Do you understand your W-2?
Many of us receive a W-2 in February (although some nonprofit workers and missionaries do get a 1099 instead). If you’re like me, you never really knew what all of those numbers meant. Box 1 always seemed pretty interesting, but the others…well…I’d only look at them if an IRS form said I had to enter it somewhere and even then I usually didn’t understand a lot about what I was copying and pasting. That was, however, before I started paying income taxes abroad. Hmm…
Yep, paying income tax abroad is a traumatic experience the first time around. And I’m not just talking about the discovery that you probably have to pay abroad. That’s was a huge shock to a lot of us! And I’m not just talking about the amount you have to pay. That can knock you over! Once recovered from that, we need to ask ourselves the question, “What on my W-2 is taxable income?” Or perhaps your overseas tax preparer who has never before seen a W-2 holds it up to you and asks, “So this is from your company? Ok, what does it mean? Where is your taxable income?”
What is taxable income on our W-2?
As I said, the US tax forms are pretty straightforward. For example, “Enter your income from Box 1 here” is hard for any of us to misinterpret. But that’s in the US. While I’ve found foreign income tax forms to be generally much shorter and more comprehensible than their labyrinthian counterparts in the USA, that doesn’t mean our US forms and boxes line up very well with the foreign forms.
When my foreign tax preparer began discussing my W-2 with me, I realized how little I understood. We were running late that first year of paying, so I gathered the information I could, slapped it all together and gave him my best guess. What a mistake! That haphazard single box miscalculation cost me close to two thousand US dollars!
How could that happen? Well, some of those pesky little boxes on the W-2 are included in the amount you find in box 1 and some of them are not. Because it is the foreign tax authority that is calling the shots on what is taxable and what is not, you can’t simply say, “Here’s my box 1 amount. Yippee! We’re done!” No, no. That would be too easy. What’s got to take place is you and your tax preparer will have to discuss what things here in the country of Generika are taxed as income and what are not? We decided together that here in Generika (and this may not apply to your country), we had to pay taxes on funds received for retirement (like a 403b plan), funds received for housing expenses, even funds paid by my employer for our health insurance, etc. Yep, that all hurt!
What hurt even more in that first year is that my 403b was a Roth 403b and not a traditional 403b. One of the main differences is that the Roth 403b is invested from taxed income (it is included in box 1 because it is taxable income in the US) while the so-called traditional 403b is pre-tax or untaxed income (and so is excluded in box 1). Can you see this coming? Yep, I gallantly added my generous Roth 403b contributions to my box 1 taxable income where the Roth 403b was already included. I paid foreign taxes on it not once but twice that first year! Ouch!
Perhaps you’re wondering at this point: “Why am I taking financial advice from this idiot?” Well, you’re not. Vagabond Finances is a financial tell-all in which I’m going to tell you my financial blunders (plenty of them!), a few successes and a few ideas I’m working on. I hope together that we can avoid a few missteps, fund our Mercy Mound and arrive at the point of Winning Financial Freedom and a state of reckless Generosity!
What do these W-2 hieroglyphics mean?
I’m no expert in this matter, but after much research online and many conversations with the financial department of my missions agency, I’ve come to conclude that these several items are at the heart of the W-2 hieroglyphics at least as concerns nonprofit employees with a W-2 who are paying income tax abroad:
| W-2 Box | What is it? | Included in Box 1? | Is this Additional Taxable Income in a Foreign Country? | Other Comments |
|---|---|---|---|---|
| Box 1 | Wages, tips, other compensation | Umm...yes. | It is your base income | |
| Boxes 2, 4 and 6 | Taxes withheld | - | No! | This is money you paid |
| Box 12 E | Pre-tax contributions to your 403b | No | Probably yes | This is not your Roth 403b |
| Box 12 BB | Taxable contributions to your Roth 403b | Yes | No | It is already in Box 1 |
| Box 12 DD | Health Insurance Premiums | No | Maybe | Many foreign countries don't see this as US gov't required universal health care, so they tax it as a benefit given to you by your employer |
| Box 12 W | Health Savings Account (HSA) | No | Probably yes | This is not taxable in the US but your foreign country will probably consider it as a taxable benefit |
| Box 12 C | Life Insurance | Yes (pretty sure) | Probably not | It is probably part of Box 1 |
| Box 14 | Housing Allowance | No | Yes |
I hope the above information is correct and applicable to your situation.
Now, as you pull out your cell phone to calculate how much of your W-2 will actually be taxed in your country, let me hastily take my leave of you lest you throw that precious phone in my direction!
