Foreign Income Exclusion--working abroad

[kaneohe]

Anyone have any experience filing for the foreign income exclusion (80K)? From the little reading I've done, it appears
you fill out form 2555 to figure out exclusion (80K if income overseas is greater than that), then put gross wages in normal box on 1040, and exclusion on line 21 on 1040 as a negative income and like magic---no tax on first 80K of income. Assumption is that you meet the residency test of >330 days working abroad.

Sounds almost too good to be true---anything else to be aware of /errors to be made/consequences later/etc.

 

[ladelfina]

From what I understand, it's supposed to work towards offsetting taxes that would be due in the country where the work is performed.

If you are working in a no-income-tax place like some Middle Eastern countries, yeah, it's a 'gift'! If you are working in a country where there's an income tax, I don't see why you wouldn't be subject to it there, so that's where I would look for 'consequences.' If you are an employee, more likely than not your employer is witholding; if you are independent, you may be skirting your tax burden. If your employer is a U.S. company I'm not sure what their options are tax-wise, but they usually employ specialized firms to work out overseas compensation and tax adjustments.

 

[bpp]

And keep it as quiet as possible about this scam because the US taxpayer will want this "perk" quashed when they discover how generous our government is to those of us who worked overseas.

A scam I pay full taxes to my country of residence, which I don't mind because I receive commensurate services from them. But having to file income tax returns with the US is a huge pain in the butt, and I receive precisely zero government services from them. Quite frankly, the Foreign Earned Income Exclusion is the only reason I haven't bothered to change my citizenship at this point; I think it is outrageous that the US is the only 1st-world government that taxes its non-resident citizens.

As it is, even with the FEIE, worldwide investment income is fully taxable in both the US and my country of residence. Yeah, there are treaty provisions to deduct foreign taxes paid, but the net result is that any tax deductions or exemptions offered by my country of residence are not recognized by the US, and vice-versa. So even with the FEIE, US citizens living abroad are not getting away with anything. Quite the reverse. The FEIE only makes the screwing less acute.

Edited to add: not a rag on you, OAP. Anybody who is into Stanley Clarke is all right by me. Chalk it up to the imo-jochu I just imbibed, if you like.

Bpp

 

[Texas Proud]

bpp,
I worked in England for 8 years as a contractor to a couple of the XXX agencies of the US government.

I paid no tax to UK or US on my first 80K, yet I was being paid by taxpayer money.  I got free healthcare from England and used all their facilities but paid no tax.  I had US military privileges like APO mail, commissary, BX, etc.

It wouldn't pass most US taxpayer's idea of Fair Taxation.

And Stanley Clarke and Billy Cobham played together in LA at jazz clubs when I lived there.  Getting to see them for free is another scam I pulled.   

I worked for a bit over a year in the UK and my tax bill was HUGH... I still have about $10,000 to $15,000 foreign tax credits available if I can somehow figure out how to get paid for working overseas!!! That is if thier taxes are not higher and I get more...

 

[mikew]

They did try to quash the exclusion about 3 years ago. The American Chamber of Commerce and a whole bunch of big corporations fought it and it got taken out of the bill at the last minute.

At the time, I read the ambassador in Tokyo said that if it was revoked it would make filing for Expats in Japan more complicated but the end result would be basically the same.

Don't know if I believe that but I have heard there are circumstances where not taking the exclusion can be advantagous. At the very least, I could open a Roth.

Bpp I think you said your wife is Japanese. Do you invest in her name or is it all in your name? Me and my Japanese wife have seperate brokerage accounts. I am trying to figure out which account would be better to put different things in.
I really need to find a better accountant.

Mike

 

[dory36]

If you are working in a no-income-tax place like some Middle Eastern countries, yeah, it's a 'gift'!

Unless you work for a large company. Most (85%+ in a recent survey) large companies impose something they call "hypothetical tax" which is only hypothetical in that they don't send it to any government. Instead. they calculate what you would have paid in taxes back home, then deduct that amount from your pay as a reverse cost-of-living adjustment.

In theory, this practice allows multinational companies to move employees around without putting any of them into a worse tax situation than they would face at their home due to the transfer. But it also means that the employee loses the benefit of a windfall tax situation such as in Saudi Arabia (where I was).

Google "hypothetical tax" for more grim details.

