How can I prepare for tax fallout from my grant?

January 18, 2007 5:48 AM

I am an American working overseas for a year on a grant. It is my primary source of income, and there is no tax withheld from the grant. I am looking for advice on the best way to prepare for the tax situation I will face.

The grant is a Fulbright scholarship, if that matters. According to this publication, it is treated as scholarship/fellowship income. This means I can probably deduct "local transportation, lodging, and food expense[s]" as well as business expenses (it's a journalism grant). For a number of reasons, I'm sure I'll need professional help on this, but I'd appreciate assistance on any of the issues below.

1. I've been saving every receipt that might be useful. Is this the best approach, or is there another way to make it easier on myself or the tax preparer that will assist me?

2. People in my position are supposed to pay "Estimated Tax Payments," but the form [pdf] has a table that only assumes dollar income -- I am paid in Japanese yen so I have no idea what conversion metric to use that will satisfy the IRS.

3. As I said, I know I need to consult a pro. What is the best way to approach finding a qualified tax professional that will advise me about my actions during 2007? (I believe this would be worth it -- if you do not, feel free to advise me of that). I am in Japan now, and I do not know where in the U.S. I will live when I return, so I'm wondering where I should be looking.

posted by jeffmshaw to Work & Money (5 answers total)

You won't have to pay taxes at the same rate at regular US citizens.


"Last year the law allowed most overseas Americans to exclude $80,000 of foreign earned income from the income taxed by the United States. The new law adjusts the exclusion for inflation to $82,400 for this year, but it raises taxes by adding complex new provisions on how the exclusion is calculated. The changes are retroactive to the start of this year." (source)

Expatriot tax FAQs
posted by croutonsupafreak at 7:15 AM on January 18, 2007

That FAQ list is for Germany, but in terms of calculating exchange rate this excerpt may be useful:

What is the average exchange rate for the Euro to the Dollar for the tax year 2006?
The IRS has NO official exchange rate. Taxpayers have always been required by Internal Revenue regulations 1.905-3 and 1.988 to translate foreign income into dollars on the date of payment. As a practical matter, a wage earner can use a yearly average with no problem. A self-employed individual usually benefits by converting at the date of payment. The IRS accepts any posted exchange rate that is used consistently.
posted by croutonsupafreak at 7:17 AM on January 18, 2007

I never paid taxes on my Fulbright, but that was years ago. You should hook up with your fellow Fulbrights and see what they're doing this year.
posted by footnote at 10:38 AM on January 18, 2007

If you are worried about estimated taxes, the best way to be sure you will not get any penalties is to pay your estimates on the basis of what you made *last* year.

IANAAccountant, so I don't recall the exact situation, but if you make below a certain amount, paying estimated taxes to the tune of 100% of what you owed last year keeps you from penalties. (If you make above that amount, you must pay 110%, I think).
posted by nat at 11:23 AM on January 18, 2007

In addition to the first $82K in income being tax free that others have noted, Americans working overseas typically are allowed to deduct costs incurred for the purposes of maintaining a residence abroad for employment purposes; what this means in practice is pretty much anything with the exception of water is deductible. If you own this includes mortgage interest, as well as lots of others items.

Also included are any local residence taxes you might have to pay - in England this is called Council Tax. Also, any days you spend outside of your host country are deductible as well - for example, I live in London and work all over Europe. Any day I'm working outside of England is of such interest to my accountants they require me to maintain a log. I'm not totally sure what's going on there, but I suspect I'm not taxable on the UK side for any days I work outside of England.

I'm currently using KPMG but be warned they are pricey (about three thousand Sterling / year for a set of US and UK returns). I'd second the suggestion upthread you first network with peers and see what they are doing.
posted by Mutant at 2:42 PM on January 18, 2007