foreign earned income

[dakota99]

What is the name of your state?What is the name of your state? TN

i was in the military from 1996 until 2000. i was also married for most of that time but now divorced, the divorse cost me all the money i had saved and put me into debt.

a few days ago i got a call from a friend who i was in the military with years ago and he said he is working for a security company providing security individuals and organization in Iraq and he is looking to hire more people with experience like mine. this job is risky but it comes with a huge paycheck. i'm not sure that i want the job but comes with a tax question.

he is telling me about it and he said one of the biggest advantages of the job is that you don't pay INCOME TAXES on the money you earn. all of your salary can be deposited into a secure foreign bank account that has all the advantages of a US domestic bank account, i.e. bill pay service and retirement investing, etc.,. he said that there was some exemption regarding income taxes and i said how can that be, if you don't earn the money in the US and it doesn't return to the US, then how can it be "reportable" or taxable? he didn't know.

so..... if money is earned outside of the US and stays there, how can it be reportable or taxable?

[Snipes5]

If you are a US Citizen or Permanent Resident, you are taxed on WORLDWIDE income. All your income is reportable.

However, you can exempt up to $80,000 using a special form (2555) that is included with your tax return.

You can't just neglect to report it, you have to put it on the return and then subtract it out, using the form.

Snipes

[BelizeBreeze]

However, you can exempt up to $80,000 using a special form (2555) that is included with your tax return.

It's gone UP? Damn, I need to go back to Vienna

[dakota99]

Snipes said
If you are a US Citizen or Permanent Resident, you are taxed on WORLDWIDE income. All your income is reportable.
However, you can exempt up to $80,000 using a special form (2555) that is included with your tax return.
You can't just neglect to report it, you have to put it on the return and then subtract it out, using the form.
Snipes

obviously i know nothing about taxes and i am not trying to be a brick here...but... i still don't get it. i do not understand how "Uncle Sam" can tax US citizens outside of the USA regardless of taxes they might pay in any other country. how can money earned by US citizens while they are oustside of the USA be reportable or taxable by the USA? how is it that the US government can have __the reach__ to tax Americans living and working outside of the USA (regardless of an exemption)?
how, how, how? this makes no sense to me. have the courts decide on this?

[divgradcurl]

obviously i know nothing about taxes and i am not trying to be a brick here...but... i still don't get it. i do not understand how "Uncle Sam" can tax US citizens outside of the USA regardless of taxes they might pay in any other country. how can money earned by US citizens while they are oustside of the USA be reportable or taxable by the USA? how is it that the US government can have __the reach__ to tax Americans living and working outside of the USA (regardless of an exemption)?

Because as long as you remain a U.S. citizen, no matter where you live or work, you can still vote, and still take advantage or the privileges of citizenship. One of those privileges is taxatation. If you are working overseas, and no longer wish to take advantage of being a U.S. citizen, then you can always emigrate. The $80k exclusion is there to offset the fact that you are most likely paying local taxes in whatever country you are in.

If you make more than $80k, then I guess you are screwed because you potentially have to pay taxes twice, but hey, people like taxing the rich!

[dakota99]

the most recent poster said
"....the privileges of citizenship. One of those privileges is taxatation. "

first of all, paying taxes is NOT A PRIVILEGE!!!!!!!!!! WHERE IN THE HELL DID YOU GET THE IDEA THAT PAYING TAXES IS A PRIVILEGE? who are you? an IRS PR rep.?

secondly, since no one in this forum wants to actually answer the question i will stop asking it. thanks to all.

[Snipes5]

Which question did we not answer? The one about "how this could be taxable"?

It's taxable because according to the tax code, ALL income earned by US Citizens is taxable unless specifically excluded, and "ordinary wages" are not excluded, regardless of where they are earned.

If you wish to exclude some of your income earned outside the US, you have to include the proper forms with your tax return, there is no automatic exclusion for same.

This site is to inform you about tax law, not debate whether or not we think the law is fair.

