Us Tax Question? Do We Have To Pay Us Taxes?

[mandmsworld]

My American wife just got a job with an American NGO in Thailand. Does she have to pay US taxes or is she exempt because we are living outside of the US?

The NGO sent us a form 673 to claim exemption if we are eligible, but like most government material, it's a bit unclear. To qualify for exemption it states we must either fall under the Bona Fide residence test or physical presence test.

Does anyone have experience dealing with this? Your help is much appreciated.

M

[MattFS218]

I don't know about how it relates to an NGO.

But in general, US citizens must pay taxes on their World Wide income. However, if she pays Thai Taxes, there's a tax treaty that basically says you get a credit of an amount equal to the taxes paid in Thailand for your federal return.

If she is out of the the US for 10 out of 12 months, then upto $80k/year is US income tax free, as long as she is paying another government's taxes.

[lanny]

All US citizens and greencard holders are required to report their world-wide income each year. If they meet either the physical presence or the bona fide resident rules, they may exclude up to $90,000 each year. This is not automatic and they must file a US tax return to claim the exclusion.

To the extent that income is not excluded, US taxpayers may claim a credit for some portion (but not dollar for dollar) for taxes paid to another country. The US-Thai income tax treaty has a provision to this effect but the credit is actually from the Internal Revenue Code.

You imply that you are not a US citizen. If this is the case, the rules as to what income needs to be reported, etc. can become very complex. They generally are not a "do-it-yourself" project.

[mandmsworld]

All US citizens and greencard holders are required to report their world-wide income each year. If they meet either the physical presence or the bona fide resident rules, they may exclude up to $90,000 each year. This is not automatic and they must file a US tax return to claim the exclusion.

To the extent that income is not excluded, US taxpayers may claim a credit for some portion (but not dollar for dollar) for taxes paid to another country. The US-Thai income tax treaty has a provision to this effect but the credit is actually from the Internal Revenue Code.

You imply that you are not a US citizen. If this is the case, the rules as to what income needs to be reported, etc. can become very complex. They generally are not a "do-it-yourself" project.

We're both US citizens.

[mandmsworld]

what do the physical presence and the bona fide resident rules require? Could someone clarify them for us?

[wannascuba]

For 2008 the Foreign Earned Income exclusion amout is $87,600. You can either use the Bona Fide residence test (if you have a foreign address) or the 330 day rule (need to be out of the US for 330 days out of a 365 day period). Note: that it does not have to fall under one calander year for the 330 day rule, it can be pro-rated for 2008-2009 or which ever years. You can go to the IRS.gov. website and read Pub. 54 and Form 2555. You can also file for an extension to file for up to 6 months if you are overseas, see Form 4868. Note: that an extension to file is NOT an extension to pay any tax that may be due.

Hope that helps,

WS

Edited January 21, 2009 by wannascuba

[Alwaysright]

For 2008 the Foreign Earned Income exclusion amout is $87,600. You can either use the Bona Fide residence test (if you have a foreign address) or the 330 day rule (need to be out of the US for 330 days out of a 365 day period). Note: that it does not have to fall under one calander year for the 330 day rule, it can be pro-rated for 2008-2009 or which ever years. You can go to the IRS.gov. website and read Pub. 54 and Form 2555. You can also file for an extension to file for up to 6 months if you are overseas, see Form 4868. Note: that an extension to file is NOT an extension to pay any tax that may be due.

Hope that helps,

WS

I think that exemption will disappear as Obama takes the axe to the working class.

[autonomous_unit]

I also recommend you read pub 54 and get familiar with the concepts. This form 673 is just an optional thing to stop the tax withholding by the employer. If you fail to do this, you may end up with a large tax refund for the first filing year, but the rules usually allow that without penalty in the case that your circumstances have changed and upset your withholding rate from previous years. You would then want to submit form 673 to stop this from recurring in future years. Of course, you might prefer to keep your money all year instead of having the IRS keep it warm for you.

It isn't clear whether or how long you've lived abroad before starting employment. The complications with the foreign earned income exclusion are with the first and last "partial" years when you move. If you've already lived here, you may already qualify for the exclusion immediately as the two methods of exclusion are based on when you travel or relocate, not on when you take employment. (Though taking employment may affect the circumstances for the bona fide residence test...)

The physical presence test is good for people who are abroad for temporary work but require you to stay out of the US roughly 11 out of every 12 months as mentioned above. The bona fide residence test is more stringent, but puts no specific limit on how often you can return to the US. It requires that you've actually moved abroad for an indefinite or permanent duration. It is essentially based on "intent" and your idea of where your home is... if you intend to return to the US in a specific period, or maintain a home and family ties to the US, you may not be maintaining bona fide residence abroad. They have a number of examples for trying to deduce intent from your circumstances, but this is an area where you can find yourself arguing your case with an auditor if you ruffle the wrong feathers.

Also, each spouse applies the test separately, and each is allowed to use a different test if desired. Through a quirk of circumstances, I used the bona fide residence test while my wife used the physical presence test on our joint returns.

[j0hnga1t]

I think the real question is where did you earn the income and did you have to relocate? Even if you work for a us company/NGO that fact remains that you earned income outside of the US for work performed outside the US while residing outside the US. If it were a temporary assignment which did not require you to relocate (I don't that applies here), then it would be questionable. BUT if you actually had to relocate then you should be fine. I'm sure there is an exemption for the "number of days" test in the year of move (maybe a proration of the exemption amount).

