Joshua Ashman is the most knowledgeable expert I’ve met on tax-related matters for US citizens living abroad. He’s helped me personally for the past three years in navigating tax matters as an expat and I’ve come to respect him as one of the foremost experts in his field. I invited him to be a guest on the podcast in order to help my audience become aware of all the potential pitfalls and factors to consider so they can keep more of their money.
Having read the IRS documentation on the FEIE and a number of other blog posts on the subject I can confidently say that what follows is the single most concise and comprehensive overview for expats on optimizing your tax posture. Note: none of this interview constitutes formal tax advice nor should be construed as establishing a CPA / client relationship. If there’s a question you have after listening feel free to leave it in a comment or contact Josh directly. Enjoy!
0:02:14 Welcome and context
0:04:54 What does a nomad need to know regarding taxes?
0:09:13 What are the first things you look for when assessing someone’s tax situation?
0:16:02 What is the FEIE?
0:19:37 How can you know if you qualify for the FEIE?
0:29:47 Can you ever definitively know once you have achieved eligibility for FEIE or is it only decided in the event you are challenged on your filing?
0:32:54 What is the worst-case scenario if you are challenged and proven ineligible?
0:36:08 What strengthens the case for not having an abode in the US?
0:42:30 Is there a point after which the IRS can no longer challenge your tax claims?
0:43:04 Can the IRS ever make changes to the tax code and then claim retroactive consequences?
0:47:36 Your exposure to so many different situations and outcomes gives you a unique window into the mindset of the IRS
0:50:52 Does either the Bonafide Residency or Physical Presence test carry a greater risk of audit or are they treated identically?
0:52:41 After passing either of the tests are there any additional qualifications?
0:56:29 What was the IRS incentive to introduce the FEIE?
1:00:18 This is all as it pertains to Federal. Can we talk about the different state tax implications?
1:06:34 Will a state honor your move to foreign country as abdicating residency there?
1:07:14 In your experience where does this process go off the rails most?
1:11:40 What is one book that profoundly affected you in some way?
1:11:45 What is your favorite tool that saves you time, money or headaches?
1:12:10 One piece of music or artist that is speaking to you lately?
1:12:44 What important truth do very few people agree with you on?
1:13:07 If you could go back in time, what would you tell your 20-year-old self?
Expat Tax Professionals
The Winners of the 2018 FEM Americas EMMAs
Foreign Earned Income Exclusion
US citizenship Worldwide Taxation
Rule of Thumb
Internal Revenue Code 9/11
Tax Home in Foreign Country
No fixed abode
Bona Fide Residence Test
Foreign Account Tax Compliance Act (FATCA)
Proof of Domicile
Expat Tax Professionals on Facebook
Sean Tierney: 00:03:16 And then we connected and basically I’ve been a client ever since. So that’s kind of the, the setup here of how we know each other. But I figured like the goal of this podcast is really to help nomads just thrive and flourish. And I feel like the FEIE, he is one of these things that depending on who I’m talking to, some people are like, of course I use it and some people have never heard of it. So can you just maybe start by for the people who’ve never heard of it, what is the FEIE?
Joshua Ashman: 00:03:42 Yeah, sure. I’m happy to get into that. And I, I certainly understand it just to add a little bit to the context, you know, when I know what the right amount of planning, I think that that digital nomads, which is, you know, we’re signal is certainly a growing trend amongst the young professionals. The, the tax impact or rather lack their own that can be, can be affected, can, can greatly enhance, I think, the overall experience and enhance the overall viability of the entire concepts. So, you know, definitely as we speak with clients about a, definitely very aware of the impact that that proper tax planning has specifically with regards to the the fee. But just overall I think with the changing tax landscapes you know, people, what are they really want to think about tax or not. Maybe it’s just the once a year thing, but in general having the proper tax setup is something that can, I think positively positively affect the overall a digital nomad experience.
Sean Tierney: 00:04:49 Yeah. Well, so I shot straight for the fie, but let’s take a step back. So definitely like what is a nomad need to know going into this to best set him or herself up, you know, for maximum. I guess the goal with tax is to be legit and yet not leave any money on the table. Right. Is that kind of the, the end goal?
Joshua Ashman: 00:05:10 Yeah, that’s what I would, yeah, that’s what I would say. In other words, we have, you know, there’s, there’s kind of a backdrops. The whole, I think to the whole planning, at least the way we like to look at it is, you know, on the one hand it’s easy to to say that I’m a resident of nowhere or you know, I kind of [inaudible] and in multiple countries throughout the year and therefore it makes sense to me not to have an obligation to any taxing authority. But I think it really starts with understanding that ultimately there isn’t obligations and obligation to somebody. Okay, yes, the proper planning. We can reduce the overall tax posture worldwide. But I think starting with perhaps an unrealistic expectation that if I choose this lifestyle that means that I have zero taxes, then I think that’s where, where people, you know, become disappointed or they learn, you know, more about their actual obligations, then you come disappointed where they really thought they’d be able to adapt this lifestyle and not have to worry about worry about taxes at all.
Joshua Ashman: 00:06:11 So I think one of the first things to, to think about when embarking on this, this kind of lifestyle, on embarking on these, these trips living around the world is really where do I still have a tax obligation? I think if we look from the sort of the positive aspects of where may I still have exposure, where may I still have an obligation, then we can attack those specific jurisdictions from a tax planning point of view and say, what’s the best approach in order to, and we’re doing the right thing. You’re doing the legal thing, but be not to necessarily pay more than is required on the wall. So I think it’s more for first and foremost, it’s about that right attitude. It’s about understanding that taxes is an obligation. And then it’s about understanding where I may or may not have an exposure to taxation.
Joshua Ashman: 00:06:57 Now the exposure can come from, from in these two places, right? It can come from the local country where where the person finds themselves affectively point, right? There’s always a local tech station. Even if I’m not necessarily a resident or haven’t applied for permanent residents. Oftentimes in most countries around the world, if you stay within a country for a vulnerable period, there’s this sort of techs connection that the country will claim that you may or may not have. So it’s the local tax tax and jurisdiction, which is very important to, to get an assessment to get an understanding of their rules and their regulations. Who did they consider a resident for tax purposes, which is often times much different than who is a resident for immigration, for legal purposes. And then it’s understanding in this context of these says as citizens understanding that even at times the country where I came from, certainly if it’s United States, I may still have a significant tax obligation to either continue to file at least or even to continue to pay taxes depending on my situation.
Joshua Ashman: 00:08:05 So it’s really this balance between the local jurisdiction and between the place where you came from. Certainly with sort of a special emphasis on the United States where we know one of the only countries in the world that has rolled water tech station. And that means that even if I actually have not arrested, I’ve successfully created residency outside of the United States. As long as I retain my citizenship to the u s I’m going to have an obligation to continue to fly with the u s and what’s really key, I think at that point is that, you know, if you have two jurisdictions to tax in jurisdictions that want to tax you essentially the same income, that it’s very important to understand who has the first right of taxation. Where do I need to, you know, pay file pay first, which country will allow to take a credit for taxes? Perhaps I paid to the brief the other jurisdictions. So there’s interaction and coordination between the multiple potentially multiple taxing jurisdictions is I think the other key as well and understanding are really in setting yourself up for kind of a successful a plan.
Sean Tierney: 00:09:12 So w when you assess someone’s situation and you look at, you know, let’s say I moved to Germany and what are you looking at first, are you saying, okay, what is this guy’s obligation in Germany? And I know what it is in the u s and I know that like us has a tree with Germany. Or like what is your thought process? What are you, how do you go about like deconstructing that person’s situation?
