Live in the Philippines

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A Little Tax Talk

Taxes / by

First, my apologies for the rather long hiatus I’ve taken from writing any articles (not just tax articles) here in LiP.  A few chronic maladies have had me down for quite a while, and making my way back to being “my chipper old self” is taking some time away from the keyboard.

Though I’m still not “firing on all eight cylinders,” some items have come to my attention that need addressing.  I can slowly finger my way into an article by answering some questions I’ve started to receive from various sources.

IT’S TAX TIME!

As most U.S. taxpayers begrudgingly know, this is tax season.  Various tax forms – W-2s, 1099s, etc. – are finding their way to us, prodding us once again to “cough up” tax money for Uncle Sam.  In the current political environment, more are feeling the pain of tax time, and they’re starting to think deeply of questions.  They’re seeking answers that could lessen their tax burden.

There truly isn’t space enough to cover each and every question here in this article.  Doing so would require a series of articles spanning months (perhaps years!).  I’ve decided to address the most frequently asked questions that have crossed my desk.  While many readers may know the answers or think the questions are too simple, others find them complex enough to inquire.

So here, we go – it’s question and answer time.

WHO IS A U.S. TAXPAYER?

This question comes in many forms, from that displayed in the heading to “Am I really required to file a tax return?”  The questions seem simple at first, but as with anything dealing with the Internal Revenue Code and other tax laws, the answers may be complex and confusing.

I’ll start with an easy answer and amplify a little bit.

An individual U.S. taxpayer can be any of the following:

  1. A U.S. citizen.
  2. An alien with U.S. residency (i.e., an immigrant with a “green card”).
  3. A nonresident alien with income that can be “sourced” to the U.S.

The first two of these categories are easy to understand.  If you have legal residency ties with the U.S., you are liable for paying U.S. income tax.  It doesn’t matter where in the world you are residing.  Possessing citizenship or resident immigrant status is the key.

The first two of these categories are easy to understand.  If you have legal residency ties with the U.S., you are liable for paying U.S. income tax.  It doesn’t matter where in the world you are residing or where you call “home.”  Possessing citizenship or resident immigrant status is the key, here.

The third category often causes a little concern – usually centered on the phrase “income that can be ‘sourced’ to the U.S.”  According to most international tax treaties, earned income (salaries, wages, etc.) are “sourced” to the country in which they are earned.

A citizen of “Country P” working in and earning income in the U.S. is liable for U.S. income tax on that income alone.  If a tax treaty between “Country P” and the U.S. is silent on this issue (doesn’t address “sourcing” – not normally the case in U.S. tax treaties), then the income earned by a citizen of “Country P” is not liable for U.S. income tax, but may be liable to “Country P’s” income tax, depending on “Country P’s” tax laws.

WHAT IS TAXABLE INCOME?

For U.S. taxpayers (outside of those in the third category listed above), all income “worldwide” is taxable income.   That’s an easy answer, with complex considerations attached.  Again, international tax treaties come into play for some taxpayers.

That “sourcing” thing for a U.S. taxpayer can make it appear as though more than one country can tax that taxpayer’s income.  Here, the tax treaties provide for tax credits (foreign tax credit) that the U.S. taxpayer can apply to his/her taxes, thus avoiding dual-taxation.  This does not negate the requirement to file income tax returns in both locales – it only provides for protection against dual-taxation.

If a U.S. taxpayer works in and earns income in “Country F,” that income may be sourced to “Country F” and the U.S. taxpayer taxed on that income by “Country F.”  When filing his/her U.S. tax return, the U.S. taxpayer would include that income in computing his/her income tax and take a foreign tax credit for those taxes paid to “Country F” – the amount of credit not exceeding the amount of tax paid to “Country F.”

WHY IS MY HEAD SPINNING?

I know mine is.  Those two questions have a whole lot of depth to their answers that we haven’t touched.  Just the thought of the permutations in tax law addressing the two issues is enough to start the room spinning!

