Tax Law (Questions About Taxes)/hypo tax

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Question
Hello,
My husband took an overseas assignment in April 2010. He had federal taxes deducted from his pay just as he had in the U.S. (he is paid by US and we did our own taxes that year)

In January of 2012 his employer switched to hypo tax formula as this would be better for him. At the same time they completed our 2011 tax return and said they did them using the hypo formula. However, federal taxes were still deducted from his pay in 2011. Now we have a big tax refund for 2011 and his employer says we have to return the majority to them due to the hypo formula.

How can that be? We paid the taxes, shouldn't we get the refund?

Answer
Dear Kathy,

Unfortunately, so called Tax Equalization system often benefits the employer rather than employee.

The rules for calculation of Hypo Tax are not set by the IRS - each company has their own policy.

Hypo tax calculation usually implies return of potential tax refunds to the employer as a compensation for the company-provide foreign allowances (i.e, housing).

See http://www.taxesforexpats.com/expat-tax-advice/us-social-security-agreements.htm

I.J.Zemelman, EA  

Tax Law (Questions About Taxes)

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IJ Zemelman, EA MBA

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I am an IRS-authorized EA and principal of a Tax Preparation firm focusing on U.S. Expatriates. We specialize in all tax issues faced by American citizens living abroad - such as foreign earned income, tax treaties, foreign spouse, etc. Visit our website - www.TaxesForExpats.com - for more information.

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18 years professional tax experience, 12 with expatriate taxes.

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Expatriate tax information on www.TaxesForExpats.com

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MBA from Zicklin School Of Business, IRS Enrolled Agent

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