Joshua Ashman: 00:09:36 Yeah, you’re absolutely right. You first have to understand the, what I call the for the local impact local jurisdiction. Because you know, the treaty is the importance of the treaties. And the reason why they were, they were entered into by the countries is to understand that we don’t want to double tax in certain situations. It’s not allowed you know, certainly not something that the governments necessarily would be able to do or feel that they have a right to do. But they’re the treaties definitely and clearly defined or which country has the right of taxation. So if we’re talking about a situation where a US citizen moves abroad, then it’s very important to understand the obligation PCT the local jurisdiction. And I’ll explain what you can really divide up. People say commit to two main categories. You have, let’s say they’re just really kind of high level.
Joshua Ashman: 00:10:23 You have your active income, which is usually your employment income, the income they receive for, for your job, for services or whatever the whatever your, your you know, whatever that entails. Or, and then you have a, sorry. Then you have your, your passive income, your investment income. So those nuances, the nuances of who gets the first right of taxation in each category of income is very different. It’s very different perhaps who has the first way to taxation on my, my compensation or my service income, my self employment income verse, who has the first one? It’s actually a nation that my on my investment. So it’s very important to know not only how the local country will treat you as far as residency because oftentimes residency will determine whether or not you’re required to report worldwide taxation, which would then of course include even income.
Joshua Ashman: 00:11:15 That’s not necessarily the source from the country where I’m located and as well as understanding you know, the activate from where am I actually performing the services because generally where I performed the services it’s going to be where I am going to have to pay the taxes. Even in instances where I’m not a resident. So, so I guess it’s a little bit tricky then to understand both the obligation that local jurisdiction places on the tax theater, places on the, you’d be individual both at a level of a non resident or even if they’re not resident in that country, perhaps were saying on their active employment income in that country. And then whether or not it gets extended to worldwide taxation, which is generally the case when residency is, is achieved. So very much, very much the understanding or need to understand what is going on in the local jurisdiction.
Joshua Ashman: 00:12:08 As far as how they’re viewing this individual visa, the taxes vis-a-vis residency for tax purposes is for me is the key because the u s I like to tell my clients that the u s is often very reactive. The U S has in place, not just treaties, but even in the regular domestic internal revenue code. We, they put in place mechanisms and various rules to be responsive to situations where I’m paying tax abroad. So in order to be able to apply those rules properly and to understand the reaction, I need to understand first the local jurisdictions you know, obligations that they’ve placed on the individuals. So I think it’s something that I find, at least in speaking to clients, it’s often overlooked. And I think that’s, I guess maybe my first point or a takeaway is that, you know, you really need to understand wherever you’re going to end up, whether it’s, you know, in one country for many months or perhaps for the entire year, whether it’s a slew of countries, you know, sometimes it’s a little bit unpractical not practical to understand, well, I’m gonna be at nine countries that may not have to try to find a counselor, nine different jurisdictions.
Joshua Ashman: 00:13:13 So I have to try to look on nine different tax authority websites. Okay. Each person will make their decision, but if we’re talking about technically the best approach, best practices like we talk, like we said, then yes, you really need to understand what your obligations locally and then the u s is very much reactive. And then as long as you’re using the right, the right to a provider, the right consultant, et Cetera, they’ll be able to to file the U s tax return to compute the u s taxes based on the, the way that the local jurisdiction is taxing.
Sean Tierney: 00:13:47 Got It. Okay. So seek to understand the local implications and knowing that they can break out. It’s not just an absolute income number that they break out the different types of income and that that has different tax effects on that. But once you understand the local situation than that dictates your approach in terms of what you do in the u s basically.
Joshua Ashman: 00:14:08 Yeah. Yeah. And I’ll just, I’ll just add just briefly as a rule of thumb, if we’re trying to summarize as a rule of thumb, your worldwide tech station is only going to be in jurisdictions where we’re on the resident. So for example, u s person who’s abroad and hasn’t established residency, has not met the threshold for tax residency in jurisdiction x and they’ve left behind in the u s a whole stock portfolio that’s earning passive income, interest, dividends, they’re trading capital gains, etc. Most often that that income will be protected from local jurisdiction taxation. In the event that I’m not a resident residents, that usually is the trigger which determines and obligation to file under worldwide taxation or sheets. But if on the non-resident or maybe to sort of remain under that threshold, whatever that threshold is that each jurisdiction is going to be different. But if I can remain under the threshold, then perhaps the only exposure I’ll have that low with jurisdiction is on the active income, the income which I actually perform while in the country. Whereas it, whereas the, the income that’s outside of the country, excuse me, the passive income will not be exposed necessarily. So that’s sort of a rule of thumb. Residency is full. What that threshold, What’s that residency threshold is crossed then or worldwide taxation is going to be
Joshua Ashman: 00:15:27 You know,
Joshua Ashman: 00:15:28 Obligated except in certain instances where there are some special residency rules where we give you some sort of quasi residency, habitual residency. There’s various, you know, the terms
Joshua Ashman: 00:15:38 Depending on the country. Yup.
Sean Tierney: 00:15:41 Yeah. And that’s precisely the situation. My situation in Portugal, like I was itinerant for over the course of like 31 countries and I wasn’t filing tax in all 31 countries because I was there maybe a week at a time. In some cases, yeah. But as soon as I established residency in Portugal, now I’m a tax paying. So you know, tax paying resident of Portugal. Okay. So can you dig into then now on the foreign earned income exclusion? Can you explain what that is?
Joshua Ashman: 00:16:10 Okay, so now we’ve talked a little bit more about the u s okay, so now whether or not I’m going to be subject to tax and the local jurisdiction, et Cetera, I could always rely on one of these provisions that foreign or make an exclusion, which is one of those provisions of section nine 11 in your internal revenue code. That was a provision that was established is interesting. It’s actually established and this, I think it’s very relevant. Later on in the session we’ll talk about the IRS is focused on foreign exclusion recently, which I think is very important, very relevant. But that was established years ago. In order to sort of equalize the playing field to help us companies send employees or really to incentify them to send employees abroad in order to expand, you know, expand businesses soon to help you as companies grow out into other markets they had enacted the foreigner and can exclusion to, to essentially allow employers and employees that a certain benefit to, to pay less taxes or really to kind of pay the similar taxes as it is, if what they would pay if they’d stayed at home.
Joshua Ashman: 00:17:13 That was sort of the idea that it shouldn’t be that if I ended up in a jurisdiction that has a high tax or higher tax than in the u s then companies would sort of be incentified to send their employees there who wants to promote business so they, they enacted this foreign or make an exclusion. The way it works is the farmer making exclusion, which is FEIE for ease of, of saying it allows a certain threshold of active income, which is very important. It’s the foreign earned income exclusion. A portion of one’s earned up to a threshold to be excluded from income. Now it sounds pretty good. Meaning if I make $100,000 for example, and it’s for indexed each year, it’s around 103,700 I believe in 2018 it’ll go up to 19 et cetera. Very, very, you know, small increments for the, for the cost of living.
Joshua Ashman: 00:18:07 But the concept is if I make let’s say, $100,000 as far as you’d say, and I meet all the qualifications in the foreigner exclusion, which we’ll talk about shortly, then I can actually exclude that income from my taxable income so I’m not going to pay tax on it, which is a tremendous benefit. Obviously if someone is in the 20 or 25% bracket, you’re saving taxes on $100,000 and talking about the savings of 20,000 or $25,000 in tax, it’s real money. So it’s certainly a very powerful tool that can be used in tax planning, especially in situations where I’m not going to be such a tax and the local jurisdiction because then it’s sort of what we call tax palate. If I can achieve a certain residency status where I can achieve certain non-taxable status and local jurisdiction. Plus on the u s side, which I’m subject to worldwide taxation because of citizenship, I could still reduce or exclude my income by this threshold. That means I’m actually achieving a really true, true savings at a dollar for dollar, a big savings in taxes. So the foreign exclusion is always an integral part of any it’s consideration. Any type of tax planning with respect to those that are living abroad. Abroad, abroad is the application in foreign exclusion. So we definitely are always considering, it’s one of the big, I’d say two or three things that are considered when talking about international tax planning for individuals
Sean Tierney: 00:19:37 [Inaudible] and what does one need to take into account? Like how would I determine if I qualify for the f. F. E. I. E. Okay.
