Remote Work for non-American Company Located Outside US

[Anonymous]

Hi,

I have been a US PR since early 2019 but I live and worked in Japan until middle of 2020 and never lived or worked in US before that (just had short visits). Since moving to US, I still work remotely for the same company I worked for in Japan (company has no presence in US), but I don't pay taxes in Japan anymore. Right now I am not exactly sure how my taxes will work this year.

So far the conclusion of my research has been that I file foreign income (which I cannot fully exclude but I can get tax credit for) for the first half of the year I was still in Japan, and I file the second half as self-employed. Can someone comment if this is the correct way of filing my taxes for 2020?

Moreover, I got a refund for my pension contributions in Japan from Japanese government, which was taxed in Japan. I believe I will have to declare this as foreign income as well. Can I get foreign tax credit for the taxed amount of this refund? I also have the option of asking for the taxed amount to be returned to me by the Japanese government, but I believe that wouldn't make sense if I can get foreign tax credit in US since then the pension refund plus the returned tax will then be taxed at US rate which will be higher than Japan's rate. Please correct me if I am wrong here.

Finally, I also paid "residence tax" in Japan (which is mandatory by law, there). Can I get foreign tax credit for that as well or does foreign tax credit only apply to income tax?

[ThomasM125]

You will need to report all of the income your earned in 2020 on your tax return for 2020. If you earned self-employment income from Japan, you should report that along with your self-employment income earned in the United States as business income in TurboTax. You can then proceed to the Foreign Earned Income and Exclusion section in TurboTax, under Less Common Income,  to see if you can exclude any of it from taxation.

If social security tax was taken in Japan from your wages, then you would not be considered self-employed and you would not include that income on your business income schedule "C" on your tax return. You would enter it as foreign wages in the section I mentioned above.

The pension income would be taxable in the US as you mention, but you may be entitled to a foreign tax credit for the tax paid on it in Japan. You enter that information in the Foreign Taxes section of TurboTax under Estimates and Other Taxes Paid in the Deductions and Credits area of TurboTax. If the tax rate is lower in Japan, you should let them keep the tax.

You can only consider income taxes for a foreign tax credit, so unless the residence tax was based on your income, you could not count it towards your foreign tax credit. However, it would be deductible as an itemized deduction, if you did not take the standard deduction.  

[Anonymous]

@ThomasM125 Thank you for your reply. Upon further research I concluded that my initial judgment was incorrect and I should actually be able to exclude all of my foreign income during the first half of 2020 since I pass the Bona Fide Residence test due to having been outside of US for the whole tax year of 2019. Note that my income in Japan was not through self-employment but rather, through official employment with a company that withheld taxes, insurance, pension, etc. from my paycheck.

The pension was related to only the time I worked in Japan, but I received the payment AFTER moving to US (it was not possible to withdraw that while I was still in Japan). Hence, I am not sure if I can exclude the pension as well based on the Bona Fide test or not, but I should at least be able to get tax credit for it as you mentioned.

The residence tax is based on income in Japan, but it is deducted from salary with a one year delay starting from June of each year. In my case it was deducted from my salary for June 2020 while I was in Japan, but since I was leaving Japan permanently, I had to pay all the rest (July 2020 to May 2021) in one go before leaving.

During the second half of 2020 that I worked remotely for the same company in Japan, I do actually still have a contract with them and I get my salary wired to my bank every month. However, I do not pay any tax or social security or anything else in Japan since I moved to US. Just to confirm, does this really count as self-employment in US for tax purposes? Technically, I am not running my own business, I just work for a company that is not in US.

Finally, do you (or anyone else) have any ideas about California state taxes and foreign income? I live in California now but I had no residence in California (or anywhere else in US, for that matter) before July 2020, but it seems California makes it too difficult to exclude foreign income. I do pass the requirement of the Safe Harbor rule for excluding foreign income for California state taxes; however, that rule seems to apply to people who lived in California and then left. I never lived in California to begin with, so I am not sure if it applies to me. This is of course only for the first half of 2020; I would be paying state taxes for second half either way.

[ThomasM125]

The foreign income exclusion only applies to income earned while you were living and working abroad, so since you received the pension distribution when you were domiciled in the US, it would not be considered foreign earned income in my opinion.

Since the residency tax is based on income, it would be allowable for the foreign tax credit.

I read the California safe harbor regulations and it applies to residents who are away for a period of 546 consecutive days. However, you were clearly not a resident of California for the first part of 2020, so you will file as a part-year resident and as such your tax will be calculated based on a ratio of the income you earned during the time you lived in California versus your total income. So, you will not pay much California tax on the income you earned in Japan.

[Anonymous]

@ThomasM125 I sincerely appreciate your guidance. Now I have to figure out how to get all these right in TurboTax.