Us Taxes – Foreign Earned Income Exemption

[siamamerican]

If things go as planned, I'll move to Thailand next month. I will still be on the payroll of a US based company until January 31, 2009, when I will receive my severance. It will be in excess of the income exemption and I understand I'll need to pay taxes on the excess. Has anyone used the tax exemption and is there any thing that would prohibit the exemption? Also, I'll meet the 330 day requirement to be domiciled in another country and don't have a home in the US.

I talked to a tax advisor and also the IRS. Both were a little vague in regards to the $85,700 income exemption on foreign earned income. I looked at publication 54 on the IRS web site and it looks like I qualify. Hopefully the tax advisor will fill in the gaps tomorrow.

Thanks for any direction you can give me.

SiamAmerican

[j0hnga1t]

Hey Siamamerican,  I'm jealous that you get to move to Thailand.

The facts are you are getting a severance package from a US company; however, you will move to Thailand.  I would think that since the money is NOT related to "employment" in Thailand, but your employment in the US, it would not fall under the foreign earned income exemption since it didn't relate to employment in Thailand.  If you were paid by a US company for work you did in Thailand (even as their employee) then I would think it would be exempt up to the $85K number.  

That's just my two cents (former CPA)

[tangoll]

Just reading from the 2007 Instructions for Overseas Filers of Form 1040, page 18, Foreign-Source Income: "You must also report earned income, such as wages and tips from sources outside the United States. If you worked abroad, you may be able to exclude part or all of your earned income. For details, see Pub. 54 and Form 2555 or 2555-EZ."

Your severance pay from a US based company doesn't satisfy the "souce outside the US" or "worked abroad". I guess it matters not when the severance pay is paid to you, even if you are abroad at that time.

As I am neither a tax attorney or tax CPA, you should get an opinion from them, but just a layman's reading of the IRS publication, it seems quite clear that your severance pay does not qualify as foreign-source income.

If however, you could structure an above board arrangement with your current employer that will pay you the $85,000 as earned income from a source outside the US, paid on Jan 31, 2009 for work performed in Thailand, then you might have a case for the exclusion, but this should be for legitimate work. That's what I would try anyway.

[siamamerican]

Hey Siamamerican,  I'm jealous that you get to move to Thailand.

The facts are you are getting a severance package from a US company; however, you will move to Thailand.  I would think that since the money is NOT related to "employment" in Thailand, but your employment in the US, it would not fall under the foreign earned income exemption since it didn't relate to employment in Thailand.  If you were paid by a US company for work you did in Thailand (even as their employee) then I would think it would be exempt up to the $85K number.  

That's just my two cents (former CPA)

Thanks for the reply and can't wait to move! I will be working some while in Thailand for that month. Probably very little, but work nonetheless.

I think it may become an ethical issue. The IRS, I assume, will have no record of why I received the funds. I can state it was salary which is a half truth. I will be receiving a salary through 1/31/08 and 2 months of unused vacation time in addition to the severance.

My W2 will show wages earned in box 1 which includes wages, tip and other compensation ( severance). I wasn't able to find exclusions for severance on the IRS site and I have no clue how they would ever know.

Thanks again,

SiamAmerican

[siamamerican]

Just reading from the 2007 Instructions for Overseas Filers of Form 1040, page 18, Foreign-Source Income: "You must also report earned income, such as wages and tips from sources outside the United States. If you worked abroad, you may be able to exclude part or all of your earned income. For details, see Pub. 54 and Form 2555 or 2555-EZ."

Your severance pay from a US based company doesn't satisfy the "souce outside the US" or "worked abroad". I guess it matters not when the severance pay is paid to you, even if you are abroad at that time.

As I am neither a tax attorney or tax CPA, you should get an opinion from them, but just a layman's reading of the IRS publication, it seems quite clear that your severance pay does not qualify as foreign-source income.

If however, you could structure an above board arrangement with your current employer that will pay you the $85,000 as earned income from a source outside the US, paid on Jan 31, 2009 for work performed in Thailand, then you might have a case for the exclusion, but this should be for legitimate work. That's what I would try anyway.

Thanks for the info. I read pub. 54 and wasn't able to find the exclusion for severance. Don't know how they would be able to determine it was severance. I'll take a second look and also look at the filing form. Maybe they ask for income specifics the would exclude severance.

