Tax Tips Part V
Professional Dance Business Tax Tips
Part V: Tax Advice About Foreign Income and Expense Deductions
by Ma*Shuqa Mira Murjan
This series of articles has reviewed the details that a professional dancer needs to know to conduct her dance activities in a businesslike manner and according to the rules of the Internal Revenue Service (IRS) of the United States. As more dancers are traveling abroad to work, it is important to review relevant business conduct related to foreign income and expenses.
Congress has provided the following important tax break for citizens or residents of the U.S. who work in a foreign country. Income which you earn while outside the U.S. can be excluded from U.S. income tax provided all of the following conditions are met:
1) The income was earned income received for services performed;
2) The income was for services performed while either:
a. You were outside the U.S. for at least 330 days out of any period of 12 consecutive months,
b. You were a bona fide resident of a foreign country or countries for an uninterrupted period which includes a full calendar year;
3) Your tax home was in a foreign country;
4) You were not an employee of the United States government or one of its agencies, paid from U.S. government funds.
In (1) above, earned income means compensation derived from personal services rendered. This includes wages, salaries, professional fees, and the like. It also includes self-employment income to the extent produced by personal services rather than capital investment. Unearned income such as dividends, interest, alimony, etc. does not qualify, nor do amounts received as a pension or annuity.
To qualify for exclusion, the earned income need not be paid by a foreign institution or company. As long as it is earned while you are outside the U.S., that’s all that counts. For example, a bank president was allowed an exclusion under a similar provision in prior law for management services he performed by mail and telephone for his bank while on extended leave abroad. [Rev Rul 72-423, 1972-2 CB 446].
On the other hand, a US. scholar who receives a grant or scholarship to study abroad is generally subject to U.S. income tax on the full payment. Such income is usually not considered to be earned income for services rendered as required under condition (1) [Rev Rul 89-67].
In (2b) above, the residency requirement does not demand that you be outside the U.S. for the full term of foreign residency. Vacations or business trips to the U.S. or elsewhere do not destroy the period of foreign residency. In fact, the only time that condition (2b) would need to be invoked instead of (2a) would be when a foreign stay is interrupted by an extended trip back to the U.S. To establish yourself as a bona fide resident of a foreign country, you should be working there for an indefinite or extended period of time and set up permanent-style quarters for your self and your family.
In (3) above, the tax home has the same meaning as reviewed in the Travel chapter. That is, your tax home is the location of your principal permanent place of employment. The reason Congress included the tax home condition in addition to Condition (2) was to rule out claiming away-from-home travel expenses in addition to the foreign income exclusion. Since the tax home must be in the foreign country to qualify for the foreign income exclusion, it would be a contradiction to claim away-from-home expenses in addition.
As discussed in the Travel chapter, new 1993 rules apply in determining whether an individual’s tax home shifts when he takes a temporary job away from home. Employment expected to last less than one year is generally considered to be temporary, and the tax home would not shift. Employment lasting more than one year is considered indefinite and the tax home would shift to the location of this indefinite employment. It should be pointed out that the law concerning tax homes refers to employment lasting one year or more. An individual who stayed abroad for more than one year but was considered employed abroad for less than one year might fail the tax home test. You must be employed as a professional dancer for the entire one-year period of time to qualify for this tax deduction.
In condition (4) above, all that’s required is that you are not a direct employee of the U.S. Government or of one of its agencies. If you are a private contractor (cf. the Outside Business Activity chapter) rather than an employee, then condition (4) will be satisfied. If you are hired as a “private contractor” and work in the dance profession as an independent professional fulfilling the terms of a contract and not employed as an employee, then you would satisfy condition (4) and would be permitted to claim the foreign income exclusion.
If you satisfy Conditions (1) – (4) above, you can exclude income earned outside the U.S. up to a maximum of $70,000. If you are not outside the U.S. for the entire year, the $70,000 is prorated according to how many days you were actually away. A separate $70,000 allowance applies to the earned income of your spouse. If your income exceeds this amount, an extra exclusion is provided for certain housing costs.
The exclusion is computed based on when the services were performed. For example, if you receive income in 1994 for services performed outside the U.S. in 1993, you exclude this income on your 1994 tax return, even if you are not outside the U.S. when the payments are received. However, you cannot exclude amounts received two or more calendar years after the services are performed. For example, you can’t exclude amounts received in 1995 for services performed in 1993.
How to Claim The Foreign Income Exclusion
The foreign income exclusion is elected on Form 2555 which you attach to your tax return. There is also a simpler Form 2555-EZ which you can use instead of Form 2555, provided you satisfy the following conditions: (1) you had foreign earned wages and salaries of $70,000 or less, (2) you did not have any self-employment income or business moving expenses, and (3) you do not claim the foreign tax credit or the foreign housing exclusion.
If you submit a suitable statement to your employer that you will qualify for the foreign income exclusion, your employer should not withhold taxes on payments to you. You can obtain a sample of a suitable statement by writing to the Foreign Operations District, Internal Revenue Service, Washington, D.C. 20225 (Form IO-673).
You should file a tax return containing the proper Form 2555 election to claim the foreign income exclusion even if all your income is excluded from tax. The election can be claimed on an original tax return or on an amended return. Note that it is entirely possible for foreign income to be exempt from U.S. income tax as described in this chapter at the same time it is exempt from a foreign country’s tax under a treaty with the U.S.
Extension of Time to File
For those who are out of the country on April 15, there is an automatic 2-month extension until June 15 for filing tax returns and paying the tax due. However, this only applies to those whose tax homes are in a foreign country. If additional time is needed, an extension until August 15 can be obtained by filing Form 4868 before June 15. The same rules apply for filing this form as for those who did not spend time outside the U.S. [cf. Section 1 of Chapter 1]. On Form 4868 you must estimate the amount of tax you expect to owe, but you are not required to make any payments until you file your tax return. However, interest will be charged dating back to April 15 on any amounts due. Also, an additional payment charge will be assessed of one half of one percent (dating back to April 15), if the amount you owe with Form 1040 exceeds 10% of the total tax liability for the year shown on that form.
If you have not yet met the 330-day test by the date your tax return is due, but expect to do so and thereby owe no tax or receive a refund, you should file for a special extension on Form 2350. This will give you until 30 days after the date on which you meet the 330-day test to file your tax return. Further details on the Foreign Income Exclusion may be found in Publication 54, Tax Guide for U.S. Citizens Abroad , obtainable from the IRS.
The next and final article in the series “Professional Dance Tax Tips” will review information related toTax-Free Grants (scholarships, fellowship grants) with which many dancers and dance troupes have sought to fund their dance performances and activities.
Having completed her MBA, Ma*Shuqa Mira Murjan now divides her time between her career as a university professor of business, her work as a business consultant, and her performing, teaching and continued study of Oriental dance. She is currently pursuing a Ph.D. in Educational Administration. www.mashuqa.com
Copyright 1995. All rights reserved. Ma*Shuqa Mira Murjan.