| Offshore Employment |
Section 911 of the U.S. tax law permits U.S. taxpayers to earn up to $80,000 per year of tax free income.
But there is a small catch.
The taxpayer must earn that income by living and working outside the U.S. for at least a year or must become a permanment resident of the foreign country. This rule exists to encourage U.S. employees to accept assignments by their multi-national employers in various countries that may have poor living conditions and to encourge the employee to accept extended separation from his or her family in the U.S.
There are two ways to qualify for this income exclusion.
The first and the simplest is to live and work outside the U.S. and its territories for at least 330 days in any consecutive 12 month period.
The second method is to establish bone fide permanent residence in the foreign country. This test is subject to an assortment of criteria such as whether the taxpayer becomes a resident of the foreign country for tax purposes and thereby becomes subject to their tax rules. Another factor is whether the employee takes his or her family to the foreign country. In a simplified way, it would be much like moving from Fresno, Califonia to Houston, Texas without any plans to return. If the residence test is met, the taxpayer is not required to meet the 330 day test.
If either of these two tests are met, the taxpayer can exclude up to $80,000 of earned income from U.S. taxes. If there are any foreign taxes imposed on that income, they are not available as a foreign tax credit or a tax deduction. Earned income in excess of the $80,000 limit will continue to be subject to U.S. income taxes along with any other income such as investment earnings.
The taxpayer can be self employed, but if the business requires a substantial amount of capital (for inventory, receivables and equipment) then only 30% of the profits of the business are treated as earned income. One way to bypass that restriction would be have the business become a taxable corporation and to pay a salary to the owner.
If a husband and wife are both employed outside the U.S. and meet either of the two residency tests, they may both exclude up to $80,000 of earnings from U.S. taxes.
The specific details of this tax break are extensive and this article is a very brief summary of the basic rules. The exclusion requires the taxpayer to file Form 2555 and the instructions to that form provide further details about the limitations on this tax break.
Vernon Jacobs
(C) Copyright, 2004 All rights reserved.
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