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Tax tips for authors: Understand foreign taxes, tax credit and tax certification

If you have sold your textbooks in foreign markets, foreign publishers may withhold foreign taxes at the source before the money is paid to your agent and before it is paid to you. If they are doing that, and you earned, for example, $10,000 in a foreign country, 10 percent, or $1,000, will have been withheld from your payment. Your agent would have received $9,000, and withheld his 15 percent commission on the $10,000 you actually earned. So you would end up getting about $7,500.

If you aren’t aware of foreign tax credit you most likely would report the $7,500 as income on your tax return. But it might make more sense to claim the foreign tax credit. What the foreign tax credit lets you do is take a credit for the full $1,000 in foreign taxes that was withheld by the foreign source, and take that $1,000 and completely offset $1,000 of your federal tax from that. So instead of reporting $7,500 of income on your tax return, you would not take a deduction for the $1,000 that was withheld in foreign taxes. The tax would get calculated on $8,500 and then whatever that tax is would get reduced by $1,000.

I’ve never seen it not work best by taking the foreign tax credit. The foreign tax credit always gives the best results. That’s why it’s important to know about the foreign taxes that were withheld from what you’ve earned and be aware of the foreign tax credit so you can take advantage of it.

The foreign tax certification form (sometimes called 6166 certifications) is IRS form 8802. If you complete this form properly–and the IRS is very specific on what they consider “properly”–you will receive a certification from the US Treasury within six to eight weeks that states that you are in full compliance with US tax rules. You then give that certification to the foreign publisher, who will then not withhold foreign taxes from what they are paying you, or they’ll withhold it at a lower rate if they’re allowed to. Some people find that to be very convenient because then they don’t have to worry about the foreign tax credit. They get paid the highest amount that they should get paid and they don’t have to wait for refunds from the government.

Robert M. Pesce, Partner, Marcum LLP, provides significant tax saving strategies and business advice that enables his clients to become more profitable and efficient.

Read the first installment in this series, “Learn how your agent is reporting your writing income.