Q&A: Is there such a thing as a “tax-free” status? My employer is in the US– does that make any difference tax-wise?
Q: My family and I are now living in Denmark. We moved to Denmark from New Jersey back in January 2009. I have been looking on the Internet for answers to some tax questions and the IRS web site was not much help. I have a few basic questions to start.
#1 – I was told by others, friends of mine (I have not seen this in writing) that after I am living and working out of the country for 9 consecutive months, I fall into a tax-free status. What do they mean by this, and is this a true statement?
#2 – Even though I am living and working here in Denmark, my employer is is in the states and my salary is being paid (deposited) into my local checking account in New Jersey. Does this effect my tax-free status? My salary is not being paid by a foreign employer, does that make any difference tax wise?
#3 – If any of the above is true and correct, do I continue to pay (have my federal income tax) deducted from my salary and then file for a refund? Or, do I file a new W-4 claiming that I am tax exempt? This one really scares me because I was in India for four years working for the US government and I did this while I was there and I had a very hard time convincing the IRS that I paid income taxes in India for the last 4 years and that I did not have to pay both. They (the IRS) wanted back taxes for the 4 years that I did not pay (2000 to 2004). This took me well over a year to get that all sorted out.
My employer is deducting my Social Security and Medicare taxes every other week. I’m listed as a New Jersey resident so I do not deduct or have to pay any state income tax. I pay no taxes here in Denmark at all.
A: I will answer your questions in the order you sent them.
1. The information you received from your friends is completely untrue. All US citizens are required to report their worldwide income each year. That does not mean you will owe tax, depending on your circumstances, but there is no “tax free” status just because you are out of the US. Please visit our Expat Tax Basics page on our main site for more information.
2. The fact that you have a US employer would not matter because you are required to report your worldwide income. The next question is –do you have a state filing obligation? The answer to this can be more complex than the federal rules.
3. Without further information I would say that leaving it as it is would be the most simple and most conservative. Depending on all details of your return I can see a situation where you might want to file IRS Form 673(PDF). This allows your employer to stop withhold federal income tax (does not apply to SS or Medicare).