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The exemption only applies to earned income, meaning you cannot apply any of that $125k to stuff like investment returns, dividends, royalties, or rents collected.
That's right.
The Foreign Earned Income Exclusion specifically applies to earned income, and does not apply to unearned income.
Nobody:
Literally no one:
Tax accountants:
Tax accountants:
If you were employed by a foreign company that has no presence in the US how exactly would the IRS know whether you've earning more than $125k?
Because money keeps getting deposited in your bank account every two weeks and you're not reporting any income.
Banks hand all of that information over.
Maybe I'm not understanding what you mean, but if someone works and lives abroad for 330 days of the year they'll likely have a bank account established within that country so that they don't have to deal with all of their daily financial activities being international transactions.
There is a system whereby foreign banks are obligated to report accounts held by Americans to the US for "anti terrorism" purposes.
And as a us citizen you are also obligated to report all of your foreign accounts in a FBAR filing each year.
There is a system whereby foreign banks are obligated to report accounts held by Americans to the US for “anti terrorism” purposes.
Could you give me a name, or at least some link to a government website that describes the system you're talking about?
https://www.fatf-gafi.org/en/countries/global-network.html
I am sure there are better sources than this, but I am going by what I was told by the bank when I opened an account here in Japan. And maybe it does not only apply to Americans, but I was told at the bank that I had to fill out additional anti-terror related paperwork with US details specifically because of US citizenship.
Perhaps I'm the one who misread. I took OP's comment as saying working for a foreign company with no presence in the US while living in the US. On a second read, that might not be what they meant.
I'm with you Cheese, the vibe was "just report that you weren't here so you aren't supporting genocide."
The title quite literally says "If Americans live outside of the US for more than 330 days ..." how can you possibly think it means what you think? Especially after two reads.
Honor system
they wouldn't know initially.
you report your income, and then if the IRS suspects foul play, they would check later.
If you're making over 125k, then you'll likely have some kind of connected web/media presence that would allow them to at least circumstances confirm your position and standing within the field.
they could also check your bank balance and international holdings against the amount you said you've been making and see if it matches up.
they could also check your bank balance and international holdings against the amount you said you’ve been making and see if it matches up.
Does the IRS have authority to issue such requests to foreign banks? How would the IRS even know what foreign bank to issue these requests to?
Sorry, I have no knowledge about what information is communicated across international borders with regards to the banking world and how this gets tracked on a per-individual basis.
"Does the IRS have authority to issue such requests to foreign banks?"
issue requests, sure.
and companies with an international presence or countries with a working relationship with the US would be happy to respond to the IRS at least in rough confirmation.
4 out of 5 people in the US would never have to worry about making more than $125 k a year, but if you're reporting $60,000 annual income and then buying a house every year, the IRS would start looking into it.
irs interest depends on how large the income disparity appears to be before they start officially investigating and probing for more certain corroboration and confirmations.
it's just like your taxes in the US.
If you have a yard sale and don't report it, the IRS isn't going to pay attention to the extra $200 you didn't report that year unless you happened to sell a personal boat later that year for 200k.
it's all about what flags the interest of the IRS.
"How would the IRS even know what foreign bank to issue these requests to?"
If you have over 10,000 usd abroad in total, all foreign holdings included, you are required to file what is called an fbar that year, which really is I think five fields on one form, you fill out the name of the Bank, address, the country and the amount.
that's so the IRS can keep tabs on. approximately how much you're making versus how much you say you're making if you're keeping your savings overseas.
"...gets tracked on a per-individual basis."
No worries, these are all great questions and I'm treating them like a refresher course.
The IRS is largely dependent on self-reporting whether us citizens or residents are inside or outside of the country, which largely works because maintaining a believable fiction about your income is not easy to consistently pull off and consequences for self-reporting income incorrectly are so much higher than the amount of taxes most people are going to pay that it makes sense to self-report as accurately as you can.
Ok, but realistically, the people who would actually attempt tax evasion here wouldn't be susceptible to any of the above.
