Another repeat from 2008, mainly because people still try to peddle this snake oil. This conversation took place just yesterday.
Two prospective clients came into my office (husband and wife). I showed them my Engagement Letter first, and they wanted to ask me some questions. The first were routine about the wife’s income. But then the husband told me he didn’t have a W-2 from his job.
“Well,” I asked, “Were you paid under the table?”
“Oh, it was nothing like that. I was working in South Korea last year.”
It turns out he was working as an independent contractor in Korea. “And isn’t it great,” he continued, “that I don’t have to pay US tax on that income.”
I corrected him. “You do have to pay US tax on that income. Americans pay tax on their worldwide income. Now, had you had income tax taken out of your Korean income you would be eligible for a tax credit. Were you overseas for 330 days in 2008?”
“No,” he said. “I came back for the summer. I didn’t like the humidity.”
“That’s a shame, because had you been overseas for 330 days out of a 365-day period, you’d be eligible for the foreign earned income exclusion.”
I told the potential client that he would pay both income and self-employment tax on his Korean income. He didn’t like my answers, and said he’d find another accountant who would see things his way. He’s likely still searching.
As noted above, if you do earn income abroad, there are some real tax tips you can take advantage of. If you have a genuine residence overseas or meet the physical presence test (generally, being abroad 330 days out of 365), you may be eligible for the Earned Income Exclusion. If eligible, you can exclude up to $87,600 in 2008. And the time period does not have to be a calendar year; if you’re overseas from May 1, 2008 through April 15, 2009, you would likely be eligible for a prorated credit.
If you earn income abroad and it’s taxed abroad, you are likely eligible for the Foreign Tax Credit. The general principle is that income should only be taxed once, so if (say) Japan taxes your income, you should get a credit of that tax on your US tax return.
Finally, anyone who is not in the United States on April 15th gets an extra two months (until June 15th) to file his tax return. (You need to attach an explanation to your tax return.) If you’re abroad, you won’t be subject to penalties but you will be subject to interest on what you owe (interest is statutory).
There are numerous caveats and gotchas, and numerous ways to lessen your tax if you either have foreign source income or live abroad. Talk to a professional who can help you if you’re contemplating living abroad or will soon have significant income from abroad. But whatever you do, remember that foreign income is just as taxable as income earned in the United States
Tags: BozoTaxTips