this post was submitted on 07 Nov 2024

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351

YSK that if Americans live outside of the US for more than 330 days a year, they don't have to pay taxes on $125,000 of their income that year (sh.itjust.works)

submitted 6 days ago* (last edited 6 days ago) by Varyk@sh.itjust.works to c/youshouldknow@lemmy.world

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why: so the government won't be able to use your money for whatever the fuck they're planning for the next 4 years.

as a traveler, none of my money has been funding Israel, for example.

one-step method: you basically fill out one extra tax form called FEIE while you're doing your taxes, write down the dates you were outside of the country, and then since you aren't in the country and are not receiving any services from the US, you don't have to pay income tax up to a certain amount (it's a little over 125k this year).

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[–] tiredofsametab@fedia.io 25 points 6 days ago (2 children)

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.

[–] Varyk@sh.itjust.works 8 points 6 days ago (1 children)

"However, since you don't pay taxes on that money, it can impact which kinds of retirement accounts you can use, if any"

The math works out in your favor.

wouldn't you rather have that money earning interest now rather than receiving a few hundred later on when you probably don't need it as much?

"Also, trying to invest as a US citizen outside the US can suck because of all the agreements with US banks."

it can suck, and it can also be awesome.

I see you're speaking specifically to Japanese banking standards, which I would agree are one of the more difficult countries for a US citizen to interface with.

but that's a great thing about there being about 200 countries.

Bank somewhere else if you want to.

try Hong Kong or China or Thailand or Portugal or Sweden or you know, a lot of countries.

you don't have to live in the country you bank in.

[–] tiredofsametab@fedia.io 7 points 6 days ago

Yeah, some is specific to Japan, though there will be similar hurdles anywhere the US has an agreement (and that the target country's institutions actually follow it, I suppose).

I have a couple of retirement accounts in the US that I contributed to before (I moved overseas in my early 30s) that I basically can't touch for a number of reasons right now. Just wanted to throw it out there.

[–] frank@sopuli.xyz 7 points 6 days ago (1 children)

Do you live abroad? I'm expatting in a few weeks (long planned, not in a pure panic due to Trump) and would love ask a few questions if so!

[–] tiredofsametab@fedia.io 5 points 6 days ago (2 children)

I can try to answer. I've lived in Japan for almost a decade (this is my 10th year).

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[–] nxn@biglemmowski.win 7 points 5 days ago (3 children)

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?

[–] AnxiousOtter@lemmy.world 5 points 5 days ago (1 children)

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.

[–] nxn@biglemmowski.win 6 points 5 days ago* (last edited 5 days ago) (4 children)

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.

[–] weirdboy@lemm.ee 7 points 5 days ago* (last edited 5 days ago) (2 children)

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.

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[–] Avg@lemm.ee 5 points 5 days ago

Honor system

[–] Varyk@sh.itjust.works 1 points 5 days ago (5 children)

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.

[–] nxn@biglemmowski.win 2 points 5 days ago* (last edited 5 days ago) (1 children)

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.

[–] Varyk@sh.itjust.works 2 points 5 days ago* (last edited 5 days ago) (1 children)

"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.

[–] nxn@biglemmowski.win 2 points 5 days ago* (last edited 5 days ago) (1 children)

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.

[–] Varyk@sh.itjust.works 1 points 5 days ago* (last edited 5 days ago)

"Ok, but realistically..."

The family is more susceptible than you suspect.

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, 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, an office and equipment that he has to pay real rent on, and slowly reintroduces that money back into the States, 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 consistently every year and never using the extranational or laundered money irresponsibly, never makes a regular everyday mistake on any tax forms so that the IRS performs an audit, and everything else goes right, tax evasion could work for that family.

is it worth it?

I don't think so.

"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 ut. 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.

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[–] Blaze@lemmy.cafe 13 points 6 days ago (9 children)

It might be interesting to crosspost this to !politicaldiscussion@lemmy.world

Also, I know you mean good, but this isn't relevant to probably a high number of Lemmy users who are not US citizens

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[–] frank@sopuli.xyz 9 points 6 days ago (1 children)

Yeah, it goes up faster than inflating each year, it seems. 126,400 per person or 253k for married I believe this year, which is a pretty fair bit especially considering you deduct the taxes you locally pay off the top first, afaik

[–] Varyk@sh.itjust.works 4 points 6 days ago (1 children)

"considering you deduct the taxes you locally pay off the top first"

i understood local taxation to be inclusive to the FEIE, can i see your source?

[–] frank@sopuli.xyz 6 points 6 days ago (1 children)

https://www.investopedia.com/terms/f/foreign-tax-credit.asp

https://www.irs.gov/pub/irs-pdf/f1116.pdf

I thought it was a Form 1116 thing, but I could be wrong for sure. IANAL and haven't yet done foreign taxes so who knows yet

[–] Varyk@sh.itjust.works 3 points 6 days ago* (last edited 6 days ago) (2 children)

oh i see. thanks.

yea, the 1116 is for people paying formal taxes to the foreign government directly, usually because you're living there as a permanent resident or operating a business full-time and significantly, have established your permanent tax home in that other country.

using the 1116, you don't pay all of the taxes twice, although you still pay some of them twice because the US wants that cash.

the FEIE, form 2555, means that your tax is still in the US and only requires that you're not in the US for 330 days out of the year to exempt income tax on up to 125k of income earned while outside of the country.

the feie does have a residency test as well, but the physical presence qualification of 330 days each year is simpler and requires much less trouble to set up initially (permanent residency, switching tax homes, work permits and all that) to qualify for, so I only deal with the physical presence test.

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