Let's assume a scenario where you have a dual citizen of the US and a South American country that has less than stellar relations with the US government.
Let's say they obtained their US citizenship by being born in the country during a temporary period of time that the parents resided there. The family decided to move back after a year or two, another 40 years passed, and the kid has grown to be a successful plastic surgeon who runs a self owned clinic and earns $200k income annually. Being aware of their dual citizenship they keep their wealth invested in entities with no US presence and never self-report anything to the IRS.
This is where I am not seeing any way for the IRS to enforce or do anything about this type of tax evasion.
"Ok, but realistically..."
The family is more susceptible than you suspect, as well as being under constant and significant duress.
I'm not sure why they would stay dual citizens if their entire purpose is to live in a different country permanently, but:
If, in your situation, the family kept all their money abroad, never reports, uses or transfers a significant amount of that money, waits 40 years, filling falsified us taxes and legitimate South African taxes the entire time, their son also never uses or transfers that money until he begins to launder it through a personal corporation that he has to keep consistent business records for, maintaining fake employees and fake patients false receipts and false invoices, a falsified or real office and equipment that either way he has to pay real rent on, and slowly reintroduces that money back into his "legitimate" accounts, then after half a century and a never-ending amount of effort at maintaining a comprehensive deception while they all continue to fill out their falsified US tax forms and legitimate South African tax forms consistently every year and never using the extranational or laundered money irresponsibly, never make a regular everyday mistake on any tax forms so that the IRS or South Africa performs an audit, and everything else goes right, apparently never live in the US but continue to file US taxes for their entire lives, tax evasion could work for that family and they could "get away with it".
is it worth it?
I don't think so. I can't see any upside to that sort of tax evasion.
"Let's assume... let's say...."
Yes, hypothetical and real situations occur because tax evasion seems much easier than it is, the risk seems lower than it is, the effort seems lower than it is, and the reward seems greater than it usually is.
that's why so many people attempt it. that's why you don't report selling a desk on Craigslist.
nobody's saying that self-reporting is a perfect, foolproof taxation model. it's a model that does what it's supposed to. it allows the IRS to function as efficiently and effectively as it currently knows how to.
The federal government is well aware whenever a person enters the country and quite possibly for exiting.
yes, customs and border protection keeps records of legal entries and exits to and from the US.
why?
Everyone is coming up with elaborate schemes the government can use to determine if someone really was out of the country when they claimed to be.
oh, haha, got it. goofballs.
But if you earn over the threshold, you're expected to pay taxes to the US government, no matter where you're actually living or working, no matter if you're also paying taxes wherever you currently are. The US is the only country in the world to assert that it has the right to tax its citizens remotely in this manner. It's not normal.
The US has double taxation treaties with over 60 countries. When you pay taxes somewhere else, you deduct all of that tax from your US taxes above the $125k.
Though I definitely agree the IRS shouldn't need these treaties, because if you're not living there, why should you even need to file?
Because US law says so lol
Y'all just now learning that laws are written for the benefit of the ruling regime, not the peasants.
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I always find it mad as hell that Americans have to pay tax in the US even if they are living and earning elsewhere
Especially given generally Americans are pretty allergic to reasonable taxation
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However, since you don't pay taxes on that money, it can impact which kinds of retirement accounts you can use based in the US, if any. Also, trying to invest as a US citizen outside the US can suck because of all the agreements with US banks. Many Japanese platforms, for instance, won't touch me because of US reporting requirements. I also can't functionally use the tax-advantaged retirement accounts here because many amount to what are called PFICs by the IRS which requires paperwork and are taxed punitively more than wiping out any advantage the retirement accounts would have.
You're also going to have a rough time getting a US investment account if you don't have one already. Then you have to figure out how to have a US phone number because two-factor auth basically requires it for any bank or anything that will touch you.
There are other "fun" things about being a US citizen living abroad.
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this post was submitted on 07 Nov 2024
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