You Need Not Necessarily Pay
April 15, 2009
Baltimore, Maryland
PLUS:
- It's Tax Day! But, Remember, Dear American Reader: If You're Not
Physically Present In The United States Today, You're Eligible For An
Automatic Filing Extension...
AND:
- Panama Versus Ecuador...Two Points Of View...
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21 Top Panama Experts Convening In Panama City Next Month
If Panama is on your radar, you want to join them.
Full details of Live and Invest Overseas' Premier Live & Invest in
Panama Conference here.
Only 13 places remaining as of this writing.
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Dear Overseas Opportunity Letter Reader,
"The most important tool in the U.S. expat's tax toolbox," writes
international tax guru Chris Rusch this Tax Day, "is the foreign-earned income
exclusion (referred to in tax-planning circles as the FEIE or 'the
exclusion').
"If you qualify, the FEIE allows you to exclude up to US$87,600 in 2008
foreign-earned income from U.S. federal income tax.
"All U.S. citizens and residents who earn more than US$8,450 (single) or
US$16,900 (married filing a joint return) in a year must file a U.S.
personal income tax return no matter where you reside.
"You must file, but that does not mean you must pay tax. One of the many
benefits for an American of living or retiring abroad is that, once you're a
foreign resident, you're eligible to take advantage of the FEIE.
"The exclusion applies to foreign-earned income only--that is, wages or
self-employment income (independent contractor earnings, for example) you
receive for services you perform while living outside the United States.
Wages can come from a U.S. corporation or a foreign corporation, including
an offshore corporation, and it does not matter if you are also a
shareholder or owner of that foreign corporation.
"Note, though, that earned income does not include interest, dividends, or
other investment or passive income.
"The key is to qualify. Bottom line, you qualify for the exclusion in one of
two ways:
"1. The 330 Day Test. To qualify for the FEIE using the 330
Day Test, you must be outside the United States for 330 days out of any
365-day period. It does not matter if the 330 days are over two calendar
years (between Nov. 1, 2007, and Oct. 31, 2008, for example), and you can
avail of a special extension to file your tax return to give you time to
meet this requirement.
"2. The Bona Fide Residency Test. In this case, you achieve
foreign residency by moving to another country and making it your 'home.'
You can intend to return to the States in the future, but you must move to
the foreign country for an 'indefinite' or 'extended' period of time that
must include one full calendar year.
"The 330 Day Test is fact-based, while the Residency Test hinges on your
intentions and is therefore more difficult to use and to prove. I recommend
relying on the 330 Day Test in the first year you claim the exclusion. Then
you can move to the Residency Test.
"For, the Bona Fide Residency Test is one of the most misunderstood and
misused sections of the U.S. tax code. You are a bona-fide resident of
another country if you move there and make it your home. You show this,
typically, by filing and paying taxes in that country.
"The perfect example of a U.S. foreign resident is a person who moves to a
foreign country, does not intend to return to the States, files and pays
taxes in the new country, obtains a long-term visa that allows him to work
in that country, sells his U.S. home and buys one in the foreign country,
and who relocates with his family.
"Of course, though, few cases are perfect.
"For example, a husband might move to France to work there indefinitely,
leaving his family in California. Maybe he returns to the States for 40 days
per year to visit and intends to return again full-time as soon as
financially possible.
"In this case, the American in question has a good chance of being allowed
the exclusion, assuming he is physically outside the States for at least one
year, but it's not guaranteed, and the determination by the IRS would depend
on many facts and factors.
"Note that simply being out of the States for a full calendar year does not
make you a resident of a foreign country. For example, if you go to a
foreign country to work on a construction job for a specified period of
time, say 14 months, you ordinarily would not be regarded as a bona-fide
resident of that country, even though you're living and working there for
one tax year or longer. The length of your stay and the nature of your job
are only some of the factors taken into consideration.
"If the residency test is so complex...you may be wondering...why should you
use it? The biggest reason would be if you want to be able to spend more
than 35 days a year in the United States.
"Furthermore, once you qualify as a resident of a foreign country, you
remain a resident of that country until you give up that residency. With the
330-day test, you must be out of the country for 330 days of each 365-day
period. In other words, the determination is made year by year.
"Plus, with the residency test, you can qualify for all or only part of a
year. Here is an example from the IRS website:
"'You were a bona-fide resident of England from March 1, 2006, through Sept.
14, 2008. On Sept. 15, 2008, you returned to the United States. Since you
were a bona-fide resident of a foreign country for all of 2007, you also
qualify as a bona-fide resident from March 1, 2006, through the end of 2006
and from Jan. 1, 2008, through Sept. 14, 2008.'
"Also note that, if you're married and you and your spouse both are residing
abroad, you each can take advantage of the foreign-earned income exclusion.
Meaning you could be able to exclude up to your first US$175,200 of
foreign-earned income from U.S. tax."
