Taxes are one area that most people understandably dislike. The dreaded tax season comes each year, accompanied by confusing rules and regulations. If regulations are not followed, hefty penalties and a plethora of wasted time, energy, and resources could result.
The fact of taxes being confusing and unpleasant is perhaps even more true for individuals or entities conducting business internationally. There are many and multiple moving parts that need to be managed. These might include avoiding double taxation, taking advantage of tax deferral opportunities, timing your tax and cash needs, and more.
When startup businesses, small companies, entrepreneurs, or freelancers make the choice to conduct business internationally, it is normally out of the perceived advantage that international markets are able to provide. That said, access and progress toward larger, more diverse markets often leave these businesses with limited resources after taxation implications, which can make it difficult to succeed internationally in the first place.
Are you taxable in the US?
Whether or not you are taxable in the United States, and how much you will be taxed will depend on a number of variables with regard to your residency-status.
US Citizen and Residents
US Citizens are those individuals who were born or naturalized in the US. Naturalization simply means that the individual is a resident (green card holder) and that they meet requirements set out by Congress in the Immigration and Nationality Act (INA).
The important distinction to make is that US Citizens must always report their worldwide income to the IRS for tax purposes. On the other hand, US Residents are subject to the same tax requirements as US Citizens if they pass the substantial presence requirement.
Substantial Presence Requirement
Individuals that ‘meet’ the substantial presence requirement are automatically considered a US resident for the purpose of paying taxes. Passing this requirement is made on the basis of an individual being physically present within the country on the following conditions:
- 31 days present in the current calendar year, and…
- 183 days during a 3-year period that takes into account the current year and the 2 years immediately before the present year. These 183 days count…
- All days you were present in the current year
- ⅓ of the days you were present in the first year before the current year
- ⅙ of the days you were present in the second year before the current year
Assess If You Can Reduce Your Tax Liability
There are a number of circumstances that will allow individuals to be eligible for decreased or excluded tax liability.
Foreign Tax Credit
When an individual has accrued foreign taxes outside of the US and is subject to an income tax on the same money by the US, individuals may be able to take either a credit or itemized deduction for those tax amounts. Ultimately, the purpose of a foreign tax credit is to reduce the impact of having income taxed by both a foreign regulatory body and the US.
Overall, only income, war profits, and excess profit taxes are the items that qualify for the credit. When taken as a credit, foreign income taxes will reduce your US tax liability, which is advisable in a majority of cases.
Foreign Earned Income Exclusion
Since the US taxes citizens and residents on their worldwide income, citizens or residents living or working outside the US are entitled to a foreign earned income exclusion, which thereby reduces taxable income. In order for individuals to qualify for this exclusion, they must qualify for one of the following scenarios:
- US Citizens who are residents of a foreign country(s) for an uninterrupted period of an entire tax year (or longer)
- A US Resident who is a citizen of a country the US has a tax treaty with and has been a resident in the country for an uninterrupted period of an entire tax year (or longer)
- Any US Citizen or Resident who was physically present in a foreign country for at least 330 days during a period of 12 consecutive months
What if you are not a citizen of the US?
Nonresident Aliens in the US are generally considered to be non-resident taxpayers. As such, individuals are only required to file a nonresident tax return, which only requires individuals to report any US sources of income. This is true unless of course, an individual passes the substantial presence requirement (as previously mentioned) or the green card test.
Other than foreign tax credits, individuals are also able to avoid double taxation by two regulatory governments through tax treaties. These treaties essentially are agreements between two countries on which country should tax investment income in order to avoid the same income being taxed twice. Treaties are normally able to eliminate or reduce US tax on a few types of personal service and/or income including capital gains, dividends, pensions, interests, and more.
International Tax Services With Gamburg CPA PC
At Gamburg CPA PC, our niche CPA firm of dedicated professionals builds relationships with our clients through trust, communication, and knowledge. We work with clients ranging in size and focus from multi-million dollar high net worth individuals and businesses to small businesses and individuals with everyday tax needs.
We work with individuals in the US, and clients with international tax needs, worldwide. Contact us today to see how our firm can be of assistance to your needs.