Thanks,

SiamAmerican

[autonomous_unit]

Income paid by a US employer can be foreign earned income for a US citizen! People keep repeating this mistaken idea that it matters who paid you or where the funds were sent.

However, the important bit here is "foreign earned" which is figured based on the location of actual efforts. The first year abroad is also more complicated: your qualification criteria define a date when you are first considered overseas, and only the fraction of the year after that date can possibly have excludable foreign earnings. The annual limit is pro-rated for the days during your qualifying period.

Then, you can only exclude income that is "attributable" to days worked abroad during that period. It is not that relevant when you receive a payment, but when the work was performed. For example, consider two guys whose qualifying periods start on June 1. A guy who is paid on May 31 for the work he will perform in June can exclude that payment amount. A guy who is paid June 1 for work he performed in May cannot exclude that payment amount. You need very specific accounting to be sure you pass an audit on this topic...

I think the real questions for you are whether any of your income is earned after you leave the US. if you severance is really "paid back vacation", I think the date of earning would be associated with when the vacation days were accrued, not when they were cashed out, and even then only if they were a benefit accrued in relation to a period of work.

[thaihome]

Besides the above excellent explanation, it is called the Foreign Earned Income Exclusion (it is not an exemption).

Not sure how the OP is qualifying under the physical presence (out of country 330 days) if he has not moved to Thailand yet and is getting a severance pay package. He must have been in another country the previous year.

As he alludes, you basically can put anything you want on a tax return, it is only questioned if you are audited.

TH

[siamamerican]

Then, you can only exclude income that is "attributable" to days worked abroad during that period. It is not that relevant when you receive a payment, but when the work was performed. For example, consider two guys whose qualifying periods start on June 1. A guy who is paid on May 31 for the work he will perform in June can exclude that payment amount. A guy who is paid June 1 for work he performed in May cannot exclude that payment amount. You need very specific accounting to be sure you pass an audit on this topic...

I think the real questions for you are whether any of your income is earned after you leave the US. if you severance is really "paid back vacation", I think the date of earning would be associated with when the vacation days were accrued, not when they were cashed out, and even then only if they were a benefit accrued in relation to a period of work.

I will be receive my normal salary while in Thailand through Jan 31, 2009. My severence is seperate and much larger than the accrued vacation pay. After my last day, I will stay in Thailand for the remainder of 2009. The IRS nor CPA friends have not been able to confirm or deny that I'm eligible for the exclusion.

My gut tells me the IRS would have issues with excluding severance and accrued vacation pay, but not sure how the IRS would be able to determine it wasn't regular pay. It really seems to be an ethical dilemma at this point.

Thanks,

SiamAmerican

[siamamerican]

Besides the above excellent explanation, it is called the Foreign Earned Income Exclusion (it is not an exemption).

Not sure how the OP is qualifying under the physical presence (out of country 330 days) if he has not moved to Thailand yet and is getting a severance pay package. He must have been in another country the previous year.

As he alludes, you basically can put anything you want on a tax return, it is only questioned if you are audited.

TH

The tax year would be 2009. I'm only concerned with income I receive in Jan 2009. I will not be earning W2 wages after Jan 31, but will be residing in Thailand for the remainder of the year.

Thanks,

SiamAmerican

[OriginalPoster]

Then, you can only exclude income that is "attributable" to days worked abroad during that period. It is not that relevant when you receive a payment, but when the work was performed. For example, consider two guys whose qualifying periods start on June 1. A guy who is paid on May 31 for the work he will perform in June can exclude that payment amount. A guy who is paid June 1 for work he performed in May cannot exclude that payment amount. You need very specific accounting to be sure you pass an audit on this topic...

I think the real questions for you are whether any of your income is earned after you leave the US. if you severance is really "paid back vacation", I think the date of earning would be associated with when the vacation days were accrued, not when they were cashed out, and even then only if they were a benefit accrued in relation to a period of work.

I will be receive my normal salary while in Thailand through Jan 31, 2009. My severence is seperate and much larger than the accrued vacation pay. After my last day, I will stay in Thailand for the remainder of 2009. The IRS nor CPA friends have not been able to confirm or deny that I'm eligible for the exclusion.

My gut tells me the IRS would have issues with excluding severance and accrued vacation pay, but not sure how the IRS would be able to determine it wasn't regular pay. It really seems to be an ethical dilemma at this point.