There will be a follow-on article (or two) with a few more questions in the upcoming weeks.  I did say that tax information could take as long.  Until then, I’ll take a short breather and do something easy like sharpening my pencil.

Reader Interactions

Comments

  1. If you are just now recovering from “chronic maladies” as you described, Paul, and you’re already talking about permutations in tax laws this early up there in Pasuquin, I’m not surprised that your head is spinning. LOL It’s good to see you back here, Paul. As for me, I’ve already filed both U.S. and Virginia tax returns online the weekend before last. Got my VA refund electronically into my bank account in exactly 6 days! The U.S. is another story. I have to pay 🙁 But before Uncle Sam gets his cut, I’m taking my wife on a 12-night cruise of Southern Caribbean out of Baltimore beginning on, appropriately enough, February 14th! We’ll be thinking about you, Paul! 🙂

    • Hi Ricardo – Thanks for the welcome! The head is spinning a lot slower these days, but spinning none the less!

      Quite romantic – a 12-night cruise beginning on Valentine’s Day. Cruises seem to be the “new Las Vegas” for a lot of Balikbayans. You should really enjoy it – just the change in weather alone would be worth it!

  2. I am a US citizen residing here in the Philippines and drawing ss from the US . I did earn a little money from a US based source in late 2010 though the actual “check in the mail” has not yet arrived , nor has a w – 2 .

    I am curious as to whether i could file on – line from here in the Philippines or whether i would need to possibly download and print out a 1040 and submit that way . For that matter , does the US Embassy in Manila provide forms , assistance ?

    Thanks

    • I used TaxAct online, not the kit you buy from stores. The U.S. return is free; the state (Virginia) costs $14.95. I’m sure you can file online, but Paul Keating is the expert on this.

      • Thanks, Ricardo – good answer!

        btw, you do realize that all of those IRS auditors are just sitting around the office prior to Superbowl Sunday with nothing to do, looking for returns to audit so that they look busy.

        😆

      • Ricardo

        Thanks for the info. Hope you and your asawa have a wonderful cruise and don’t worry about paying Uncle Sam until April 15th. Take care my friend and be safe.

        • Randy, my asawa is very much looking forward to this cruise, as it is a make-up cruise for the one we took in December 2010. We had to cut that one short after only 4 days at sea (out of 14) because of an emergency. We were in Haitian waters heading to Samana, Dominican Republic, when we got the news. Got off the ship at Samana, then took a 3-hour cab ride inland to Sto. Domingo where we caught a flight back to WDC. For this upcoming make-up cruise, Celebrity pretty much took care of the cost. The cab ride inland to Sto. Domingo was interesting. The climate and landscape reminded me so much of the Philippines – on the side of the road, they had lechon in portions for sale or a whole pig in a bamboo pole. Strange though that on 24th of December as we drove past towns, I noticed that, for a country that is 95% Roman Catholic, the houses did not have Christmas decorations like you see in the Philippines. Thanks for the good wishes

    • Hi Alan – Ricardo is correct. I usually recommend http://www.TaxACT.com for online tax return preparation and e-filing to those who do not have need of a full service preparer. (I employ the preparer edition of TaxACT as one of my means for preparing/filing tax returns, and have yet to have it fail on me!)

      As Ricardo said, the service is free for federal income tax filing and a state return would cost $14.95.

      It is available via the internet here in the Philippines – unlike some websites that block access to users overseas. So, when your tax documents arrive, you can go to the website and file yourself right away. They will electronically file your return and allow you to print a copy of your return for your records.

      The US Embassy in Manila does not have any services available on a continuous basis from the Internal Revenue Service. At times, an IRS agent or two will visit and hold an “outreach” for a few days, but nothing is permanent. You will be directed to the IRS’s 1-800 number for tax information.

      • Thanks Paul for that info.. I did take a look at the Manila Embassy site and their IRS link but better to have someones direct experience . 🙂

      • Paul

        Welcome back. Missed your columns. Hope you are feeling better. Thanks so much for the good info. Take care and be safe!

