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US taxpayers advisory: Reporting taxable income
Joe Krebs, CPA
The June 15th deadline for U.S. taxpayers living abroad to file their
Federal income tax returns is rapidly approaching. However, many American
expatriates, especially those living in Thailand, often misunderstand what
income must be reported on their tax returns. It is clear and simple…all
worldwide earned and passive income is reportable whether received in the
form of wages and commissions, or as passive proceeds such as Social
Security benefits, pensions, interest and dividend income, and retirement
account income (IRAs, Roth IRAs, and 401Ks).
US taxpayers reading this Advisory should take special note of the
differences between (1) reportable income, which is a combination of earned
and passive income, (2) excludible income, which is deducted from reportable
income, and (3) adjusted gross income, which is the difference between (1)
and (2). Thus, reportable income that is not excludible or tax exempt is
taxable only if it exceeds the amounts allowed for the standard or itemized
deductions, and exemption amounts. Simply illustrated:
Reportable Earned and Passive Income (1)
Less: Excludible and Tax Exempt Income (2)
Adjusted Gross Income (3)
Less: Standard or Itemized Deductions, and
Number of Exemptions X $3,300
Taxable Income
For example, a single taxpayer under age 65 would not have to pay income
taxes unless Reportable Income less Exclusions and Tax Exempt Income exceeds
$8,450 (the Standard Deduction of $5,150 + one Exemption amounting to
$3,300).
Wages, commissions, and net income from businesses are defined as earned
income, and are often excludible if earned abroad; that is, reportable but
not taxable as long as the taxpayer is not an employee of the U.S.
government and meets certain other conditions; for instance, not returning
to the U.S and/or its territories in excess of 35 days during the tax year.
Nonetheless, taxpayers are still required to file a Federal income tax
return if their earned income from wages and commission was more than the
equivalent of $5,150, or if they have self-employed net income of $400 or
more. For year 2006, taxpayers can exclude hefty foreign earned and
self-employed net income up to $82,400 from their reportable income if they
meet foreign residency requirements.
Often times, Americans living abroad erroneously believe that their passive
income as earlier described is equally not reportable. Such is not the case;
they are required to file a tax return if their passive income exceeds $850.
Once again, there is no tax due unless their combined non-excludible earned
income and non-excludible passive income exceed the total of their
exemptions and standard deduction as previously illustrated.
Taxpayers who do not file their income tax returns on a timely basis are
subject to two civil penalties: (1) failure-to-pay and (2) failure-to-file.
The failure-to-pay penalty is ½ of 1% of the unpaid taxes for each month, or
part of a month, after the due date that the tax is not paid. For US
taxpayers living abroad, the due date for paying their income tax liability
is normally April 15th.
Failure-to-file is a completely separate issue. This civil penalty is
usually 5% for each month or part of a month that a return is late, but not
more than 25%. If the taxpayer files a return more than 60 days after the
due date, the minimum penalty is the smaller of $100 or 100% of the unpaid
tax. For US taxpayers living abroad, the due date for filing their income
tax returns is June 15th.
Obviously, it behooves US taxpayers to file their income tax returns
annually, reporting all of their worldwide income accurately, whether
excludible or taxable. Otherwise, they could be prosecuted for criminal
penalties such as tax evasion or preparing and filing fraudulent tax returns
in addition to the two civil penalties as noted above.
Hopefully, this Advisory will help simplify much of the confusion about the
filing requirements for reportable income and some of the income tax
terminology that is too often misinterpreted by US-taxpayers living abroad.
The overall goal of this Advisory is to alert US taxpayers about the
importance of filing correct Federal income tax returns to preclude future
litigation with the Internal Revenue Service.
Joseph “Joe” Krebs, CPA is a U.S. tax practitioner living in Thailand. Send
questions about this Advisory to: krebs@us-taxpayers.com.
Positive factors
in Thai economy
Lehman Brothers, one of the world’s leading investment
bankers, says that the foundation of Thai economy is still strong, and if
the political uncertainty ends, the economy should expand by 5.5 percent
next year. The firm says investment in Thailand is still attractive as all
investment factors are positive.
Lehman Brothers forecast that the Asian economy for 2007 and 2008 will have
to deal with lower exports. However, three factors will help support the
economy in this region, and they include low inflation, stimulation of
investment, and the rising of the Southeast Asian economies. The firm
believes the Asian economy will expand by eight percent this year and 8.2
percent in 2008. TNA
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