 

[bpp]

They did try to quash the exclusion about 3 years ago. The American Chamber of Commerce and a whole bunch of big corporations fought it and it got taken out of the bill at the last minute.

I remember that.

At the time, I read the ambassador in Tokyo said that if it was revoked it would make filing for Expats in Japan more complicated but the end result would be basically the same.

Don't know if I believe that but I have heard there are circumstances where not taking the exclusion can be advantagous. At the very least, I could open a Roth.

You could open a Roth now if you took a business trip to the US or otherwise managed to generate some US-sourced earned income with which to feed it. The problem is, Japan will treat the Roth as a regular taxable account, nullifying the tax benefits from the US side. This is why I think the current system is unfair: one should only have to answer to the tax system of one country -- probably one's country of residence, since that is where one receives government services. Having to answer to two of them means that one gets squeezed in the overlaps. I don't see what justification the US has for taxing non-resident citizens.

Bpp I think you said your wife is Japanese. Do you invest in her name or is it all in your name? Me and my Japanese wife have seperate brokerage accounts. I am trying to figure out which account would be better to put different things in.
I really need to find a better accountant.

We have some investments in her name, some in mine. Hers are all in Japan, in a simple, global index fund (bought through her bank), because she doesn't want to deal with details. Mine are in brokerage accounts in Japan and the US. The structure of my investments is more complicated than hers, partly due to tax reasons. For example, I would love to just buy a TOPIX ETF (11 bp expense ratio) through my Japanese broker for my Japanese stock exposure and be done with it. But because of the ridiculous PFIC rules in the US, that would expose me to lots of taxable phantom gains, so I hold a collection of individual Japanese stocks instead. Why should such contortions be necessary? What public policy aim is served by forcing expat investors into individual stocks rather than letting them avail themselves of locally-registered index funds? But that is another rant.

Edited to add: In your situation, I guess it matters how you guys file your US taxes. (Since Japan doesn't make much distinction between married and unmarried filers, Japanese taxes won't be affected.) If you file jointly, or if she has a US Green Card, and she is treated as a US resident for tax purposes, then it really doesn't matter how you divide things up, I guess. If she is outside of the US tax system, then you could put her into Japanese index funds/ETFs if you like, to simplify that part of the portfolio, if that is a goal. How complicated you get also depends on how much interest she has in managing investments. Does she get into investing?

Bpp

 

[mikew]

I don't see what justification the US has for taxing non-resident citizens.
I agree. But besides giving up citizenship, I don't see anyway around it.

My wife is outside the US tax system. What I have been doing is putting everything that pays out distributions in my account and everything that doesn't in her account. I have this idea of retiring, moving our tax home to a country that doesn't tax foreign capital gains, have her sell and then rebuy everything erasing the capital gains. Then moving back to the US after a couple of years. I have a feeling it won't work but it is a strategy.

I wish I had your confidence about Japanese finacial stuff. I don't really trust Japanese Brokeages or financial products. We had an account with Yamaichi Shoken. First they weren't knowlgeble and then they went bankrupt. I have also talked to Nikko Cordial and Nomura but couldn't see the advantage of dealing with them over Schwab.

I have heard that Japanese tax authorities are not very competent collecting investment taxes from overseas accounts. Until a few years ago, everyone hid money in goverment postal savings accounts because you could open them with fake name seals (hanko) and no ID. I wonder the chances they would catch someone if they didn't file their taxes on overseas accounts. But of course, I will be filing my Japanese taxes on my investments, because it is the right thing to do.

Mike

 

[bpp]

I wish I had your confidence about Japanese finacial stuff. I don't really trust Japanese Brokeages or financial products. We had an account with Yamaichi Shoken. First they weren't knowlgeble and then they went bankrupt. I have also talked to Nikko Cordial and Nomura but couldn't see the advantage of dealing with them over Schwab.

Well I don't have complete confidence, keeping stuff spread around as much as possible, not to mention also keeping some stuff in the US. But as a practical matter, it seems hard not to keep the majority of our assets here in Japan. I just wouldn't feel comfortable having everything "abroad," even if "abroad" means my native country in this case.

I can see why you felt burned with Yamaichi. Did you get everything back from them, by the way? I use Nikko Cordial, they are pretty good for a few things (mini-kabu, pseudo-DRIPs, foreign bonds, and lately they have started trading Chinese stocks), but they are not deep-discount by any stretch. You have to be careful of which services you use there to keep costs down. Eventually, when I have enough assets, I will probably diversify to another brokerage as well, for safety.