Joshua Ashman: 00:19:45 So it’s like probably is very important. There’s a lot of misconceptions too. I guess I’ll, I’ll first talk about the misconceptions and then we can talk about the, the actual conditions. I think there’s a lot of uncertainty. Of course today the day which everything is hooked up on the Internet and everything like the Internet has to be correct. That I think some people get confused. We get calls from clients that are, that are a little bit seem a little confused with the rules. So when I’m not going to start with is the physical presence test. And I think that’s the misconception that as long as I’m out in the U S for 330 days, I take the foreign exclusion. That is the, the aspect of farness delusion that everyone understands, everyone knows the problem is that’s only part of the part of the guff conditions that to be fulfilled.
Joshua Ashman: 00:20:30 Yes, we get to the physical presence, you know, outside of the U s for three 30 days. But that is a very, very much a secondary or at least in the order of things that comes only after meeting certain prerequisites. And those prerequisites are really divided into categories. One is known as a having a tax home abroad. That’s the first principle. You need to have a tax on our tax home as it sounds is much more related to to one’s business or one’s earnings. It’s not, it doesn’t really have a domestic sort of connotation. It’s not about connections. It’s not about, you know, where my center of life is, where my, my Thomas Silos, if you will, you are familiar with those terms which are much more domestic in nature. The tax home speaks to one’s business where it’s one’s main place of business slash employment throughout the year and there’s some sort of rules where the safe harbor sort of did you pass that threshold for at least a year?
Joshua Ashman: 00:21:34 It needs to be more than a year. Having a tax home of role, that means my main place of business, and I think we drill down a little bit, this certainly beginning of our relationship that’s as it was connected to the revolt year participating in, Oh, here, this, this really becomes a very, very important point. Does someone was living abroad right? Or are they down to the one? Let’s face it, we’re living abroad. So who is spending more than the year abroad on the program? Likable here like some of the other programs that are available to to folks these days and they were working for more than a year abroad, whether or not they went back to the u s run in between. That’s really more related to the physical presence. We’ll talk about that in a second. Does that automatically beacon? I have a tax home so here is subject certainly to debate in subject to the actual facts.
Joshua Ashman: 00:22:25 Specific facts and circumstances of each individual’s cages. Absolutely needs to wait. Sorry. I want to have a sort of operating line, you know, safe harbor technically talk with people. It’s very much based on facts and circumstances. What a tax home really means that that may place of employment slash business is abroad. But in the case of, for example, an employee, the reason why they are abroad needs in order to have a kind of a slam dunk case, but much trauma case would be at the behest of the employer. This is sort of where we started to run into issues. Some of the remote your participants were where they are choosing to go abroad for a year. It’s an exciting opportunity, you know, global citizenship. It’s nice too to give back to the world and all these are amazing things that people, you know, I encourage people to do, but if the employer is sort of okay, I guess you can go for the year nowadays for easy to work with locally, you have a connection to the Anders coworking spaces.
Joshua Ashman: 00:23:25 Okay, we’ll give it a shot, but it’s another guys that did it previously that worked out fine. That’s hardly at the behest of the employer, employer, you know at the desk. He’s impartial, right at work. He’d rather than you come to the office every day, but since you’re a good employee, once the motivated et Cetera, we’ll give you that opportunity. But I think it’s far off from saying that he’s sending, because we of course have any clients and they’re existed in the world. I think sort of the maybe traditional that people are sent abroad on assignment, right. Company US wants to send. That’s what I was saying originally. That was the idea behind the foreigner exclusion it company in New York or Tennessee or California, wherever it is, we’re sending you to China, right? We’re sending you to Germany, we’re sending to the UK on a sign it, so someone’s on a sign and it has to be employer. To me that means they need the tax. So that’s their main place, employment and they can place a business and its activity has to be important when it comes to someone’s choosing just to work abroad. It’s not, the argument is not as strong. Okay. That’s I think important overall tax.
Sean Tierney: 00:24:30 Well, but real quick on that, so on that point though, I mean, so in our case, like we’re a managed wordpress hosting provider and I was able to make the case that, look, I’m an, I’m an evangelist for PD usually and I’m going to go visit all these WordCamps and I mean, you know, you know, put, go to WordCamp Europe and I’m going to give talks and whatnot. So we crafted it where it actually, there was a business reason and it made sense and I think that was strong enough, at least in my situation, we decided that, okay, like that’s a decent business purpose and we can justify that. So is the strategy there too, you know, as a, an employee tried to work with your employer and craft a legit [inaudible] business case for why it makes sense to send you?
Joshua Ashman: 00:25:11 Absolutely. Absolutely. And there’s really two points there. One is your point that crafting with your employer sort of business purpose. It’s even best of course that that’s inside of the contract. You know, if there’s a new contract that they’re, you know, giving you when you go abroad, sometimes people move from employees on the w two they moved to like a 10 99 consultant depending on what the needs of the corporation. That’s any of the company that’s sending. But absolutely creating a business purpose, creating sort of in a business card for a local address. You know, defining what, what advantage there is to me as an employee or as a contractor what advantage it is to my clients, to my company by me being abroad and be able to network. Absolutely. You’re right. You need to then create, if we’re saying it’s not as easy as I’m being sent on assignment working in a local office of my parent company that it is all about strengthening the case and the case of spreads and by doing all these things, exactly creating creative business purpose, showing a certain identity abroad.
Joshua Ashman: 00:26:14 Whether that’s through, you know, like I said, business cards or having on on your website, having all of your email signature, you know, things like that that show that this is something that has business purpose. The other thing I’ll say we’ll get into a little bit perhaps now is the itinerant argument and the itinerant arguments says, and this is much more relating to, to those self employed individuals, kind of freelancers or contractors where they’re not working for a company per se. And in that case there’s a kind of a different argument you are in is based on a section one 62 of your tour of Newco which has to do with very famous arguments. The IRS and tax cases the IRS has have with the truck drivers, truck drivers for example, not related for exclusion of course but related to taking per diem or meals and entertainment or lodging travel expenses for those that are truck drivers.
Joshua Ashman: 00:27:08 The question becomes if a truck driver is driving around the u s and that’s what they do all day, well then can they take their travel and can they take their, you know foods or lodging, et Cetera as a deduction. It’s not like a business expense, right? Cause it like sort of a someone who is being sent to a conference for a week and then as to you know, pay for their food for the week. Then that we all know recognize that definitely a travel expense, right? There’s a business purpose of the trip. It’s outside of my tax home, which is interesting how that tax homework comes up both in section nine 11 for exclusion as well as the section one 62 is outside their tax home. And therefore of course I can, I can deduct that. Where’s the truck drivers? They had a hard time arguing that they’re outside of their texts.
Joshua Ashman: 00:27:52 So because essentially where ever they are in the rig, that is their tech stuff, right? So that was sort of the argument. So we borrowed that itinerant type of argument that use it now instead of for the favor of the IRS, use it for the favor of the individual to say that since I am itinerant, therefore my tax home is wherever I am. So if the whole concept here is to maintain a tax on the road, if I happened to be abroad, then my tax home follows me and is also abroad. So that’s also a different kind of direction. That’s a different type of argument. Again, it’s going to apply only to certain people. Certain people will need to build the art. And based on the first part of our discussion, because they’re employees, they can’t really argue that their itinerary. Whereas the, the freelancers are self employed people, contractors, et Cetera, they can start to build the argument that even in the U s I have no one specific location or I don’t need to actually go into the office of my client.
