I’m dealing with a couple of situations involving my clients who are earning foreign income while living in a foreign country. Consequently, there are a couple of things everyone should know.
1 – Universal Income
US Entities must report universal income on their tax returns. If you earn $500K while operating your business in America and another $500K while in another country, your total income figure in America is $1M.
2 – Deducting Expenses
We can deduct all of the expenses you incurred generating that income but this must be done on the US Return under the IRS Code. If an expense is deductible in another country but not under U.S. tax law, we can’t deduct it here, regardless of where the expense occurred.
3 – Foreign Taxes Paid
If you paid taxes on your foreign earned income, that doesn’t mean you have to pay taxes twice. We can get a credit for the taxes you paid elsewhere on the US Return.
The rules are similar if you work as an employee.
1 – Universal Income
Again, if you earn $50K in the US, and the equivalent of another $50K in another country, the topline of your 1040 must be $100K. We can also deduct reasonable expenses that align with the IRS Code and claim a credit for any foreign taxes paid.
2 – An Exclusion
Foreign income up to $132,900, as a single taxpayer treated as an employee, can be excluded if you meet the Foreign Residency test. One requirement for this is living in the other country for a minimum of 330 days during that calendar year.
There are plenty of other requirements and tests that could either include or exclude a taxpayer from this exclusion.
Let’s not forget the dreaded FBAR, which is a reporting requirement for anyone holding a foreign account valued over $10K US for any one day during the calendar year. These must be filed in June.
If you don’t file this, the additional tax, interest, and penalties for non-compliance can easily exceed the original amount held in the foreign bank.
Let me leave you with this…
I can’t tell you how many conversations I’ve had with clients subject to these rules who don’t want to comply.
Their normal response is something like, “Don’t report the money. How will the IRS ever know?”
To this I say nay, nay. There was a time not so long ago, when this would have been true. but not so much any more.
Foreign Financial Institutions are now required to report information on their clients who have Social Security Numbers to the Feds. Because of this new requirement, it can be almost impossible for an American citizen, depending on the country and financial institution in question, to even open an account in a foreign country.
The banks and trading houses don’t want the reporting hassle in the first place.
As a business owner, if you don’t report the income you earned while in a foreign country, this could make you guilty of income tax evasion. If you get audited and the revenue office just happens to notice the additional $500K deposited into your checking account, you’ll be hard-pressed to convince them that you received the money from a rich uncle.
Each instance of Tax Evasion can get you three hots and a cot for up to a year. Please don’t mess around with this.
It’s just not worth it.
As always, if you’re having problems with your accounting and tax work, we’d love to help. Please contact us today.
We’re all going to get through this. Let’s get through it together..
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, Accounting and Tax Work, Tax Planning, or Tax Representation, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
888-310-0300
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