Usa $80k Foreign Earned Income Exemption

[The Coder]

If one resides outside the USA more than 330 days a year it is possible not to pay US income tax on up to $80K of earnings (Reference: Publication 54 on www.irs.gov). I have a US sole proprietorship that generates income from non-Thai companies over the internet generally on its own without me having to work; just the occasional email to respond to or such. I believe I can claim the exemption because I meet the physical presence test and my tax home is my Thai residence as I have no place of business.

The concern is if I file with the IRS stating I am exempt from income tax because it was earned while in Thailand, will they then pass this info along to Thailand who will in turn tax me on this income? I am on a tourist visa. I am not looking to abuse the system in any way; I just want to choose the most beneficial option I am legally entitled to.

By the way, I do not spend income in the year it is earned because I am aware that scenario does trigger Thai taxes if one is residing in Thailand over 180 days (Reference: Personal Income Tax section on www.boi.go.th/english/how/taxation.asp).

Anyone have experiences here or any thoughts?

Edited March 9, 2005 by The Coder

[Thaiquila]

A very interesting question which I can't answer.

However, I think the key wrinkle for you is that you are the sole proprietor of a US sole proprietorship. It seems to me that the income exclusion is generally intended for employees who work outside the US and for American owners of foreign businesses.

Another perhaps salient point is what is the money flow? Does the internet business income flow directly into a US bank or Thai?

What I am getting at is that I wonder if the IRS would accept you as a legitamate expat earner, and decide instead that you are a really still a US worker. Another point: I am guessing you have a US address associated with the sole proprietorship, correct?

If you don't get an answer here, please share with us what you find out.

[Khun ?]

Is the money being earned outside the U.S. or for services inside the U.S. It kind of sounds like your business is actually earning income from inside the U.S. while you are the only thing outside the U.S.

That would be fully U.S. taxable.

[Harmonica]

If one resides outside the USA more than 330 days a year it is possible not to pay US income tax on up to $80K of earnings (Reference: Publication 54 on www.irs.gov). I have a US sole proprietorship that generates income from non-Thai companies over the internet generally on its own without me having to work; just the occasional email to respond to or such. I believe I can claim the exemption because I meet the physical presence test and my tax home is my Thai residence as I have no place of business.

The concern is if I file with the IRS stating I am exempt from income tax because it was earned while in Thailand, will they then pass this info along to Thailand who will in turn tax me on this income? I am on a tourist visa. I am not looking to abuse the system in any way; I just want to choose the most beneficial option I am legally entitled to.

By the way, I do not spend income in the year it is earned because I am aware that scenario does trigger Thai taxes if one is residing in Thailand over 180 days (Reference: Personal Income Tax section on www.boi.go.th/english/how/taxation.asp).

Anyone have experiences here or any thoughts?

The Infernal Ruffian Service currently has agents in LOS -- shhhh!

[The Coder]

Is the money being earned outside the U.S. or for services inside the U.S.  It kind of sounds like your business is actually earning income from inside the U.S. while you are the only thing outside the U.S.

That would be fully U.S. taxable.

<{POST_SNAPBACK}>

When talking income tax, I beg to differ. Publication 54 says it comes down to where YOU are and has nothing to do with the income source/destination location. Income from a US source qualifies. Income direct deposited into a US bank also qualifies. Even if you earn a salary from a US company and it is direct deposited into your US bank, it can be classified foreign earned as long as you yourself meet the requirements.

I seem to meet the requirements, but the concern is calling Thailand my “tax home” which is the terminology used. That just sounds taxable from the very words and if it does trigger Thai taxes, that cancels the benefits and may raise a question about “working” on a tourist visa. I tried asking the IRS, but they say this is a “special” subject and they can’t directly answer it on the phone.

[Khun ?]

Been doing it for more than 20 years all for american companies

deposited in U.S. bank but the work is overseas not in the U.S.

You will need to contact an accountant, if the money and the service is

in the U.S. it will be taxed as you being there also. It has as much to do where the income is being earned. What you are saying you can have a business in the U.S getting money for providing services in the U.S and as long as you stay outside the first 80K is tax free. I don't think so, the money is being earned in the U.S.

You are right it has nothing to do with where your pay for the work is sent to, it is where what you are doing to earn the money is being done.

They could give a &lt;deleted&gt; where you keep your money after taxes even though foreign bank accounts have to be reported also. If you have a server in the U.S. making money it is taxable. I am not saying you cannot get away with claiming foreign earned income but you may also have a problem with avoiding income taxes.

[ProThaiExpat]

Residency is rarely an issue in the U.S. when federal taxes are concerned but a a major battle ground when individual states are concerned.

