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Hi, I have a friend working on a work permit in Costa Rica, being paid from an organization in San Jose. She has just been told by the parent organization in the US that she needs to pay taxes in the US. I recall somewhere on this forum somebody mentioning a tax free allowance (she is earning around $20,000) so does it come under the allowance?. She recives no payments directly from the parent organization in the US.
Your friend should probably seek an accountant in CR that is familiar w/US tax laws and can clarify if there are limits on earnings since she only made $20K. There are some recommended on this site. As far as origin of income, I was told that it didn’t matter where my salary came from, the US tax laws want to make sure that any US Citizen that earns income, in or outside of the US, must declare it in their annual tax returns.
I believe that the annual exclusion (corrected from exemption) (about $83,000 per annum per person) is ONLY if you meet either a bona fide residence test or a physical presence test.
You might want to see [ http://www.wwwebtax.com/income/foreign_earnings.htm ] which says:
“Foreign Earnings Exclusion – Bona fide Residence Test
The bona fide residence test can be used by U.S. citizens and U.S. resident aliens who are citizens or nationals of a country with which the U.S. has an income tax treaty. You must be a bona fide resident of a foreign country or countries for an uninterrupted period that includes one full tax year. The characteristics usually qualifying you as a bona fide resident include establishing a home and settling in that country with some degree of permanence.
Foreign Earnings Exclusion – Physical Presence Test
The physical presence test can be used by any U.S. citizen or resident alien. You must be physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. The 12-month period can begin with any day in the tax year.
Generally, your tax home is the general area of your main place of business or post of duty, regardless of where you maintain your family home. If you do not have a regular or main place of business because of the nature of your work, then your tax home may be the place where you regularly live. You are not considered to have a tax home in a foreign country for any period for which your household is in the U.S. However, if you are temporarily present in the U.S., it does not necessarily mean that your household is in the U.S. during that time.
You qualify for the foreign earnings exclusion only if your tax home is in a foreign country throughout your period of residence or your 330 days of physical presence. “
Scott Oliver – Founder
WeLoveCostaRica.comScott you are a rock star. She would qualify for the presence test and doesn’t have a home in the US. Thanks!
Besides what Scott said about being a full time resident some of the US states also consider you a resident unless proven otherwise. They do not necessarily follow the federal tax rules and you may be libel for taxes in your state of US residence. Like the US government you are considered a citizen of that state until you are a proven citizen somewhere else. IF you still are a US citizen then you must also be a resident of one of the states. . . Since every state has different tax laws (some do not have income tax) you need to look into that as well as federal taxes.
I’ll second Scott on what he said, but want to emphasize that it is an “exclusion”, not an “exemption”. In order to exclude foreign earned income, you must file at minimum the 1040 and 2555 forms. If your friend has been doing his/her own taxes, then the exclusion process shouldn’t be that difficult to learn especially with only $20,000 income. They would need to read publication 54 from the IRS. If they have always had someone else do their taxes, then any US tax accountant in Costa Rica should be familiar with the foreign earned income exclusion. There are several of them that advertise in the newspapers. Recently, there was an article in AMCostaRica about this, stating the reasons to file and why not doing so would be foolish.
Jon
Thanks for clarifying this Jon, I know that I was told to report my earnings and if they were under the set limits (back then) then, I didn’t have to worry about having to pay taxes based on those amounts. I thought things had changed since 2000, but I guess Uncle Sam still wants to make sure they keep an eye on ALL the earnings each and every citizen makes…Well, they closely watch some more than others since God knows everything the large corps get away with writing off as long as they work within this particular ‘system.’
Your welcome. When you mention you were “told to report my earnings and if they were under the set limits (back then) then, I didn’t have to worry about having to pay taxes based on those amounts”, it sounds like you are talking about the minimum amounts for filing. These amounts still exist and for 2006, ranged from $3,300 to $18,900 depending on your age and filing status. They can be found in chapter 1 of pub 54. I don’t know the history of these amounts over the years because I have always filed so I don’t know if anything has changed.
However, some people believe that the $80,000 (and change) exclusion amount is the threshold for determining whether they need to file or not. This is not the case.
BTW, the foreign earned income exclusion was nearly eliminated a couple of years ago. It narrowly survived the vote. There was however a significant change in that the amount that is earned in excess of the exclusion is now taxed in the same tax bracket as what it would have been in without taking the exclusion. This had devastating effects on some people, especially married couples with dual incomes, one foreign and one not. I know of one person that says his wife is basically working for nothing now because of that change. In other words, their take home pay would be the same whether she worked or not.
Jon
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