and answered:

• How will my performance be measured?
• What deliverables are expected and by when?
• What level of local resource support will I have to meet these objectives?
• What level of home office support will I have to meet these objectives?
• What level of cultural training do I need to have to be successful in the assignment?
• How is the overseas team structured and what are the relationships and skills of the people in the team?
• What happens at the end of the assignment? Is there opportunity for continued growth in the company? Can I go back to my old job if nothing else is available?

As you can see, it’s pretty daunting to accept an overseas assignment as there is usually a high element of fear of the unknown, and rightly so.  The work culture is different from country to country as are the local regulations and laws.  The key to managing this risk is to manage your employer’s expectations by understanding what is needed and also to learn as much as possible about the culture of the region and country.  Of course, you need to learn as much as possible about the people already on-site, locals & ex-pats.  Only after you do this are you able to make an informed decision of if taking the assignment is good for you.

Assuming that everything looks ok, you are now ready to examine the different elements of an ex-pat compensation package.  These can often be quite lucrative since many expenses may be covered, based on your company’s policy.  Normally all moving expenses are covered by the company as well as services assisting in finding a residence.  Many companies offer an option to help sell your current home and pay closing costs however many people do not like the idea of selling their residence for a short term foreign assignment.  Other things that are normally included in an ex-pat package are:

• Accommodation / Living allowances
• Schooling costs
• Company Car and Driver (may be more than one if there is a family involved)
• Annual plane fare for the family to come home once a year
• Storage costs for your stuff back at home
• Full medical and dental coverage
• Tax equalization – very common for US based ex-pats. Basically, this means you would pay the same taxes as you would in the USA on your basic salary.
• Tax filing assistance - this can be favorable or unfavorable to the employee depending on how this is filed, I will talk about this later.
• Local mobile phone paid for by the company

I did a lot of research on this before making my move overseas to Southeast Asia and have found working overseas to be very lucrative.  This is because you can generate similar or higher income while minimizing your expenses and therefore can save much more than at home.  I have been in two roles abroad: the first was a 2 year ex-pat assignment, the second has been under a local contract (I am still in this role).  My working career has spanned 15 years, and during the last 5 years of working abroad I’ve earned twice as much as the first 10 years of my career.  Read that again -- I’ve been earning 4 times as much per year living overseas mainly because I am in a larger leadership role and have been able to negotiate a good compensation package.  The big ways to maximize savings, in addition to having a good income, is to consider the following:

• In most countries outside the USA, it is not uncommon to have a car or car allowance when in a Manager or higher level position.  This is part of the local compensation package. Furthermore, there may be safety considerations present (the company would not want to risk an employee getting into an accident).  As such I haven’t had to worry about paying for gas, insurance, maintenance, tolls, or repairs in the last 5 years.  It’s a great feeling!  Since the car is owned by the company and used for the primary purpose of commuting to work, there is no tax liability.  It is not the same as if the company gifted you a car for personal use, this would have tax consequences.  Disclaimer: I’m not giving tax advice and I’m not a qualified tax attorney
• Health care: In many countries health care is paid for by the government and even private hospitals are much cheaper than what you would pay in the USA.
• Housing- in many countries there is no property tax.  I made the bold move of buying a residence the year I took my foreign assignment and fully paid for this.  It was a potentially risky move at the time as I had to draw down my savings, but this has proved to be a great benefit as my living costs are very low.  In my first role I was given a housing allowance that helped to justify making this purchase.
• Food / going out to eat: this is generally cheaper than in the USA but you can also spend much, much more.
• Taxes: this is one of the biggest factors in saving money.  You should note that the USA requires her citizens and residents to pay taxes on all worldwide income, even if living outside the country.  The only two other countries in the world that does this is North Korea and Libya!  That being said, the tax law is complicated but generally favorable to US ex-pats.  You do not have to pay state taxes, social security, Medicare, or unemployment insurance.  Federal taxes only.  When working abroad and passing a residency test (means you have an established foreign residence or are outside the USA for a minimum of approximately 335 days per calendar year) you will get an exemption on a certain level of income you make.  Last year it was approximately $86,000.  Anything under $86,000 means you don’t have to pay any Federal taxes, but amounts over this are taxed at the marginal tax rate which will be 25% or 28%, this can be a much lower tax burden than what you are used to at home!
• Keep in mind you have to pay foreign taxes on your income first.  You would then file your US taxes and be able to offset the foreign taxes paid as a credit to any taxes that need to be paid to the Federal Government. If the foreign taxes are under what you owe then you need to pay this difference.  In my experience this would only apply if you are working in countries with low tax rates (UAE, Singapore, and Hong Kong) and making well over six figures.   If you pay more in foreign taxes then you can keep this foreign tax credit and carry it over to the next tax year.  There is no limit to how long you can accumulate these credits which can be offset only while you remain overseas.  This can be quite lucrative- for example if you have several thousand dollars worth of foreign tax credit it means you can earn income in the US – through interest, dividends, capital gains – without paying tax on this.  It also means that any bonuses or special payments that are not subjected to local foreign tax can be applied to the foreign tax credits carried over.  