Thanks,

SiamAmerican

Just out of cursiosity, in what sense would you be working in Thailand prior to receiving the severence, as a telecommuter? If the IRS were to investigate by calling your employer's HR department and ask in what country you worked, would they say that you last worked in Thailand?

Anyway... I received a severence this year and on my pay stub it does indeed look like regular earnings. Thus I think that you're right that the IRS probably wouldn't pick up on it being anything other than normal wages unless something else on your return raises a red flag. I suspect that if your claim that you earned your last couple of paychecks in 2008 outside of the US doesn't raise any red flags, that classifying whatever appears on your W2 in 2009 as being foreign earnings won't raise any red flags either. Whether it's correct to classify it as foreign earnings, that's something that I don't know.

[siamamerican]

Then, you can only exclude income that is "attributable" to days worked abroad during that period. It is not that relevant when you receive a payment, but when the work was performed. For example, consider two guys whose qualifying periods start on June 1. A guy who is paid on May 31 for the work he will perform in June can exclude that payment amount. A guy who is paid June 1 for work he performed in May cannot exclude that payment amount. You need very specific accounting to be sure you pass an audit on this topic...

I think the real questions for you are whether any of your income is earned after you leave the US. if you severance is really "paid back vacation", I think the date of earning would be associated with when the vacation days were accrued, not when they were cashed out, and even then only if they were a benefit accrued in relation to a period of work.

I will be receive my normal salary while in Thailand through Jan 31, 2009. My severence is seperate and much larger than the accrued vacation pay. After my last day, I will stay in Thailand for the remainder of 2009. The IRS nor CPA friends have not been able to confirm or deny that I'm eligible for the exclusion.

My gut tells me the IRS would have issues with excluding severance and accrued vacation pay, but not sure how the IRS would be able to determine it wasn't regular pay. It really seems to be an ethical dilemma at this point.

Thanks,

SiamAmerican

Just out of cursiosity, in what sense would you be working in Thailand prior to receiving the severence, as a telecommuter? If the IRS were to investigate by calling your employer's HR department and ask in what country you worked, would they say that you last worked in Thailand?

Anyway... I received a severence this year and on my pay stub it does indeed look like regular earnings. Thus I think that you're right that the IRS probably wouldn't pick up on it being anything other than normal wages unless something else on your return raises a red flag. I suspect that if your claim that you earned your last couple of paychecks in 2008 outside of the US doesn't raise any red flags, that classifying whatever appears on your W2 in 2009 as being foreign earnings won't raise any red flags either. Whether it's correct to classify it as foreign earnings, that's something that I don't know.

I will be working as a telecommuter while in Thailand for the month of January. I'm not sure what the HR department would tell the IRS. Most of the operations at my company are being closed down, including the department I head. HR will be taken over by an overseas parent company and not sure how they would handle the IRS inquiry. I will receive my final checks and W2 at a Thailand address.

I don't think there is a definite answer to my inquiry. I'll at a minimum, claim the exclusion for California state and fed taxes and wages earned in January. I'm still undecided on the severance and accrued vacation pay.

Here is how I see it:

* I meet the physical presence test (330 days overseas residence)

* The IRS probably would have an issue that I only earned income during January, even though I lived in Thailand for the remainder of the year.

* There is no IRS publications that cover a situation where a person earns money for only part of the year that the tax payer resides overseas.

* Outside of an audit, the IRS would not be unaware of when I earned the money.

Thanks, SiamAmerican

Edited November 11, 2008 by siamamerican

[OriginalPoster]

Then, you can only exclude income that is "attributable" to days worked abroad during that period. It is not that relevant when you receive a payment, but when the work was performed. For example, consider two guys whose qualifying periods start on June 1. A guy who is paid on May 31 for the work he will perform in June can exclude that payment amount. A guy who is paid June 1 for work he performed in May cannot exclude that payment amount. You need very specific accounting to be sure you pass an audit on this topic...

I think the real questions for you are whether any of your income is earned after you leave the US. if you severance is really "paid back vacation", I think the date of earning would be associated with when the vacation days were accrued, not when they were cashed out, and even then only if they were a benefit accrued in relation to a period of work.

I will be receive my normal salary while in Thailand through Jan 31, 2009. My severence is seperate and much larger than the accrued vacation pay. After my last day, I will stay in Thailand for the remainder of 2009. The IRS nor CPA friends have not been able to confirm or deny that I'm eligible for the exclusion.

