The answers to these questions are basically applicable to high earners as well as young artists at the start of their careers. The essential difference between high earners and new performers whose income is more limited is the difference in rates. The basic tax principles do not differentiate based on amount of income.

1.    Can you provide a few very basic tax do-s and don’t-s?

The most basic “do” is to keep meticulous records of all income and expenses, with receipts for everything. While there is a rule in the US that receipts are not required for minor expenditures, keeping all receipts allows the artist to make certain of having a record of all expenses. Without receipts, the artist may forget that occasional $7 taxi ride and those minor expenses add up to substantial amounts over the course of a year. I also recommend that anyone who incurs business expenses (such as voice lessons) and travel costs (such as mileage, tolls, parking, etc.) keep a diary and make daily contemporaneous entries to reflect those costs.
The most basic “don’t” is don’t expose yourself to investigation for noncompliance with the tax laws. People do not want to pay taxes, but the easiest way to get into tax trouble is to fail to report your income and expenses properly. There is an ocean of difference between an innocent mistake in computations and a deliberate attempt to evade tax by not reporting income or overstating expenses. I advise clients never to take the risk that they can cheat on their taxes and be confident of avoiding detection. Revenue authorities have enormous investigative powers and you do not want to be the taxpayer who is facing those powers first hand.

2.    Please provide a short and simple explanation of tax treaties and how they affect individuals.

Tax treaties are international agreements between two countries which provide benefits not otherwise found in the laws of the two countries. The most common benefits of tax treaties are reduced rates of taxation on common forms of income and even exemption from taxation for limited amounts of income. For example, many income tax treaties which the US has with other nations provide for the exemption of income (usually between $10,000-$15,000) for performing artists who are citizens of one country and are performing on a limited basis in the other country. Thus, a US citizen performing in the foreign country would not be taxed in that foreign country if the income is below the treaty threshold for taxation. This can be an enormous benefit in two ways. The first is to eliminate the need for filing or reporting in the second country. The second is much more complicated but it involves the potential to save taxes in the US based on credits for taxes paid to other foreign countries.

3.    Please provide a short and simple explanation of tax evasion and its possible consequences.

Tax evasion is the most serious tax offense. In the US it is a crime involving the potential for imprisonment and very substantial fines, with each year being a separate offense. To evade tax is to intentionally fail to file a proper return reporting all income and expense according to the tax law, with the intent to not pay your proper tax. The most common forms of tax evasion are the failure to report income, the intentional inflation of expenses or the reporting of phantom expenses. Aside from the serious penalties associated with a conviction for tax evasion there are at least three ancillary consequences. First, you have a criminal conviction with the associated stigma, just as you would for a robbery, an assault or other serious felony. Second, you have invited heightened IRS scrutiny of your future returns. Third, even if you have not yet been caught, you have left your tax returns open for inspection without time limit, unlike the three-year time limit which normally applies to the IRS’s right to audit your tax returns. As I advise my clients, if you actually commit tax evasion, you forfeit your right to a good night’s sleep until you get caught, come clean or pass into another universe.

4.    Is it viable for someone with taxes withheld in more than one state or country or just someone who has worked in more than one country to prepare his/her own taxes? Is there any software available to help?

It is viable, but my experience is that most people with other than the most rudimentary income tax returns are intimidated by the complexity of tax laws and therefore are inclined to seek professional assistance. There are software programs available for US federal and state taxation which can be very helpful. These programs guide you through income and expense, step by step, with a series of questions designed to elicit all of the necessary information from you in order to properly complete the required returns. I do not know whether there are any software programs to assist in the completion of foreign income tax returns although I imagine that there are.

5.    Do you have any suggestions to help individuals who do not have large budgets but do have earnings in more than one country figure out how not to pay more taxes than they really owe?

You really have a two part question here. The first part relates to filing in their home country. In this regard, and considering what I just said in response to question 4, it should be possible for them to file a proper home country return without seeking professional assistance. They would need to carefully follow the directions relating to the preparation of the tax return. Also, at least in the US, revenue authority personnel are available to answer tax questions and assist in the proper filing of returns.
The second part of your question relates to the non-home country (or countries) where income has been earned. In this regard, it often is necessary to obtain professional advice if a return is due. It is my experience, in the context of performing artists, that the non-home country presenter can often provide some very simple advice as to whether a return may be due, and can certainly direct the artist to an appropriate advisor. Also, it often is the case that the non-home country tax law requires that tax be withheld at a flat rate on the fee with no responsibility on the part of the artist to file a return, so there is no need to delve into the local tax laws.

6.    What about US citizens or residents who work in more than one state?  Where do they owe state taxes?  Are there similar considerations in other countries?

US citizens or residents who reside in one state but work in more than one state may have a responsibility to pay taxes in their resident and non-resident states. Just as with foreign countries, many states impose a flat withholding tax on nonresidents, with no obligation on the non-resident to file a tax return. Many states do not impose tax on non-residents who have only a limited engagement in that state although they could under a most technical reading of the tax laws. If a US citizen or resident pays taxes in more than one state, that individual generally has the right to a credit against their home state income tax for some or all of the income taxes paid to the non-resident state.
Other countries could have the same considerations. Canadian provinces are separate tax jurisdictions similar to our states, as are the Swiss cantons, with different tax rates depending on the province or canton. Other countries without such separate jurisdictions do not impose this equivalent to state taxes.

