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:
- A U.S. citizen.
- An alien with U.S. residency (i.e., an immigrant with a “green card”).
- 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.