Welcome to the official blog of Brittany Lanphier, managing partner of Lanphier LLP based in Denver, Colorado!
Any tax guidance in this blog is intended for informational purposes only and is not guidance on which Lanphier LLP intends for you to rely. All tax issues specific to your business or family are largely facts-and-circumstances based and you should consult your tax advisor (or Brittany directly) to discuss how this might relate to you.
August 1, 2012
Who else totally has Olympic fever right now? Confession: I LOVE the Summer Olympics. I have been hooked since I was 12 and watched the Atlanta Olympics non-stop for 2 straight weeks in the summer of 1996 (don’t work too hard on that math, please). Every four years, I get sucked in again, finding myself convinced that I was somehow meant to perform triple back handsprings and fly through the air on the uneven bars like those gymnasts. Alas, I never made it very far in gymnastics as a kid, because to this day I have the flexibility of a 75-year-old man.
This year, especially, I watch all the sports with new eyes – as a mom – seeing all these kids who have worked so unbelievably hard perform such amazing feats with their bodies. I admittedly get all kinds of choked up at this Proctor & Gamble commercial:
Holy-sappy-manipulative-marketing, that kills me. Speaking of kids, Brooklyn is growing way too fast, and I feel like she is going to be a teenager next week. At 15 months, she is a little holy terror – running, climbing, jumping, and ALWAYS moving. Who knows, maybe there are some back handsprings in her DNA yet. Here is a picture of the little stinker from our mountain vacation last month. She is out of control.
Earning Income Abroad
In the international spirit, today’s post will be a brief summary of how the United States taxes its citizens and residents on income earned abroad. Dennis and I both started our careers in international taxation at one of the “Big 4”. This is obviously a very complex area with thousands of rules, regulations, etc. I just wanted to touch on a broad overview for those that are interested.
The U.S (and many first-world countries, such as Great Britain) have what is called a “worldwide” or “global” taxing regime. This mean that if you are a citizen or resident of the U.S., you will be taxed in the U.S. on ALL of your income, regardless of whether it was earned in the U.S., in a bank account in the Caymans, or on a business in Malaysia. Uncle Sam wants it all. Contrast this with a country like Hong Kong which only taxes incomes earned within its borders (often referred to as a “territorial” taxing system). The rationale behind the global taxing regime is that it doesn’t provide incentives to businesses and individuals for off-shoring income that is “portable” – interest, dividends, royalties from intangible property, etc.
Almost all countries (including the U.S.) tax non-residents on any income earned within their borders or “sourced” to their country. Therefore, if you earned a buck in the U.K., the U.K. is going to want to tax it as well. Oh dear, you say! If both the U.S. and U.K. want to tax that dollar, I am going to pay tax twice on that income. Well, thankfully, the U.S. offers a credit for income taxes paid to another country for foreign-sourced income. So, if you paid 30 cents of tax on that dollar in the U.K., you would theoretically get a 30 cent credit on your U.S. taxes for those income taxes paid to a foreign government.
Typically, the credit is limited to a) the tax you actually paid in the foreign country or b) what you would have paid in taxes on that income in the U.S. Therefore, if the U.K. had a tax rate of 35% (and you paid 35 cents in tax on that dollar you earned), but the U.S. rate was only 30% (and you would have paid 30 cents on that dollar in the U.S.), your credit going to be limited to 30 cents. Conversely, if the situation were reversed, and the U.S. had the higher tax rates, you would be limited in your credit to what you actually paid in taxes to the U.K. (i.e. 30 cents).
As always this is a grossly oversimplified explanation of the Foreign Tax Credit. We used to spend literally months working on a foreign tax calculation for large multinational corporations in my Big 4 days. There is much that goes into the sourcing of the income, sourcing of deductions, types of taxes paid, etc. But this at least gives you an idea of the mechanics that are intended to prevent double-taxation of your income earned abroad.
Also, if you are actually living abroad and are either a bona-fide resident of a foreign country or physically present in that country for 330 days in a one year period, you may be eligible to exclude all or a portion of your income from U.S. tax altogether under the Foreign Earned Income Exclusion (up to $95,100 in 2012). I will delve more into that subject on a different day.
In closing, I hope everyone has a great time continuing to cheer on Team USA over the next week or so. In case you were worried that our athletes are going to get hit with a big tax bill in the UK for their participation (even though they aren’t compensated for performing in the Olympics, many are still “earning” income through their endorsements and mere presence in London), Forbes’ Tax Girl, Kelly Erb, wrote a great post about the exemption passed in the UK for the athletes competing in the Games.
Best to all!