My gut tells me the IRS would have issues with excluding severance and accrued vacation pay, but not sure how the IRS would be able to determine it wasn't regular pay. It really seems to be an ethical dilemma at this point.

Thanks,

SiamAmerican

Just out of cursiosity, in what sense would you be working in Thailand prior to receiving the severence, as a telecommuter? If the IRS were to investigate by calling your employer's HR department and ask in what country you worked, would they say that you last worked in Thailand?

Anyway... I received a severence this year and on my pay stub it does indeed look like regular earnings. Thus I think that you're right that the IRS probably wouldn't pick up on it being anything other than normal wages unless something else on your return raises a red flag. I suspect that if your claim that you earned your last couple of paychecks in 2008 outside of the US doesn't raise any red flags, that classifying whatever appears on your W2 in 2009 as being foreign earnings won't raise any red flags either. Whether it's correct to classify it as foreign earnings, that's something that I don't know.

I will be working as a telecommuter while in Thailand for the month of January. I'm not sure what the HR department would tell the IRS. Most of the operations at my company are being closed down, including the department I head. HR will be taken over by an overseas parent company and not sure how they would handle the IRS inquiry. I will receive my final checks and W2 at a Thailand address.

I don't think there is a definite answer to my inquiry. I'll at a minimum, claim the exclusion for California state and fed taxes and wages earned in January. I'm still undecided on the severance and accrued vacation pay.

Here is how I see it:

* I meet the physical presence test (330 days overseas residence)

* The IRS probably would have an issue that I only earned income during January, even though I lived in Thailand for the remainder of the year.

* There is no IRS publications that cover a situation where a person earns money for only part of the year that the tax payer resides overseas.

* Outside of an audit, the IRS would not be unaware of when I earned the money.

Thanks, SiamAmerican

I think that you'd get away with it, and that if audited at most they'd disallow the exclusion and not try to go after you for fraud. Howevever, I have to believe that the IRS would strike down your claim that the severence pay was "foreign earned income" if they knew about it because, as you describe it, it sounds as if you are entitled to that severence pay because of work that you performed over the years primarily in the US, and because your entitlement to the severence pay is in no way related to your presence in Thailand.

[OriginalPoster]

Then, you can only exclude income that is "attributable" to days worked abroad during that period. It is not that relevant when you receive a payment, but when the work was performed. For example, consider two guys whose qualifying periods start on June 1. A guy who is paid on May 31 for the work he will perform in June can exclude that payment amount. A guy who is paid June 1 for work he performed in May cannot exclude that payment amount. You need very specific accounting to be sure you pass an audit on this topic...

I think the real questions for you are whether any of your income is earned after you leave the US. if you severance is really "paid back vacation", I think the date of earning would be associated with when the vacation days were accrued, not when they were cashed out, and even then only if they were a benefit accrued in relation to a period of work.

I will be receive my normal salary while in Thailand through Jan 31, 2009. My severence is seperate and much larger than the accrued vacation pay. After my last day, I will stay in Thailand for the remainder of 2009. The IRS nor CPA friends have not been able to confirm or deny that I'm eligible for the exclusion.

My gut tells me the IRS would have issues with excluding severance and accrued vacation pay, but not sure how the IRS would be able to determine it wasn't regular pay. It really seems to be an ethical dilemma at this point.

Thanks,

SiamAmerican

Just out of cursiosity, in what sense would you be working in Thailand prior to receiving the severence, as a telecommuter? If the IRS were to investigate by calling your employer's HR department and ask in what country you worked, would they say that you last worked in Thailand?

Anyway... I received a severence this year and on my pay stub it does indeed look like regular earnings. Thus I think that you're right that the IRS probably wouldn't pick up on it being anything other than normal wages unless something else on your return raises a red flag. I suspect that if your claim that you earned your last couple of paychecks in 2008 outside of the US doesn't raise any red flags, that classifying whatever appears on your W2 in 2009 as being foreign earnings won't raise any red flags either. Whether it's correct to classify it as foreign earnings, that's something that I don't know.

I will be working as a telecommuter while in Thailand for the month of January. I'm not sure what the HR department would tell the IRS. Most of the operations at my company are being closed down, including the department I head. HR will be taken over by an overseas parent company and not sure how they would handle the IRS inquiry. I will receive my final checks and W2 at a Thailand address.

