Working as a contractor in Saudi but paid by American company - Tax exempt?

My husband is working as a contractor in Saudi. The Saudi company pays his company who pays him. No taxes are paid for him. If he is out of the states for a year, does he have to pay taxes?

Reply to
Linda H. in Rosharon
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Is his company a US company who will report his income on orm W-2?

If so, he can elect to exclude all foreign earned income up to an indexed maximum amount -- over $90,000 by now -- see form 2555 and its instructions.

Reply to
Arthur Kamlet

While he may pay no federal tax because on his salary because of the foreign earned income exclusion, he still has to pay federal taxes on non-earned income like interest, dividends, and capital gains. In addition, he has to pay full state taxes on all his income; I don't know if any state allows the foreign earned income exclusion.

If he pays no taxes in Saudi Arabia, does he still get the foreign earned income exclusion? Form 2555 seems to allow it.

Is Schedule C income considered to be foreign earned income? Seems to me that it ought to be. The 2555 instructions suggest this

Foreign earned income for this purpose means wages, salaries, professional fees, and other compensation received for personal services you performed in a foreign country during the period for which you meet the tax home test and either the bona fide residence test or the physical presence test. It also includes noncash income (such as a home or car) and allowances or reimbursements.

However, is US social security tax due on the full amount (before the exemption)?

Reply to
removeps-groups

,

The imposition of tax by the foreign governement is not a requirement for this exclusion. It is a requirement for the foreign tax credit (on non-excluded income).

Depends on where the business is located. Income from a sole-proprietorship located in the U.S. may not be excluded.

Careful: Exemptions and exclusions are two different things. Exemptions are things that are included (or includible) that are backed out. Exclusions are never included in the first place.

Reply to
D. Stussy

You say the Saudi company pays his company which, in turn, pays him. If his company is a US organization, the company must withhold taxes, including FICA and Medicare taxes. However, he may request the income tax withholding be adjusted for the exclusion available to him.

Assum> My husband is working as a contractor in Saudi. The Saudi company

Reply to
Lanny Williams

Whether his earnings are subject to state income tax depends on the state of residence and all of the facts and circumstances. For example, in California a person who is outside the state for an uninterrupted period of at least 546 days on an employment-related contract is considered a nonresident; an absence is uninterrupted if the individual spends no more than 45 days of any taxable year in California. In that case, the expatriate spouse's community 1/2 of his foreign earnings would not be subject to California tax. However, because California is a community property state, and current earnings are community income in the absence of an interspousal agreement to the contrary, the other spouse's community 1/2 of the expatriate's foreign earnings would be subject to California tax if that spouse remains a California resident. California does not conform to the IRC Sec. 911 exclusion, although many other states do.

Each state defines a resident for income tax purposes by its own statutory rule, and many states either conform to IRC Sec. 911, or consider a person who is absent in foreign country for a certain period of time to be a nonresident, or both. On the other hand, quite a few states would consider the expatriate to be resident taxable on all of his income, regardless of source. Fortunately most of those states allow the 911 excluson.

It depends on the state and the circumstances of the individual case.

Katie in San Diego

Reply to
Katie

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