I’m a freelance designer with dual citizenship and I currently live in Turkey but I still have to pay the %15.3 self employment tax even though I don’t live in the US. This is a huge amount. I’ll be buying a smart phone because my current phone is really old and as web designers we need to use phones/tablets etc. to test our websites to see how they look on these devices. My question is, can I claim a smart phone as a business expense and therefore a deduction when I file my taxes?
If you live in Turkey, then you pay taxes in Turkey, and you are subject to the Turkish tax rules and laws. Your citizenship has got nothing to do with it.
I don’t know the details of Turkish tax laws, but I would think it’s highly likely that if you buy a phone for the reasons you mentioned, it will indeed be an allowable business expense. It’s really no different from buying a computer for your business - or, for that matter, a desk.
The only thing you might need to watch for is if you use the phone for personal use as well, in which case there might be a clawback of part of the cost. In other words, only a percentage of the cost would be deductible, that percentage being the proportion of the phone’s costs that is attributable to the business. But you’d have to check the details of that for yourself.
Mike
Gosh…I’m not talking about my Turkish citizenship. I just mentioned Turkey to tell people that I live outside the US but I’m a US citizen and I have to pay US taxes. I don’t pay taxes in Turkey. I’m talking about the US tax laws and I was wondering if the IRS would allow me to list the phone as a business expense.
But you said that you live in Turkey. In that case, you are subject to Turkish tax law. (If you also pay taxes in the US, you might be eligible for double-taxation relief, but you are still within Turkish jurisdiction).
OK, so you are now saying you want to know if the phone would be deductable in the US. The answer is the same. If it’s a genuine business expense, then of course it would be allowable - subject to a possible deduction for any personal use.
Mike
From the reply, it seems for me like you are looking for an excuse for not paying the taxes. I am sorry, but you will not find any here, nor should you be looking for one.
If you live in Turkey, then you do not tax towards US unless you also work in US, the reason you live in Turkey is due to your working on an abroad assignment from a US company, or have any other connection to it (like owning a company in US which is running).
In addition, if you have not already done so, you should contact the Turkish tax department and get setup with them to pay taxes and social security + setup the proper company form for your business.
Now, if you do business in both countries things start to get muddy, in this case it all depends on the tax agreements (normally called Double Tax Treaty) and social security agreements US and Turkey have.
What is important to note, is that you in most countries have to send in an application regarding the tax agreements and social security, i.e. to avoid being taxed by both countries.
In your case, you would most probably have to pay full tax to Turkey and then reduced tax in US if you actually have a “work relationship” in both countries, this is how the double tax treaties normally work, which means sometimes it can give you a higher tax as well, in the event the country you live in has a higher tax rate than the other country.
The IRS gives pretty wide latitude to deductions for expenses related to business.
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
Yes, a mobile device would be considered a necessary expense for a web designer as a designer must test on mobile devices. Furthermore, you can use the phone for business communications. If the majority of the use of the phone is for business purposes, then you may not need to worry about tracking personal use.
Under United States law, citizens working abroad must pay United States taxes. While a credit is available for taxes paid in other countries, one must still pay the differential between what was paid in the other country and what would be due in the United States, including Social Security and Medicare self-employment tax.
http://www.irs.gov/Individuals/International-Taxpayers/U.S.-Citizens-and-Resident-Aliens-Abroad
If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside.
If you are living abroad and you are a self-employed U.S. citizen or resident you generally are subject to the self-employment tax.
Do not forget you are required to pay estimated taxes within 15 days following each quarter. Or go to prison.
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estimated-Taxes
http://www.irs.gov/publications/p505/ch02.html#en_US_2013_publink1000194638
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Interesting, never seen a country stat it that clearly before.
Do you know if this apply even when someone has filled in the papers and declared moving to another country? (I.e. terminating the social security etc. while they live abroad).
Yes, it still applies - the only way for a US citizen to stop paying US taxes is for them to renounce their citizenship. Don’t forget, in the US, Social Security and Medicare are intended to be post-retirement benefits, so you pay for them while you’re working, then can collect on what you paid in when you’re done working. Granted their are exceptions (deaths, certain medical diagnoses, etc.) where people can collect on them early, but they’re the exception, not the rule.
You cannot terminate your United States tax obligations by living abroad.
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Thanks for the update, did not know this was the case for US citizens. This really means as a US citizen you need to think twice about moving to another country if it does not have an Tax treaty with US.
We have a similar social security system in Norway as well (only covering medical as well as pension), but we have the ability to stop paying it for a period if desired, if we for example move abroad. And then start paying it again later when we move back, of course you don’t get any pension points during the period your not paying for it.
Unfortunately, from a logistical standpoint, that’s just not feasible due to our population. The US and all it’s territories account for somewhere between 280 and 305 million people (depending on the site you look at). Assuming this chart is somewhat accurate, with an avg working population of 69.1%, that means there are somewhere between 193 and 210 million people ages 15-65, which is considered the working population - we have a lot of people over 65 who must or choose to work, but this is the “standard”. Compare that to Norway, which at [URL=“http://countryeconomy.com/demography/population/norway”]last count has 5.05 million people. Even assuming a population boom in the last two years, the working population for Norway looks to historically be about 76% (using last ten years of data from same chart as for US), so 76% of 5.1 million is roughly 3.8 million people. It’s just not logistically possible to process that many people through accurately, and not have people taken off the rosters for years or getting credit where they shouldn’t, so they kept it simple (shockingly for the US) and has everyone pay all the time, but they all get the same ratio of benefits at the end (what you get out is based on what you put in).