I don't think there is a definite answer to my inquiry. I'll at a minimum, claim the exclusion for California state and fed taxes and wages earned in January. I'm still undecided on the severance and accrued vacation pay.

Here is how I see it:

* I meet the physical presence test (330 days overseas residence)

* The IRS probably would have an issue that I only earned income during January, even though I lived in Thailand for the remainder of the year.

* There is no IRS publications that cover a situation where a person earns money for only part of the year that the tax payer resides overseas.

* Outside of an audit, the IRS would not be unaware of when I earned the money.

Thanks, SiamAmerican

I think that you'd get away with it, and that if audited at most they'd disallow the exclusion and not try to go after you for fraud. Howevever, I have to believe that the IRS would strike down your claim that the severence pay was "foreign earned income" if they knew about it because, as you describe it, it sounds as if you are entitled to that severence pay because of work that you performed over the years primarily in the US, and because your entitlement to the severence pay is in no way related to your presence in Thailand.

There is one thing that I can think of that might cause your return to stand out to the IRS depending upon what type of statistical screening they do to find returns that are ripe for an audit. If your severnece is far in excess of the $91,400 foreign income exclusion that will be in place in 2009 and you do not claim a Foreign Tax credit that is anywhere near to the amount of income tax that Thailand would be charging on income in excess of $91,400, that might be an unusual pattern and cause them to look closer. As far as I know, you are not required to pay taxes in your host country in order to claim the foreign income exclsuion, but it probably would be unusual that a high earner working for a multinational company would not be.

[think_too_mut]

America and - only few other countries in the world maintain that stupid tax system.

You will never guess which country is company to America in that bunch. It's North Korea.

Heavily double-taxed American pilots working for Cathay Pacific and Singapore Airlines are among those queueing in front of American consulate in Hong Kong - to renounce their US citizenship.

Read on....

America's Berlin Wall

Jun 12th 2008 | HONG KONG

From The Economist print edition

Congress increases the ransom expats must pay to escape the taxman

QUEUES of frustrated foreigners crowd many an American consulate around the world hoping to get into the United States. Less noticed are the heavily taxed American expatriates wanting to get out—by renouncing their citizenship.

In Hong Kong just now, they cannot. “Please note that this office cannot accept renunciation applications at this time,” the consulate's website states. Apart from sounding like East Germany before the fall of the Berlin Wall, the closure is unfortunately timed. Because of pending legislation on President Bush's desk that is expected to become law by June 16th, any American who wants to surrender his passport has only a few days to do so before facing an enormous penalty.

That penalty is buried in an innocuous piece of legislation with the veto-proof name, Heroes Earnings Assistance and Relief Tax (HEART) act. The new law means active American soldiers will benefit from tax relief. To pay for that, Congress has turned on expats, especially those who, since new tax laws in 2006, have become increasingly eager to give up their citizenship to escape the taxman.

Under the proposed legislation, expatriates surrendering their citizenship with a net worth of $2m or more, or a high income, will have to act as if they have sold all their worldwide assets at a fair market price. If the unrealised gains on these assets exceed $600,000, capital-gains tax will apply. A study by the Congressional Budget Office guesses that the new law will progressively net the government up to $286m over five years. It is unclear, however, why people would suffer the consequences if they did not expect to save money in the long run by escaping American taxes.

That expats want to leave at all is evidence of America's odd tax system. Along with citizens of North Korea and a few other countries, Americans are taxed based on their citizenship, rather than where they live. So they usually pay twice—to their host country and the Internal Revenue Service. As this makes citizenship less palatable, Congress has erected large barriers to stop them jumping ship. In 1996 it forced people who renounced citizenship to continue paying income taxes for an extra ten years. Theoretically, the new law allows for a cleaner break.

But even as the law tries to prevent people from renouncing their citizenship, it may have the opposite effect. Under the new structure, it would make financial sense for any young American working overseas with a promising career to renounce his citizenship as early as possible, before his assets accumulate. For everyone else, plunging stock and property prices mean now may be as good a time as any to hand back the passport, says Kurt Rademacher, a partner at Withers, a global tax-planning firm.

In Hong Kong the temptation for Americans to switch citizenship is particularly strong, because of the territory's low taxes. On the other hand, banks and other firms who want to hire Americans may find it harder to do so, even though greater China is one of the world's fastest-growing regions. It places Americans in the awkward position of weighing their patriotism against their vocation.

