So you’ve unpacked your boxes of knickknacks and photos and set up your home abroad. But did you also realize you’ll need to unpack some tax boxes too? Many host countries require US expats to file taxes where they have residency, but your host-country tax preparer and tax forms might not understand all those strange W-2 boxes. If you are receiving a US W-2, you’ll likely need to be able to unpack those a bit.
Let’s take the example of Erica Expat, an American expat working for a US mission agency or other non-profit and residing in a host country we’ll call Victorialand. Since Victorialand taxes anyone who resides in their country for more than 183 days in a year, Erica Expat walks into a local tax preparer’s office with her American W-2 from her employer, her 1099s from her US financial institutions, her local charitable giving receipts, and such.
Erica’s local tax preparer intuitively knows what to do with receipts from charities and with bank statements, but when he arrives at Erica’s W-2, he furrows his brow. Erica can see in his eyes that it looks like gibberish to him. There are boxes and boxes of noise on her W-2.
Yes, our American 1040 and other tax forms (which we probably also need to complete due to citizen-based taxation in the US) give us nice, clean instructions like: “Enter your W-2 salary from box 1 of Form W-2.” However, our host-country tax forms have no way of guiding us here. Our local tax preparers may not be much of a guide either unless we can unpack some of those boxes with them.
Below is a list of potential W-2 issues that Erica Expat, you, and I might need to explain to our tax preparers. Bear in mind, this is only my non-professional understanding due to personal trial and error. YMMV! I’m going to use only boxes that appear on my W-2. I’m not trying to be exhaustive or authoritative on this. H&R Block has a great article about ALL of the boxes and codes. Mine is just a real-world example of the boxes that I needed to unpack for my host-country tax preparer and what I understand them to mean in my situation.
Starting with box 14 and counting down to that all-important box 1, let’s begin.
“Box 14” contains my Housing Allowance
As an ordained person in the US, I can separate part of my wage as a housing allowance. While this looks like a great way to reduce taxes if you are paying them in the US, you’ll probably find it is not very useful while overseas. Since my host country doesn’t recognize such an allowance, my local tax preparer will probably add box 14 to my box 1 salary as a taxable benefit. But that’s not all….
“Box 12 Code W” is my Health Savings Account
While the HSA is an incredible tax tool in the US, it loses some (not all) of its luster while abroad. As I understand it, this amount is not included in my box 1, so my tax preparer will likely add it to my box 1 as a taxable benefit as well. Don’t worry, it gets worse.
“Box 12 Code DD” is my Health Insurance as paid by my employer
If your host country considers this a taxable benefit, your tax preparer will probably add it to your box 1 compensation as well. This is getting discouraging, right? Well, here is a little bit of good news.
“Box 12 Code BB” is my contribution to my employer’s Roth 403b retirement plan
You may have a Code AA (Roth 401k) or Code EE (Roth 457b) here. The operative word is “Roth.” My understanding is that contributions to a Roth 401k, Roth 403b, etc. are not pre-tax contributions in the US. That means they were already taxed in the US just like the rest of your normal salary. I think you’ll find that these contributions are already included in your box 1. I want to be clear with my tax preparer about this so that he does not add this to my box 1 wage. That bears repeating. Your box 12 Roth contributions should already be included in your box 1 salary. Don’t get taxed twice. I did it once. It’s no fun.
“Box 12 Code E” is my contribution to my employer’s “traditional” 403b retirement plan
I’m cheating a bit here because I haven’t had a Code E contribution in many years. However, it is worth pointing this out. In contrast to Roth contributions, contributions to a “traditional” 401k (Code D), 403b (Code E), etc. are made before US taxation of our wage. This means that these contributions are not included in our box 1 compensation. Our host countries may not consider this contribution to be untaxable as the US does.
My tax preparer will likely add this to my box 1 as another benefit. This is one of a handful of reasons why Roth (and not “traditional”) employer retirement plans seem to be the logical choice for US missionaries who have to pay tax in their host countries. There are other considerations, but this would seem to be a big one.
As you can see, box 12 is full of surprises. H&R Block sums up the box 12 mysteries this way: “The W-2 Box 12 codes provide more information and determine if the amount is income. However, if any amount is gross income, it’s already included in W-2 Box 1.” When we work on our foreign taxes, we’re going to need to understand our codes and know if they are included in box 1 or not. There’s a lot of unpacking to be done.
“Box 2,” “Box 4,” and “Box 6” are various US taxes that were withheld
This is where it gets tricky. Boxes 2, 4, and 6 show various taxes that may have been withheld by our US employers. These figures are already included in box 1 as part of our gross salary for US tax purposes. Our foreign tax preparers might use this information in boxes 2, 4, and 6 because our US taxes can often offset the taxes we owe in the host country (and vice versa). It seems easy enough just to point out those boxes, right? It’s not. I don’t have all the answers here, but these are some questions I’d want to discuss with my host-country tax preparer:
- Can any of the box 2, 4, and 6 categories lower my host country taxes?
- Do you need to see my US taxes to see if some of these tax dollars were returned to me when I filed?
- Does it matter if some of those taxes were for self-employment?
That last question certainly doesn’t apply to everyone. However, my US non-profit employer treats me as self-employed for social security/medicare taxes but employed by them for income tax purposes. It is my understanding that this is not uncommon among US mission agencies. In my case, that means that my box 2 includes a large amount. Half of that represents employment taxes I paid as a self-employed employer and half represents employment taxes I paid as a self-employed employee. Isn’t being self-employed fun? I get to pay both! My local tax preparer is going to need that information. It is possible that the employee portion of the taxes paid to the US will reduce my host country taxes but that my employer taxes do not reduce anything.
Despite some rather difficult issues like this, it is important to bear in mind that boxes 2, 4, and 6 are probably already included in your box 1 wage. Don’t let this be taxed twice by your host country. To prevent that error, we’ve got to unpack these boxes very carefully.
“Box 1” contains your “Wages, tips, and other compensation”
This seems straight-forward enough, right? It is except for the fact that some of the figures in boxes 12 and 14 will need to be added to box 1 and some of them most definitely should not be. If we understand this badly or explain it poorly to our host-country tax preparers, we may end up paying tax on some income twice.
Well, that’s my take on how to unpack my own W-2 boxes. Now, it’s your turn to know your W-2.