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Tax Information With a Mother's Touch

Published by Eva Rosenberg, EA, aka TaxMama
Volume 3, Issue 95 January 12, 2001

Tax-Free Foreign Income

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From London, England

Dear TaxMama:

I am an American living in London, England. I am a dependent of a military officer. I worked from my home office for the entirety of 2000 as an employee of a U.S. company. They pay me as a vendor/contractor, but I get all the bonuses and benefits. They did this so I could figure out where/how to pay taxes.

I have now been appointed to a director position of the London operation and will move to an official office space. I make less than $74,000. I have not paid any tax to either the UK or the US.

I work strictly in the UK and do not have travel/work days in the US and have lived here for over 2 years. I deposit my check each month (in U.S. dollars) with a military bank in the UK.

My company said they would start paying me via direct deposit to my U.S.-based bank, but that they would have to start deducting payroll taxes. Does this mean I would be paying U.S. taxes unnecessarily when I should be paying UK taxes? Please help. Please just tell me I don't have to pay any taxes! :-)

And is it true that if you make over $74,000 you have to pay taxes in the U.S. on everything about that $74,000? And is that per household or per person filing?

What should I do about the money I made in 2000 but did not pay taxes on?

Paulette

Dear Paulette,

Oops ... you should have been filing tax returns all along.

To get the benefit of the $76,000 foreign income exclusion, you have to report your income on a timely-filed return, using form 2555 - otherwise, you lose that right. See: http://ftp.fedworld.gov/pub/irs-pdf/f2555.pdf (I happen to have the information about a regulation that lets you get this benefit on a late-filed return. This is one of the few, precious pieces of information that TaxMama will not divulge for free.)

In fact, since you were paid as in independent contractor, you should have been filing the returns, deducting your business expenses (office in home, etc.) and paying self- employment tax on the profits (Social Security)

So, you will owe a bundle!

Sit down with a good tax pro to catch up on those years as soon as you can.

As for your new position ...Congratulations!

Give the company a Form W-4, and write EXEMPT in box 7 See: http://ftp.fedworld.gov/pub/irs-fill/fw4_01.pdf

They will still deduct your Social Security and Medicare, but no Federal Income taxes.

And your hope that you just won't have to pay any taxes ... keep dreaming ... sigh. That's my favorite dream, too.

Best wishes
Eva Rosenberg
TaxMama

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