Snipes

[divgradcurl]

first of all, paying taxes is NOT A PRIVILEGE!!!!!!!!!!

Dude, chill -- SARCASM!

But the rest of my post -- and Snipes5's posts -- give you the answer to your questions.

And no, I don't work for the IRS...

[TLWE]

[url]http://www.irs.gov/taxtopics/tc853.html[/url]

[url]http://www.irs.gov/taxtopics/tc854.html[/url]

[dakota99]

...well, let me try again with my limited communication skills.

i do not understand this sitution...i am not trying to be difficult with this. i just want to understand. and i am not saying that i think the situation is unfair or that i object to it either. i just want the facts.

i do not understand how our government with its Internal revenue Code can tax its citizens beyond its borders. it makes no sense at all. how can the Code ___reach___ beyond the border to collect taxes? how can the government tax citizens living and working abroad? have the courts decided on this issue, upon what basis?

i'm sorry. i can't help it.

[Snipes5]

"Have the courts decided on the issue?"

That, I don't know, but you could probably look it up. I'm sure if there had been some sort change in this particular regulation, those of us who study the tax code would have heard it by now.

The US can reach beyond its borders to tax its citizens because those citizens still retain the privileges of citizenship regardless of where they happen to live. If you think our taxes are bad, check out the tax rates in the countries to our north and south.

If you think it's that incomprehensible, why don't you go to work in a foreign country, then come back and "protest" having to pay US Taxes on your foreign income. Then when the IRS takes an interest in you personally, you can attempt to drag your case all the way to tax court.

I hope in that case you have a lot of money, because it isn't going to be cheap.

Snipes

[divgradcurl]

Show me, Snipes, where it says ALL income is taxable regardless of where it comes from.

I know, I'm not Snipes, but I'll jump in anyway:

"Except as otherwise provided in this subtitle, gross income means all income from whatever source derived..."

26 USC 61(a)

Then check out the sections following section 61 to try and find an exclusion for income earned overseas. I don't see one (except for members of the armed services serving in a combat zone); if you find one, more power to you!

[abezon]

The tax code begins from the premise that ALL income is taxable. This includes illegal income (crime money), income that would not be taxable in the country where you received it (Canadian lottery winnings), etc. Then you look for code sections that will allow you to reduce or exclude some of that income. If you can't find some specific exclusion in the tax code, the income is taxable. Common 'reductions or exclusions' include: the standard deductions & personal exemptions, itemized deductions, exclusion of disability pay & welfare payments, gifts, IRA/401(k) contributions, etc.

There is a foreign earned income exclusion, which allows you to exempt the first $80,000 of inocme earned while you resided in a foreign country, & is figured on Form 2555 or 2555-EZ.

[dakota99]

abezon...
as i said before i'm not trying to be difficult here and your explaination seems to make sense except for two things.

we could just drop the discussion now or proceed.

regardless of your comments, which seem to be a bit too presumptive and still seem to be missing something, HOW, HOW, HOW can "Uncle Sam" TAX (and require the reporting of income) BEYOND ITS BORDERS FROM CITIZENS THAT ARE LIVING OR WORKING OVERSEAS WITH THE MONEY NOT RETURNING TO THE USA?
i suppose the kernal of my question regarding taxes is, how can US law go beyond its borders?
Americans can grow, buy, sell and use marijuana in Amsterdam, no?
Americans men can marry multiple women if it is allowed in the country that they are in, no?

as i ask previously, have the courts decided on this issue?

[stephenk]

If you are not planning to return to the U.S., then dont worry about paying taxes.

The same situation arises with people who work on cruise ships. Most cruise ships are registered under foreign flags. A U.S. citizen working on the ship that never docks in the U.S. still reports the income on their 1040s when they return home. they arent taxed for the first $80k, just like you wont be taxed for the first 80K you earn.

If you are going to earn more than $80k, then you can afford to sit with a CPA who specializes in foreign income and work out a game plan.