Finally, as Chris points out, the foreign-earned income exclusion is use it
or lose it. If you don't file your returns year by year, you can't later go
back and try to claim the exclusion. You'll be required to pay U.S. tax on
all your worldwide income for any year in which you failed to file.
Chris is happy to answer questions. Reach him here:
TaxExpert@LiveAndInvestOverseas.com.
Kathleen Peddicord
P.S. Remember: The foreign-earned income exclusion applies to U.S. tax only.
As an American abroad, you can have a local tax obligation, as well, in the
country where you're residing.
However, choose a zero-tax jurisdiction as
your place of foreign residence...earn no more than US$87,600 in foreign
income each year...and you could reduce your overall tax bill to nothing.
My best advice on all this is: Don't go it alone. Again,
Chris is happy to help. He's the most knowledgeable and
open-minded international tax consultant I've met in more than 24 years
covering this beat.
You can meet with Chris (and discuss the best options for mitigating your
personal tax burden) at our Live & Invest in Panama Conference
in Panama City May 14-16. Places are filling. I believe 13 remain as of this
writing.
Or Contact Conference Director Stephanie Valencia with your questions:
SValencia@LiveandInvestOverseas.com.
P.P.S. The top three zero-tax jurisdictions right now are:
Panama,
Belize, and Uruguay.
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On this U.S. Tax Day, remember, dear
American reader, that, if you're not physically present in the country right
now, you're eligible for an automatic filing extension. If you're outside
the United States today, your Tax Day is not April 15, but Aug. 15.
"Kathleen, may I ask why you and your family chose Panama
over Ecuador as a place to invest and start several
businesses?
"I have spent quite a bit of time in Panama the past few years, and I really
like what I see. However, Ecuador also appears to be very appealing, with a
lower cost of living, more diversity in landscape, and much of what Panama
offers, except for the banking and business community in Panama City."
-- Mark, United States
When we moved from Paris to the Americas last summer, we chose Panama for
the following reasons:
- Panama City offers top-tier choices for international schooling,
including a French school that is administered not by the Panama Ministry of
Education but by the French Ministry of Education. Our 8-year-old son had been
attending school in Paris for four years. We were delighted, therefore, when
we discovered the Paul Gauguin school in Panama's capital.
- After more than a dozen years researching and scouting global real estate
investment opportunities, my husband, Lief Simon, wanted to develop land
of his own. He determined that Panama's Pacific coast, along the western edge
of the Azuero peninsula, offers the greatest potential for this right now.
- After 23 years running the International Living publishing
business, I wanted to launch a publishing concern of my own (you're
reading the early fruits of this effort in these dispatches). France is no
place to start a business. Panama, on the other hand, is one of the best
places in the world to indulge your entrepreneurial inclinations.
- We've been doing business in Panama for more than a decade. We've
established a local infrastructure of resources and contacts we knew we
could rely on to help support our business and investment efforts. Plus, after
all these years spending time in this country, we have good friends here.
These are our primary reasons for choosing Panama over the other options in
this part of the world (including, yes, Ecuador, but also Nicaragua, Belize,
Uruguay, and Argentina, all of which we also considered seriously).
In addition, we had one reason in particular for not choosing Ecuador: I
don't do well at high altitudes. Over all the years I've spent time and done
business in Ecuador, I've never acclimated. Invariably, I'm sick in bed the
first few days of every visit.
That's me.
For another point of view, I put this Ecuador versus Panama question to
Latin America Correspondent Christian MacDonald.
Christian knows this part of the world well and chooses to spend much of his
time in Ecuador. "Why?" I asked.
"I would recommend Ecuador over Panama as a place to live," Christian
explains, "because the cost of living is lower and the cost of real estate
is dramatically lower. The weather is better. The pensionado
programs offer equal benefits (assuming Panama's includes half-off
international flights, as Ecuador's does).
"I'd also give Ecuador the edge for privacy and banking secrecy, although
Panama has done a much better job at promoting these benefits.
"I'd put the two countries even for accessibility. Ecuador has the advantage
of nonstop flights to Europe, while Panama is closer to the U.S. by more
than two hours.
"But doing business is another matter. Panama's banks are stronger and more
stable. Their business infrastructure is mature and leading edge. Their
banking products and options for structuring a business are great, and there
are loads of qualified professionals to help you.
"I have no business experience in Panama, but I can tell you that, in
Ecuador, doing business can be difficult...and the bigger the business, the
more difficult it becomes.
"I know small business owners who are content, except for the awkward tax
system. But big endeavors are tough for expats. I had a friend who was part
of a forestry project in Ecuador, but he gave up. What drove him out was the
dishonest business ethic in this country and the inability of business
associates to keep their word, to meet their commitments, to tell the truth,
and not to steal from you.
"So, yes, I agree with this reader's assessment on Ecuador's beauty and low
costs...and I agree, as well, with the credit he gives to Panama's banking
and business community. The bottom line is that if I were recommending a
place to live, I'd choose Ecuador. But if business or investment were my
primary concern--including development and forestry--I'd choose Panama."
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