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Overseas jobs and 401(k)s
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April 10, 2000: 1:03 p.m. ET
A special tax credit may affect how much you can put aside for retirement
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NEW YORK (CNNfn) - If you worked overseas last year, you can take advantage of a special tax credit, and you may be able to deduct some housing costs.
In response to a reader's question, Mark Groesbeck, a certified financial planner from Houston and a member of the Financial Planning Association, said working abroad might also affect your retirement plans.
Ask the experts a question.
I am working in Japan, and between a rising salary and a weakening dollar, I will probably earn much more than the "foreign earned income credit" will cover. Are there any savings options available to me that would help reduce my taxable earnings?
For those individuals that work out of the country for the whole year, the IRS allows you to exclude the first $74,000 of your earned income. U.S. citizens can claim this exclusion filing their tax returns with Form 2555 included.
Additionally, they must meet the residency requirements -- they must be a bona fide resident of another country or be there for more than 330 days before they file their tax return.
For more details, see IRS Publication 593, Tax Highlights for U.S. Citizens and Residents Going Abroad.
For example, if an individual were to have compensation of $115,000, the first $74,000 could be excluded from income, they will pay tax on $41,000 less their standard deduction or itemized deductions and less their exemptions. At this level, you would be taxed at the 15 percent tax rate on the difference.
In addition to the earned income exclusion, it is possible that you could also claim an exclusion or a deduction from gross income for your reasonable housing costs that are more than a certain base amount.
One final note, if you claim these exclusions, you will not be able to claim a "foreign tax credit" for any overseas income tax paid on excluded income. A "foreign tax credit" can be claimed only on non-excluded income. Click here for more information on Federal Tax Credits.
Savings plans for those living abroad are impacted. How? When calculating your IRA or 401(k) contributions, the excluded income is not considered compensation and may impact your ability to contribute to these types of plans. For those living abroad, your company should be able to identify for you how overseas income will impact your participation in retirement plans. If you are working abroad as contract labor, then remember you will be responsible for a self-employment tax of 15.3 percent.
If your company has a 401(k) plan, make sure you maximize your allowable contribution, which in 2000 has been indexed to $10,500. Check with your human resource department to see if there are any other employee benefit plans provided by the company that would allow you to pay for expenses on a pretax basis -- for example, a Section 125 Medical reimbursement plan.
Tax planning can be complicated for those living abroad -- I would suggest that individuals consult a tax consultant to make sure that all allowable exclusions are utilized. 
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