  3. Dear sirs,
    They can be of assistance The IRS toll free Number and website, I will try and see if i can put in some info on the same with Phone number and the Tax calendar if possible

  5. Paul,

    I have missed your words of wisdom. I am glad you are back.

    The IRS is going after tax cheats all over the world. I read an article yesterday on Yahoo Finance that the IRS is offering amnesty on interest income on Foreign Accounts. I also heard about this in annual tax update class the IRS will be looking at Foreign Income to catch tax cheaters. I couldn’t find the original article but here is a link to a similar article.

    http://www.theyeshivaworld.com/news/General+News/83612/IRS-Offers-Taxpayers-Another-Chance-To-Disclose-Foreign-Accounts.html

    • Jack and Paul;
      In 1989 a friend of mine walked out the front gate of Subic Naval Base, the day he retired from the Navy, He had built a small bar on Fender St. in Olongapo. He never applied for a visa to stay in the Philippines, he let his US Passport expire, His retirement check was deposited in a joint account with his Brother in Texas and he (the brother) took care of all interest taxes on his yearly income taxes. My friend never again filed with anyone, and lived off the grid until he died a few years ago. He was cremated and his ashes were sent to the states via FedEx, marked as soil samples, as there was no other way to remove his remains from here. So I was wondering, “Was he a tax cheat or just my hero?”
      Paul; I’m glad you’re back!

      • Thanks, Paul – sounds to me that the fellow’s picture should be in the dictionary, right next to the definition for “cheap”! Add to that book another definition for “tax cheat – see definition for ‘cheap'”!

        I wonder how his estate taxes were settled? 😯 😆

        • Paul;
          What estate;?
          His girlfriend kept the bar as it was in her name anyway, (great Mexican food BTW was there last week.), his brother got the money from the joint account. His ashes were spread along the Rio Grand in Texas. The RAO notified the Navy of his passing, and stopped the retirement check. The IRS got zip.

          • Paul and Paul,

            Your friend is a hero. This is an IRS attitude and not mine.

            I took my tax class at a local college. The class was taught by an elderly retired IRS agent. The first words out of his mouth was “The country has every right to tax you 100% on your income but by the grace of God they don’t.” It was the only original words out of his mouth as he proceeded to read from the textbook (which he did for the rest of the semester).

            The IRS is getting very aggresive. Congress is putting pressure on the agency to collect more revenue. The agency feels that most taxpayers are many cheaters and they are putting new rules in place. One new rule being discusses is Schedule C filers will have to file 1099’s to account for all expenses on the form. It is going to be very difficult for small businesses to stay in business with all of the new rules.

    • Thanks, Jack – Yes, they definitely are looking to “offshore” accounts for hidden sources of tax revenue. They are having difficulty with some countries in obtaining info, but not the Philippines. So a word to the wise here in the islands would be to be (or start to be) honest with the IRS. One never knows what they know about you.

  6. Hi Paul: Good to see you back up on your carabao, and getting your eight cylinders fired , hope they are the in-line (straight eight) finest gas guzzler ever made.

  7. Anyone,

    I think I’ve received all the annual tax documents (1099s, W2s, etc). As I prepare to file my tax return I am wondering how I will receive all the “hard copy” documents when living in the Philippines. Is there a way to receive them electronically? Do you guys get them in the mail in the Philippines? I’ve always assumed I’d be lucky to receive them on time, if at all.

    Jon

    • Hi Jon – Most of my clients receive their tax information electronically, either direct or from a relative who agrees to receive and electronically forward the info.

      Forms 1099 usually come from entities who provide a means of electronically receiving those forms. Examples are military pay, retirement and IRS funds, etc.

      To obtain W-2s electronically, one either has to set up an arrangement with the employer to provide on electronically or have it mailed to an address of record (perhaps that relative).

      The only source of problem is usually the Social Security Administration which relies on paper and the US Mail for practically everything, including one’s Form SSA-1099.

      A number of “expats” here in the Philippines use a mail forwarding service for snail mail. They arrange with a mail box provider to periodically forward their mail to them via FedEx or other such courier service. (This topic is discussed in earlier articles that others have written on the Live in the Philippines web magazine.)

