Unfortunately for Americans living in Thailand, the United States reserves the right to tax its citizens on their worldwide incomes regardless of where they are residing at the time the money is earned. The US does, however, have tax exclusions and credits that may result in a zero American tax liability for taxpayers who have foreign income.
It is important to note that regardless of the liability, taxpayers are still required to properly report all income. In short, they still have to file a U.S tax return.
The United States is somewhat unusual in how it treats the income of its citizens residing outside of its borders because of its use of a dual system of exclusions and credits. The US system allows citizens that are living overseas to exclude income that is earned up to certain limits while it also allows for foreign taxes to be credited toward their US tax liability if certain requirements are met. Of importance is that any tax on income that is excluded may not be used as a tax credit.
For 2013, the Foreign Earned Income Exclusion (FEIE) is 97,600 USD. To qualify for the exclusion, the filer must meet one of two requirements. First, they must have worked out of the country for 330 days for any 12 month period. The 330 days may be split among two calendar years – for instance, 200 days in the last part of one year and then 130 days in the first part of the next year. Or, alternatively, the filer must be a Bona fide resident of another country.
“Bona fide resident” is poorly defined. It is considered to be a "fact and circumstances" test because the IRS will study the facts and circumstances of a person’s residency. The IRS will review the reasons for claiming the provision such as where a person’s work, family, and main home are located to make a determination of residency. While the test may seem to be arbitrary, in many cases the taxpayer will gain a level of flexibility in travel if they choose to use this test over the more rigid fixed period test.
For income types that are not eligible for the FEIE exclusion or exceed the FEIE’s limits, US tax payers with foreign income sources are able to utilize the Foreign Tax Credit (FTC) to negate the effects of double taxation. The FTC allows eligible foreign taxes to be used as either a deduction from income or they can be used as a credit against US tax liability. It is important to note that when used as a credit, the FTC can only be used up to the amount of US tax liability for the same year. The credit is not refundable. However, a person subject to a limitation on the credit is able to utilize the credit by carrying it back one year then carrying it forward for 10 years. In order to claim a refund on the 1 year carry back, the individual needs to file an Amended Return using IRS Form 1040X.
For foreign taxes to qualify for the credit they must meet four tests:
- A. The tax must be imposed upon the tax payer
- B. The tax must have been paid or the tax must have been accrued
- C. The tax must be the legal and actual foreign tax liability
- D. The tax must be an income tax (or a tax in lieu of an income tax)
- E. The tax must arise from income that is subject to taxation in the foreign country.
There are also type of taxes that are excluded from “Foreign Taxes for Which You Cannot Take a Credit.” Those taxes are:
Taxes on excluded income
Taxes for which you can only take an itemised deduction
Taxes on foreign mineral income
Taxes from international boycott operations
A portion of taxes on combined foreign oil and gas income
Taxes of a US person controlling foreign corporations and partnerships who fails to file required information returns
It is important to note that if you are living overseas you are not eligible for the Earned Income Credit; however, if you have children, it may be possible to generate a refund using the Additional Child Tax Credit. Thus it may be possible to get a refund check from the United States with no income withheld there.
One of the most important facts about the taxation of US expats living overseas is that any income earned in the United States is taxable first in the United States. So, if you have any interest, capital gains or retirement withdrawals, they are first taxable in the United States and then in Thailand.
One bit of tax policy that is still under review is the Obamacare health insurance mandate. The law is supposed to exempt U.S. citizens from the insurance mandate if they are living overseas but, as of yet, the rules defining living overseas have not been released. The only IRS definition is for the FEIC where you have to be out of the country for 330 days or a Bonafide resident. There is every reason to believe the rules should closely follow the 330 day rule but it would be best to check back for updates on the law.
The most important thing to realise, however, is the simple fact that U.S. citizens are required to file tax returns regardless of where they live in the world.
When it comes to taxation the devil is in the details and the above article is only meant to be a general guide to some of the primary issues. The taxation of US expatriates is very complex and it is recommended that you contact a qualified tax professional if you have any specific questions.