Taxes When Living Aboard

[BandB]

There is one more complicating matter. There are two ways of qualifying as an expatriate and getting foreign income credit. One requires you to be a legal resident of another country. The other is the 330 day rule, but here's the problem with that. You must live in another country 330 days, not just be out of the US. Being on a boat doesn't count as living in another country.

For such reasons as the technicality mentioned above, go to a professional tax adviser expert in expatriate issues. Like many tax issues one small twist in circumstances can completely change the answer.

[jmschmidt]

Yes, and that means you can only come back to the US for the reminder of the 365 or 366 days. And, I think its cumulative rather than calendar year bases. In other words you can't double them up and come back for both December and January (62 days total).

[Hud3]

Originally Posted by Julie Mor

If you're a US citizen and have sold your home(s) to live aboard your boat and are not in the US for any part of a given year, do you still owe income taxes? This of course assumes you are still earning a normally taxable income from an entity based in the US.

If your only income is a US-based pension, as you say, all the advice above about foreign income exclusion and the 330 day rule doesn't apply to you. Doubly so if you're cruising around and not an "official" resident of any foreign country.

The answer to your question is simple--yes, you must file a return with the IRS, and you must report all income from any sources.

Another consideration for you is whether the state that you formerly lived in will expect you to file a tax return. If so, a solution is to establish domicile in a state with no income tax, like Florida. St Brendan's Isle, the mail forwarding service that many offshore cruisers use, will handle all the details for you without you needing to physically be in Florida. Once legally domiciled in Florida, you'll be exempt from any state income tax, and will be eligible to apply for voter registration so you can vote in federal and Florida elections by absentee ballot. You'll also be eligible for a Florida driver license, but will have to apply in person. This is what we did when we moved to Nevis, in the Caribbean.

[Boatguy30]

Seems like it would be way harder living on a boat on the hook than working an office job if you were disabled?

[kmason]

You should probably read the tax rules on Foreign Earned Income Exclusion at: Foreign Earned Income Exclusion

In short, if you earn income and have been outside the U.S. and it's territories (including territorial waters) for over 330 days of the tax year you may qualify for up to $99,200.00 for 2014. You may also include anchoring in another country's territorial waters as a Bona fide residence. I urge you to read and understand the tax rules or hire someone who is well versed in U.S. tax law.

[belizesailor]

Originally Posted by Boatguy30

Seems like it would be way harder living on a boat on the hook than working an office job if you were disabled?

" Diasbled" is one of the biggest public benefit scams going. SSDI pays out billions in benefits to people that are in no practical way disabled.

[cwyckham]

Originally Posted by jmschmidt

Wow! Very good answers. I can't find fault with any of it and I can add little else. I didn't see a specific reference but regarding the Foreign Earned Income (from a job or business, not investments) you still have to pay both FICA and Medicare but at the double rate as if you were a self-employed person at home. So you're looking at 16% or whatever it is now. The is also an exemption for "foreign living expenses" so you might be able to charge off some or most of the cost of maintaining your boat if you have a real job or a business. US citizens, Green Card holders and anyone else classified as a "US Tax Person" (look up the IRS definition) is required to file a US Federal tax return (and maybe state) unless you're below a certain earnings threshold, like your in poverty. Even if you renounce your US citizenship you are on the tax hook with the IRS for ten years. Didn't used to be that way. Dual citizenship will do you no good. Unlike most other countries, the US taxes us on our world-wide income from all sources. Don't cheat, or if you do, don't ever come back. Capt. Jack

FICA and medicare payments are not required. I believe that you can opt to pay them if you like. If I understand correctly, if you pay them you will get the benefit. If you don't you won't. So it depends on whether you think you'll be returning to the US in your later years.

This stuff is really complicated and worth paying an accountant to look at. If you pay them a consult and get it all worked out for one year, then it is easy to use that as a template and do it yourself in later years.

[Julie Mor]

Originally Posted by Hud3

If your only income is a US-based pension, as you say, all the advice above about foreign income exclusion and the 330 day rule doesn't apply to you. Doubly so if you're cruising around and not an "official" resident of any foreign country.

The answer to your question is simple--yes, you must file a return with the IRS, and you must report all income from any sources.

Another consideration for you is whether the state that you formerly lived in will expect you to file a tax return. If so, a solution is to establish domicile in a state with no income tax, like Florida. St Brendan's Isle, the mail forwarding service that many offshore cruisers use, will handle all the details for you without you needing to physically be in Florida. Once legally domiciled in Florida, you'll be exempt from any state income tax, and will be eligible to apply for voter registration so you can vote in federal and Florida elections by absentee ballot. You'll also be eligible for a Florida driver license, but will have to apply in person. This is what we did when we moved to Nevis, in the Caribbean.

Illinois (where my house is) has no income tax for retirement income, so pensions and SS are tax exempt. Would Illinois be the state I would continue filing taxes with if I sold the house?

[BandB]

Originally Posted by Julie Mor

Illinois (where my house is) has no income tax for retirement income, so pensions and SS are tax exempt. Would Illinois be the state I would continue filing taxes with if I sold the house?

