It indeed is the case that a U.S. corporation is subject to tax on its worldwide income. However, because of the foreign tax credit system, a US corp generally only ends up paying tax at the higher of the rate in the US and the rate in the foreign country where the income is earned. Because the US has one of the highest corporate tax rates, many corps have an incentive to go offshore by reincorporating in a tax haven jurisdiction. Recent legislation attempts to stop this by imposing a toll charge on corps that go offshore.
There is one logical reason for the law, which is that it prevents the US having “tax exiles”, that is, people who claim a foreign address (honestly or otherwise) just so that they can get out of paying income taxes. This is a significant problem for a lot of other countries. Here in Ireland, for example, several of the opposition parties are calling for the government to introduce laws that would force these people to pay up. So even as someone who is subject to the US requirement, I don’t mind it, although I do think the threshold is set far too low.
Surely there is a way to verify the difference. I mean someone that lives in the US but has an address in Cayman is surely different than someone that moved away from the US 30 years ago and has not been back… or a fellow who was born overseas to US citizen parents, and has never even been to the US, is paying US taxes. That is wrong on every level.
I think there are already mechanisms in place to prevent US residents from being tax exiles. If you are living in the US, even if you have a residence abroad, then you won’t pass either of the tests (bonafide residence or physical presence) which are required for you to claim the exemption.
But the point isn’t just to prevent US residents from becoming tax exiles. It’s also to prevent US citizens from *actually * moving abroad just to claim tax exempt status, as many citizens of European countries do.
Agreed. But the reality is that the person who doesn’t ever go to the US probably isn’t paying US taxes anyway. I know plenty of US citizens abroad who ignore the law and not one of them has ever been pursued by the IRS for it (not that I’m condoning this, mind). They really do seem to only be interested in the real high-earning expats.
I think it should be a person’s right to choose where they live and to only pay taxes to the country they are living in permanently. The US is odd that it taxes based on citizenship… to the point where you can be taxed by the US for 10 years AFTER you have given up your citizenship.
Let’s not forget that it’s not just expats, but temporary workers, too. I’ve met the threshold on three separate occasions now for stints in Mexico and Canada, under the principal of “physical presence” rather than “bonafide residence.” (Unfortunately I’m obligated to participate in my company’s tax equalization scheme, and so I get no benefit other than exceptionally late returns and even more red tape than normal.)
What’s interesting is that there’s very little burden of proof. I suppose that if you’re audited you’d have to show ticket stubs or bridge toll receipts, passport stamps, or credit card statements or something, but in reality you have only to declare your foreign residency periods in your tax return. Because I was still on a US salary, my income was still reported with a normal W-2 (except during the equalization phase the next year which grossly exaggerated my income [legally]). Importantly, there was nothing to submit from the Canadian/Mexican governments indicating that I’d paid taxes in either of those places. Had I stiffed those governments, it would have been a considerable bonus (but again, forced tax equalization).
If I were to some day establish permanent residency in Mexico and have my own business (for example), it’d be a simple matter to continue sending in tax returns with only US-source income (pension, social security, capital gains, interest whatever) and just not declare anything earned in Mexico. Would the IRS audit me? No idea, seeing that I’d have a foreign address.
I have to ask, realistically, what is to just stop someone who is moving overseas from the US never filing a tax return and just not mentioning it when (if) they finally come back?
Fear of getting audited when you get back (although I don’t know how the US government would establish your income while overseas). But a lot of companies report your income to the US tax authorities, even if you are working overseas. Hell, ever since I started working overseas in 2000, my employers have all taken US social security taxes out of my paycheck. That’s something you can’t legally get exempted from, unlike federal income tax.
What I mean is, assuming you are working for a private company in, say, Australia, who’s going to know that you earned any money while overseas?
None of the Tax Forms that I’ve seen here have a question like “Are you an American Citizen who might be liable for Taxes in the US?”, for example.
The whole idea sounds crazy- you don’t live there, you aren’t getting any of the benefits of living there that paying taxes entails (roads, infrastructure, police, fire brigades, schools, hospitals etc) so why are they taxing you?
Nothing, as long as it’s not reported to the IRS. As I said above, my company did report to the IRS, but I also had expectations of coming home after each of the jobs were over.
