Contact Usam a US citizen residing and working in India. I hold a US passport with an OCI (Overseas Citizen of India).I was born in India.The company that I work for (an Indian company headquartered here), pays me in the local currency (INR), and pays my Indian taxes. Paying US taxes, when I am ALREADY paying my taxes to the Indian government, and that too, being taxed at the HIGHEST bracket (30%).
What does the US Tax Law state, about...
1. Paying US taxes, when I am ALREADY paying my taxes to the Indian government, and that too, being taxed at the HIGHEST bracket (30%), and
2. Paying US taxes, if I were to work in a country like the Middle East, where people receive tax-free salaries?
1. Paying US taxes, when I am ALREADY paying my taxes to the Indian government, and that too, being taxed at the HIGHEST bracket (30%), and
2. Paying US taxes, if I were to work in a country like the Middle East, where people receive tax-free salaries?
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Tax Professional Answers
John Stancil
Thanks for your question.
The United States has what is know as a worldwide tax system. What this means is that, as a U S citizen or resident you are subject to income tax on all your worldwide income, regardless of source.
Fortunately, there is tax relief to minimize the impact of double taxation. You are allowed to exclude up to $99,200 of foreign earned income from U S taxation. You would do this by completing Form 2555 as a part of your 1040 each year.
To qualify for the credit, you must have foreign earned income and meet the physical presence test or the bona fide residence test. It does not matter if you pay any foreign tax or not, your situation would be the same.
To meet the physical presence test, you must have been physically present in a foreign country for 330 days in a 12-month period. The days do not all have to be in the same calendar year. You would prorate the amount of exemption based upon the number of days in the year that you were physically present in a foreign country.
To meet the bona fide residence test, you must be a bona fide resident of the country where you reside. This is met by demonstrating that you intend to be considered a bona fide resident of the country and is evidenced by things like a local driver's license, home ownership, car registration, and other such incidences indicating residency.
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511 weeks ago
The United States has what is know as a worldwide tax system. What this means is that, as a U S citizen or resident you are subject to income tax on all your worldwide income, regardless of source.
Fortunately, there is tax relief to minimize the impact of double taxation. You are allowed to exclude up to $99,200 of foreign earned income from U S taxation. You would do this by completing Form 2555 as a part of your 1040 each year.
To qualify for the credit, you must have foreign earned income and meet the physical presence test or the bona fide residence test. It does not matter if you pay any foreign tax or not, your situation would be the same.
To meet the physical presence test, you must have been physically present in a foreign country for 330 days in a 12-month period. The days do not all have to be in the same calendar year. You would prorate the amount of exemption based upon the number of days in the year that you were physically present in a foreign country.
To meet the bona fide residence test, you must be a bona fide resident of the country where you reside. This is met by demonstrating that you intend to be considered a bona fide resident of the country and is evidenced by things like a local driver's license, home ownership, car registration, and other such incidences indicating residency.
Michael Atlas, CPA, CA
John-I think it might be appropriate to mention the other tax relieving mechanism available for Americans working overseas: foreign tax credits. This would be of particular significance for Americans working in countries that levy taxes where their earnings exceed the limit of the foreign earned income exclusion.
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510 weeks ago
John Stancil
Michael makes a very good point. The Foreign Earned Income Exclusion is best for Americans with foreign earned income who are working in a country that has a tax rate lower than the US income tax rate. If the US citizen is working in a country that has a tax rate higher than the US rate, it would be beneficial to forgo the Exclusion and take the Foreign Earned Income Credit. I would add that a tax credit is available for taxes paid on any type of foreign income. Frequently, US taxpayers may have foreign investments and received dividends. In the course of receiving the dividends, the US taxpayer is levied an income tax on the dividend by the originating country. This tax is normally available as a credit on the taxpayer's US return.
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510 weeks ago
Dan Gordon
Then there is the question of unfiled returns and FBAR filings. This person needs to file back year return back a minimum of three years, and with no statute of limitation on unfiled returns I would recommend going back 7 years, and to do it at their earliest possible convenience.
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500 weeks ago