by Tom Andrews, CPA
The career of a professional mariner sometimes affords opportunities and circumstances that the crewmember might not have planned on. The travel requirements of a mariner often result in a nomadic lifestyle in which the crewmember lives overseas, purchases a home or property, and in some cases gets married and starts a family. Since United States citizens file an income tax every year regardless of whether they live overseas a common concern is that an American expat will be double taxed on their income. When faced with this situation some taxpayers choose to not file their United States income taxes for fear of being over taxed.
If you find yourself in a situation in which you are now incurring the tax obligation of another jurisdiction you can take some satisfaction in knowing that you probably will not be double taxed on your income. If you paid or accrued foreign taxes to a foreign country and are subject to US tax on the same income you may be able to take either a credit or an itemized deduction for those taxes. You can claim a credit only for foreign income taxes that are imposed on you by a foreign country and social security taxes do not count towards the credit. While the IRS gives you the option to take an itemized deduction or a foreign tax credit you may not claim both and in most cases taking the foreign tax credit in place of the itemized deduction results in a more favorable outcome.
The credit is only designed to provide relief from the United States income taxes that would have otherwise been due and are not meant to equalize the tax between the foreign jurisdiction and the Untied States. For example a long term capital gain rate in a foreign jurisdiction might be 25% and in the United States the capital gain rate on that same income would only be 15%. Assuming capital gains tax on 100K of income would be $25,000 in that foreign jurisdiction (100K x 25%) you would only be entitled to a Untied States foreign tax credit of $15,000 as that is the maximum amount of tax you would have paid in the United States assuming that income were taxed at a 15% rate.
Nonresident crewmembers should also be aware of the “Foreign Tax Credit” as most are now required to report income in their home country. When it comes to nonresidents the foreign tax credit generally works the same as it would for Americans except in the reverse. If a nonresident crewmember is being taxed in the United States on yacht income and then they are required to pay tax on that same income in their country of residency they will (in most cases) be eligible to take a tax credit on their domestic income tax return as to avoid “double taxation”.