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Mail Bag #7: Freelancers, Partnerships, Italian Social Security Idiosyncrasies, ROTH Contributions, and Student Stipends

Mail Bag #7: Freelancers, Partnerships, Italian Social Security Idiosyncrasies, ROTH Contributions, and Student Stipends
Ines Zemelman, EA
05 September 2017

1. Freelancer

I'm a current client of yours - and very happy about it, by the way! Until now I have been employed in Germany but had a small amount of freelance income. Since July of this year I have been unemployed, and am launching a full-time freelance career either later this year or at the beginning of next year. Are there any tax considerations that I should take into account when planning the start date? The business will be registered in Germany, but I would like to know if it makes a significant difference to my US if a product is sold primarily to customers in the US or to customers in Germany. Thank you for your help!

Good luck with the business!

You can sell to whomever you wish from a US tax standpoint. Please note that if you have a foreign tax corp - there are implications from that (positive ones from a tax standpoint, but heavier on compliance).

If your business is registered as GmbH, this will be your additional filing requirement.


2. ROTH contributions

I currently work overseas as a teacher in Myanmar and my salary is tax free and I am a U.S. citizen. I have a roth and a rollover ira through vanguard. My question is, if I contribute money out of my checking account into my rollover ira or roth ($9000) to purchase stocks or index funds does my whole salary I earn from overseas become taxed, meaning I am no longer tax exempt?

Your tax exemption status would not be compromised. However , if all of your income exempt through the Foreign Earned Income exclusion, you cannot make contributions to ROTH IRA. However, there are methods that allow you to leave a portion of your foreign earned income not excluded.

Contributions to Traditional or ROTH IRA account can be made until April 17, 2018 (for 2017 tax year). We recommend to do your tax return early next year, and we will calculate how much you can put towards your IRA account while preparing your return. This way there will be no need for a potential amendment.

ROTH contributions

3. Italy INPS

I was wondering if I pay INPS in Italy will those taxes count towards my social security in the US?

No it will not - sorry! Those payments will not increase the $ amount of your US Social Security balance for future benefits.

Italy is unique from other counties with social security agreement in that only if you are self-employed and an Italian citizen, then contributions to INPS will make you exempt from US SECA tax.

If you are self-employed and not a citizen then you have to contribute to US system instead of INPS.

Italy INPS

4. SS distributions

My mother's British tax person wanted me to ask you why Social Security distribution is exempt from US income taxes but IRA distributions are not exempt. He referred to article 17.1 and 17.2 of the tax code (I'm not really sure if that is US or UK tax code).

He says that my mother's IRA distributions are being taxed in the UK.

Are IRA distributions subject to income tax in both the US and UK?

Please recommend to your UK advisor getting familiar with the US/UK treaty Article 1 and Technical Explanation.

IRS distributions are not exempt for the US citizens like Social Security is. There is place in the treaty referred to as a "Saving Clause" specifying which treaty benefits are allowed for US citizens. Article 17(1) for pension distributions is not allowed while Article 17(3) for the Social Security is allowed for US citizens. If UK had tax applied to the U.S.

IRA distributions, this would count as foreign tax credit towards the US tax obligation and offset US tax on the same income.

SS distributions

5. Divorce

I am a green card holders and have lived abroad for many years. I do file my federal tax and California Return every year. For California State return, I have been filing Non-resident return based on the safe harbour rule. My intention is that i I do plan to return to California (domicile in California) but I have been working abroad for over 546 days and have no California source income.

My question is: I am considering filing a divorce petition in California, I wonder if this action contradicts the safe harbour rule and whether I will be then deemed as Resident.

Your divorce does not directly preclude you from the Safe Harbor Rule. However, visits to California should not exceed 45 days within a calendar year. Shorter visits during the contract are allowed and seen as temporary.

For further detail, please see Safe Harbor Rule.


6. SS Credits

For most of my career I have been working and residing outside the continental United States. As foreign earned income, most of my earnings were paid directly to my foreign bank (in Japan and Australia) accounts and during those years I do not believe social security tax was withheld from my earnings.

I have reported my earnings each year to the IRS but my social security earnings statement shows my earnings as zero earnings for years where social security tax was not withheld from earnings.

I want to be able to qualify to receive social security and am still a bit away from receiving the minimum amount of credits.

My questions are:

1) do I qualify to receive credits from earnings if social security tax was not withheld from my earnings?

2) is it possible to claim credits from previous years earnings?

3) how do I qualify to receive credits going forward?

US and Japan have a mutual reciprocal agreement called the Social Security Totalization Agreement.

If you have at least 6 credits (generally one and a half years of work) under the US system you may be able to qualify for a partial benefit from the United States based on the combined U.S. and Japanese credits.

Same applies to credits earned in Australia if you had contributions withheld to the Superannuation system.

Credits "shared" with the other country system will not increase your monthly benefits in the US but will make you eligible for the benefits based on the amount earned in the US.

If you want to start making contributions in the US to boost your future benefits, this can be done too.

SS Credits

7. Italian Partnership

I would like to inquire about the classification of a "Societa Semplice" with regards to the US Tax form 5471 filing requirements.

The Societa semplice was established to purchase property. The property is not habitable and has no income.

"Societa Semplice" is an Italian partnership - if your interest in this partnership is over 50% you will need Form 8865. If less, you will only report your share of income. Of course, we will determine your filing requirements after reviewing your completed tax questionnaire and supporting documents.

Italian Partnership

8. Japan Student

I have been living in Japan for 10 years, mostly as a student, though I have worked a little here and there. My family told me I don’t make enough to claim for taxes and so I never did them, but I’m moving back to the USA in September and want to make sure I am all clear. In 2014, worked for about 9 months at a company, though my wages were quite low, amounting to less than 13,000$ for the whole year. The company went bankrupt in early 2015 and I received unemployment wages here in Japan, also working part-time, and again making very little, less than 9,000$ from part-time work. In 2016 I received a 2 year Japanese government scholarship to go to graduate school - I am wondering if scholarships (They are not stipends) would be taxable in these situations and how difficult it might be to file taxes for previous years for even the part time work, or even if it is necessary.

Please see Minimum Filing Requirements to determine if you are required to file.

At $13k you must file. Add unemployment benefits to your total income to determine your taxable income in the years you were unemployed.

Scholarships for school are not taxable income. Stipends are. Please see the scenario outlined in our US Tax Guide.

Japan Student

Ines Zemelman, EA
Founder of TFX