International Tax Matters

Traders have access to global markets.

U.S. traders move abroad; others make international investments, and nonresident aliens invest in the U.S. How are their taxes handled?

U.S. RESIDENT TRADERS LIVING ABROAD

U.S. tax residents are liable for federal tax on worldwide income whether they live in the U.S. or a foreign country. A U.S. tax resident has U.S. citizenship or a permanent resident card (green card). If you qualify for “bona fide” or “physical residence” abroad, which is living abroad for an entire tax year, try to arrange Section 911 “foreign earned income” benefits on Form 2555. Avoid the potential double taxation of paying tax in both a foreign country and the U.S. by availing yourself of foreign tax credits reported on Form 1116. If you live in a country with higher taxes than the U.S., skipping the Section 911 exclusion may make sense because creating officer compensation in a TTS S-Corp also causes some U.S. payroll taxes (FICA and Medicare). It might be better to go the foreign tax credit route. 

The “foreign earned income exclusion” (FEIE) is $120,000 for 2023 and $126,500 for 2024, which the IRS raises yearly. There is also a housing allowance and a maximum amount (cap) per location. The problem for traders is that an IRS publication indicates that capital gains and trading gains are not “foreign earned income.” Hence, they are likely unable to utilize Section 911 benefits unless they create officer compensation with a TTS S-Corp. 

There is a solution: TTS traders with trader tax status can form an SMLLC with an S-Corp election to pay officer compensation, and that compensation is foreign earned income. Before committing to this solution, compare expected net income tax savings, minus payroll tax costs, vs. using a foreign tax credit. 

Excerpt from Green’s Trader Tax Guide Chapter 14 International Tax.