Since you actually relocated, I would think the income earned while residing in Thailand would be exempt based on the treaty amount (the 80K-90K mostly prorated...) and all other income earned before that in the US would be subject to standard US taxes.

You have to report all/worldwide income on your US return; however, you would be able to exclude all or at least a prorated portion of the income earned in Thailand

that's my 2 satong

[autonomous_unit]

You cannot claim the exemption until you've qualified, which takes a one year qualification period. But once you qualify, it is applied retroactively to the entire period abroad. So you have to file (or file for extensions) and pay your pre-exemption tax liabilities and then get a refund once you qualify. That is what makes the first year so complicated.

You are correct that the first partial year has a pro-rated exemption limit, and that only the earnings "earned abroad" are subject to the exemption. This calculation is often similar to pro-rating but takes into account your daily presence (or lack thereof) in the US during earning activities of the qualified period. It can be harder to describe than it actually is to understand, once you get your head around the intent of the rules...

[OriginalPoster]

My American wife just got a job with an American NGO in Thailand. Does she have to pay US taxes or is she exempt because we are living outside of the US?

The NGO sent us a form 673 to claim exemption if we are eligible, but like most government material, it's a bit unclear. To qualify for exemption it states we must either fall under the Bona Fide residence test or physical presence test.

Does anyone have experience dealing with this? Your help is much appreciated.

M

Form 673 is to apply for an exemption from withholding of tax installments from your paycheck, it is not an application for expemption from taxation per se. Depending upon how much she earns, she may or may not end up owing US taxes regardless of how much (if anything) she has withheld from her paychecks each month. In either case, she'll need to file a US tax return by April 15th each year. Anything that you underpay or overpay via monthly withholding from your paychecks get's settled up when you submit your annual US tax return.

Edited January 23, 2009 by OriginalPoster

[OriginalPoster]

I think the real question is where did you earn the income and did you have to relocate? Even if you work for a us company/NGO that fact remains that you earned income outside of the US for work performed outside the US while residing outside the US. If it were a temporary assignment which did not require you to relocate (I don't that applies here), then it would be questionable. BUT if you actually had to relocate then you should be fine.

No, that's not correct. There is no requirement to establish that relocation was necessary, what matters is that you are able to either meet the "330 days" physical presence test or the "bonefide residence" test. If you can't pass either of those tests then you can't claim the exlcusion even if you were required to relocate. Conversely, if you can pass either of those tests, you can claim the exclusion even if you lived out of a hotel rooms instead of moving your household to your host country.

Edited January 24, 2009 by OriginalPoster

[PeaceBlondie]

When I first moved here, and started working for a govt. school, I thought the physical presence test was the way to go. Once I talked with a specialist at the toll free number, I realized the bona fide presence was easier for me. Either way, the usual good advice by lanny, and the poster named OriginalPoster, sound excellent.

[IMA_FARANG]

My American wife just got a job with an American NGO in Thailand. Does she have to pay US taxes or is she exempt because we are living outside of the US?

The NGO sent us a form 673 to claim exemption if we are eligible, but like most government material, it's a bit unclear. To qualify for exemption it states we must either fall under the Bona Fide residence test or physical presence test.

Does anyone have experience dealing with this? Your help is much appreciated.

M

Yes.

She has to file a U.S. tax return on her income. She owes tax on what she earns, but see below.

She is eligible for an exemption of up to $80,000 on taxable income that she earns working for a U.S. based NGO. (if paid from the U.S. office or NGO)

Fill out the form that states you expect to qualify for the tax exemption in the next year. I think it night be a W-4 form that lists your exemptions. It's the one you use to establish how many exempyions you claim and how much tax is deducted from you paycheck. You can write EXEMPT on there and claim either the physical presence test or the bona fide residence test.

Use either the Physical Prescense test (you are living, physically present, in Thailand.) or the Bona Fide Residence test (i.e. you claim a tax residence in Thailand). Personally I would claim the physical presence test as you are in actually living in Thailand.

When she gets a W-2 with her income listed, she fills out a form 1040. There is a space on there where she can deduct the amount of the $80,000 income.

Claim the 80,000 exemption useing a form 2555 or form 2555A.

If her income is not more than $80,000 she can deduct the anount of the actual income (i.e. if she earned $35,000, she can only get a $35,000 exemption.)

If her income is over $80,000 she can deduct the $80,000 from her income. She has to pay taxes on the rest of her income.

She is eligable for a 60 day FILING delay, from April 15th to Jube 15th for recideding overseas. If she OWES tax however that tax is still due for payment on 15 April. Any unpaid tax owed draws interest from April 15th.

In order to qualify for the physical prescense test you must be outside the U.S. for all but 30 days in the tax year. So if you return to the U.S. for a visit make sure you do not stay more than 30 days in that tax year.

A tax year starts from midnight 01 January and ends on midnight 31 December of that year. For example, tax year 2008 started at midnight 01 January 2008 and ended at midnight 31 December 2008.

Get the IRS publication for overseas tax oayers and it is explained there.

You can download form 1040 and form 2555 or 2555A from the IRS internet site.

One other thing, the exemption only applies to her. Be carefull about filing a joint tax form (husband and wife file together). Check carefully, that by filing a joint form you don't end up paying more tax than filing seperately.

[Jimjim]

Why not ask the NGO who actually sent you the form?