I only owe $19,000??

This will be a highly wonkish post, so those of you who don't delight in digging into some of the more arcane provisions of Title 26 of the United States Code, also known as the Internal Revenue Code, might just want to skip this one.

This is kind of a good news/bad news day. The good news is that my company deposited $19,000 into my checking account today. The bad news (and this is not a coincidence) is that I need to send a check for $19,000 to the IRS tomorrow. Now, it's not every day that I write a check for $19,000. The reason that I owe so much money to the IRS is because of how I'm taxed on the expenses that my company covers for me to live in Switzerland.

All kinds of things that the company pays, including housing, school for the kids, the cost of living allowance, and other things, count as taxable income. Well, school for the kids runs about $50,000 per year, which would result in a substantial tax bite to the Wood family. So my company pays the tax for me. Let's say that the tax on the $50,000 is $15,000. That $15,000, of course, counts as income to me, so the company pays the tax on the $15,000, but that tax paid by the company counts as taxable income, so the company pays the tax on that, but that tax paid by the company counts as taxable income, so the company pays the tax on that, and you can see how this goes. Eventually, this diminishes to the point where the company is paying the tax on one cent of taxable income, which is zero. (Some of you may know this as "grossing up," which doesn't have anything to do with tossing your lunch.) So as far as the IRS is concerned, that $50,000 school payment counts as something like $80,000 or $90,000 of income to me. There's a mathematical formula for figuring this out. It goes something like this: reimbursed expense divided by (1 minus the tax rate).

Anyway, enough of that. The other trick here is that I can't actually file my 2008 taxes until early next year, because for complicated reasons having to do with the foreign tax credit, I need to live in Switzerland for an entire calendar year to establish my foreign residency. The IRS will grant me a filing extension to see if I actually establish foreign residency. However, the IRS isn't willing to let me sit on their money for another nine months, so they want a payment of what they think my ultimate tax liability will be. That's where the $19,000 comes in. My company's accountants think that my company owes the IRS another $19,000 on my grossed-up income, so I have to pay that amount along with my application for a filing extension.

In the end, to us, this is just a numbers game. In the eyes of the IRS, my income for 2008 was around $250,000 because of all of those expenses paid by my company, but rest assured, I didn't see anything close to that amount in my paycheck. Nowhere near. The company works up a hypothetical tax return and expects me to pay the amount of tax I would pay if I were still living in Minnesota without all of these other expenses being covered. The company then pays the additional tax on the housing and the school and all of that stuff. So the bottom line for us is that we're no better and no worse than if we had stayed in Minnesota, which is the whole point of the company's relocation policy. (Although the view from our terrace in Switzerland is slightly better than the view from the deck of our house in Minnesota. And it doesn't take as long to fly to Finland for spring break.)