Joshua Ashman: 00:28:45 My client is in, you know, Phoenix it up. I’m in Florida type thing. I might, I’m itinerant. Wherever my laptop is, whoever my materials are, that’s where, that’s where my attacks on it. So, you know, I think what I’m trying to do here is to show that again, this is only the first step at the part exclusion, the tax and what we’re trying to show that it’s very, very effective specific facts and circumstances. And it’s and the key I think for success is to be able to a, be aware of what the pitfalls may be. You’re aware, can I risk argue that I’m not thinking the texts on threshold and to really use that and to work it into strengthening, we are strengthening that position by setting myself up on my documenting things and like having things in place in case I’m challenged in order to show that no, actually do have a text. This was done on purpose this way because I was educated about that. That’s I think a sort of a tip I think are best practice.
Sean Tierney: 00:29:42 Yeah. When you say strengthen the case, so is this only relevant in the case that you are challenged or is there a gating first step, you know, to qualify and then they give you the green light, red light and then you can go forward?
Joshua Ashman: 00:29:54 Well, I think one thing that, that we’ll call it maybe dangerous as Dana, a bit extreme, but there’s a certain precedent I think that people feel like oftentimes, especially when you are in the kind of the, the community of let’s say digital remotes and it people are sort of comparing notes as they are approaching tax season or row where they’ve already filed. Whatever the case may be. They’ll say, oh, I found them, I got the money back. You know, that kind of thing. So you know, filing, getting your money back is definitely not a indication that the IRS reviewed the tax return questions, your eligibility to file the foreign exclusion and positively agreed and said, oh yeah, this guy emailed it the job, you know, here’s the refund. We all know that the IRS process returns somewhat automatically, right? As long as there’s no sort of like on issues that popped out of the system, which there can be with regards to far exclusion pain or how the actual forms filled out the form 25, 55.
Joshua Ashman: 00:30:53 But, but they’re the IRS issuing you the refund doesn’t really need a, they for short. It doesn’t mean that they don’t reserve the right to come back at all your question afterwards. We’re talking about if your kids, it’s shortly so. So I think that what I’m about to say is that it’s important to, to develop the position. It’s important to feel confident in position to strengthen the position by doing all the things we talked about. But of course that’s not necessarily going to be needed unless the IRS does challenge you. Right. So it’s again, a very personal choice. Sometimes people will talk to us and they’ll say, okay, well how do you gauge my, my eligibility? Do you think my case is strong? I think my cases not really correct myself. They actually come to us and say, do I qualify? And that’s a very hard question for me to ever answer, not just because you know, often times tax professionals never want to give you the right answer, but I’m not just the flexing there.
Joshua Ashman: 00:31:52 I’m saying that that, I don’t know. If you’re eligible, only the IRS can determine ultimately rule. Determine ultimately if you’re eligible, what I can tell you is the strength of your position and that’s what we can advise clients. Build your position from a vantage point of understanding the rules and then build your position with enough support behind it that in the event that you’re challenged, you have what two to respond to the IRS. So eligibility is something only the IRS will determine. It’s all very much facts and circumstances oriented. I think we’ve just been clear from this conversation, but I do believe best practice is to make sure you’re aware of yourself aware of of the strength of your, of your claim before filing it. That’s just my personal tip. Others would say, you know what I’ll deal with if it’s an issue, you know, it’s easy. This is something that everyone does and I just, I just need to catch.
Sean Tierney: 00:32:45 Yeah. Well and it seems like the ultra conservative way to play it is just to, even if you have a weak position than just escrow, the reimbursement. So in the event that you’re challenged, the worst cases, what you’ve got to pay interest on that are penalties or are there no penalties as long as you did it right? Or like how does it,
Joshua Ashman: 00:33:01 Yeah. First of all, I agree with you. Let’s say you’re in a situation where it was the folding cause or employee, right? So don’t stop the withholding. That’s something that we generally advise. In other words, you can tech it as a technical mechanism to inform your employer that you’re going to be claiming the foreign exclusion and that employer will have stopped withholding on your paycheck. Right? That’s part of the [inaudible] six in three you attach it to the w 40 telling the employer, listen, I’m going to be qualified for foreign exclusion, therefore stop withholding my wages, or at least take into consideration x amount that’s going to be excluded. So that’s kind of a very, I won’t say it’s necessarily an aggressive approach, but it’s certainly a very confident approach to say that I want my money on the front. I don’t want them to withhold the money.
Joshua Ashman: 00:33:45 And then of course I support that by filing the tax return with departments who should claim in that case, IRS comes back. It’s not just the gun interest that point, it’s about tax, right? You didn’t give us the text, there was no withholding on your, on your payroll. And not only do you owe us attacks, the deal is fountains, et cetera. I think the, the middle road is to say, okay, I’m going to continue the withholding online with my employer, you know, on the, on the pink slip on a w two, but they don’t want tax return home to claim the forest. And in that case I’m actually going to get a refund. Right. Because if I’m going to be eliminating or reducing my tax, then of course the excess excess withholding based on the position I’m taking and now I get the refund that’s of the middle position.
Joshua Ashman: 00:34:29 I get the refund spend on that happy. It’s the most conservative position, I think is what you were referencing. Is that a, of course I don’t see the holding. I have to hold them throughout. I make the claim on my tax return. I get my refund, but I kind of stashed the refund for a couple of years, you know, until the statute of limitation lasts, which is three years. And therefore if the IRS comes and I am not successful at at you know, arguing the strength of my claim or convincing the IRS that I am eligible, then I can check, okay I just kind of go into this savings account and I put the extra money and then I’ll give it back. And yes, there will be there will be probably some interest in that in that case, but at least, you know, being on the hook for a little bit of interest is not the same as you want to hope for the taxes you’re talking about, you know, 20 to $25,000 over the course of a few years.
Joshua Ashman: 00:35:17 That’s a lot of mine to come up with. So it very much depends on phone’s personality. Some people were and none of the percentage of their needs. Also some people, this is kind of just gravy on this is great. I’ve got this extra kind of stuff and I can put it on the side and doesn’t say, no, no, no, I need to use it when I get it. And then the third really did say the most aggressive, let’s say, and I don’t even want to pay the taxes to begin. I need the cash for the cash. What the cash, when the cash, well immediately without it is holding. So couple different options. So what next? Okay, fine. So we had, so that’s tax. So I think we’ve done a good job at explaining tax, which I think is honestly it’s the most complex part of the form of solution player.
Joshua Ashman: 00:35:56 But the good news is that in fewer cases the IRS actually argues that tax isn’t met. And I’ll get into now I think what the IRS is focusing on more and the reasons why the next condition is not having an abode Abo d and abode in the US and in a vote in the u s zone that has an ability to us automatically does not have a tax on sort of like a negative tax. Right. I, I kinda compare it to the positive establishing attacks from abroad and not having the negative, which is u s ago, which all automatically disqualifies me from having a tax from abroad because I had the support with us now on a boat of the u s unlike the implications of a tax home, which we talked about, the ability of the u s has very much as a domestic connotation sort. So the intent or a connection to the u s and I think with the specifically with this crowd that’d be listening to the podcast.
Joshua Ashman: 00:36:52 That to me is, is, is the easiest to meet because oftentimes, you know, the digital nomad or the, the remote, they sort of are packing up in the u s they put some stuff in storage. They don’t necessarily have an apartment or a house there. They don’t have family there. You know, oftentimes they may not even have a car anymore. They don’t really have much of a connection. And they’re embarking on this, on this journey, on this experience, and they consider themselves, I’ll come back and when I come back we’ll see what happens. You know what I mean? That kind of thing. They sort of severed their connection to the u s as far as their personal ties and the like, of course they saw family, their parents and siblings and friends and things. But, but that’s not really, you know, the indication. It’s much more about you know, properties and it’s about you know, certain affiliations and things like that.
