Tax advantages

[EditorDude]

Just an afterthought but can setting up a company in certain countries have a bearing on tax breaks and tax advantages etc? And do the servers have to be in those countries? And, sorry if this is obvious, would that entail setting up a business account with a Bank in that country?

[kamakiri]

There are some huge advantages to off shore companies. I own a company in the BVI, and it was well worth the $3,000 or so in fees I paid. Now, if you are living in the US, and try to store money in another company, that is called tax evasion, and you will go to jail if caught.

The tax advantages really vary by country, but as a US citizen you are taxed on your worldly income, so you can't realize any sort of legal savings by using an off shore bank. If you are out of the US for 330 days a year, you can use the Foreign Earned Income Exclusion Deduction (Form 2555), and take a substantial discount. The flip side there is that you would have to pay taxes on that foreign earned income in the country it was earned, negating any real legal tax savings.

Death and taxes are about the only two guarantees in life, and it is a very bad idea to try and cheat either.

[TimW]

Possibly...depends on your citizenship. The United States taxes its citizens on ALL income made, made ANYWHERE in the world, from ANY source.

If you reside outside the United States for a minimum period of time (I think it's 330 days), then you have a certain amount that is exempted from taxes (the first $85,000-$90,000). There are a myriad of other issues and details that are best discussed with an accountant, which I am not. I merely convey what I learned when I lived overseas.

The whole "earned outside the US" issue is partly what got Wesley Snipes into all that trouble.

[EditorDude]

Thanks - another question - again please forgive me if it's obvious - should any bank account receiving money from an automated website be a private account or a business account? Also, does one have to form a company if you are selling information eg pdf download vis a website or is it better to do it as a private individual - or in other words, which is appropriate or safer?

[kamakiri]

If you are in business, you should open a business account. Banks love business customers, and you are treated much better when you call in to get one serviced. Wells Fargo has a completely different phone bank set up just for business customers, and call volumes are kept low, and the staff is far more knowledgeable than the rest of the bankers.

Business accounts are just easier and better to deal with. Your banker will also have all of the paperwork to set up a DBA account (Doing Business As), and will be happy to give you all of the education you will ever want. If they can't, then you don't want your money anywhere near that bank. Accounts make money for the bank, so they want your business. Consultants will give the same advice, and charge you for the privilege.

You banker will also be aware of all the local regulations you will need to take care of for doing business where you live. They really are a killer resource, and a good banker will pay for himself many times over.

TimW is talking about the Foreign Earned Income Exclusion Deduction. I file my taxes with that form every year, and it is amazing how close to $85,000 I make a year. That exemption does not however apply to any income that comes from being self employed.

[TimW]

That exemption does not however apply to any income that comes from being self employed.

No shit? Wow...so, if you own your own business in a foreign country, you don't get the exclusion?

[kamakiri]

Income from self employment is taxable no matter where or how long you live outside of the US, and is excludable as foreign earned income in figuring your income tax. Does the IRS have agents in foreign countries looking for you? Probably not.

The flip side, if you own a company and are an employee getting a pay check, then you are fine.

[davebs]

As I understand it, you can have a company incorporated in the US paying you wages (which are tax deductible for the corporation), live in another country for most of the year (330 days or whatever), and not pay taxes on the first $85000 or so of your personal income by filing under form 2555. However, everything after that 85000, what tax bracket would you be paying taxes in? Is it trated as starting from 0 or is it taxed starting from 85000? Also, I kind of doubt the IRS is going to report to your country of residence your income, so if you're there on a visitor's visa is there any practical reason to pay income tax in the country in which you're living?

[TimW]

From my recollection of a conversation with my late father (who was a CPA), your marginal tax rate would be the same as it would be if you were here in the US. It's just that the amount that is taxed is less.

Thus, if you make 100,000 while living overseas, $87,600 (for 2008) of that is exempt from US taxes, but the remaining $15,000 will be taxed at whatever rate $100,000 would be taxed.

Additionally, the money earned must be from a company or agency in the country of residence (meaning the foreign country) or from a US company operating in that country. As an American, I think you'll have a tough time claiming that your "muse" is operating in Spain. Though there is a self-employment clause in it, as listed below:

http://www.irs.ustreas.gov/taxtopics/tc853.html (http://www.irs.gov/businesses/article/0,,id=182017,00.html)

Self-employment income: A qualifying individual may claim the foreign earned income exclusion on foreign earned self-employment income. The excluded amount will reduce the individual’s regular income tax, but will not reduce the individual’s self-employment tax. Also, the foreign housing deduction – instead of a foreign housing exclusion – may be claimed.