Today’s Bozo Tax Tip is a repeat from last year. It’s just another of the tax protester myths, that only foreign income is taxable. It’s also one that has come up again during this tax season. So, without further ado, here’s what I wrote last year:
This is definitely an issue I’m aware of because of my practice areas. I deal with plenty of individuals who earn their living while residing abroad or through foreign sources of income. “It’s tax exempt, isn’t it?” They’re not happy when I let them know that’s not the case.
The Tax Code, which is law (Title 26, U.S.C.) states that Americans are taxed on their worldwide income. Basically, everything is taxable unless Congress specifically exempts it.
Anyway, about six months ago I was approached by an individual who was about to be levied by the IRS because of failure to pay taxes. He resided in the continental U.S., but earned all his income from royalties from the Far East. So I asked him a few questions:
“Are you an American citizen?” He was.
“Was this income taxed at its source? That is, had the countries where it comes from levied a tax on it?” No, he received all of the income.
“Do you pay income tax in any of these countries?” No, he didn’t.
In summary, the individual really owed the tax. But as much as I tried to tell him that, I was talking to a brick wall. Given my dislike of talking to brick walls and of taking bozos on as clients, I suggested he try to get someone else to represent him.
But 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 $85,700 in 2007. And the time period does not have to be a calendar year; if you’re overseas from May 1, 2007 through April 15, 2008, 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.
