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February 3, 2017 - Phil Hodgen

The Foreign Earned Income Exclusion and Self-Employed Americans Abroad

This is for the self-employed Americans living abroad who want to enjoy some of that tax-free goodness that comes from the foreign earned income exclusion.

Perhaps you are a digital nomad — an American abroad earning a living online by building websites. You have not organized your business as a corporation. You are a sole proprietor.

You live at the intersection of Schedule C (PDF) and Form 2555 (PDF).

The Answer

Watch out for “gross” and “net” income. It is easy to assume (because it is logical) that the foreign earned income exclusion applies to net income. Not so.

As soon as a self-employed person grosses more than the exclusion amount for the year, there is an assurance of income tax and self-employment tax no matter what the net profit really is — unless you are in rounding error territory.... continue reading

Friday Edition
January 31, 2017 - Phil Hodgen

State Income Taxation for Expatriates

The exit tax is a Federal tax law, but it can trigger State income tax.

There is no “standard” method for computing taxable income for State purposes, so this is a high-level overview, not an “Insert Tab A in Slot B” detailed instruction manual.

Summary

State income tax laws usually take Federal income as a starting point for calculating State income tax.

Noncovered Expatriates: No Problem

Noncovered expatriates have no additional income for Federal purposes that has been triggered by expatriation. This means they have no additional State income tax, either.

Covered Expatriates: Problem

Covered expatriates have potential State tax to pay.... continue reading

Expatriation
January 26, 2017 - Haoshen Zhong

Reducing PFIC Tax by Annualizing the First Year Distributions

This is a question we got in an email:

My client bought shares in a foreign mutual fund a few years ago. I see from the client’s statements that the average distribution for the last few years has been about the same, but I do not have statements for the entire first year. Can I annualize the first year distribution?

This post will discuss how to annualize the first year distribution to reduce the tax on distributions from a passive foreign investment company.

PFIC defined

A passive foreign investment company (PFIC) is a foreign corporation that meets either one of the following two tests (IRC §1297(a)):

  1. Income test: At least 75% of the corporation’s gross income is passive income.
... continue reading
PFIC and CFCs
January 20, 2017 - Phil Hodgen

Immigrants and Estate Tax: Four Choices

The Estate Tax

The United States has a wealth tax that is imposed at the time of death, called the “estate tax”. In round numbers, the first $5,500,000 of a person’s wealth (measured at the time of death) is tax-free, but everything above that is taxable. The top tax bracket is 40%.

You might have accumulated significant wealth before becoming a U.S. resident. You might wonder why the U.S. government should be entitled to take 40% of that away from your spouse, children, and grandchildren when you die.

It is not polite to say this out loud, but the estate tax is largely optional.... continue reading

Friday Edition
January 17, 2017 - Phil Hodgen

Treaty Election to Avoid Long-Term Resident Status

Green card holders, if they give up their visa status as a permanent resident of the United States, can be hammered by the exit tax. But not all green card holders are at risk—only if you are a long-term resident.

Avoid becoming a long-term resident and the exit tax rules simply do not apply to you.

Let us look at how a green card holder can use an income tax treaty to avoid being a long-term resident.

Green Card to Long-Term Resident to Expatriate

Receiving a green card (and setting foot in the United States) makes you a resident of the United States for income tax purposes.... continue reading

Expatriation