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October 27, 2019

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When Outside the United States is Not Foreign

February 11, 2017

As I do a fair amount of individual returns for persons not physically present in the United States, the question invariably comes up, but why does the US tax me?  Well I'm not going to debate the merits of US tax law here.  Given that in the nearly 30 years I've been a registered voter, and considering that I have in fact voted in every single state and federal election, I can proudly say that the election rates of candidates I have voted ranks in the single digits.  I therefore reserve the right to criticize and insult the people who were elected instead, and I can proudly say, I TOLD YOU SO.  Thats a blog post for another day.

 

The answer to the question why is found in IRC 61.  Income from whatever source derived.  No limitation based on US boundaries.  That being said, there are some mitigating provisions to reduce tax and the burden for US citizens living outside the country.  Tax paid to another nation on income in that nation can be taken as a credit against US tax.  And then there is the Foreign Earned Income Exclusion, which excludes up to an annual limit against earned income from the foreign nation.  A foreign tax credit cannot be claimed or the tax deducted if paid on any income excluded.  

 

The basic elements here for the FEIE are that you are domiciled or living in a foreign country for 330 days in any 12 month period (not calendar year).  You must have earned income (wages or business) earned while in that foreign country, must not be military or civilian employee pay of the US government, combat pay (which is excluded anyway), and must not be international waters.  

 

The general points that get missed regularly are the 330 day test if not a bona fide resident of a foreign nation (a post for another day), and that it has to be in a foreign country. I won't get into the need to not have a US abode for the 330 day test here.

 

Mariners are excluded from this for time they spend in international waters, workers on oil rigs in international water, and astronauts on the international space station.  Something that people still don't quite get is that Antartica is not a nation.  There have been nearly 100 tax court cases of people trying to claim the FEIE for pay earned while working in Antartica.  Every single one of them lost because Antartica is neutral international territory and not claimed by any sovereign nation.

 

 

 

 

I will point out that even though Tax Court does not consider Antartica to be a foreign nation for tax purposes, other federal courts have considered it one for purposes of labor law.  Go figure.  While I understand the rationale for the different results, a layperson won't care.  #PenguinLivesMatter

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