# US Foreign Tax Exclusion, what counts as a "Foreign Earned" income?



## S.W. (Aug 4, 2015)

Greetings,

I am planning to move to Japan and work for a medium-sized software company as an in-house contractor - not an employee - for a year or two based on my contract renewals or not.

According to my CPA, as a contractor it might be difficult for me to declare my income as "foreign" without a sheet like this:
gaijintax.com/wp-content/uploads/2009/01/tax-withholding-slip-english-gensenchoshuhyo.jpg
Which is I assume a Japanese equivalent of W2 form. (Can't post link, I apologize)

Is this true?


Also, my yearly wage is below the exclusion limit, would I get taxed more in the US if I use the Foreign Tax Credit instead?

Sincerely


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## Bevdeforges (Nov 16, 2007)

Foreign Earned Income is salary or salary equivalent (including contracting payments, accounted for as self-employment income) earned while you are physically located abroad - provided you meet either the physical presence or bona fide resident test.

There is no need to have a "W-2 equivalent" of any sort, although you may wind up having to file as self-employed or as a sole proprietorship (basically a Schedule C, I think it is).

A Japanese tax or withholding form really has no relevance when you are filing your US taxes. They wind up having to pretty much take your word for what your earnings are while overseas (in large part because "taxable income" varies so much from one place to the next.) For the US, they want you to report gross income, before any taxes or whatever are withheld.

Whether the FEIE or FTC works best will have to be determined once you see how much tax you're paying. (You can only take the income tax withheld or paid - any other miscellaneous taxes aren't recognized for US income tax purposes.) 
Cheers,
Bev


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## thethirdcoast (May 9, 2012)

S.W.-

You should sit down with your CPA and review IRS Form 2555 and Publication 54 to understand more about how the IRS will treat your situation. These documents make it clear what is and is not foreign income.

To earn the exemption, I would aim for the "physical presence" test because it can be clearly proved to the IRS based on visa stamps, passport scans, airline tickets, etc.

The "bona fide" resident test seems much less well-defined and is handled on a case-by-case basis. It is granted at the IRS' discretion.

Also, are you working for a Japanese or US firm? Your firm's internal policies may also impact your tax situation significantly.


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## thethirdcoast (May 9, 2012)

S.W.-

One more thing, you will want to investigate if there is a Tax Treaty between the US and Japan as this may impact your tax exposure significantly. I don't know enough about working in Japan to tell you if the impact will be positive or negative.

Best of luck.


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## BBCWatcher (Dec 28, 2012)

FYI, to Bev's point, skipping the FEIE and taking only the FTC could be to your advantage. Japanese income tax rates are generally higher than U.S. rates. That'll also greatly simplify and protect your ability to continue making U.S. IRA contributions, such as Roth IRA contributions. I would run the tax calculation both ways to determine what works better.

If the U.S.-Japan social security treaty allows you to continue making U.S. contributions instead of contributing to the Japanese system, I would do so. Japan's system is not a generous one, and preservation of U.S. disability coverage would be useful. If you are required to contribute to the Japanese system then I'd look into getting a refund of your contributions when you exit Japan. There's a strict deadline to claim a refund, so watch that very carefully. If you remain in Japan for "too long" no refund is possible, but due to the treaty (and combined with your U.S. contributions) you should qualify for a tiny, future Japanese retirement benefit. Take a look at your U.S. contribution history to understand where you are. If you have nontrivial contributions into the U.S. system for at least 10 years you're fully "vested," and that's a better place to be than not. If you aren't fully vested then consider flying to the U.S. for a couple weeks each year to clock some U.S.-based working hours from which to contribute to U.S. Social Security/Medicare. If done correctly that'd help keep your disability coverage intact and get you qualified for Medicare.

Japanese gift and inheritance taxes are, well, "strange," so make sure you understand those implications if you have an estate of any consequence.


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