Article on taxation called incorrect on two points

Your article “Intrusive tax form and more woes for U.S. expats” contains expensive tax misinformation.

Specifically, living on a tourist visa here does not disqualify anyone from taking advantage of the Foreign Earned Income Exclusion.

For U.S. citizens living overseas, the Foreign Earned Income Exclusion (Form 2555) allows you to exclude up to $91,500 ($183,000 married) of foreign earned income from taxation. To qualify for the exclusion, you must either (a) be outside the United States for 330 days during a 12-month period, -OR- (b) establish a bona fide residence in a foreign country. Neither the physical presence test nor the foreign residence test require legal foreign residency. The physical presence test can qualify tourists with U.S. residences, or no residence what-so-ever, so long as they stay out of the U.S. for all but a few weeks per year.

The income must be earned income, but it is foreign source so long as it is earned while you are physically present outside the United States. So even income paid by a U.S. company qualifies as foreign earned income if you telecommute from outside the United States.

The second piece of expensive misinformation is that foreign expats must still pay Social Security taxes. FICA payroll taxes (social security/medicare/etc) are owed only by self-employed individuals and individuals working for U.S. companies. Individuals working for foreign companies do not owe any FICA payroll taxes. An expat would be smart to create a foreign company and avoid self-employment status (but beware of controlled foreign corporation tax rules).

Expatriates who are married to a foreign citizen must have their spouse elect to be treated as a U.S. resident for tax purposes in order to file together and exclude $183,000. I strongly recommend avoiding doing so. As a non-resident alien without the election, your spouse owes no taxes to the United States on foreign income and assets. This means that your spouse can earn dividends, and capital gains on investments and real estate, without paying any U.S. taxes, and can earn his/her own salary greatly exceeding $91,500 without any U.S. tax consequences. Your spouse can transfer to you up to $100,000 in assets every tax year without triggering U.S. gift tax, allowing you to report up to $191,500 per year married filing separately tax free. Unearned income can be shielded from taxation by putting them in your spouse’s name (transfers of existing assets allowed up to $133,000 per year without triggering gift tax). (Note also most amounts are adjusted up every year for inflation).

Adam Selene

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