[taxabletalk] Russ: Bozo Tax Tip #9: Only Foreign Income Is Taxable

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Posted by Russ:
Bozo Tax Tip #9: Only Foreign Income Is Taxable
http://www.taxabletalk.com/posts/1238562567.shtml


   Another repeat from 2008, mainly because people still try to peddle
   this snake oil. This conversation took place just yesterday.
   Two prospective clients came into my office (husband and wife). I
   showed them my Engagement Letter first, and they wanted to ask me some
   questions. The first were routine about the wife's income. But then
   the husband told me he didn't have a W-2 from his job.
   "Well," I asked, "Were you paid under the table?"
   "Oh, it was nothing like that. I was working in South Korea last
   year."
   It turns out he was working as an independent contractor in Korea.
   "And isn't it great," he continued, "that I don't have to pay US tax
   on that income."
   I corrected him. "You do have to pay US tax on that income. Americans
   pay tax on their worldwide income. Now, had you had income tax taken
   out of your Korean income you would be eligible for a tax credit. Were
   you overseas for 330 days in 2008?"
   "No," he said. "I came back for the summer. I didn't like the
   humidity."
   "That's a shame, because had you been overseas for 330 days out of a
   365-day period, you'd be eligible for the foreign earned income
   exclusion."
   I told the potential client that he would pay both income and
   self-employment tax on his Korean income. He didn't like my answers,
   and said he'd find another accountant who would see things his way.
   He's likely still searching.
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   As noted above, if you do earn income abroad, there are some real tax
   tips you can take advantage of. If you have a genuine residence
   overseas or meet the physical presence test (generally, being abroad
   330 days out of 365), you may be eligible for the Earned Income
   Exclusion. If eligible, you can exclude up to $87,600 in 20087. And
   the time period does not have to be a calendar year; if you're
   overseas from May 1, 2008 through April 15, 2009, you would likely be
   eligible for a prorated credit.
   If you earn income abroad and it's taxed abroad, you are likely
   eligible for the Foreign Tax Credit. The general principle is that
   income should only be taxed once, so if (say) Japan taxes your income,
   you should get a credit of that tax on your US tax return.
   Finally, anyone who is not in the United States on April 15th gets an
   extra two months (until June 15th) to file his tax return. (You need
   to attach an explanation to your tax return.) If you're abroad, you
   won't be subject to penalties but you will be subject to interest on
   what you owe (interest is statutory).
   There are numerous caveats and gotchas, and numerous ways to lessen
   your tax if you either have foreign source income or live abroad. Talk
   to a professional who can help you if you're contemplating living
   abroad or will soon have significant income from abroad. But whatever
   you do, remember that foreign income is just as taxable as income
   earned in the United States