Global mobility - The Basic Issue

websitebuilder@thryv.com — Thu, 26 Jan 2023 22:46:44 GMT

So, what’s the big deal with the international parts of US taxation, anyway? If I am not resident in the US, I don’t have to pay US taxes, right?

Wrong. The US is only one of two countries (the other being Eritrea, in case you are interested) that taxes on the basis of citizenship as well as residency. So, if you take a dream job in Australia or Zimbabwe, Uncle Sam still expects you to report your tax affairs. You may not actually end up paying any tax in the US for various reasons, but you still have to file your taxes if you earn over the filing threshold.

Because the IRS is interested in your affairs in Outer Mongolia, if you own any assets or business interests abroad, chances are you will also need to file reports known as information returns. These, as the name suggests, are reports that detail your business income, what assets you own, and how much wealth you have abroad, so the IRS can compare this data to the income you report on your tax return. These are filed with your tax return and have a dazzling array of form numbers (5471 for foreign company interests, 3520/A for foreign trusts, 8938 for foreign financial accounts, and so on) that can become confusing.

The IRS, in its wisdom, has decided over the past few years to increase the depth of reporting regarding foreign assets and now these forms, for example the 5471, are now mind-bogglingly detailed and baffling, and beyond the experience of the average local CPA. Where all this becomes really important is that the majority of these forms attract a whopping $10,000 per form for missing or incomplete submissions.

These situations also apply to people immigrating to the US. The most usual scenario is that they come to the US assuming that all of the foreign affairs are not subject to US taxation rules and then find themselves in significant difficulties.

Thus it is extremely important that your tax preparer has a history of preparing information returns as well as the standard expat return. We are experienced in these situations for quite a while now, so if you are a non-resident looking to come to the US or a US person looking to move abroad, talk to us before you get into a situation you cannot remedy.

Ways to avoid double taxation on foreign assets and income

websitebuilder@thryv.com — Thu, 26 Jan 2023 22:46:44 GMT

Now we know that the US government is keen to know all about our money and assets abroad, doesn’t that mean that we can get taxed twice- once on the income in our foreign country, and another in the US?

Yes, and no. There are a variety of options that one can utilize to reduce the effect of this:

Foreign Earned Income Exclusion

If your earned income is less than the threshold (currently about $110,000), you can elect to exclude it from US taxation in your US return. If it is higher, you can elect to exclude the full amount and pay tax or take a tax credit on the remainder. As with most cases regarding US taxation, there are twists- any amount taxable after the exclusion is taxed at the rate as if the exclusion does not exist, you cannot make IRA contributions on excluded income, and you cannot claim certain credits if you exclude. Plus, if you stop excluding, you cannot exclude again for five years.

2. Foreign tax credits

You can claim a tax credit for taxed paid or accrued in a foreign country on your income. You cannot claim more than the US tax paid on that income- any excess is carried over for up to 10 years. The income usually must arise outside the US, and another drawback is that income and taxes paid are allocated into categories of income (for example, passive income) and taxes in one category cannot be offset against income in another.

3. Tax Treaty claim

The United States has entered into treaties with various countries to agree on how certain items are treated and which country gets to tax you on that income. If there is one for your country of residence, it may be that your income from abroad is excluded from US taxation by virtue of a treaty, or that the US is required to give tax credits on taxes paid abroad on US-based income. If this is the case, then a claim form is required to be attached to your return.

The obvious question is- how do we know which method to take? Can we mix and match?

As with all other areas of taxation, there is no simple answer. It depends on the following factors:

How much tax you pay in your country of residence

If you are in a low-tax jurisdiction then tax credits may not work as well as taking the exclusion. Plus low-tax countries tend not to have treaties with the US. If you are in a high-tax jurisdiction you can choose between the tax credit or election, or, depending on how much you ear, both.

2. Whether you have kids or want to make an IRA contribution.

If you have kids then you generally cannot claim the refundable child tax credit if you claim the exclusion. If your earned income is less than the exclusion threshold you cannot make an IRA contribution. If it is higher, you may be able to make a contribution.

3. If you are self-employed

The exclusion is on gross income and you cannot take a deduction for expenses attributable to income excluded. Thus if your net income is over the threshold, you will end up with a reduced exclusion to account for expenses in your business that are no longer deductible.

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Global mobility - The Basic Issue

Ways to avoid double taxation on foreign assets and income