Double taxation - too much income

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kingdragonfly

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#235938 10-May-2018 14:47

I'm in an odd position. I hold both a NZ and US passport.

Frankly the US passport is a pain-in-the-rear. The US is unique in making you fill out $0 tax returns, detailing your "foreign" income, and disclosing all financial records, under threat of prison time.

I only keep the US passport because once given up, I'd never get another one. I'm too old.

Many people have renounced their US citizenship for just these reasons. Renouncing US citizenship triggers an automatic 5 year US tax audit, including this year.

The US gives a $140,000 "foreign income exclusion:" If you're "foreign" (meaning NZ) income is less than $140,000, you don't owe anything to the US

The US also allows "carry-over" which means you can carry-over unused tax credits, if you didn't use them.

Unfortunately I've used all my carry-over credits, and I'm looking at a contract which will seriously put me over $140,000.

So as a contractor, can I set up a NZ company, have my salary paid into that company, and pay myself a lesser amount over a longer period, and put the rest into something like KiwiSaver?

Besides going on an extended vacation, any ideas?

sbiddle

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#2013455 10-May-2018 15:00

I know a couple of people who are in a similar situation with dual citizenship. One has a rather complex structure to get around things, and I'd suggest if you want to do the same you seek the advice of an accountant with US tax knowledge. He's not in NZ so it probably wouldn't be a lot of use finding out who he uses.

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wellygary

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#2013460 10-May-2018 15:12

NZ and the US do have a double tax agreement mean you wont end up double paying, but as above find a tax Accountant that specialises in NZ-US taxes

In fact the US embassy in NZ helpfully provides a list of some of them

https://nz.usembassy.gov/u-s-citizen-services/internal-revenue-service-u-s-taxes/u-s-tax-specialists-in-new-zealand/

kingdragonfly

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#2013467 10-May-2018 15:29

Thanks sbiddle and wellygary

hmacinn

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#2013478 10-May-2018 15:59

Just because you earn more than the FEIE (Foreign Earned Income Exclusion) doesn't mean that everything above that will be double taxed. You'll still be allowed a FTC (Foreign Tax Credit) on your US taxes (form 1116) for NZ income tax paid on that income.

An alternative to the FEIE is to use just FTCs and not claim the exclusion. Because NZ rates are higher, it will likely result in the same US tax, but more foreign tax credits to carry forward. The only catch is that if you've been claiming the FEIE, and then you change to not claiming it, you can't claim it again for five years. Using FTCs instead of FEIE also allows you to potentially put money into an IRA which isn't allowed if all your earned income is excluded.

US taxes are a pain and much more complicated than NZ. I just don't want to think about how badly my Kiwisaver will be taxed when I figure out PFICs.

kingdragonfly

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#2013486 10-May-2018 16:11

Even after filling out my US taxes for a while, I barely understand it. It's never the same two years going.

Contacting the IRS is almost no-go, since the IRS is punishing the Republicans for cutting back IRS budget, by cutting back the IRS front-line staff.

And while you can use a free IRS website to fill in the forms, you can't use it to actually electronically submit it. As an individual you have to print out many pages, and physically mail it in.

It usually takes me about 8 to 10 hours of concentrated effort.

RickD

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#2018500 18-May-2018 18:06

So as a contractor, can I set up a NZ company, have my salary paid into that company, and pay myself a lesser amount over a longer period, and put the rest into something like KiwiSaver?

I don't think this will work. The company income will be included as pass though income on your personal tax return so you're still taxed on the full amount (I think the rule is if you own over 25% of the shares). I had ltd co. setup for contracting purposes and then entered the US part way though a tax year and ended up with a very complicated return. If you go this route you'll also need to submit forms related to control of a foreign corporation.

If it was me I would take the extended holiday.

MichaelNZ

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#2037708 14-Jun-2018 19:11

kingdragonfly:
So as a contractor, can I set up a NZ company, have my salary paid into that company, and pay myself a lesser amount over a longer period, and put the rest into something like KiwiSaver?

In theory that sounds like a good idea, however, have you considered the wider implications that as a US taxpayer, banks, etc, you will need for your company may not be too helpful?

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chevrolux

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#2037827 14-Jun-2018 19:52

Setting up the company makes sense doesn't it?

Perhaps this shows my ignorance, but how could a NZ based limited liability company have any links to personal tax return in the US? Especially if as the director you only receive say $100k in directors fees, and the company pays no dividends. Then the following year you just pay yourself another $100k. Then once the contract is done you liquidate the company and that's that.

Tzoi

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#2037885 14-Jun-2018 21:12

Would need to be careful of the 5% difference in tax between the company rate and the marginal rate - see Penny and Hooper cases

kryptonjohn

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#2038011 15-Jun-2018 08:00

kingdragonfly: I'm in an odd position. I hold both a NZ and US passport.

Frankly the US passport is a pain-in-the-rear. The US is unique in making you fill out $0 tax returns, detailing your "foreign" income, and disclosing all financial records, under threat of prison time.

I only keep the US passport because once given up, I'd never get another one. I'm too old.

Many people have renounced their US citizenship for just these reasons. Renouncing US citizenship triggers an automatic 5 year US tax audit, including this year.

The US gives a $140,000 "foreign income exclusion:" If you're "foreign" (meaning NZ) income is less than $140,000, you don't owe anything to the US

The US also allows "carry-over" which means you can carry-over unused tax credits, if you didn't use them.

Unfortunately I've used all my carry-over credits, and I'm looking at a contract which will seriously put me over $140,000.

So as a contractor, can I set up a NZ company, have my salary paid into that company, and pay myself a lesser amount over a longer period, and put the rest into something like KiwiSaver?

Besides going on an extended vacation, any ideas?

You can't really get away with paying yourself less than your true market value - lookup "Penny Hooper IRD"

However, New Zealand has a double tax treaty with most trading partners, including USA, to prevent the problem you highlight: http://taxpolicy.ird.govt.nz/tax-treaties/role-double-tax-agreements

In a nutshell, you get a tax credit in NZ for the tax you have to pay in the USA.

kryptonjohn

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#2038013 15-Jun-2018 08:01

chevrolux:

Setting up the company makes sense doesn't it?

Perhaps this shows my ignorance, but how could a NZ based limited liability company have any links to personal tax return in the US? Especially if as the director you only receive say $100k in directors fees, and the company pays no dividends. Then the following year you just pay yourself another $100k. Then once the contract is done you liquidate the company and that's that.

I wish. I'm sure people do this but it's against tax law.

Tzoi

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#2038363 15-Jun-2018 15:49

Also, sections GB 27 - 29 of the income tax act 2007 might apply anyway

Amosnz

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#2038400 15-Jun-2018 17:28

I'm not sure on the specifics but my accountant briefly mentioned some time ago that in some situations there is an income source test as well.

Something like, if you setup a company with you as the only employee but derive xx% of your income from one source, it can be directly attributed to you anyway.

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Tzoi

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#2038422 15-Jun-2018 20:13

Yea that's the sections I mentioned