U.S. jewelry designers and their ilk have to declare international sales during stints abroad. But things change after living in another country for a year
I am a jewelry designer with an online store and plans to live in Paris and sell wholesale and retail in Europe and Asia. Will I declare all international sales on my American tax records? Do I have to file taxes in Europe or Asia as well if I make sales there? —C.S., Boston
In its latest international tax fact sheet, released late last month, the Internal Revenue Service reminded self-employed Americans that they must include all their income—including income earned overseas—when they compute their net earnings from self-employment.
So yes, you and all U.S. citizens are subject to U.S. income taxes on your worldwide income. "It is possible, depending upon the exact circumstances, that you may be subject to state tax in Massachusetts as well," says Alan E. Weiner, CPA and partner emeritus at Holtz Rubenstein Reminick in Melville, N.Y. Check with your local accountant and the Massachusetts Department of Revenue for more information.
Foreign Earned Income Exclusion
After you've lived in France for a year, you may qualify for the Foreign Earned Income Exclusion, says Brad Hall, managing director of Hall & Co. CPA in Irvine, Calif. The IRS has information on the exclusion at its Web site.
"You'd qualify if you've been a bona fide resident of France for an uninterrupted period which includes an entire taxable year, or if you've been physically present in France for at least 330 full days during any period of 12 consecutive months," Hall says.
The exclusion includes foreign-earned salaries, wages, and business profits. It allows you to exclude up to $91,400 of that income when calculating your total income in 2009. That amount is expected to rise to $91,500 in 2010, Weiner says.
VAT and Import Taxes
In terms of the French tax system, both Weiner and Hall agree that you must file in France as a resident alien and you are likely to be subject to the French individual income tax, which is on a progressive rate schedule. It ranges from 5.5% to 40%, Weiner says.
"Consult with a French tax accountant for both income and VAT (value-added tax) taxes when you are in Paris," Weiner recommends. "The income tax—but not other taxes like the VAT—that you pay to the French government will be partially creditable against your U.S. income tax, so as to avoid double taxation."
Sales to other European and Asian countries may incur import taxes in those countries, but if you sell only from your base in France, you probably don't have to concern yourself with paying income taxes in those countries, Hall says.