March 24, 2008

Tax Time

I don't know what to think about taxes when one is a resident of a foreign country. I think it is completely reasonable to pay taxes where you live: I am living in Japan, and taking advantage of their infrastructure, so of course I should pay taxes to help defray those costs.

I also think it is good that, as an American citizen, I am allowed to take a certain exemption (about $80,000) of foreign earned income that I do not have to pay taxes upon. Since I don't get paid all that much (why did I go to grad school and get a phd again? Well, at least I enjoy what I do!)

I'm not so sure that people who make over the exemption amount should pay taxes. Just because of the coincidence of where one is born, the US decides that it is entitled to a cut of the money you make even if you do not benefit from the services that the taxes support. I suppose the argument is that, as an American overseas, you benefit from America's reputation, the protection of the US armed forces in keeping the global peace, US foreign policy and aid, and so on. I can't really say that the US foreign policy has helped me out personally: in fact, living in Japan right now a few thousand people in Okinawa are pretty angry with Americans.

So I don't really know where I stand on that issue, but I guess I'll give the US the benefit of the doubt: while I do not agree with current US Foreign policy, I hope that in the future it will change to be less violent and warlike. Given the way the US Political system works, I'm hopeful that a change can be made (unfortunately, with major policy changes likely every four years, that doesn't say much about stability, but that is another issue entirely.) I also exercise my right to vote via absentee ballot, so I guess that is worth paying some amount in taxes to have a voice in my government.

Anyway, as like last year I am again going to take the foreign earned income exemption. You can read about it in the Tax Guide for US Citizens and resident aliens abroad publication 54.

A really, really interesting note is that you are able to also take a foreign housing exemption. Most places in Japan (and Tokyo-to) are about $30,000 - $40,000 a year. Tokyo (do they mean only the area around Tokyo station??) though jumps all the way up to $85,000 a year. My guess is that this is where politicians who have some influence over the tax code live. :)

Assuming I filed correctly last year, I was able to use the 2555-EZ form (2555EZ instructions here) and the 1040 form (1040 instructions here.)

I would have preferred to use a 1040EZ but the 2555EZ says to use the 1040 form. It is nice the that US Government sent me a booklet of tax forms to use, but man that thing is big and complicated. It is poorly laid out: you open it, and are faced with the 1040 form. No table of contents until after that first form, and as far as I can tell, no simple directions. I wouldn't have known what to do had I not used the 2555EZ and 1040 forms last year.

Taxes. This stuff is crazy. I would much prefer something simple, like a single sided sheet of paper that says "pay 20% of your income for the time that you lived in the US" but I'm sure that doesn't cover enough cases, and would decimate the tax preparation industry.


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