Foreign Earned Income

[Ian223]

So after doing some reading on here, I've seen a number of postings on "Foreign Earned Income" tax exclusions. I'm a US citizen, presently working as an independent contractor in Laos. While here ("here" being Thailand, where I have an apartment, and Laos, where I spend most working weeks), I also telecommute (as an independent) for a US company. My total income will be below $87K USD, and I'll be in Asia for >330 days for the 2008 calendar year, so I will pass the bona-fide physical presence test.

Based on this, I would qualify for the exclusion on my Laos income, but what about for the US income? I posed this question to my accountant, and he wasn't sure about it, as it falls into a bit of a grey area. The last thing I want is trouble from the IRS, but at the same rate, I certainly would like to take any breaks that I may qualify for.

Can any other US expats on here advise??

[Scott]

Check the IRS website, but as I recall you have to declare your US income as regular income with all that entails. You need to declare your overseas income and then take the exclusion.

Remember that lots of those expenses may be tax deductible against your US expenses.

Best of luck to you.

[PeaceBlondie]

I think his question is, does his telecommuting income count as domestic earned income? I do not know the answer.

[Ian223]

That's exactly my question -- can I be exempted from taxes on my US income since I meet the physical presence test?

[PeaceBlondie]

That's exactly my question -- can I be exempted from taxes on my US income since I meet the physical presence test?

I did not think that was your question. Either of the tests for the foreign earned income test only exclude the income that is foreign, and has no effect upon non-foreign income (domestically earned income, and all unearned income). That is not one of my US income tax specialty areas, but being abroad does not exempt American income.

My question is whether telecommuting income is domestic income. If so, it would not be exempt. Please read some basic info on a site like www.irs.gov about foreign earned income exclusion.

[kudroz]

For this income to not be subject to U.S. taxation, your income must:

- Not be sourced in the U.S.

- Not be "ECI" (effectively connected with a trade or business in the U.S.)

Source Income

If the activities for which you are paid for are physically performed outside of the U.S. (does not matter if you are transmitting data over the internet/phone); it is deemed of foreign source.

Effectively Connected Income (ECI)

In your case, if the U.S. payee is a partnership deriving its revenues from U.S. sources and you are a member (owner) of such partnership; it is deemed of U.S. source.

Now if you have determined that your income is not U.S. sourced income, you probably wonder where lies your tax liability. I don't know about Laos, but in Thailand if the activities for which you are paid for are physically performed in Thailand; it is deemed of Thai source and subject to taxation in Thailand regardless of how many days you've stayed in the year.

I would imagine Laos have similar tax laws as they have applied in 1998 to be part of the World Trade Organization. This same "source of income" principle is generally shared by most OECD and WTO member countries. But Laos has yet to be accessioned, they are still negotiating.

Edited April 22, 2008 by kudroz

[kudroz]

Example of U.S. Source Income

- Pensions

- Personal Services performed physically in the U.S.

- Royalties paid for a book published in the U.S.

- Interest from deposits in a U.S. bank

- Real Property Income (you rent out your house in the U.S.)

Example of U.S. Foreign Source Income

- Services performed outside of the U.S. (Telecommuting from outside the U.S. and not being physically present in the U.S. while performing the services you are paid for)

- Interest from deposits held outside of the U.S.

- Capital Gains from investments held outside of the U.S.

- Royalties for a book published in the U.K.

- Real Property Income (you rent out your house in France)

Edited April 22, 2008 by kudroz

[thaihome]

Note question #9 on the Form 2555:

“List your tax home(s) during your tax year and date(s) established”

If you are taking the Foreign Income Tax exclusion, the expectation is that you are paying any applicable local taxes on that income. You are not supposed to exclude the income for US purposes and then avoid the local tax by saying it is not earned in the country since you are telecommuting.

TH

[autonomous_unit]

Part of the foreign-earned income exclusion (reported with Form 2555) involves figuring your foreign/US split, so that you can for example determine that the income earned on days in Thailand or Laos is excludable, but income earned on days when you travelled to the US is not excludable.

You are confusing the topic by referring to your telecommute work as "US income". In general, it does not matter who paid you or where the payments were sent. What matters is where you were when you performed the work that earned the income. If you plan to figure your taxes and exclusion, you should read IRS publication 54 "Tax Guide for U.S. Citizens and Resident Aliens Abroad".

Note, all non-earned income (rents, dividends, deposit interest, etc.) is non-excludable regardless of source. You would have to use the foreign tax credit to try to prevent double-taxation on these incomes, rather than the foreign-earned income exclusion.

A separate issue is that you may find it impossible to pay Thai taxes on your telecommute income if you do not have a work permit here. I am not sure where this leaves you with claiming the foreign earned income exclusion, ethically or legally. I see that Thaihome just made a similar comment while I was writing this...

[wasabi]

I think the safest thing to do is to pay tax from the country who is paying your salary regardless of where you physically are. This obviously applies mostly to telecommuting type setups. You will get many different opinions here and I don't think most know 100% as the laws are vague but from everyone I've checked with from consulates to lawyers says Thailand isn't concerned with money you earn overseas. There really is little difference between owning a house that pays rental income and performing IT work over the internet while you are living in Thailand and I doubt a home owner would expect to pay Thai tax. Thailand will become concerned with you having a work permit if you are earning money from a Thai source or are doing a job a Farang is restricted from doing. They are also concerned you have valid visas. I've noticed these threads get debated to death but I've done my due diligence and this is what I've been told. I've also been told no matter what your source of income is in Thailand it's best not to make a big deal of it.

[PeaceBlondie]

I would only add that, by making it very difficult or actually impossible for foreign workers in Thailand to get work permits, the Thai treasury loses out on millions of baht of tax revenue, maybe weekly or monthly. Once the worker has crossed the line of the technical law by not having a work permit, you cannot blame him for failing to report the income. Most teachers do not pay tax on private lesson income, even if they have a work permit for their day job. Surely there are many more examples.

I don;t think this is off topic. We have basically concluded that telecommuting is subject to Thai income tax, but ineligible for work permit