Keep in mind that you’re not required to file a tax return in the US unless you owe taxes or want to claim a refund. You always subject to audit, even if you don’t file. And so if you fall under the current threshold for income for foreign residency, you don’t even have to bother filing. You should still keep records in case both (a) you’re ask to appear for an audit, and (b) you choose to comply with the audit.
While you’re there, most likely no one. But if you go back home, and start working again, and the IRS notices an x-year gap in which you never paid any taxes or filed any returns, you’re probably going to have a little explaining to do. And I wouldn’t put it past them to exchange info with the authorities in whatever country you lived in - especially when you hit your golden years and start looking for your social security contributions.
Can you get away with it, probably, especially if you don’t ever go back home. But there’s always a risk. And since I’m never going to earn above the threshold where I have to actually start *paying * taxes to the IRS, it’s not too much bother to me to just file the damn return once a year.
I don’t think that’s correct. According to the IRS itself, you’re legally required to file if your income is above a certain (very low) threshold, regardless of whether you live in the US or abroad.
IANA tax accountant, but I have been living in Canada for 40 years and have yet to pay a cent of US tax. When I was working, I had the $80,000 exclusion that covered my salary (in every year but one, I believe, when the Canadian dollar was high and the exclusion was only 70K, I was over by a few hundred). Since I have retired and am living mostly on my pension, I have used instead the foreign tax credit, which counts dollar for dollar against US taxes. If you are excluding income, the tax credit must be reduced proportionally, but, Canadian taxes being considerably higher than US taxes, this credit completely cancels all the US tax that my return says I owe. Actually part of my pension is also excluded because part of it is considered return of capital. As for US social security, there is a tax treaty between the US, Canada, and a number of other countries that says that if you are part of a similar social insurance scheme in your home country, you are exempt from US SS payments. Several years ago my return was sent back with a query about this. I photocopied the relevant paragraph of the IRS instruction book and mailed it back and never heard another word about it.
So unless you are somehow being paid on a tax-exempt basis in Canada, you have been badly overpaying for years. I would quickly find a tax accountant in Canada who can help you with a US tax return. They exist; I have a colleague who has considerable US income from a family trust and needs a pro to fill out his return. Or thinks he does.
Even if you have US income (I do) the result is that you get to exclude only a percentage of your Canadian taxes. In my case, that amounts to less than 2% of my income, but I still get to exclude 98% of the Canadian taxes, which is much more than enough. Incidentally, both provincial and federal taxes are part of this exclusion.
I was astonished this summer when my wife and I received a check for $600 from the US Treasury to fight the recession. We got none of the “rebate” from several years ago since we had paid no tax. I am still trying to decide whether to declare it on my Canadian tax return. Lottery winnings are not taxable here and this is more like a lottery than income. It is not declarable on US tax returns.
I am not in Canada. I pay no tax in the UAE because there aren’t any, but my US W2 has Social Security withheld and some Federal Tax to cover the portion over $85K as well as tax on interest earned in bank accounts.
My tax home actually varies a lot as I am itinerant much of the time… my records of expenses for 2004 are probably the most varied as they are in about 40 different currencies.
I just don’t understand why I have to (a) pay any income tax at all to the USA as I do not live there, (b) pay Nevada unemployment tax on myself when I can never collect any benefits. As for Social Security, I can go either way on this - the system may well collapse before I can ever collect… and although I do not pay any local Soc. Security, there are only agreements to balance the payments between the US and about 20 other countries, non of which I have ever lived in.
You hold a US Passport right? You can use the services of US Consulates, right? If you liked, you could become a citizen of another nation for tax reasons, but you *choose not to *as your US Citizenship is of value to you.
The whole “what if I tell Uncle Sam to take a hike” question is all about what happens if you want to return. Burning bridges is never a good idea even if you think you’ll never want to cross them.
I wonder if the IRS has ever attempted to go after someone in another country. I imagine they would like to try if someone was openly earning megabucks while living in a foreign country and not paying US taxes. How would they go about it? The person is not breaking the laws of the country they are in so I don’t think it could be a criminal matter but maybe it could be a civil matter where the IRS could sue the person in the courts of the country of residence. Or would they try extradition?