i am teaching english in hungary how do i get them to stop withholding income tax?

Question

I heard from the IRS office and Frankfurt and a bureaucratic office here in Hungary that as an American citizen teaching in Hungary for less than two years I am exempt from income taxes. But the school I am teaching at has been withholding tax money out of ignorance of this law and I can't figure out how to go about getting the money (a pretty large percentage) back and how to prevent them from doing it in the future. A lawyer is too expensive, please help me figure out what to do.

Edit: Yes, I am talking about Hungarian taxes. The tax treaty between the US stipulates this exemption from income tax for a teachers who work in one of the contracting parties for less than 2 years. It's not an especially well-known stipulation but it is there and as I said affirmed to me by people in trustworthy positions, but as far as local bureaucrats go it's not that well-known, probably mostly because they don't have to deal with American people teaching in their districts everyday. My yearly salary is actually under the $8,500 cut-off so I think that actually means I don't even need to file a US tax return, but currently just under 40% of my income is withheld from me a month by the Hungarian government, a certain percentage is pension and health insurance which I am not exempt from but another percentage of it is income tax which I am definitely exempt from, and I want to stop losing almost half my income to taxes every month.

Answer 1

What taxes are you talking about? If you're talking about US taxes, that's not necessarily true. You may be able to exclude your foreign earned income from US taxes if you meet certain conditions and file a timely return but you can't claim any carte-blanche tax exempt status on the withholding end. You must file a timely return and attach Form 2555 to your return to claim the exemption. If you can exclude the income from US taxes, you'll get a refund of any US taxes withheld.

If you're talking about Hungarian taxes, you'll have to contact the Hungarian tax authorities. You'll probably have to file a Hungarian tax return to have those refunded by the Hungarian tax authorities.

Addendum: Here's a link to the explanatory text of the treaty: http://www.irs.gov/pub/irs-utl/hungarytrweb.pdf and a link to the formal treaty itself: http://www.irs.gov/pub/irs-trty/hungary.pdf

If the school is unwilling to stop withholding the tax, you'll have to take your case to the Hungarian tax authorities. It may be that you have to file an income tax return with them and reference the treaty in your claim for exemption from Hungarian taxes in order to have those taxes refunded to you.

Answer 2

As Bostonia says, you have to file a US Income Tax return even if you owe no tax. It must be done within one year of the filing date in order to be eligible for the exemption.

I worked for many years overseas and saw many US Expats fail to file because they didn't owe any tax, and they wouldn't take my advice to file anyway to protect themselves.

As for the Hungary stuff, follow Bostonia's advice, he's always right.