The Domestic Tax Consequences of Income Earned Outside the Country

The subject of my blog and my tax resistance came up today at my weekly Spanish lesson, and I allowed myself to daydream again of moving South of The Border, Fred Reed style, and setting myself up somewhere outside the immediate sphere of Uncle Sam.

Coincidentally, Tax Talk has a column about the domestic tax consequences of income earned outside the country:

A U.S. citizen or resident can exclude up to $80,000 in wages earned in a foreign country. This means that the person actually has to live in the foreign country and earn the wages for work performed in that country. To claim the exclusion, a citizen can either be a bona fide resident of that foreign country or spend more than 330 days in 12 months outside the United States. However, U.S. residents only qualify under the 330-day rule.

If you qualify as a bona fide resident, you can spend more than 35 days in the United States, provided you maintain your residence in that foreign country. To qualify as a bona fide resident, you actually have to be living in that foreign country on a more-permanent basis, and you actually have to live there for a whole tax year to qualify. For example, if you move now, you wouldn’t be a bona fide resident until tax year 2006. You could only get a partial exclusion for 2005 based on the 330-day rule. In addition, the rules state:

For example, if on the immigration forms you are asked your country of residence, you would have to say that country, not the United States. The fact that you don’t pay taxes in and of itself is not detrimental to the exclusion. For example, if you say you’re a resident, but you ignore your filing obligations, you could still be considered a bona fide resident.

Mmmmm… daydreamy…