[PeaceBlondie]

I do not know. At first, your idea sounded fraudulent. If you telecommute in January, however, that might make a difference.

The department of the IRS that handles foreign issues is an entity onto itself. Hardly anybody else at IRS knows foreign issues, except maybe in Austin now. That means that hardly anybody knows how they select expatriate returns for audit. I have many years of experience in selecting returns for audits, but none of it international. Computer systems have improved so much in the last twenty years that they may have easy ways of detecting an error, and seasoned classifiers who smell a rat. I suggest you proceed with extreme caution

[siamamerican]

I do not know. At first, your idea sounded fraudulent. If you telecommute in January, however, that might make a difference.

The department of the IRS that handles foreign issues is an entity onto itself. Hardly anybody else at IRS knows foreign issues, except maybe in Austin now. That means that hardly anybody knows how they select expatriate returns for audit. I have many years of experience in selecting returns for audits, but none of it international. Computer systems have improved so much in the last twenty years that they may have easy ways of detecting an error, and seasoned classifiers who smell a rat. I suggest you proceed with extreme caution

I was hoping you would respond, considering your past occupation. The situation is unique and I have a few months to make a decision to exclude the income on my returns. To be honest, I will be performing little work while in Thailand, so I'm torn about excluding the income. It will save me roughly $35k in taxes and the extra money would be nice. Another justification is that I'll be living in Thailand and not using public services in the US, including unemployment insurance.

Thanks, SiamAmerican

Edited November 12, 2008 by siamamerican

[PeaceBlondie]

Those reasons are not justifications, only personal rationalizations. Good luck.

[thaihome]

America and - only few other countries in the world maintain that stupid tax system.

You will never guess which country is company to America in that bunch. It's North Korea.

Heavily double-taxed American pilots working for Cathay Pacific and Singapore Airlines are among those queueing in front of American consulate in Hong Kong - to renounce their US citizenship.

Read on....

America's Berlin Wall

Jun 12th 2008 | HONG KONG

From The Economist print edition

Congress increases the ransom expats must pay to escape the taxman

QUEUES of frustrated foreigners crowd many an American consulate around the world hoping to get into the United States. Less noticed are the heavily taxed American expatriates wanting to get out—by renouncing their citizenship.

In Hong Kong just now, they cannot. “Please note that this office cannot accept renunciation applications at this time,” the consulate's website states. Apart from sounding like East Germany before the fall of the Berlin Wall, the closure is unfortunately timed. Because of pending legislation on President Bush's desk that is expected to become law by June 16th, any American who wants to surrender his passport has only a few days to do so before facing an enormous penalty.

That penalty is buried in an innocuous piece of legislation with the veto-proof name, Heroes Earnings Assistance and Relief Tax (HEART) act. The new law means active American soldiers will benefit from tax relief. To pay for that, Congress has turned on expats, especially those who, since new tax laws in 2006, have become increasingly eager to give up their citizenship to escape the taxman.

Under the proposed legislation, expatriates surrendering their citizenship with a net worth of $2m or more, or a high income, will have to act as if they have sold all their worldwide assets at a fair market price. If the unrealised gains on these assets exceed $600,000, capital-gains tax will apply. A study by the Congressional Budget Office guesses that the new law will progressively net the government up to $286m over five years. It is unclear, however, why people would suffer the consequences if they did not expect to save money in the long run by escaping American taxes.

That expats want to leave at all is evidence of America's odd tax system. Along with citizens of North Korea and a few other countries, Americans are taxed based on their citizenship, rather than where they live. So they usually pay twice—to their host country and the Internal Revenue Service. As this makes citizenship less palatable, Congress has erected large barriers to stop them jumping ship. In 1996 it forced people who renounced citizenship to continue paying income taxes for an extra ten years. Theoretically, the new law allows for a cleaner break.

But even as the law tries to prevent people from renouncing their citizenship, it may have the opposite effect. Under the new structure, it would make financial sense for any young American working overseas with a promising career to renounce his citizenship as early as possible, before his assets accumulate. For everyone else, plunging stock and property prices mean now may be as good a time as any to hand back the passport, says Kurt Rademacher, a partner at Withers, a global tax-planning firm.

In Hong Kong the temptation for Americans to switch citizenship is particularly strong, because of the territory's low taxes. On the other hand, banks and other firms who want to hire Americans may find it harder to do so, even though greater China is one of the world's fastest-growing regions. It places Americans in the awkward position of weighing their patriotism against their vocation.

