The US Tax System – A Unique World View
The US is unique in its view that citizens should pay tax on money they earn anywhere in the world, even if they don’t live in the US. Most countries either tax their citizens only on tax earned within the country or have a tax system that is not based on income earned. But here in the good ole USA, that’s not the case. And you might be surprised how complicated it can be.
Where you earn income matters and whether or not you end up paying tax on it in the country you earned it in also has an impact. The US Tax Code provides a credit for foreign tax already paid. But this only applies if you earn the income in the country. So earning it in the air or at sea doesn’t count.
For example, if you’re a pilot that flies across the ocean, you earn some of your money while in the airspace of a country and some while you’re in the ocean airspace. Only the income that’s earned while in country airspace is eligible for credit. Anything else is considered US income and foreign tax credits don’t count. The same is true of individuals working on ships that sail the oceans. Somewhere between 3 and 200 miles from a country’s coast (depending on how you interpret the law – it’s currently not clear) is considered within the country. But once you’re further out at sea than that, if you’re a US citizen then you’re earning US income.
And perhaps most problematically, the IRS requires you to have records of each trip and what income was earned where. So access to flight plans and nautical records are generally required. In one difficult case, the IRS audited a merchant sailor’s return who was working on a ship hijacked by pirates and surprisingly, the IRS was unsympathetic as to the sailor’s inability to demonstrate where income was actually earned.
So if you’re a trans-continental worker or just working in another country and a US citizen, you’ll want to be very aware of the reporting and record keeping requirements. And now’s the time to make sure things are in order so you don’t have an undue burden at the end of the year.
If you are in a similar situation, contact us today to ensure your taxes are prepared properly. Call (480) 888-7111 or submit a web request here.