  8. Thank you Paul. Yes, I get all my USAA documents online and I can get other bank/investments online. I will have primarily pension income from age 55 (taking it early while it still exists) to whenever, or if ever, social security payments come along. There is a good chance I’ll teach online for a community college or university, and that income may or may not be enough to live on, but I’m sure going to ask about electronic W2 delivery. Thanks for directing me to the articles on mail forwarding. I had not thought of that option.

  9. hello. i have a green card and i work here in the US and i pay alot of taxes because i work a lot of overtime. but my concern is im going back to the philippines this october so i cant file my taxes here in the states. is there any way that i cant file my tax and file my tax refund eventhough im going back in the philippines? because im gonna stay there for a year of for good.

    • Hi Angelito – You can file your income tax return prior to leaving the USA and have any refund direct deposited into your bank account. If you can’t file before leaving, then you can still file from the Philippines, as MindanaoBob said.

      Filing from the Philippines would be best accomplished via the e-File program offered by the Internal Revenue Service (IRS) or via one of a number of tax preparation programs available via the internet. These are free.

      There are tax preparers in the Philippines as well, who offer their services for fees. On a personal note, I do offer such tax preparation services. If you wish to further discuss your situation with me, you may contact me via my web site http://www.k-c-limited.com .

    • Basic documents needed for tax form preparation are:
      – Form W-2 received from your employer reporting wages & withholdings.
      – Forms 1099 (if any) received from banks, investment firms, etc., reporting interest, dividends, etc.

      There may be other documents, dependnig on the complexity of your personal tax situation.

      Your tax return will be on Form 1040, Form 1040A or Form 1040EZ, depending on how complex your tax situation is. There may possibly be other forms and/or schedules that need to be attached to the return, again depending on the complexity of your tax situation.

  11. where can i get those documents? im sorry its my first time to have a job and to pay taxes

    • Hi Angelito – Your employer is required to provide you with the Form W-2. It may be a little hassle for you if you are moving to the Philippines in October 2012 – employers usually providee the W-2s in January and February. You’ll have to provide your employer with a valid forwarding address. If your employer can provide the W-2 in an electronic format, he could email it to you.

      The federal tax forms are available on the IRS’s web site at: http://www.irs.gov/Forms-&-Pubs .
      You may also be liable for State income taxes, depending the state in which you lived. You can usually “Google” a state’s tax agency and its forms.

  12. can i ask something again. im going back to the US this april and stay for a month or 2. can i file something to prolong my stay in the philippines because of my studies. im a green card holder. thank you

    • Hi Angelito – I’m sorry but I do not know very much at all about immigration/ visa/ green card issues. I will forward your question to MindanaoBob – he may be able to help us out with this.

    • When you say you are a green card holder, Angelito, do you mean a green card in the USA? I am confused, because you say you want to prolong your stay in the Philippines for your studies, but there is no such thing as a green card in the Philippines. Please clarify and I will help you if I am able to.

  13. im sorry. im a green card holder in the US. im going back in the US to have my vacation for 1 month. while im there can i file something that when i go back in the Philippines i can stay for 2years without may greencard being expired? thank you sir

  14. Great article. Thanks for the info, you made it easy to understand. I mostly use PDFfiller to fill out my tax form. This site also has some tutorials on how to fill it out and a tons of fillable tax forms that you might find useful. Here is a link to the blank IRS form 1040 that I was able to fill out http://goo.gl/5b34MW.

    • Thanks, Paul. Yes, PDFfiller has just about the largest collection of tax forms available for download that are in pdf format and can be completed by filling in information onto the correct lines of the form. The website’s url is part of my “tax library,” though it’s a little rare for my other tax software not to have the form that I need.

      As a CPA, an income tax return preparer, and an IRS authorized e-filer who is required to file all of his clients’ current year income tax returns electronically, my generating paper returns is limited to amended returns and returns that are for years other than the current one. Still, on occasion, PDFfiller does come in handy.

      Thanks, again, for sharing the link in your comment.