One other implication is that you can set up several income streams in the US and retire overseas earning $85k of passive income per year without paying any US taxes (but I think some of the passive income needs to come from non-USA sources)!  The exemption usually goes up every year and I have not checked what this is for 2010.   In the 5 years I’ve been working overseas, my effective total tax rate has been about 32%, this is substantially lower than what it would be for earning the same while working in the USA.  So not having tax equalization may be beneficial.   Also it is worthwhile to learn about the tax code for citizens working abroad.  In my first role I found out that the tax advisor the company used (one of the big 4 accounting firms) was not using all the potential forms to minimize my tax payment. Correcting this saved me thousands of dollars.

I hope these tips are helpful.

Comments

[jbhk]

That's why I'm planning to go back home - Hong Kong!

My husband is an American and he is an English teacher with a Master degree in English. Sad to see the fact that US government has been cutting budget on education. In the past four years, he couldn't find a full-time teaching job. Right now, he is making about $1,050 after tax every month from a part-time teaching job, although doing a full-time workload.

I just asked information yesterday from an expat who was living in Hong Kong doing teaching. He told me that he could arrange a teaching job for my husband very quickly in a kindergarten, paying HK$20,000 a month (US$2,564). Even better is you will get every single penny without deduct any withholding or medicare!!

My husband also qualifies to be an English Instructor in university level. In addition to the monthly salary up to almost US$4,000, schools usually offer housing allowance as well. Suddenly you see all opportunities over there.

No sales tax, no medical insurance is needed, no car is needed, lower living expense, and like Mike Hunt said that probably we don't need to pay any tax to US with our annual income. I believe we can even get a better saving over there!

[Bruce]

The analysis on US income tax and SS tax isn't entirely correct. There are a few other caveats involved in order for one's overall tax burden to be less than it would be in the USA. In many cases it will be true but very, very important to sort this out with an experienced accountant before assuming otherwise.

[Mike Hunt]

Bruce,

What you say is somewhat true. Remember total USA tax burden= Federal + State + FICA + Medicare + local taxes. To not have any more State and local tax liability you need to show proof of residence in another country, you may also need to show that you do not have a home in the old state of residence. Of course if you are in a state with no income tax (FL, TX, ND, WA, AK, etc) then this will be less of an issue.

Once moving overseas there is no FICA withholding, however you will not be increasing your FICA benefit as well.

Negative sides to living overseas is that there is no 401k deduction unless it's a US based company overseas who has this already set up.

And for sure, your federal tax liability goes down as you don't have to pay taxes on the first $86k of income. Believe this number can be doubled if there are two people in the family working and filing is done as married filing separately.

Complicated, but worth looking into.

-Mike

[fka CPA Abroad]

Mike - your experience sounds very similar to mine. I worked for a Big 4 firm in western Europe from Oct. '08 (not a great time to move to a financial center) until July '10. Your summary is very good, but I would like to add to a few points so people do not minimize them.

1. Home office support - this does not just include performing your job, but for your benefits as well. Living overseas can be hard, and having your supposed support not helping can be an added strain. Working for a Big 4 firm where clients often come before all else I expected the same type of response from my home office "support" staff. However, I found it very difficult to even get an e-mail response from the very people who were supposed to be helping us with benefits questions (my paycheck was totally screwed up for my first 4 months). When going on assignment, make sure you have a designated contact person that can be relied upon to crack the proverbial whip when necessary to get you what you need.

2. Be careful how you define tax "expert" - as part of our assignment (my wife worked for the same firm) our US and local taxes were prepared by the firm. Being a tax accountant, I know a little something about taxes, but the expat rules can be very cumbersome and confusing and I had zero experience in them prior to my assignment. That said, I learned the rules and went over our taxes line by line and found thousands of dollars in errors and actually had to fight with our US preparer on a few positions on our return. In the end I had to have this person removed from our account because she spent more time trying to prove me wrong than to come to the correct answer (I had several work colleagues that were experts in expat taxes confirming my positions).

3. Foreign tax credits (FTC) are pretty much worthless once you return to the US - if you end up carrying over FTCs once you return, it will not be easy to use them unless you have a good deal of foreign investment income (e.g. dividends from foreign companies) because only foreign income can offset FTCs, although the country of origin does not matter as long as it is non-US.

Thanks again Mike for the summary. Wish you would have written this in the summer of 2008 because I could have used it then.

[Kyle]

You do still have to pay social security taxes if you are not in a country that holds a Social Security Tax Exemption treaty with the U.S.

[Mark]

As noted above, don't underestimate the difficulties of living overseas, especially for non-working spouses, and especially if not much English is spoken locally. Imagine going to a gyneacologist with a translator tagging along and you'll get the picture. Or staring at the shelf in a grocery store and not recognizing a single word.

Having said that, it is often a very good deal financially. I made more money in 5 years overseas than in 15 prior to that, similar to the author. And my investments increased from $1 million to $3 million as well. Company-paid housing, medical, transport, schooling, etc. all contributed to that.

Some of the questions (e.g. performance measurement) suggested in the original posting apply to any job, not just foreign. This depends very much on the company. A true multi-national may use the exact same systems and processes as they do in the US. For me, that was definitely the case.