Joshua Ashman: 00:37:43 So I think it’s easiest for the, for the remote, the digital moment to, to meet this, not having a u s have both threshold. Okay. Whereas we have other clients, which I think we’ll talk about now just to kind of for context is those that are connected to the military. And the reason why I’m bringing this up, even though it’s probably less relevant to, to the crowd here, is because this very much is a window into what the IRS is thinking. And it’s a window into what very, very recently or really daily goes on between the IRS, a taxpayer, the tax court. And it’s really a good way for us to assess exposure, so to speak, to the, to the Domecq community. The Thursday, there’s a rule and it’s a new rule, so I think it’s a positive or to positive change. You know, we have a lot of great men and women that are working in, you know, combat zones.
Joshua Ashman: 00:38:36 Okay. Either they’re actually in the military itself or they’re working for companies that are supporting the military when we call them military contractors. So the question becomes whether or not someone who is, let’s say Afghanistan or someone as a Kuwait, someone working in some of the other combat zones, are they able to play foreign exclusion? So here it’s interesting the tax home, right may place of employment. I think it’s obviously the argument is of course you have their main place of employment abroad after all, you’re working for a company that sent you to work in it or to fly helicopters or be an engineer, whatever it is in these combat, some support. He was military. So certainly there may place employment slash business is going to be abroad. The problem is, and this is where we see the IRS is, has been attacking tax theirs and has been winning by the way.
Joshua Ashman: 00:39:26 IRS has been some winning overwhelming oracle in cases that they say that these taxpayers are failing the U s upvote threshold that they suppose certainly still maintain that who civil and the reason is because they still have family oftentimes love family back home, right? Then they go by themselves, but a wife will leave her husband, her husband, the wife and the kids that lead them back into the u s they visit the u s often there are are in our, you know, a couple of weeks on top of the softer things. But what’s most interesting if you read the cases is that they say, come on, how can you say that you don’t have a vote in the US? Where else do you have in the boat? Where else is your main place and living? You don’t leave the base, right? You’re, you’re sort of, you’re given a room on a base somewhere, you know, in a tent is dangerous, et cetera.
Joshua Ashman: 00:40:15 So the IRS sort of by proving that it can’t be that you’re an actual member of society in these jurisdictions and therefore you must still be connected to the US. I think that’s a very powerful tool for us to understand. Are we still connected to the U S or have we established connection to the local jurisdiction? So I think certainly with regards to the nomads, from what I know for my clients and from just being involved with the remote, your company, etc. Very much, the objective is very much to be integrated, very much to be part of the society, very much to be part of the community, very much to experience the people culture, et cetera. So that’s why I think that the argument of having the whois vote is more simply overcome by nomads. Then perhaps the argument of taxol, have I met the, you know, how do I have in place of business outside us?
Joshua Ashman: 00:41:05 But unfortunately these military contractors are like picking them off one by one and these are just normal people. But we see, I can see case after case. I think if you’ve wrote extensively on this and some text journals, et Cetera, that they are winning. The IRS is winning these cases because a bone in the u s is still, it’s still maintain and therefore they can’t have a from abroad. And to your point before shot, we’re faced with a lot of clients are queries, inquiries, leads, et Cetera, that are saying, I owe the IRS all this money. You know, because I took foreign solution, I got an old holding back from the company. Obviously it’s all gone and now the IRS is coming sometimes even, you know, three years later and is saying that your claim is still good. So something needs to be careful, but I think as far as you know, the, the nomad community, like I said, I think the having a road with us, while you need to be careful about it. Okay. I think you, we talked about this recently, you need to be careful not to establish a boat with us, which can be multiple trips, essentially showing connection, having certain, you know, things in the u s that would, that would otherwise you know, show that you’re disconnected. But I think generally if you’re planning on spending a number of years abroad, certainly if you’ve established actual hesitance somewhere else, then you can be confident to do it. The in your case,
Sean Tierney: 00:42:26 I’ve got a question. Is there ever a point at which that re that reimbursement check, you can confidently know that that is truly yours and that there will be no challenge to it? Or is there like a statute of limitations where after a certain amount of time they can’t undo that or how does that work?
Joshua Ashman: 00:42:41 Yeah, it’s a three years. Yeah, it’s pretty simple. It’s three years unless there’s something fucking gross understated. But assuming you stayed at all on your income claim, these solution that you have three years from file once, three years with filing this last, the IRS does not have, does not have the ability to, to open up that case.
Sean Tierney: 00:43:00 And can they, let’s say that you filed and under the policy today, let’s say for like 2018 taxes, everything is above board, it’s legit entitled to it and then two years ago by IRS changes a policy. Can they retroactively make that stuff apply or does it like are you locked in under the code that you filed them?
Joshua Ashman: 00:43:21 Yeah, no, unless specifically the, the, the rule would go retro, which is usually more than fair. No. Like at your second thing, just cancel foreign exclusion. Yeah. You’d be okay. No, not much of enough. No. I think I’d be surprised. Very, very enlightened. Yeah. Got It.
Sean Tierney: 00:43:41 Yeah. They couldn’t just wipe it out retroactively and then suddenly, but then nothing is out of the question. Right. Like you’re, I guess you can’t put words in the IRS is mouth. It sounds like
Joshua Ashman: 00:43:50 That is true. That is true. But I see that as that, like,
Sean Tierney: 00:43:54 All right, well, so, so we’ve talked about the physical presence test. Is there anything else we need to know on that one or can you, can you transition to the bonafide?
Joshua Ashman: 00:44:02 Yeah. Yeah. So, okay, let’s, let’s transition then. So then we’ll, so we talked about taxstone talked about the boat, you know, you can prove these are the sort of that prerequisites I call them of qualified foreign exclusion. By the way, I will add one other thing. I think it’s just the benefit of the listeners here. The reason why I work as case, it’s not just the military contract to show these sort of juxtaposition of the vote argument, but also because it sort of gives us a sense of what the IRS expected. We know that the IRS, it’s challenging upload claims because we know the IRS has see a number of claims of foreign exclusion for military contracts, right? It’s very easy for the IRS. You can look at the address they can set up faces against, it says Kuwait says I this theory of whatever it is, and we know that the IRS has kind of smartly going after these clients and say, okay, let me make sure that they qualify.
Joshua Ashman: 00:44:50 So I think my point is to, to nomads is at this point, this whole concept of, of nomads, digital nomads, it’s very new. It’s very new to it’s, so I would caution and say we’ll get it. We’re going to have to have the perspective of time to really understand this also gets on the radar of the IRS. Like right now, I have not yet seen it. It’s been about a couple of years since sort of the Novec community has to start to grow a couple of years where people claiming for an exclusion and haven’t heard anything like us. Yeah. We receive correspondence, you know, some clients have shown us there are 25, 55 was incorrectly filled out, which is maybe I’ll just say by the way, you can’t just put other, if you can be in multiple countries, you’ve got to list those countries, et cetera. But the point is I don’t yet have, we only didn’t have the perspective of time to really understand and precedent and really understand it.
Joshua Ashman: 00:45:41 The IRS is going to make a big deal about tax. So I sort of am a little bit fearful that in a few years the IRS will move on from the military contractors who you know, they’ll already kind of made all those claims. People will be more aware of, people will stop. For example, practitioners will become aware of these cases and will advise their clients and stuff file under the foreign exclusion if they may have boat with us. But but we don’t yet know about tax. So we’ve about this whole argument about the itinerant or about nomads, et cetera. So what I’m saying is that we need to still be a little bit cautious because we don’t yet know what the IRS spoke to do. It could be a number of years until they sort of discover, okay, this is this new new sort of trend and you sort of experienced that people are going on, hey, let’s take a look.
Joshua Ashman: 00:46:26 Because we all of a sudden are noticing a, you know, incremental versus really increase in foreign exclusion plates. Let’s try to figure it out. Because so far the audits that I’ve seen have been on a boat like I mentioned, and also on what we’ll get to in a second or the five presidents. So sort of the IRS has, it’s a tested, it’s tried and tested planes that it makes on those that you smart exclusion and it’ll require them to be adaptive in order to sort of discover perhaps, you know, other weaker arguments maybe about taxes. I think we’re okay for now, but I think just need to be cautious that the IRS will pick up on the whole concept of the notebook.