Bpp

 

[kaneohe]

thanks all for your valuable input. I was also going to thank someone for providing that url link but can't find that message anymore.

 

[mikew]

About Yamaichi, we were doing mini kabu. When they went bankrupt, they told us we couldn't transfer it to another brokerage. The mini kabu was only an internal thing. We needed to bring our holdings up to a full batch (not sure if this is the right term) or sell out. We sold out and took a little loss. Not a big deal but we quit investing for a while and got behind on FI.

Have you looked at the Japanese online brokers? I am thinking of etrade.ne.jp or monex.

I am looking at moving my accounts out of schwab global to reduce costs. I am considering fidelity or internaxx in luxenburg for my wife's account. Internaxx may be more protected from tax changes in the US and Japan and also more secure. But it is more expensive. Isn't Japan going to raise taxes on investments? 

Mike

 

[bpp]

Have you looked at the Japanese online brokers? I am thinking of etrade.ne.jp or monex.

I hadn't looked seriously into brokerages in 2-3 years, but now that I look at the ones you mention, they do seem to have added a lot of services that they didn't have before. Another one that I am keeping in the back of my mind is kabu.com, mainly because they have some kind of tie-up with my bank (Mitsubishi-Tokyo-UFJ).

I am looking at moving my accounts out of schwab global to reduce costs. I am considering fidelity or internaxx in luxenburg for my wife's account. Internaxx may be more protected from tax changes in the US and Japan and also more secure. But it is more expensive.

Ironically, I was just looking into Schwab Global for my wife, in the event that we decide to diversify her holdings. For simplicity, sticking with TD Waterhouse/Ameritrade, where I have my US-based investments, may work also.

Isn't Japan going to raise taxes on investments?

As I understand it, we are now in a temporary period of reduced taxes, which is set to expire soon. When that happens, dividends and capital gains will go from 10% back up to 20%, I believe. Is that what you are referring to? Or is there worse news that I haven't heard about? (Quite possible.)

Bpp

 

[mikew]

Ironically, I was just looking into Schwab Global for my wife, in the event that we decide to diversify her holdings.  For simplicity, sticking with TD Waterhouse/Ameritrade, where I have my US-based investments, may work also.

Bpp
I haven't made up my mind about switching companies. I like schwab global. The service is good and they are friendly. They are set up to deal with people living overseas. They have Japanese language support. And you can direct deposit yen at Citibank Japan with no service fee.

The problem is trades are $30. I didn’t think this was going to be a big deal because I don't trade a lot. I have decreased fees by buying in $10,000 blocks but this is a large chuck of my current portfolio. I could trade 2 $5000 blocks at fidelity and still save money. Also watch out for Schwabs fee for accounts under $75,000.

The other problem is you can only hold offshore mutual funds in the schwab account. I am mostly content in all ETFs and CEFS but I would like to have more options.

I don’t know if this is interesting but this is an exchange I had with fidelity about a month ago. (Always send email the guys on the phones don't know anything.)

I live in Japan. I am looking to open 2 brokerage accounts. One for me a nonresident US citizen and my wife a nonresident alien. Is it possible to open accounts? Is it possible for us to purchase open ended mutual funds either fidelity's or other companies'?

It is possible to establish a Fidelity Account and invest in our mutual funds from outside of the United States. However as we interpret U.S. and International securities regulations, we are unable to assist prospective clients outside of the country with the establishment of a new account. The Fidelity Web site is intended for clients physically inside of the United States, so you are unable to apply online without a U.S. address. We are also unable to send promotional information to an overseas address. If you have a U.S. address, then we would be happy to send you the information needed.  Once you obtain an application, you can apply by mail with a non-U.S. address.

 

As I understand it, we are now in a temporary period of reduced taxes, which is set to expire soon.  When that happens, dividends and capital gains will go from 10% back up to 20%, I believe.  Is that what you are referring to?  Or is there worse news that I haven't heard about?  (Quite possible.)

Yep that's the one. That is going to be a pain. It might be wise to reduce my allocation of bonds and REITS.

Mike

 

[Ed_The_Gypsy]

Not applying to anything in particular,

It is worse than you think:

It should be remembered that even if one renounces one's US citizenship, one must file taxes in the US for 10 years.

Ed,
hiding from tax men in two countries.