The statement that US citizens pay tax twice is not exaclty true. You generally end up paying taxes at which ever country, the US or where you work, has the higher rate.

The problem in HK is the taxes are lower then the US, so they do have enough foreign tax credits to offset the US tax they owe after the exclusion. I have always worked in higher tax countries so my tax credits have offset my US tax. When they changed the tax bracket calculation in 2007, they also allowed you to take 100% foreign tax credits against the AMT instead of the previoous 80%. Which is why I used to have to pay a little US tax each year, last year was none. In 10 years I have paid less the 3K in US taxes in total. But lots and lots of Thai, PRC, Malaysian, etc....

I really cannot imagine giving up citizenship due to taxes.

TH

Edited November 12, 2008 by thaihome

[Hairy]

The statement that US citizens pay tax twice is not exaclty true. You generally end up paying taxes at which ever country, the US or where you work, has the higher rate.

My understanding is that that only works if both countries have a tax treaty. Japan and the U.S. apparently don't, so American expats working in Japan get doubly taxed after five years of residence in Japan. (Based on statements of an American lawyer I know who is about to hit the five-year limit in Japan.)

[thaihome]

The statement that US citizens pay tax twice is not exaclty true. You generally end up paying taxes at which ever country, the US or where you work, has the higher rate.

My understanding is that that only works if both countries have a tax treaty. Japan and the U.S. apparently don't, so American expats working in Japan get doubly taxed after five years of residence in Japan. (Based on statements of an American lawyer I know who is about to hit the five-year limit in Japan.)

I don't think I made myself real clear with that statement. What I meant was you pay tax in both countires but your net tax ends up being at whichever is the higher rate. I paid more Thai Tax then what I would have paid in US on similar income, but I did not pay any US tax as I was able to use my Thai tax credits to offset my US tax.

You can still get the exclusion and foreign tax credits (dollar for dollar on tax paid on income above the exclusion) even if there is no tax treaty and there is no time limit that I am aware of.

TH

[Hairy]

I understood what you meant. What I meant is that, based on statements made to me by an expat living and working in Japan, unless there is a bilateral tax treaty with the U.S. and the country in question, the person will get taxed twice on the total amount, with no deductions, exemptions, exclusions, or other accounting steps available to limit the taxes to the higher-of-the-two.

In other words, where Japan might tax income at 20% and the U.S. at 28%, the net tax on a person who stays more than five years is 48%, because there is no tax treaty between the two countries to allow taxes paid in one to be deducted from taxes paid in the other.

As the person who was complaining about this problem is an attorney, and presumably is capable of understanding tax laws, I deem it credible information for American expats living in Japan. I don't know about Thailand, but I assume it has such a tax treaty with the U.S.

[taxout]

Your understanding of US tax law is not correct, Hairy.

Specifically, US tax law allows a foreign tax credit (or, optionally, a deduction) whether or not there's a tax treaty, subject to all sorts of restrictions that would take pages to explain.

In any event, there is a tax treaty between the US and Japan.

Edited November 17, 2008 by taxout

[Sam125]

I understood what you meant. What I meant is that, based on statements made to me by an expat living and working in Japan, unless there is a bilateral tax treaty with the U.S. and the country in question, the person will get taxed twice on the total amount, with no deductions, exemptions, exclusions, or other accounting steps available to limit the taxes to the higher-of-the-two.

In other words, where Japan might tax income at 20% and the U.S. at 28%, the net tax on a person who stays more than five years is 48%, because there is no tax treaty between the two countries to allow taxes paid in one to be deducted from taxes paid in the other.

As the person who was complaining about this problem is an attorney, and presumably is capable of understanding tax laws, I deem it credible information for American expats living in Japan. I don't know about Thailand, but I assume it has such a tax treaty with the U.S.

Being an attorney or accountant is helpful in understanding tax law but unless you are a tax accountant or tax attorney preferably with a masters degree in taxation you are not always going to get good advice.....

It is sort of like talking to a family medicine doctor about brain surgery.

Also you need to be up to date.

[richm7]

I do not know. At first, your idea sounded fraudulent. If you telecommute in January, however, that might make a difference.