Yes, you remain a resident of Illinois for tax purposes unless or until you establish another residency.

This serves as a warning too. I know one couple from New York that moved aboard their boat and never returned to NY. They did the loop and then cruised, never establishing another residency. After four years NY came for income taxes, finding them having not filed a NY return and not paid taxes with some huge penalties. They could have avoided all of that by establishing a residency elsewhere as many St. Brendan's users do. Easy to establish in Florida. But they hadn't done any of that, thought they just were in no state. A tax attorney was able to negotiate most of the penalties away but taxes and interest all had to be paid.

[valhalla360]

Originally Posted by cwyckham

Even somebody born abroad to an American parent who has never seen the US needs to be putting their tax forms in.

If you have never been to America and have no intention of moving here...why not just renounce citizenship if it's so horrible?

If you are here regularly, plan to move here or just want the benefits of being a US citizen, suck it up and pay your taxes. They give you an out for reasonable earnings if you really live outside the country, you just need to document it.

[hellosailor]

Julie-
Try calling the IRS toll-free helpline, 1-800-829-1040.
Usually, they give you accurate advice. Of course, you can call back on another day and see if the advice is the same as the first time, which one hopes it is.

And, you can ask them to mail you the printed publication that covers your situation. You can't depend on phone calls if you are ever called in for an audit, but the printed publication is all you are expected to comply with.

Probably the best thing you can do, regardless of where you live or whether you have zero income, is to FILE ANYWAY every year. Failing to file is an offense under some conditions. Filing a zero income return is taken as an expression of "good faith", i.e. at least you have filed, whether it is correct or incorrect. (This according to CPAs and former IRS agents that I have known.)

One year I got a letter from a municipal tax authority saying "Gee, we have no record of your business taxes for the past ten years...Please send..." and fortunately, I had sent the prior year certified mail. So I sent them a reply saying "Gee, the USPS says you DID get my return last year...do I have to ask how many returns and how much data you lost? This is in relation to the news about your agency's computer problems that I recently heard?"

And they never replied to it, because obviously, they had lost a ****load of data and returns and they were trying to cover it up.

Get the phone opinion, get the free publications, and then you can have a much shorter consulation with some financial advisor or other party before you leave the country.

[cwyckham]

Originally Posted by valhalla360

If you have never been to America and have no intention of moving here...why not just renounce citizenship if it's so horrible?

If you are here regularly, plan to move here or just want the benefits of being a US citizen, suck it up and pay your taxes. They give you an out for reasonable earnings if you really live outside the country, you just need to document it.

This is a very personal and often emotional issue for those of us caught up in this mess. I receive no benefit right now from my US citizenship, but I need to pay a cost. In the future, I may want to move to the US, though, so I need to decide whether to renounce or not based on current pain vs possible future gain.

I'm also concerned that I may have trouble at the border if it shows that I've renounced my citizenship. US border guards can be very arbitrary.

No other country other than Eritrea forces its citizens to make this choice.

I am lucky that I don't actually have to pay any taxes to the US, but that doesn't mean there's no cost.

• I've had to pay an accountant to lead me through the complex tax laws.
• I can't have a Tax Free Savings Account to invest tax free.
• I can't have a Registered Education Savings Plan for my son. This is the primary vehicle that the Canadian government uses to issue education grants (luckily my wife isn't American, so we can put it in her name and get around that one).
• If I buy a house as a primary residence I need to be careful to meet the (different) rules for primary residence of the two countries to avoid paying capital gains.
• If I buy a house that isn't a primary residence and sell it a few years later for the same as what I bought it for, I could be on the hook for thousands of dollars in US taxes if the exchange rate moved the wrong way in those years.
• If I have non-sheltered mutual funds in a Canadian bank I need to be very careful that they don't fall under US "foreign trust" rules, but nobody really fully understands those rules.
• Every year I need to list the maximum amount in every account that I have, including my joint accounts and send it to the US government (this one is an annoyance and takes time, but also really irks me from a privacy standpoint).
• In some countries (luckily not in mine) US citizens can't get bank accounts because the resulting reporting the bank has to do to the US government is too onerous.

Anyways, you get the idea. The real kicker is that the US government gets little to nothing out of putting all of this onto their citizens abroad. Mostly we get enough foreign tax credits that we don't have to pay but have the worry hanging over our heads that we'll inadvertently screw something up and be out thousands in taxes or fines or even thrown in jail for screwing something up.

[jmschmidt]

Re: Pension income. Hawaii is only one of two states with a state income tax that does not tax pension income. There are many other tax reasons to not be a resident of Hawaii but if pension income is your only or main source of income they will give a driver's license to anyone.

[Pelagic]

The US tax system does seem ridiculously overcomplicated!

Instead of providing a secure melting pot it forces its travelling citizens into some type of fiscal deep fryer.

[BandB]

Originally Posted by Pelagic

The US tax system does seem ridiculously overcomplicated!

Instead of providing a secure melting pot it forces its travelling citizens into some type of fiscal deep fryer.

I've done business world wide and I can assure you that nearly all tax systems are ridiculously over complicated. And they change constantly, so talking to someone about what existed or what the laws were just a few years ago is very dangerous.