Dave, could your clarify that?
If the citizen does not live in the US, and has no income at all in the US, surely he is not subject to US taxes? As I said earlier, your citizenship has nothing to do with where you pay taxes. What’s important is where you live, where your business operates (if any), and where you income derives from.
I accept what you say about Social Securty. If you live outside the US, and have never paid into Social Security, then you presumably won’t be entitled to make claims on it if you eventually move back to the US. But that’s surely quite separate from taxes.
Mike
A United States citizen is subject to United States taxation no matter where he or she lives or earns income. If a U.S. citizen lives and works in Ireland, that income is subject to United States taxes less a credit for whatever was paid to Ireland.
The same applies to corporate income, which is much different that the way other countries handle things. In many other countries, foreign profits are not taxable by the home country. In the United States they are. That is why the largest corporations such as Apple keep their foreign profits invested outside the USA where it creates jobs outside the USA. Apple, Inc., has over $100 billion in foreign profits invested overseas to avoid paying the statutory 35% federal corporate tax if it were to bring the profits home to America. Then it would have to pay California state taxes. So taxes would take at least 40% of that $100 billion and that is why they don’t bring it back home to America.
Elderly immigrants who never worked in America and never paid a penny of Social Security tax are able to collect from Social Security. Plus housing subsidies, free health care, food stamps, free cell phone, and whatever else may be offered.
The Labor Force Participation Rate is 63% and dropping.
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Far be it from me to disagree with you. I guess you know much more about the subject than I do.
But I do find it surprising. If someone happens to be born in the US, but never lives or works there - spends his or her entire life in another country - you’re saying that he or she is still liable to the US for taxes? Or if that person is born outside the US, and never even visits the US, but happens to have an American parent, then they are also liable to to US taxes? As I day, I’ll take your word for it, but I find it vey surprising.
What you say about corporate taxes is another matter. No disagreement there.
Mike
You bring up an interesting point. A child born outside of the United States is considered a US citizen if one or both of the child’s parents is a citizen. I don’t know how the USA could possibly demand taxation from someone who has never set foot in the USA. I don’t think the USA worries about such cases. I would assume the child has to make some formal claim of citizenship in order to be recognized as a citizen.
This site seems to indicate that all foreign-born USA citizens are subject to taxation:
expattaxandlaw.com/us-citizen-abroad.html
What the USA does concern itself with is citizens who have lived in the USA but are now living overseas.
- I’m a U.S. citizen living and working outside of the United States for many years. Do I still need to file a U.S. tax return?
Yes, if you are a U.S. citizen or a resident alien living outside the United States, your worldwide income is subject to U.S. income tax, regardless of where you live. However, you may qualify for certain foreign earned income exclusions and/or foreign income tax credits. Please refer to Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, for additional information.
- I pay income tax in a foreign country. Do I still have to file a U.S. income tax return even though I do not live in the United States?
You have to file a U.S. income tax return while working and living abroad unless you abandon your green card holder status by filing Form I-407, with the U.S. Citizen & Immigration Service, or you renounce your U.S. citizenship under certain circumstances described in the expatriation tax provisions. See Publication 519, U.S. Tax Guide for Aliens, for more details.
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Yes, that was the sort of case I had in mind. And then it’s just a small jump to the case of the person who is born in the USA but leaves in infancy, never to return.
Obvioulsy, these aren’t typical cases - and presumably they are not relevant to the original question. But, as you say, it’s an interesting point.
Mike
The number of American citizens renouncing their citizenship has soared since 2009, going from a few hundred per year to close to 3,000. Here’s a nice article about the reason why.
http://finance.yahoo.com/news/expats-ditching-u-s--passports-151127757.html
It’s worth a read. It mentions that a woman who’s Swiss-born daughter is a U.S. citizen only because the mother is a citizen is obligated to pay U.S. taxes even though the daughter does not live in America.
3,000 Americans around the world renounced their citizenship last year. Meet five U.S. citizens who have given up their passports – or are thinking about it – to escape an overly complicated tax code.
…
We also didn’t realize until recently that my daughter, who has U.S. citizenship through me, was required to file taxes after she turned 18 three years ago.
I guess we answered a question.
I just learned another important piece of information for United States citizens living abroad. A 2010 law that seems to have regulations taking effect now requires all U.S. citizens living abroad, including “accidental citizens” who were born in another country but are U.S. citizens because one or both of their parents were citizens but who have never lived in the United States, to report all financial assets exceeding $50,000 in value combined. This includes savings, checking, and investment accounts. If you have the American equivalent of $50,000 in an investment account and are a U.S. citizen living abroad, you must make this report with your annual American tax return or face penalties or possible imprisonment. Don’t forget: all interest, dividend, and capital gains income you make is fully taxable under U.S. law.
http://www.irs.gov/Businesses/Corporations/Foreign-Account-Tax-Compliance-Act-(FATCA)
As a result of this over-reaching law which also requires foreign banks to report assets held by persons with U.S. citizenship, foreign banks are dropping those with American citizenship as customers.
http://money.cnn.com/2013/09/15/news/banks-americans-lockout/
http://money.cnn.com/2013/09/04/news/citizenship-us-tax/index.html?iid=EL
Well, far be it from me to criticise the policies of a foreign government, but it does seem extremely draconian. I’m not aware of any other country that imposes such stringent requirements on non-residents, regardless of nationality.
Thanks for al the additional information, Cheesedude.
Mike