Taxes for foreign residents (April 11, 2006)

Ahhhh, income tax is always so fun. I thought 3-state filings were complicated, back when I "resided" in South Carolina but worked only in Georgia and California. This year I have the fun of residing part-year in Switzerland. Here are my notes on it for anyone who is either morbidly curious about U.S. taxes or who is in a similar situation in the future. I would think my situation is actually common, but finding advice about it has proven difficult. I even called H&R Block to ask, and they promised to look into it but never called me back!

So, here are my various notes.

Swiss income is taken care of automatically, apparently. There are no deductions or credits. The government takes some of each paycheck, and what they give you back is what you keep.

For U.S. income tax, you have to convert all of your foreign income into U.S. dollars. You can get the correct exchange rate at the web site for the embassy in your country. Happily, the exchange rate for Switzerland is fixed for the entire year, so you can do one conversion of all of your income instead of doing a separate conversion for each paycheck.

Foreign income does need to be filed for U.S. citizens. Even if you owe no taxes on it, you are obligated to report it and file that you are exempt. Big Brother needs to keep tabs on all of us little brothers, you know.

Multiple people told me that foreign income is exempt from U.S. taxes up to $80k. However, this is only true if you have resided abroad for a full year! Since I only lived in Switzerland for three months at the end of 2005, I have to pay U.S. taxes on that income. Next year I will be exempt (but will still have to file for the exemption!)

Even when you are not exempt altogether from taxes, there is a tax credit that prevents full double taxation. Take it! Simply report the amount of tax withheld in Switzerland, and pay that much less tax to the U.S. feds.

The fact that the foreign income is reported to the feds adds complexity when filing for state taxes, because most states base your income level on the feds' calculation. In order to pay state taxes only on your state income, you need to file as a part-year resident. Different states handle this differently, but at least in Georgia you will then approximately only pay taxes on the income you earned in Georgia.

Finally, let me mention my experience with TurboTax. In general it works very well. The user interface is smooth, the site is easy to use, and it works great under Firefox on Linux. However, it is up against the U.S. tax code, and so there is only so good it can do. It took me a while to figure out how to file my foreign income. Also, I completely failed to file correctly as a part-year resident in Georgia, perhaps because my non-Georgia income was in a foreign country instead of a foreign state. Nevertheless, I will happily pay their fee just for the service of doing my complicated federal forms.

UPDATE: Blah. Well, I ran into new problems with the final steps of TurboTax. First, they make it hard to get the pdf's of your forms, and instead try to manipulate Adobe Acrobat. This does not work well for Linux users! Second, they appear to use non-standard PDF features, such that the kpdf program on Linux cannot read the PDF's and Acroread is required. Would it be so hard to use standard PDF?? Finally, they insist on having a telephone number entered when you pay, but they do not accept non-US telephone numbers. Since I do not have a US number right now, I put in a fake number. Lame all around. They worked very hard on the main system; they should improve the final steps. Maybe I will try a different system next year after all.

Lex Spoon