Sean Tierney: 00:47:04 Yes. Certainly as the pie grows and is, did you know the digital nomad thing becomes a bigger thing, then the bulls-eye is going to become bigger, you know? Right. The IRS will at some point target it because it represents just a chunk of money they’re not getting. So I think that’s really astute what you’re saying. Here’s the deal. What I think is cool, and this is the thing, it’s like we can individually go and research all this stuff on our own, but where you’re in a really unique position is we’re just an n of one. You are dealing with hundreds, I don’t know how many clients you have, but you have all this collective exposure and not just with nomads but like the military contractors. And so you have a window into where the IRS, his head is at and you can see things coming that we just through research on our own couldn’t. And I think that’s like a good portion of the value of, of why to contract you know, a professor, a tax professional who focuses on ex-pat.
Joshua Ashman: 00:47:58 I agree. I appreciate that. But that, that’s very true. And the court doesn’t need to be honest necessarily, but it’s true because when you have that sort of broad experience for many different profiles and 80 different people, you’re going to, you’re going to be in the know a little bit more than that. You know, just an individual that’s perhaps read articles. I agree. But I will say, I will say a publicly showing you’re my only client. Yeah, for sure. So, so that’s, that’s cool. Okay. So if you go on, if we, if we go on from the, the abode and the tax home, then now we, now we reach those two tests that need to be fulfilled. One of the two tests need to be fulfilled. And and this is where we enter the physical price for people to put in all that.
Joshua Ashman: 00:48:47 So after I have attacks from abroad, I don’t have an event in the u s etc. I have, of course foreign income. I of course the foreign exclusions that foreign income, I think it is important to point out, even if you qualify for foreign exclusion, if you’re working in the states or you spend a couple of weeks in the u s have application into the u s you can exclude it. Of course it needs to be foreign, foreign or, but those two big tests that need to then be fulfill is either it’s one or the other, either the, the physical presence test or the bonafide residence test, the physical presence test. And they’re very technical tests. It’s just essentially accounted days. It’s 330 days outside of the U S in any 365 day periods, you can have up to 35 days in the u s it doesn’t need to be in the same year.
Joshua Ashman: 00:49:36 It doesn’t have to be from January to December. It can be from February to January. From march to February could be from June to to net. There’s a 365 day period. It can straddle multiple or two tax years. Within that window you have to find yourself outside of the u s for 303 days. That’s the physical presence test and that’s usually often a test that that no hands will roll a checkoff as a, as their qualifying test. The other test is the bonafide residents test and that as it sounds, it needs an I am a bonafide residents. I have residency or I’ve taken steps to achieve residency in the jurisdiction, which I think is more difficult for those of the nomadic lifestyle. If they’re flipping around several different countries, the probably not going to have established one of my residents, although there are lows that decide to sort of anchor here for awhile or even to apply for residency and to achieve it. So either one of my residents or physical presence. Those are the two qualifying tests, one side past the prerequisite test of Texas and not having the call with us.
Sean Tierney: 00:50:47 Does one or the other get targeted more for audits? Like are, did you raise yourself for more exposure if you’re under the physical presence or the bonafide residence or is it all, is it all equal in the IRS?
Joshua Ashman: 00:50:59 Yeah, I think it’s, I think it’s equal and it’s very easy. Usually this is information that requests these examination or this is look like if you claim physical presence, they’ll say, okay, give us a copy of your passport. How are you can see the entry exit, you know, stands, et Cetera. Each approved that you actually were abroad in three days. So that’s, you know, is sometimes what, what, what taxpayers would we see the IRS accommodate or notice or a, or a question to follow up with. One of my residencies, it’s actually much more of kiss. It’s more the facts and circumstances by nature. It’s not a technical test. One by residents. The IRS will challenge and say, okay, show me that you met or show me that, hey, you pay taxes in that country. Show me that you have some sort of presence in that country.
Joshua Ashman: 00:51:43 Show me that, you know, what’s your lease at this point? Or are you a citizen? Are you a resident or are you just a tourist? The length of your states that are all these various questions, which if you notice are really, there’s very similar questions on the actual form 25 55 in the part that, that that goes through one of my residents. The IRS will usually just kind of minute mimic that or copy that part of the form. But we’ll be asking for, for substantiation of that. Not just sort of the answer. Yes. You know, I’m a resident and say all people, let me see your residency and see or you know, copy of the passport with a d, You know, where you’re standing, et cetera. So yeah, I think both equally the IRS has the ability to very easily identify which tests you claim. Of course it’s on the form and then there was fun. Connie you’d said if they want to challenge you or you’re meeting of those tests, they will challenge one in accordance to the quote.
Sean Tierney: 00:52:40 Okay. So the, so you’ve passed one of the either bonafide residents or physical presence any other qualifications that people need?
Joshua Ashman: 00:52:48 Yes. That’s really it. That’s really a thing. I just think, like I said earlier, I said it just quickly in passing, but make sure that the incomes are going abroad and if, if we kind of remained in both places and kind of going back and forth and make sure you’re going to the allocation properly and all these schools which was allocated to the time spent outside us. One thing I will say also is we talked about briefly about,
Sean Tierney: 00:53:13 I was just standing there just to put a bow on this, like, so there are some hoops to jump through here to get it, but the carrot is pretty large. And like you said, if you’re in the 25% withholding bracket and you make 100,000 and you’re doing remote year, which costs $27,000, you can essentially get the entire year paid for through this tax thing. If you’re able to, you know, meet all these qualifications and make it work.
Joshua Ashman: 00:53:37 Yeah, that’s true. That’s true. That’s it. That’s why I state, that’s why I think that the IRS, you know, what you see in a different couple of different contexts, whether it’s certain credits that were fundable, whether it’s foreign exclusion, you know, where the IRS is going to, they’re going for the monitoring, right? So if they’re, see, you know, huge reef funds being paid by to a taxpayer multiple years in a row, that’s sort of where they started going to be open to go look. So, yes, there’s a lot of things that need to be, a lot of hurdles that need to be passed. But, and there’s a lot at stake. There’s a lot of benefit in state, but you know, the IRS also has sort of that same vested interest in in you know, not allowing it. Right. So that’s why it goes back to the beginning of our conversation that you just really want to know what you’re, you just really want to know what you’re up against.
Joshua Ashman: 00:54:23 You really want to know the strength of your argument. You don’t really want to go on blind. It would be ended up with some really bad situation where you’ve got to come up with a lot of money and just were sort of surprised because you know, the guy next to you had no problem with it. That’s never the way the tax plan. I always get frustrated a bit, I understand it, but whenever clients say they complain, it will say, you know, well this guy I was talking to, he got a, this one had no money and I’m not getting anything. You know, obviously your situations are entirely different, you know what I mean? But yeah, it’s natural to sort of be, to prepare like that. But I think the best advice really is to just to be aware, be aware of the, of the requirements, the qualification requirements and then be aware that that is something that is somewhat on the IRS radar even if you’re not yet remotes or nomads.
Joshua Ashman: 00:55:11 Even if that’s not yet on the IRS is radar. We definitely know foreign exclusion is, has been on the iris radar for a while. By the way, there are people in Congress, I once remember attending, attending a a conference when I would say senior manager, a principal, or has pwc. And they had some guys from the Washington national office there and kind of have their ear of Capitol Hill. They figured, you know, they kind of hear what’s going on inside of the Congress, where as, as is as it relates to text and stuff. And what I’ve got up and was like, do you understand that there are many, many, you know, senators and Congress people that want to repeal and want to push to appeal the entire foreign exclusion, you know entirely, right? Because they say, well Hawaiian is that fair? You have no us workers, domestic workers that aren’t getting the benefit of [inaudible] solution just because I kind of go overseas, they’re getting smarter teachers. So you have to understand that there are voices and pressures within Congress to to sort of resend the revoke your end, the foreign exclusion. So I think while it’s still out there and we should take advantage, right, that’s part of our job as part of the tax payer school. Take advantage of the legal loopholes and the rules that are are given to us, but we just need to be aware.
