If you’re like many security clearance holders, you may find yourself living and working overseas at some point in your career. And whether you’re attending embassy parties in Europe or getting your hands dirty in the Middle East, filing U.S. income taxes will probably be the furthest thing from your mind. Unfortunately, taxes are a hassle you’ll still need to address if you want to avoid security clearance problems (among others).
A common misconception is that U.S. citizens are only required to pay taxes on income earned in the United States. In actuality, a U.S. citizen living and working abroad is still required to file a U.S. tax return each year – in addition to whatever is required by the host country – and pay taxes on any amount of income not otherwise excluded from taxation. This is the reason why wealthy U.S. citizens living abroad are renouncing their U.S. citizenship at record rates. Indeed, the United States is the only major country that taxes its citizens’ income regardless of their location.
Don’t Rely on Bad Tax Advice
My law firm has litigated several security clearance cases recently in which the primary issue was the clearance holder’s failure to file U.S. tax returns while living and working overseas. In most cases, its simply a matter of the clearance holder receiving bad advice. Unless that advice came from a lawyer, however, the clearance holder must still prove that their reliance on the bad advice was reasonable. In other words, you have an implied duty to investigate your tax obligations.
The relevant question on the SF-86 form is question 26.3. That question asks whether an applicant has, in the last seven (7) years, “failed to file or pay Federal, State, or other taxes when required by law or ordinance.” Fortunately, many security clearance holders who fall into this trap only failed to file a tax return – not pay taxes. That is because the IRS excludes roughly the first $100,000 of overseas earned income from taxation here in the U.S. (See Internal Revenue Code § 911 and IRS Publication 54). If you made under that amount in income, you most likely only need to file a tax return and take the exclusion. But if you made over that amount, you may actually be double taxed – both by the U.S. and the country in which you’re working – unless another exclusion (e.g. U.S. government-approved combat pay) applies.
No matter what your overseas earned income level, just remember that if complying with your U.S. tax obligations seems easy or straightforward you’re probably doing something wrong. Make sure you carefully review the requirements for taking the foreign earned income exclusion. Better yet, consult a tax lawyer or accountant.
This article is intended as general information only and should not be construed as legal advice. Consult an attorney regarding your specific situation.
