Foreign Earned Income Exclusion

[girlx]

I am telecommuting from Thailand for companies in the US. I will have to look at my tax situation soon and am wondering if there is any tax professional available in LOS that I can talk to about this.

I know there is a foreign earned income exclusion for up to $82,XXX for US citizens who have been out of the country for most of (in my case all of) the tax year. I am trying to find out if I am eligible for this. In which case I would owe no taxes this year, but that seems way too easy for me to accept.

Any ideas of where I can go to get professional advice?

[Khun ?]

Tough one as most likely they will consider your work is in the U.S. being connected through

electronic means. If you set up a foreign company could change such situation but either way it is a gray area. I am sure many do claim the overseas earned income as private citizen and not foreign company doing the work.

[lanny]

From what you posted, I would say there is no problem with the foreign earned income exclusion. It does not make any difference where you are paid FROM; what matters is where you perform the services you are paid for.

There is a question about your tax liability, though. Are you treated as an employee? Does the employer withhold taxes? If you are an independent contractor, and the employer(s) issue you 1099s, you will still owe the self-employed, social security taxes. The exclusion is only for income taxes, it does not apply to the SE tax.

If you would like more information, PM me, I can probably help. The mods will not let me post my email address or URL.

[LivinLOS]

Maybe now you understand why in the other thread that you owe taxes in Thailand..

Its not you "owe no taxes this year".. Its that your not paying your taxes in the country your working in.

[Buckwheat]

girlx,

I'm no expert by any means...all I can tell you is from experience doing the "two step" with the IRS.

If the SOURCE of your income is from a foreign entity, the first $82,500 is tax free.

Example...my retirement is "earned" (issued) in the States and I pay tax on it.

The company I work for is a very large corporation in the States, by my income is disbursed by another foreign government through them (not Thailand) and my first $82,500 is tax exempt.

Hope this helps

[thaihome]

One problem I see in you claiming the exclusion is question # 3, tax home test, on Form 2555. If you haven’t claimed any income to Thailand you are not claiming it as a tax home. You cannot have it both ways; you are expected to pay tax somewhere.

TH

[taxout]

You don't necessarily have to be subject to Thai income tax to qualify for the foreign earned income exclusion.

But your "tax home" must be overseas to claim the exemption. "Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home." There's a fuller description here:

http://www.irs.gov/businesses/small/intern...d=96950,00.html

Once you've got your tax home squared away, then you have to further qualify for the exclusion on the basis of either foreign physical presence or bona-fide residence.

The physical presence test requires that you be physically present overseas for 330 full days in a consecutive 12-month period.

The bona-fide residence test requires that you be a bona-fide resident of a foreign country for a full taxable year. It's always a little difficult to say what constitutes "bona-fide residence," but as the detailed description at the link below notes, "You do not automatically acquire bona fide resident status merely by living in a foreign country or countries for 1 year." There's no absolute physical presence requirement under the bona-fide residence test.

However, you cannot claim bona-fide residence in a country "if you make a statement to the authorities of that country that you are not a resident of that country and the authorities hold that you are not subject to their income tax laws as a resident. If you have made such a statement and the authorities have not made a final decision on your status, you are not considered to be a bona fide resident of that foreign country."

Point here is, your Thai tax situation comes into play only if you're qualifying under the bona-fide residence test; if you qualify under the physical presence test, then it's irrelevant.

http://www.irs.gov/businesses/small/intern...d=96960,00.html

Note that you'll be subject to Social Security tax at self-employed rates if you're self-employed overseas and at employee rates if you're working overseas for an "American employer."

Detailed IRS info on the exclusion here:

http://www.irs.gov/businesses/small/intern...d=97130,00.html

[autonomous_unit]

Taxout, do you know all the rules surrounding the self-employment tax? It is my belief that you also owe "one half self-employment tax" on income earned while in the US when employed by a foreign employer (for example if you visit a US client's site while working for a Thai firm).

That is, on the portion of earned income that is not counted as foreign earned due to temporary presence in the US during the tax year. However, I am not sure where to look in the IRS documentation to verify this right now...

[thaihome]

Taxout, do you know all the rules surrounding the self-employment tax? It is my belief that you also owe "one half self-employment tax" on income earned while in the US when employed by a foreign employer (for example if you visit a US client's site while working for a Thai firm).

