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Will leave my company and work abroad, how much of 401K taxes can I get back when I do the Tax Return in 2012?

  • Hi, I am leaving my company at the end of the first quarter to work abroad for at least 3 years. My gross income by the time I leave my company will be $18K. I live in NC, I am married, we are filing jointly, my wife does not work, and we have a kid. My total 401K balance is $35K. I know I have to pay 10% penalty and federal & state taxes if I cash my 401K out. Since my total income will only be the first quarter earnings ($18K) and 401K for the year of 2011, can I get some of the taxes I pay on 401K next year whenever I do the tax return. Or should I wait until 2012, and cash it out then, since I will basically have no reported income in the US in 2012. I think there is also a rule such that if you work abroad for over 9 months, you do not pay federal taxes here in the US. If that's the case, can I get all federal taxes back (including income and 401K) as long as I leave my company by the end of the March? Thanks for all the inputs.

  • Answer:

    Get IRS pub 54 and read it. You do NOT understand how the foreign earned income exclusion works at all. It's 11 months, NOT 9 to qualify for the FEIE. Let's say you wait until 2012 to cash out the 401k. On the 2012 return you will list 100% of your worldwide income. If you meet the 330 day test, you will exclude the foreign earned income to the LESSER of the actual amount or $92,000. That means the money from the 401K is still in the taxable income. Then you subtract your standard deduction ($11,400) and your 3 exemptions ($10950). If you cash out the entire 401K, you will still have $12650 leftover even if you can exclude all of the foreign income. That extra $12650 is taxed as if the foreign income had never been excluded, so plan on 25%. The add back the $3500 for the 10% penalty and you sill owe around $6600.

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too many things going on here. With respect to the 401k, don't cash it out. Roll it over to an IRA and leave it there. JUST LEAVE IT ALONE. With respect to working overseas, you need to research the rules on "physical presence test" and "bonafide residence" to make sure you qualify (which you probably will.) By qualifying, your first $91,500 of wage income is exempt from federal income taxes, BUT YOU HAVE TO FILE your return and claim the exemption using appropriate forms (like form 2555). You will have a whole bunch of other matters to address as well including the "Foreign Bank Account Reporting" (FBAR form TD.90.22.1) <----- THIS IS THE BIGGIE. ALWAYS FILE YOUR FBAR TIMELY OR YOU WILL BE FINED AT LEAST $10,000 PER YEAR for failing to file. Finally, TODAY, RIGHT NOW, contact an accountant or tax attorney that specializes in "Expatriate Income Taxes". Make sure you do everything right today.

sometimes you don't have a choice, when you leave the employe of a company the 401(K) may have to be withdrawn or transferred to another financial institution, you probably need to check your company's 401(K) program to find out

You really, really need to not ask that question here. Talk to a tax professional, preferably a CPA about your tax picture for the next two years. Taking money out of your IRA can be costly in more ways than one. There may also be state taxes that vary from one state to another. Your CPA will be able to research the question on foreign income.

Where ever you are getting your tax advise from they are incorrect or you misunderstood. Among the issues that you seem to misunderstand is the taxation of your income while out side the US. All US citizens are subject to income tax on their worldwide income. You may be able to qualify for a form 2555 Foreign Earned Income Exclusion but those rules are complex and 9 months has nothing to do with it. If you wish to pursue such an exclusion you should contact a tax professional familiar with that issue.*

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