Sean Tierney: 00:56:27 Yeah, I mean I guess my, my response to those people though is if I’m not living in the US, then I’m not driving on federally funded roads. I’m not going to public, you know, public hospitals and I’m not using power lines and train tracks and you know, whatever. All this stuff that federal money buys. So it seems only natural that you wouldn’t be, and granted you pay some portion of tax, right? You’re responsible for the amount over the 103 or whatever it is. But to me it makes perfect sense that you, there is a exclusion for that, right? Like why, why would we be paying for services we’re not consuming? Yeah,
Joshua Ashman: 00:57:06 Okay. I understand what you’re saying. I think that again, if you fall, the point of the foreign exclusion wasn’t, that really wasn’t the, I think the impetus behind the foreign exclusion was more to kind of equalize to this company so they can spend, you know, I’d have an even playing field abroad that I think your point, and maybe we’ll talk about this now if we sort of transitioned a little bit from from foreign exclusion, but I think your point, you’re raising a very interesting point. It’s kind of a very
Joshua Ashman: 00:57:34 Especially now with a lot of these intergovernmental agreements, notice FATCA and different things like that. Not sure how much we want to get into that. I’m happy to if you want to, but it sort of speaks to the concept of of citizen ship based taxation and whether citizenship is taxation to something that the US should think about moving on from which I don’t think it’s on their radar at ultimate one firm, but that’s where they going to, you’re making not just someone who is a a nomad living abroad, but really US citizens that were after they were born abroad. Right. The many US citizens that are born outside the u s citizens by birth because the parents view us citizens or there are many US citizens that were born in the u s but I’ve left the u s when they were, you know, two, three years old because their parents who were, you know, for example, and the university are doing the graduate program or we’re working on assignment in the u s they happened to have been born then this is 35 40 years ago now.
Joshua Ashman: 00:58:29 They’ve been living abroad full lives. They don’t even have any connection to the u s citizenship based taxation I think is the overarching debate. I think the position of the IRS or if the u s government really is that being US citizens of privilege and this sort of comes with the territory. This is part of the responsibilities. I’m not here, I’m not a spokesman for the u s government for the IRS, but that’s their vantage point. Now whether or not texted and the rules need to have sources of sort of logical explanation to them, we know what the rules are, but I think that’s sort of where it comes from. Just like green card holders, US citizens, they have the, the protections so to speak, in the privilege of being citizen. We’re rarely are in a world. We’ll come and get your commonality, et cetera up the euro citizen.
Joshua Ashman: 00:59:14 Then I think they come with the tax obligation as well. So I’m sure there’s merits to both sides of the argument. It’s not something that we’re going to solve today, but I think it’s a similar as a response to the claim that people should be looking for in exclusion because Washington [inaudible] aren’t abroad and are not necessarily getting services that are provided with the use or that are, you know, use the tax money to use for, I think it kind of speaks to the overarching argument whether or not the US should be taxing people who are outside the u s at all.
Sean Tierney: 00:59:43 Yeah. And I certainly don’t want to get into like political discussion or forward looking stuff I’m really more interested in for my listeners, like what are the actionable things that can help them, you know, keep more of their own money. But yeah, to me it’s more just around if you have any kind of cognitive distance about not paying tax in the u s on some portion of your income. I mean, that’s to me how, or at least personally how I make peace with it is that, well, I’m also not consuming any of the services that those tax dollars buy. So a, that seems fine with me. And then I, yeah. So okay. Can you talk, actually I want to address also that state implications because I know every state is different and when you leave, like for instance, that first year I was a resident of the state of Arizona and so I paid Arizona state income tax for an entire year that I didn’t live in Arizona. Are there provisions if where, if you’re outside of a state for a year that like, like, okay, so what is the best way to deal with that situation?
Joshua Ashman: 01:00:41 Okay. I think that the first step in dealing with the situation is recognizing that what works for the federal government does not necessarily work for the state governments. So this whole discussion we just had to meet the foreign exclusion or to be eligible, you know, to exclude my income based on tax and et Cetera. All that kind of stuff. Bonafide residents that has nothing to do or it’s not going to apply on the state level. So that’s kind of step number one, understand that whatever the federal government decides is not necessarily the case with these state governments for a state, not to tax you on your, your income, in order for you not to be taxed on the income, you’d have to be a non-residents of that state. Similar to the u s government, right? Like we’re saying, US taxes worldwide income to its citizens, you sort of a resident because of citizenship, the states, you’re not a resident because you’re a citizen of the u s your resident state because you are a resident of that state.
Joshua Ashman: 01:01:35 So until you actually cease residency or terminate residency in that state, then you’re going to be required to continue to file in that state. There are some states that will respect the foreign exclusion. They’ll follow the federal government and will allow the foreign exclusion as well. Many states allow the foreign exclusion. In other states they will be called decoupled. They do call from that rule of Thoreau grown it and they don’t about foreign. So just you’re in a situation where you had a nice big exclusion for federal purposes, but when it comes to the status and add back, the income gets added back in tax. So residency and the state different than residency for federal purposes. Certainly nothing in the citizenship base. Now, like you said correctly, each state these, the states that have tech station, right? There are many states don’t have that, but the states have depth taxation.
Joshua Ashman: 01:02:20 They all have very unique rules. But we see sort of as a recurring theme, which would sort of makes it difficult to terminate residency in the state or more difficult is a recurring three theme in many states. I won’t say in all states, but some states are just about the actual count of days in that state. Those are of course would be easier to terminate residency from, but there’s a common thread of what we call domicidal. They call it domiciled and domicile is the way I like to look at it in the states. Also sort of view it this way, is that at the end of the day, right, where is your home? Where are you from? Where do you, where do you envision yourself returning to? Right. That’s sort of Mike Donna’s style. So no matter how long I’m away on a silent or as a nomad or for whatever reason outside of the state where I call my home, right, where homes were the hardest, I get to, they say, right, if I’m planning on leaving for even five years or 60 or 70 years, certainly for last, but even for a nice amount of years, if I already know.
Joshua Ashman: 01:03:21 Yeah, of course I’m going back to Pennsylvania and went back to New York and going back to California, then oftentimes that’ll be enough to maintain dominant sire, which would maintain residency. A good way to break down a style in, in most, most states have this, have this threshold and they actually want you to, to define it or to assign your new devil’s side, where is your new down? So that’s sort of a way to think about it. Well, if California is not in my Donald Sob where I grew up, I lived there for a few years, et Cetera, and now I go on this journey. Well, if California is not your diamond salad, where is it? I think it’s, I like clients to sort of start to think about that because that’s really what they’re going to be. People are gonna be facing, not just on the tax return when you need to actually identify your new Donna salvage determinate your old downside.
Joshua Ashman: 01:04:07 But just in general, it’s a good way to figure out if you’re not from California anymore physical connection to California, you’re not planning on returning to California, but where is your home? And then they start to him and, Oh, well I’m actually in seven, seven different countries throughout the year, doesn’t actually my home, I don’t really have a home at this point. I’m not sure. So oftentimes I’m not being sure where you’re domiciled is not strong enough to terminate side. And we know that as a general rule states are even more aggressive than the federal government states. Obviously our revenue start, many, many states are pretty bad financial situations. So taxes and their tax authorities are quite aggressive, not just the big ones. California, Massachusetts, New York, they’re famous for their aggressiveness in pursuit of residents. I think also, especially in some of the states like that where a lot of people live there at different times of their lives but aren’t necessarily connected to there, so I think they sort of have this, a little bit of this complex where they have all those people living in my state, but not enough people pay taxes on general there.
