Foreign Salary Exception

• When you provide services to an employer, the IRS requires you to pay tax on the entire amount. However, one exception exists for expatriate taxpayers who live and work abroad. The federal government offers the foreign earned income exclusion, which allows you to shield a certain amount of the income you earn abroad from U.S. taxation. To qualify, you generally must be living out of the country for most, if not all, of the tax year. Even though you still have an obligation to file a tax return, the IRS allows you to exclude up to $92,900 of your foreign salary.
  
  

Withholding on Salaries

• If you live and work within the U.S., then you have no option but to pay tax on your salary. In fact, your employer will withhold federal taxes from each of your paychecks. At the end of the year, your employer will report your total salary and federal tax payments on a W-2 form. This document is important when you fill out your tax return because it will allow you to collect a refund from the IRS if the withholding payments you make exceed the tax liability you calculate on the return. You also have the option of reducing the amount withheld from each paycheck by claiming more allowances for your deductions and exemptions on a W-4 and submitting it to your employer.
  
  

Including Employer Benefits

• When you receive your W-2, you may notice that your total income is higher than your basic salary. This happens when you receive bonuses, educational grants or other types of compensation from your employer. For example, if your annual salary is $100,000 and at the end of the year your boss gives you a $10,000 holiday bonus, the IRS treats this bonus no differently. You must pay tax on the additional $10,000 as if it were part of your salary.
  
  

Reducing Taxable Salaries

• One way to reduce the amount of tax you pay on your salary is to claim as many work-related deductions as you can. Generally, the IRS allows you to deduct any out-of-pocket expense you incur as long as it's for the benefit of your job. Commonly, these include all travel expenses, such as purchasing an airline ticket to attend a business meeting or driving to meet with clients using your own car. In addition, you can deduct hotel stays for overnight trips and even some of the meals you purchase. Keep in mind though, the IRS only allows the deduction if you don't receive reimbursement from your employer and you elect to itemize your deductions at the end of the year.