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however when you get to send all your profit to Uncle Sam...

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I recently got into a heated discussion with my mom about taxes, she works for a CPA.

When I started negotiating a service contract overseas, she asked me about it, and she stated that about a third of it must be set aside for taxes. My immediate response was "bullshit". In this case it will be over $25,000 per year in taxes. Why should I pay that much money to the IRS when I spend most of my time out of the country? I don't have my own company and I work out of my cell phone.
 

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Posted by Paul Mayer (Member # 355) on 06-03-2008, 12:13 PM:
 
My next contractor job may be in Doha, Qatar so I've been reading up on this stuff.

For US citizens working overseas in 2007, one can earn up to $85,700 and pay no US federal income tax. But you'll probably be paying taxes to the country where you are living.

To qualify for the US income tax exemption, you have to establish a foreign residence and show that you actually live there. Generally to have a foreign residence (a "tax home" under IRS rules) you have to show that you've had said residence for at least one complete tax year (1 Jan to 31 Dec) and that you've physically been there a minimum of 330 days within that year.

If you don't qualify or only partially qualify for the overseas income exemption, you pay tax like you normally would. The full tax benefits of living and working overseas begin when you've been established overseas for a full tax year.

See IRS Publication 54 - Tax Guide for U.S. Citizens and Resident Aliens Living Abroad for lots of fun reading.
 

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Posted by Richard Hamilton (Member # 321) on 06-03-2008, 12:53 PM:
 
Paul, I got a headache just looking at the link you posted, then when I clicked on it, my head almost exploded!!! Just a quick question...If I charge them less than $85,700, does that mean I won't have to pay taxes? I've lived there off and on for a few years
 

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Posted by Mike Blakesley (Member # 26) on 06-03-2008, 01:35 PM:
 

quote: Richard Hamilton

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My immediate response was "bullshit".

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Wow, you said "bullshit" to your Mom?
 

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Posted by Paul Mayer (Member # 355) on 06-03-2008, 03:04 PM:
 
Richard, you'll just have to hunker down and read through all that stuff just like the rest of us former/current/wannabe ex-pats. It's not a bad deal, a couple days reading time can set you up to not pay taxes on the first $85,700 next year.

I'm no tax guy, but I think the "off and on" part of your time in China will be the expensive part, tax-wise. Under the rules, you need to establish a home over there, and stay there. None of that "off and on" stuff. Obviously you can leave for vacations and the like (that's the 330-day rule), and there are exceptions for things like being forced out due to things like wars and civil unrest. But to fully qualify for the tax exemption you must stay out of the US for at least the first full tax year. That's my understanding anyway, from having worked and talked with lots of people that have done it. We both need to read further.

Your US citizenship (and the IRS) follows you everywhere. If you don't qualify for the tax exemption in a given year, you file and pay (or not) as usual, depending on your deductions (and as a self-employed contractor, there should be no problem finding deductions! ). If you do qualify and make less than $85,700 in a given year, you still file and probably pay no tax. If you're self-employed (and receiving 1099's and/or the Chinese equivalent) then you need to keep track of and pay your own quarterly estimated tax withholdings to the IRS no matter where you live. Once the overseas exemption kicks in you'll get all or most of that back anyway.

As for Chinese taxes, I have absolutely no clue. But if you're not paying foreign taxes by claiming you are not a resident, the IRS uses that to establish your continued US residence status and deny the overseas income tax exemption.
 

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Posted by Tim Reed (Member # 137) on 06-03-2008, 04:33 PM:
 

quote: Richard Hamilton

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My immediate response was "bullshit".

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