There are many definitions of what a "residence" is but the majority of cases that I am familiar with rely on the number of "indicees" of residence. I would examine your situation from that point of view.

Since your tax planning requires you to take all means necessary to pay less tax, certainly you should structure your business to take advantage of any tax exemption you can.

You are a U.S. citizen and thus are subject to U.S. federal taxes. As a U.S. citizen, you file annual tax returns and pay all that your are legally required to pay.

Am I corect so far? Thus, it would seem to me, that the more "indicees" you have that indicate your incomes source is the U.S. and your business entity is subject to U.S. taxation, the better off you are since you have the 80k U.S. exemption as an objective. (This is assuming that at your income level your have compared U.S. taxes you would pay with Thai taxes you would pay and find the exemption in the U.S. the best way to go) I am personally unaware of what the Thai tax is on expats working in Thailand for U.S. companies.

A sole proprietorship, in my view, is the most problematical business entity in this regard. I would think a Limited Liability Company would be a simple, inexpensive and far stronger tax device, as you would then be an employee of the company which would have a U.S. address and you would be treated by the Thai taxing authorities as any other expat employee of a U.S. based company working in Thailand, as assigned.

I think under the foregoing plan, there is little danger that the IRS would treat you as a U.S. taxpayer earing his money in the U.S. as your "indicees" of place of work, place of office, where your decisions are made, office expenses incurred, etc. are all in Thailand.

Your original question regarding the sharing of tax information between the U.S. and Thailand seems worrisome, but I would doubt that the IRS would voluntarily divulge confidential tax information with a foreign govenment unless bound to do so my treaty and then I believe they would be obligated to inform you of such. I would say unlikely.

There are many expats working for U.S. companies that should be able to advise you in this thread whether such a practice exists, as you would be treated no differently than other expats working overseas for U.S. business entities if you establish a business that the IRS couldn't contend was located where you are physically located.

If you choose to not form a LLC, and there are many tax advantages in doing so, you might try to establish as many "indicees" of business residency in the U.S. as possible. An office address in the U.S., a bank account in your sole proprieterships name into which your earnings are placed with statements to your business address, a business license in the city where your sole proprietership is "located", all business mail, perhaps later forwarded, to your U.S. business address, etc.

I think the bottom line will be a weighing of "indicees" between the U.S. and Thailand, and the country in which the most indicees of business residence exists will be controlling. This is assuming you will be audited or the Thai tax guys get after you or the IRS tries the unlikely of suggesting you weren't entitled to the exemption.

Being prepared and taking the steps required by your tax plan and strategy will pay off handsomley in peace of mind and provide a mighty weapon in your defense if the tax guys come after you.

PM me if you have any specific questions regarding the foregoing.

Edited March 9, 2005 by ProThaiExpat

[Thaiquila]

Interesting points, PTE, however I am not sure you are correct about what a one person US LLC really does for an individual.

Based on my understanding, a one person LLC would mean that person is:

protected against many kinds of liabilities (law suits) similar to a corporation

protected against any debtors going after that person's wealth that is outside the amount of the initial starting capital of the LLC (this is the most popular reason individuals create one person LLCs or groups create multiple person LLCs)

tax is passed through to individual; if paying US tax, the person must pay the full tax on the annual profit whether that full amount was disbursed or not

the one person LLC person would be considered a profit owning, capital share owning MEMBER and also MANAGER of the LLC. This person would not be considered an EMPLOYEE of the LLC. The LLC can of course hire outside employees.

Edited March 9, 2005 by Thaiquila

[ProThaiExpat]

Thaquilla: My memory is going back ten years and is limited to California.

My recollection is that LLCs were created to give individuals most of the benfits of the corporate structure without all of the legal difficulties attendant to corporations from a regulaatory point of view.

My own experience was only using the corporate structure because it was familiar to me and easy to form.

I cannot refute what you have said relative to LLC's and owner-employees, but if not permitted, then an LLC is not the way to go. However, cerrtainly an up to date CPA should be consulted in any case relative to this issue before one goes forward with any tax planning strategy.

PS: I mispelled "indicies" but my edit button has disappeared.

[taxout]

The Section 911 exclusion is for "foreign earned income." That means the income must both be "foreign" and "earned."

From Publication 54:

"The source of your earned income is the place where you perform the services for which you received the income. Foreign earned income is income you receive for working in a foreign country."

On page 16 you'll see a discussion of income from a sole proprietorship.

It sounds like you're trying to turn part of your personal investment income into excluded income under Section 911 by arguing you that provide some sort of management services for your investments while overseas.

If so, that's not going to fly.

[Thaiquila]

Yes indeed, page 16 of the IRS pub here:

http://www.irs.gov/pub/irs-pdf/p54.pdf

appears to contain some of the relevant guidelines.