The department of the IRS that handles foreign issues is an entity onto itself. Hardly anybody else at IRS knows foreign issues, except maybe in Austin now. That means that hardly anybody knows how they select expatriate returns for audit. I have many years of experience in selecting returns for audits, but none of it international. Computer systems have improved so much in the last twenty years that they may have easy ways of detecting an error, and seasoned classifiers who smell a rat. I suggest you proceed with extreme caution

I was hoping you would respond, considering your past occupation. The situation is unique and I have a few months to make a decision to exclude the income on my returns. To be honest, I will be performing little work while in Thailand, so I'm torn about excluding the income. It will save me roughly $35k in taxes and the extra money would be nice. Another justification is that I'll be living in Thailand and not using public services in the US, including unemployment insurance.

Thanks, SiamAmerican

This is an interesting dilemma. OP you must have quite a nice severance package if you are talking about saving $35k in taxes - good luck to you, I'm certainly jealous!

I would argue though that a severance package is not something that has already been earned. It is a payment made to enable you to get back on your feet or readjust to your new circumstances, so morally (and maybe legally) it IS earned in Thailand and is overseas earned income. I'd add to that the fact that immediately prior to receiving that severance you are domiciled in Thailand, though I'd be a bit careful regarding what it is you do; if you effectively working a home office here but doing work directly related to US only business things would be dodgy under any circumstances, even if you continued to be employed. I have been involved in making the 330 day claim for years now and have never come across any reference to severance payments and how they are considered. I think whoever you ask is going to give an opinion, not a statement of fact.

[PeaceBlondie]

I am no expert on foreign issues. But after I first settled permanently in Thailand, I was frantically trying to figure out the 330 day physical presence rule. I called the toll free number and the guy quickly advised me that I had already met the residence rule, and not to count days. There are two methods of meeting the exclusion rule.

[thaihome]

Using either qualification method, they OP is going to struggle to say it is foreign income as he has not paid Thai income tax on it. If he earned while resident in Thailand, he owes Thai tax on it. Again, this will only come up in audit, and will undoubtedly be the very first question asked.

You cannot have it both ways, you owe either US or Thai tax on it.

TH

Edited November 18, 2008 by thaihome

[autonomous_unit]

Sorry, no. The requirement for foreign earned income is not that it was taxed somewhere else, but that it was earned by labor performed in a foreign location. It doesn't matter where it was paid, where it was reported, who else got their fingers on it, etc. The tax treaties aim to reduce this gap, but that is separate from the definition of foreign earned income.

I think the OP will have real trouble arguing that a severance is foreign earned. If it is considered earned at all, I think it is going to be attributed to the work performed over the previous period of employment. There are many forms of income aside from basic interest and investments which are still classified as unearned by the IRS. The OP is not going to get better or more accurate advice from us here, but needs a real expert if he cares to know for sure.

[PeaceBlondie]

I am too lazy to do the research, but a qualified tax accountant or attorney who has the library or access to a search engine could surely find a precedent for such a case in less than a couple of hours and write an opinion. Might be worth the investment for siamamerican.

[LaoPo]

I am too lazy to do the research, but a qualified tax accountant or attorney who has the library or access to a search engine could surely find a precedent for such a case in less than a couple of hours and write an opinion. Might be worth the investment for siamamerican.

I fully agree !

The OP wants to save a lot of money, to be paid or not to the US or Thai taxman. That's understandable.

But, to look for plausible answers on an expat forum is not the way to receive the perfect answer, simply because the members do NOT know his -financial, personal, family and income- details.

The OP (any OP) will only tell the forum what he WANTS to tell....the rest he keeps to himself.

The ONLY way to get the proper answer is to talk to specialists who have offices in both countries and know the taxlaws from both countries. A company like PriceWaterhouseCoopers *, but there are a few others too with offices in Thailand **. Search for yourself:

* http://www.pwc.com/extweb/home.nsf/docid/d...a2571110026e503

** http://www.deloitte.com/dtt/home/0,1044,si...3D34220,00.html like Deloitte Touche

** http://www.bakertillythailand.com/ Baker Tilly Thailand

When I set up my businesses in Canada, the US and the Far East, my first steps were to talk with the proper legal and tax specialists. They cost a bit but will protect you from HUGE problems in the future.

So: the first step the OP should make is a phone call with an appropriate tax consultant with experience in Thai tax laws, combined with US laws....preferably BEFORE he moves to Thailand and make an appointment !

Don't expect the perfect answer here but invest a little money and ask for advise with the proper consultants !

LaoPo