Tax Question: US Citizen, Japanese Resident - Going back to the states for a few months of work

[diana14]

Hi Friends,

I'm not quite sure if this permutation has been covered here, so here goes.

1. I'm a US Citizen that has lived in Japan on a spouse visa for the last two years.
2. My income derives from US companies, a mixture of payroll and invoicing. When on payroll, I have been able to have the tax withholding removed.
3. As a Japanese tax resident, I first file/pay my taxes to Japan for all income, and then file my US taxes, exempting all owed money through Foreign Earned Income Exclusion or Foreign Tax Credit.

This has worked out so far. The catch is, NOW (early 2024), I will be going back to the states for a few months to work, with income totaling around $80,000. They won't let me invoice as a sole proprietor. My choices are billing through an LLC or going on payroll. I'm not sure what choice makes more sense. A bit more info, I'll be working/staying in New York City. I usually use my Florida address when filling out w-4/w-9.

I guess my main question is where is my tax liability on income earned while back to the states? I'm kinda assuming it would be the states, but since I am a Japanese resident I thought maybe otherwise. If my tax liability is to US, perhaps payroll would make the most sense? I'm hoping i can at least claim Florida residency (I have a home address there). I could also create a single member LLC in Florida and bill through that. I do want to avoid any particularly complicated accounting though.

Any advice appreciated!

I'll hit up my accountants in US and Japan too but, Japan accountants are quite busy at the moment, and US accountants usually have a consultation fee, so going for the free expertise first.

 

[kristhuy]

@diana14

where is my tax liability on income earned while back to the states?

Under Article 14 of the treaty, the US has primary taxation rights and Japan has secondary taxation rights (assuming you will return to Japan after a few months). This means you must claim a foreign tax credit on your Japanese tax return with respect to US tax you paid on the income corresponding to work you performed while you were physically in the US. This thread contains lots of information about how to claim a foreign tax credit on a Japanese tax return.

If my tax liability is to US, perhaps payroll would make the most sense?

Yes, this strikes me as the simplest arrangement.

 

[diana14]

@kristhuy Thank you! And thanks for that thread. If I read it right, since my taxes in US will be withheld each paycheck, I should be able to apply for the foreign tax credit on my Japanese tax return for the same year (2024) - do I have that right?

 

[kristhuy]

@diana14

I should be able to apply for the foreign tax credit on my Japanese tax return for the same year (2024) - do I have that right?

Probably. It's not entirely clear-cut in the case of US citizens, though. See this recent discussion.

 

[losingyour]

@diana14 Yes definitely talk to your accountants, hopefully your US accountant is very familiar with expat/living abroad taxes in the US.

While you would not qualify for the 330 days outside the US for FEIE, you would still very likely have no issue for the bona fide resident qualification. So my assumption is even if you took W2 income while there, and NY might claw onto whatever they have received, the main US income may still be excluded and thus refunded based on FEIE.

If that's the case though, you'd still be liable for it in Japan as even though it's US sourced (you made the money while in the US), that income could still be taxable in Japan, since you're a long term resident there, and plan on going back after this few months in the US.

The tax treaty may just mean you can pay your payroll taxes in the US and be done with it though

 

[reflectionsbythewater]

@losingyour No FEIE for income earned while physically present in the US, and as a US citizen being paid by a US employer, the 183 day "business trip" exception is also off the table.

The income while in the US will be primarily taxable in the US and OP will have to claim foreign tax credit on the Japan side.

 

[losingyour]

@reflectionsbythewater OP said a few months, not 6 months. And that's why I mention bona fide residence for FEIE. There's very specific requirements, but for the bona fide residence abroad, it certainly seems like OP qualifies if he has been living in Japan and paying taxes there for the last 2 years. Going back and working in the US for a couple months is not changing your tax home.

It seems like his company is being weird about it, not the US government. That's why I suggest he looks into taking the W2 and withholding taxes but possibly getting a refund, even if it goes back to the Japanese government. But either way he's getting taxed on that income

 

[reflectionsbythewater]

@losingyour FEIE does not apply to income earned while physically present in the United States under any circumstances. The income earned the rest of the year while outside of the US should still be covered.

 

[losingyour]

@reflectionsbythewater Where are you getting that information? FEIE is for people who live abroad. Bona fide residence requires an entire tax year abroad, but as long as you are essentially living in a foreign country and paying taxes there, you can use FEIE.

I see nothing on the US gov website that says you are liable for any excluded income tax while physically in the US if you continue to qualify for FEIE https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion

 

[reflectionsbythewater]

@losingyour https://www.irs.gov/individuals/int...ncome-exclusion-what-is-foreign-earned-income

 

[losingyour]

@reflectionsbythewater Wow, man the US sucks

 

[diana14]

@reflectionsbythewater right, reading this it seems only income earned for services performed in a foreign country (ie, not the US) would qualify for the FEIE. seems like my best move is to file a foreign tax credit with my Japanese return (for work done in the US), and a FEIE or FTC with my US return (for work done in Japan. Japan will remain my tax home, but the US gets my taxes while I work there.

 

[kristhuy]

@diana14

seems like my best move is to file a foreign tax credit with my Japanese return (for work done in the US), and a FEIE or FTC with my US return (for work done in Japan

Exactly. Given the contents of the treaty, that's the only way to avoid double taxation.