There is a distinction made between earned and unearned income,

with earned income being possibly eligible for the foreign exemption.

Unearned income is related to how much of the income is derived from capital investment. If the income derives from a mixture of capital investment and active working, there is still a very generous (though not complete) exemption.

I don't think it would be too radical to suggest professional advice is probably needed here regarding the US tax angle.

Oh, and correct me if I am wrong, but if the income is being claimed to be based on actively working, rather than a passive investment, I think you are liable for the full amount of self employment taxes. These are not covered by the foreign unearned income exclusion. (Ouch!)

Edited March 10, 2005 by Thaiquila

[taxout]

Yes, if you're self-employed overseas then you're subject to social security tax, at the self-employed rate; the Section 911 exclusion doesn't help you.

And you're subject to SS tax at the employee rate if you're employed by a "US employer" overseas, that is, a US-incorporated company or a foreign subsidiary of a US company that's elected to be treated as a "US employer."

If you're employed in Thailand, but not by a "US employer," then you don't pay Social Security tax.

As to the comment in post 7, there's no provision in tax treaties or the Internal Revenue Code for automatically notifying a taxpayer if a foreign tax authority requests taxpayer information pursuant to a treaty.

The tax treaty between the US and Thailand does in fact have an information-exchange provision.

[Thaiquila]

"The tax treaty between the US and Thailand does in fact have an information-exchange provision. "

OK, this is interesting, in a bad way.

Just wondering, but given this potential and totally legal info sharing, I am wondering if there would be additional risks in claiming the foreign income exclusion for a person working in Thailand, without a visa that allows working, obviously without a work permit, and not paying Thai taxes.

What I am wondering if it would be safer (though much more expensive in the short term) to just file as a resident in the US taxpayer.

[taxout]

I have no idea how frequently Thai authorities use the information-sharing provisions. But generally, information-sharing under tax treaties is not a routine matter.

Note that if you're claiming Section 911 benefits on the basis of foreign residency, not the 330-day test, then claiming you're a non-resident of Thailand to the Thai authorities may dis-qualify you from Section 911 benefits:

"If you submitted a statement of nonresidence to the authorities of a foreign country in which you earned income and the authorities hold that you are not subject to their income tax laws by reason of nonresidency in the foreign country, you are not considered a bona fide resident of that country.

"If you submitted such a statement and the authorities have not made an adverse determination of your nonresident status, you are not considered a bona fide resident of that country."

http://www.irs.gov/instructions/i2555/ch02.html

The obvious question is whether "authorities" means only "tax authorities."

[PeaceBlondie]

I second everything that taxout has written above. It's a foreign earned income exclusion, only of income that's EARNED by working abroad.

[IMA_FARANG]

If one resides outside the USA more than 330 days a year it is possible not to pay US income tax on up to $80K of earnings (Reference: Publication 54 on www.irs.gov). I have a US sole proprietorship that generates income from non-Thai companies over the internet generally on its own without me having to work; just the occasional email to respond to or such. I believe I can claim the exemption because I meet the physical presence test and my tax home is my Thai residence as I have no place of business.

The concern is if I file with the IRS stating I am exempt from income tax because it was earned while in Thailand, will they then pass this info along to Thailand who will in turn tax me on this income? I am on a tourist visa. I am not looking to abuse the system in any way; I just want to choose the most beneficial option I am legally entitled to.

By the way, I do not spend income in the year it is earned because I am aware that scenario does trigger Thai taxes if one is residing in Thailand over 180 days (Reference: Personal Income Tax section on www.boi.go.th/english/how/taxation.asp).

Anyone have experiences here or any thoughts?

<{POST_SNAPBACK}>

Don't want to get in a long involved conversation about the 80K dollar exemption, but the requirements/procedures are:

1. At least 330 days residing outside U.S. in tax year. (1 Jan to 31 Dec.)

2. Income derived solely from overseas employment or "as consequence of overseas position" (I.E. no funds derived from other sources.)

3. File on form 2555 or 2555EZ. If you can answer yes to the questions on that form you probably qualify. Choose either residence or physical presense test.

4. File form 1040 (not 1040EZ) In proper space on 1040 (2555 tells you where) enter amount of exemption. Subtract that from Taxable Income. Result can't be less than zero. Can only claim amount of income if income is less tha 80K. (can't claim 80K unless you earn 80K)

5. Must file in overseas IRS office Philidelphia, Pa. (for all overseas tax returns).

I do it every year.

[taxout]

No, under the test you have to be outside the U.S. for 330 days in a 12-month period, not necessarily a calendar year. Your 12-month period can, for example, run from July 1, 2004 to June 30, 2005. In that case you pro-rate the $80,000 exclusion between the two tax years.