The venues for performing classical music are all over the world, so sooner or later you probably will be dealing with the tax consequences of working abroad. Many American singers land a Fest contract in Germany, which keeps them out of the United States for extended periods of time. Some never come back and make their permanent home overseas. However, all U.S. citizens must file a tax return yearly if they meet the minimum income requirements for filing, no matter where they live on the planet. But there’s good news! The IRS has several methods of relieving your tax burden if you work in a foreign country. Although you still may have to file, if you follow these tips, you probably won’t pay any tax to the IRS or your home state.
To start with, check to see if there are any tax treaties between the United States and the foreign country where you’re going to sing. Refunds may be available from the foreign country. See IRS Publication 54 as a starting point. As an example, in the treaty with Canada, Article XVI says that if a performing artist from the United States works in Canada and earns less than 15,000 Canadian dollars in a calendar year, Canada will impose no income tax. Over the years, our office has prepared many Canadian tax returns and has gotten thousands of dollars in refunds of Canadian income-tax withholdings. Since foreign countries naturally ask that you to fill out tax returns in their language, which might not be English, it’s best to consult with a professional tax-preparer in that country to see if any refunds of withholding taxes are possible. Get a referral from a native cast member or the stage manager.
If you’ve established a residence in one of the 50 states by owning or leasing a dwelling, it’s important to decide if you’re going to give up residency, or just be away temporarily while you do your foreign gig. Keeping your residency usually means that you must continue to pay taxes to that state, even though you earn your income abroad. Each state has its own rules, but in general, if you don’t give up residency, the state will claim that you must still file a resident tax return. Since states don’t give credit for taxes paid to foreign countries, you might get an unwelcome surprise in the size of the state income tax that’s based on your foreign earnings. Generally, if you’ll be gone for a year or more and own a home, consider selling or renting it. If you lease, you should sublet or terminate your tenancy. Check the laws of each state for the rules about giving up residency. But this doesn’t apply to singers who live in a state that has no state income tax. Those states are Alaska, Florida, Nevada, New Hampshire, Tennessee, Texas, Washington, and Wyoming.
The foreign taxes you pay may be deducted on Schedule A, along with state and local taxes. However, it’s usually more to your advantage to use the Foreign Tax Credit for income taxes paid to other countries. The idea is to not be taxed twice on the same income. Use IRS form 1116. Most countries (e.g. Germany) have a higher tax rate than the United States, so the credit for foreign taxes paid will usually cancel out any American taxes. But if you fall under the Alternative Minimum Tax (AMT), the credit is limited to 90% of the AMT. The AMT is a system of computing your income tax that doesn’t allow most deductions. Single folks whose income is under $35,750 are exempt. For “married filing jointly,” the exempt amount is $49,000. If the regular way of computing the tax yields a number that’s higher than the one you got using the AMT, then the AMT again doesn’t apply. You’ll have to compute the AMT just to see if the regular way is truly higher.
There is no separate form to fill out for the Foreign Tax Credit under the AMT. You must use form 1116 and modify it to conform to the AMT rules. Modifying means you ignore what’s printed on each line and check with the instructions for the real meaning of how to fill it out. Some accountants compare this to finding the real meaning of life. Nobody is quite sure! Why the IRS, in all of these years, has not designed a unique form for this remains a mystery in professional tax-preparation circles. Keep an ample supply of aspirin handy if you decide to tackle the Foreign Tax Credit for the AMT on your own. And if that doesn’t have your head spinning and you’d like additional information, see IRS Publication 514 for more details.
The IRS also offers a Foreign Earned Income Exclusion under two methods: the “physical presence test” and the “bona fide residence test.” To qualify, your “tax home”—the country to which you pay income taxes—must be out of the United States. The foreign income itself is excluded up to US$78,000 for 2001, and up to $80,000 in 2002. This could put your other income, such as bank interest and the rent earned on your home back in the States, into a lower tax bracket, so it’s quite desirable. But there’s always a catch. Once excluded, that income doesn’t let you qualify for pension contributions to an IRA or SEP.
For the “physical presence test,” you must be physically out of the United States and living on foreign soil for 330 of 365 days. You get to choose on which day to count as the first day of the 365. So, for example, if you leave the States on October 5, choose October 6 to start the count. Since you left on October 5, you must have been standing on U.S. soil that day, so you can’t use it toward the 330. If you plan to come home for the holidays or your grandmother’s birthday, pay close attention to the days you are physically present in the States. One extra day home could eliminate the exclusion altogether. A day is counted as midnight to midnight. This is important, since a brief singing job in the States, plus vacation, could easily keep you on home soil for more than the 35 days allowed. Flying over foreign air space is not considered standing on foreign soil. I hope you get the idea that an IRS auditor would closely examine your passport and airline tickets.
For the “bona fide residence test,” you must show your intention to be a resident of a foreign city. Your word is not enough. Your actions would be examined. Buying a dwelling or leasing an apartment will show a strong intention. Joining local clubs and getting a local driver’s license would help. Touring all over Europe and staying in hotels would probably fail the test since it doesn’t show intentions of living in one city. Here, the calendar-year rule applies. You must be a resident of a foreign city for an entire calendar year for the first year you wish to use the Foreign Earned Income Exclusion. Under this method, there is no strict limit on the days present in the United States, as long as you don’t move back here.
Here’s an example of how all this works. Let’s say you have a two-year singing contract in Bonn, Germany. You leave the States on August 25, 2001. You rent an apartment in Bonn with a two-year lease. From August 26, 2001, to August 25, 2002, you spend 330 or more days outside of the States. You can, therefore, use the “physical presence test” for your 2001 tax return. You must prorate the allowed US $78,000 in foreign earnings by the number of days in 2001 that you were physically present abroad. So, there are 128 days from August 26 to December 31, which, when divided by 365 and multiplied by $78,000, equals 27,353. And that means that if you earned US $27,353 or less singing in Bonn from when you got there in August to the end of the year, the income could be excluded.
Beginning on January 1, 2002, since you are now a Bonn resident, and for the rest of the calendar year 2002, you’ll get the full exclusion of US $80,000 (an increase over the 2001 allowance) on your foreign-working income under the “bona fide residence test,” even if you spend more than 35 days back home in the States that year. Your gigs need not be confined only to Bonn. Once you establish residency there, you can sing wherever your contracts take you, even to the Met.