Joshua Ashman: 01:05:10 Their mindset is that, okay, if I have an attachment, if there’s going to be, let’s say a letter except for bank account there, or even just a small piece of mail, then then the local jurisdiction say, okay, well this is enough indicative for us to at least write you a letter and say, hey, by the way, we got this bank statement that has California on it. We assume you’re a resident because of that. That is of course it’s up to the tax payer to say, no, no, no, I’m not a resident just cause I get my mail there, et cetera. All these various different facts and circumstances based a test that that would show yes or no residency, but I think what we can take away and even when we can’t cover 50 states, I think the main takeaways then just in summary is in general, I’m going to continue to be a resident at where I was resident until I actually terminate residency in order to turn in residency.
Joshua Ashman: 01:05:59 Each state has different rules, but to keep in mind this concept of downside, it’s not so easy to terminate a residency in a state unless you are pretty sure that your connection to that state is is weak. And then of course understanding that if you spend a number of days or a good amount of time or own property perhaps in that state combined with other factors, then it may still be considered as statement. So we generally sorta sort of caution or advise our clients to be a bit more conservative when it comes to states.
Sean Tierney: 01:06:31 Okay. Is Do states only recognize shifting residents to another state as exiting the first state’s residence? Or will they recognize, for instance, me moving to Portugal now that I’m a resident of Portugal, can I go back to wherever I lived last and say, hey look, I’m no longer a resident there because I’m a resident here.
Joshua Ashman: 01:06:51 Yeah. It doesn’t matter. It can be anywhere. Yeah. It just has to be somewhere. Got It. It doesn’t, it doesn’t have to be another state. No.
Sean Tierney: 01:06:58 Got It. Okay. well we’re actually over the one hour mark and I tried to keep it to one hour, but I do want to just ask you like having seen so many people that you deal with and you know, obviously exposure to all the different scenarios, where do you see it going off the rails most? What gets challenged? What are the, the main things to avoid?
Joshua Ashman: 01:07:22 I think that the, the first of all, it starts with the forms, right? Because the forms is your first sort of, the IRS has first knowledge of your claim, right? So we have seen, and it’s really unfortunate because if everything else is in place, when you have your forms wrong, you’re going to be sort of heading down, heading down yet difficult pat. So it really starts with the forums. It starts with getting the forms right, maybe short, they’re complete and they’re not so easy. They’re multiple pages, you know, some nice four or five different pages around the foreign exclusion. We want to make sure that you’re filling out all the questions. You don’t want to give the IRS a reason to write you a notice. Even if it’s just an Ada said notice, oh you didn’t fill in, you know, aligned 15 [inaudible]. But that can sort of get them thinking [inaudible] why are you filling out this form in the first place?
Joshua Ashman: 01:08:09 Et cetera. Start putting pieces of things together. So I think the pitfalls as simple as sounds, is making sure you got a tax return right. When you show the forms complete, make sure the forms are filed timely. You want to make sure that if the FBI plane is late, we have the right disclosures on the tax return. That would allow you to claim the part exclusion, you know, a non timely manner. So I think to me the first default is, is the forms. The second is in filling out the forms, make sure as much as you can, we talked about earlier about strengthening your arguments. So your presentation of your claim, your presentation of your argument is very important. For example, with foreign addresses, I think it’s one that we see often people don’t put a foreign address if they’re claiming that data techs home abroad, right?
Joshua Ashman: 01:08:56 The IRS can simply say, well, we didn’t know. Right? This is ridiculous. So, so making your shoe, making sure that, excuse me, as much as possible, you have the, you have your, your case, the, the support for your case would strengthen your case, sort of laid out for the IRS so that they don’t have an excuse. So to speak to them, we immediately select yours for, for audit. I think the other thing is the, we talked about earlier about the money. Make sure like everything else in life, make sure you have a backup plan. You know, we can help you determine whether or not [inaudible] good argument better. And like I said earlier, the IRS makes the funds nature. Even if you can argue with them, you can go back for them to take a couple months, et cetera. End of the day. Ultimately they’re going to render the decision.
Joshua Ashman: 01:09:44 You can take it all that the tax court, but the end of the day they’re going to read her decision. So just be careful in terms of being able to plan for it. I’m not advocating and saying that there’s going to be, you know, one a hundred percent audit, right? Right now we know by the way for or tax returns with foreign exclusion and other farm type elements attacking them are all ironed up 10 times more. That standard a US citizen. So it’s still not, it’s still only got 5% or so, five, 6% or five 6% compared to the normal, you know, domestic. The type of taxpayer is a huge, a huge amount when you think about it. That’s actually a lot of five, 6% of all tax returns that are filed within the international context or review. So you have to expect that there might be a little bit more scrutiny here. So just, I think that’s the other thing we’re saying. Just make sure you, you, you have that understanding of it. Got It.
Sean Tierney: 01:10:41 Got It. So do everything right so you don’t raise your profile and then just make sure that you’ve got a backup plan in the event that it is audited in somehow you ended up, you know, being challenged and you owe the money and that whole thing about, you know, if you really want to play it safe to treat it as almost like forced savings and for three years hold on to that money, don’t you know, put it into like a low yield, high safety. Okay.
Joshua Ashman: 01:11:04 Yeah. Then you can even earn, you could eat it or you can even earn the amount of interest you’ll have to pay eventually. Right.
Sean Tierney: 01:11:12 I was going to say it’s almost like an interest free loan from the IRS at that point. And then if you happen to make the spread and you make a little more, it’s still, it’s still in that wind. Okay. Well, John, Josh, I’m gonna wrap this up. There’s one more section to this interview. We’ll transition to this. It’s just a set of, kind of same set of questions I ask every guest and it’s called the breakdown. So, are you ready for the breakdown? I’m ready. I’m ready. Break down, baby. All right. What is one book that has profoundly affected you? Oh, the Bible. All right. What about one tool or hack that you use to save time, money, headaches, et Cetera? The black barrier. You still use a blackberry? Absolutely not friends. Absolutely. I might be the only guy in the world blackberry forever. I love it, man. You are my only guests to say that, so that’s amazing. Okay. What is one piece of music or a musical artist that speaks to you lately?
Joshua Ashman: 01:12:14 Well, lately it’s actually country music, which is a, not really my upbringing. I’m from the East Coast, from Baltimore, Maryland. But but I like Luke combs and yeah, good stuff. Real wholesome, good messages. I like it.
Sean Tierney: 01:12:30 Inspire nice man. Ali Nolde was my guest two guests ago and he said the same thing. So this, this is a new trend and a question answering, but that guy can’t say that I agree with it, but, okay. All right, last question. What about, or no, sorry, one more. What is one important truth that very few people agree with you on? Taxes can be fun. Yeah. And you’re like coming up with all these contrarion answers. Love it. Okay. I’m glad this is why I hired you man, cause I do not feel that way. Okay. This is truly the last question. What about what is, if you had a time machine to go back to your 20 year old self and give yourself any bit of advice, what would you say?
Joshua Ashman: 01:13:16 Wow, what would I say? It’s hard for me, I guess. I, I don’t have any regrets. I don’t know. Good job. Good job. You know this, you’ll have good days and bad days, but you know, it’ll all work out.
Sean Tierney: 01:13:32 [Inaudible] Yeah, please. Perfect. Yup. That would’ve been a good one. Although 20 years ago, you’re going to be like, what the heck is a computer? Anyway? Cool. Well, Josh, thank you so much. Where do people go to connect with you? Ask questions or learn more about what you’re doing?
Joshua Ashman: 01:13:56 I think the, the easiest is is by our Facebook page expert as professionals. I think we are on Twitter too, but
Sean Tierney: 01:14:06 I got to up my social game games. No, man, you worry about taxes and let someone else worry about the social media. Josh, thank you so much for spending the time, man. It’s been a pleasure. All right, cheers. Thank you very much.