That is, on the portion of earned income that is not counted as foreign earned due to temporary presence in the US during the tax year. However, I am not sure where to look in the IRS documentation to verify this right now...

If you claim bona-fide residence amount of time in the US is irrevelent.

TH

[taxout]

I don't have access now to the materials needed to answer AU's question for certain, but I believe there's a good technical argument that you're subject to Social Security tax in that case.

There is, though, a de minimis exception which could exclude wages earned on brief visits to the States on business.

Under this exception, your wages earned in the US while working for a foreign employer won't be subject to Social Security tax provided they're earned over less than half of your "pay period." Your "pay period" is the normal period over which your employer pays your wages, not to exceed 31 days. So if you're paid on a calendar-month basis and spend a week in the US on business, for example, this exclusion should cover you.

But -- and here's the catch -- if you spend half or more of your "pay period" in the US, then all of your wages, US and foreign, will be subject to Social Security tax.

In short, Social Security tax is applied on an "all or nothing" basis in each pay period.

The exception's in IRC Sec. 3121( c ).

If you want to see how the exception works, start at IRC Sec. 3101(a), which applies Social Security tax to "wages" with respect to "employment." Then note how IRC Sec. 3121( defines "employment" to include (a) all services performed within the US regardless of employer and ( all services performed outside the US but only for a US employer. Finally, note how Sec. 3121( c ) then modifies "employment" to create the de minimis exception.

http://www.ssa.gov/OP_Home/ssact/ircprov/3121.htm

http://www.ssa.gov/OP_Home/ssact/ircprov/3101.htm

There are Regulations on the provision as well at CFR Sec. 31.3121-1 but they're not very helpful:

edocket.access.gpo.gov/cfr_2005/aprqtr/pdf/26cfr31.3121©-1.pdf

(That ampersand should be replaced with a lower-case "c" in a parenthesis, which the coding on this board seems to forbid.)

[Thaihome is addressing the earned income exclusion from Federal income tax, while AU is asking about Social Security tax.]

Edited January 6, 2007 by taxout

[Khun ?]

Reading into it a bit, her place of employment is in the U.S. as she or the work was not assigned overseas by the employer. She is not self employed unless she works out a contract with the company she works from my understanding. Would have to read again but think she also mentioned she was owner or partner of the company may be a no no also. Being part of her work is done in the states ( stamps on documents she states the reason a Thai cannot do the work) might preclude her from claiming overseas income.

I am sure in the future with many being able to preform work by internet, rules will change as they have in state taxes ( N.Y and a few others) will be in the works or the exclusion will be done away with and only a credit system will exist. Anyone for flat rate tax

[Kaojai]

girlx,

Example...my retirement is "earned" (issued) in the States and I pay tax on it.

Hope this helps

"Earned" means you are performing a service for it. Pensions, social security, royalities, interest or investment income, rent, etc are not "earned" as far as the IRS is concerned.

I have worked at various times for a US company and foreign entity. The money I received was earned and I worked outside the US. The exemption and housing allowance applied. Once retired, my pension and investment income is not "earned" for tax purposes and can be taxed.

Your exemption is based on whether your are physically present or a resident outside the US for a minimum period in each tax reporting year.

[ballbreaker]

I am telecommuting from Thailand for companies in the US. I will have to look at my tax situation soon and am wondering if there is any tax professional available in LOS that I can talk to about this.

I know there is a foreign earned income exclusion for up to $82,XXX for US citizens who have been out of the country for most of (in my case all of) the tax year. I am trying to find out if I am eligible for this. In which case I would owe no taxes this year, but that seems way too easy for me to accept.

Any ideas of where I can go to get professional advice?

It appears from your statements you would be considered self employed and should file as self employed operating a business under your name unless you have a business name. This assumes you receive a 1099 at years end from your clients. I would also use the physical presence method when you file.

Your take on the foreign earned exclusion is correct for personal income tax liabilities, but as a self employed person you will be responsible for self employment tax, which is both halves of Social Security (employer/employee). This amounts to something less than 15% of you net income.

Make sure you keep records of all expenses spent to operate your business, phone, office space, internet, etc. This info will be helpful in lowering your self employment tax liability.

I would also suggest you download a copy of TaxCut or one of the other tax prep software programs. Its an easy step by step procedure for your tax return. I've been using this method for the last three years without problems.