7.    What about individuals who move around so much that they don’t really have a legal residence?

Everyone has a legal residence, which is loosely defined as the place you come home to when you are not traveling. Legal residence is a question of fact. Revenue authorities look at home ownership, apartment rental, family contacts, driver’s licenses, voting records, mailing address for bills and similar factors in determining legal residence.

8.    What constitutes residency for tax purposes in any country? State? Examples?

Residence is where you live and is often used interchangeably with “domicile” which is a different concept. Domicile is defined as the place where you reside, with no present intention to reside elsewhere. You can have only one domicile. Residence is where you are presently living. The factors I mentioned in response to question 7 would be considered in determining where you reside. The test is essentially the same for any country or state, although there are some jurisdictions with draconian rules, such as NY state and city which have statutory provisions saying that if you own a home or rent an apartment in NYS or NYC, with the right to spend time there whenever you want (that is, the place is not rented to someone else), you have a NYS or NYC residence, even if you do not spend one minute in NYS or NYC during the year. While this sounds absurd, the provision has been upheld in court decisions.

If a person owns or rents living space in a jurisdiction, that is a factor which the revenue authorities will rely on to assert residence. Of course, that assertion can be defeated by other facts which would tend to show that the living space is a vacation home and not a primary residence, but this starts to become a question of proof. Then, factors such as where the person has a driver’s license, is registered to vote, receives mail, etc., will drive the outcome. Of course, if a person has a spouse and minor children, where the family resides would effectively control the person’s own residence since we are assumed to reside with our spouse and minor children. None of these rules is so hard and fast, however, that contrary arguments are necessarily untenable.

9.    What is the most advantageous country for residence vis-à-vis taxes?

This is a question which cannot be easily answered. First I need to clarify what you mean by “advantageous” because this concept is susceptible to different interpretations. In some ways, the US is the most advantageous tax country in the world. We have a well developed tax system with expansive rules defining taxpayers’ obligations so there is little question as to a taxpayer’s responsibilities in complying with most of the common situations they would face. Moreover, the system is fair in that each taxpayer similarly situated pays the same tax.

On the other hand, in many countries the law is not clearly defined or fair and it is possible for wealthy taxpayers enter into special arrangements where they agree to pay a predetermined amount of tax to the national government, so there is great disparity in the tax burden, even among the wealthy. In other countries there is no codified tax law as we have in the US, so one needs to piece together each individual tax law passed in order to determine one’s liability (the US Internal Revenue Code compiles our tax laws so that there is no need to be separately familiar with the tax laws passed each year), although tax return instructions do provide necessary guidance for filing returns. There are tax haven countries which do not have income taxes at all, but to claim a tax residence there would be extremely difficult and to advise anyone that it is possible to do so successfully would be very misleading.
If we are dealing with US citizens it is vital to realize that the US taxes its citizens on their world-wide income, regardless of where they reside (although they likely will be able to avoid double taxation through the system of foreign tax credits). Therefore, for a US citizen to seek a tax advantageous country in which to reside (outside of the US) is not a viable concept.

10.    What’s the most advantageous US state for residence vis-à-vis taxes?

There are several states that do not have individual income taxes, such as Florida, but these states make up for the lack of an income tax with other taxes, such as personal property taxes and burdensome motor vehicle taxes. Also, states without income tax or with low income tax often have much higher property or sales taxes, or place taxes on businesses which then pass the taxes along to consumers in the form of higher prices. Every state needs revenue and will place taxes on specified activities in order to raise that revenue. For those states with generally lower taxes, there usually is a limit on state or local services which makes life in the state less pleasant. For example, in those states with lower local property taxes there often is no public garbage collection so individuals need to hire private companies to collect and remove garbage. There also will be fewer public parks and other limits on state and local services.

That being said, states such as NY, NJ and MA, have high tax burdens while states such as NH, VT and ME are less taxing. On the West Coast, CA is the highest tax state, but OR and WA have substantial taxes as well. I advise my clients that while taxes certainly are a consideration in determining the quality of life, they are not the only factor one should consider when establishing a place to live and the convenience of one’s location often outweighs the tax burdens. For many performing artists, the proximity to audition locales and high quality voice teachers and coaches (NYC comes to mind) is important to consider when deciding where to live since if you are not close to NYC, the amounts you spend to travel here for auditions and voice lessons can outweigh the income tax savings to be gained from living far away, and there are all of the nuisance taxes which must be considered as well.

11.    Are there specific tax consequences for working in more than one country?

Certainly there can be specific tax consequences to working in more than one country, such as an actual tax liability to that country. Another would be the need to file a return or other document to comply with tax reporting requirements. Yet another is to properly report the tax situation to one’s home country to make sure that there is proper tax filing (and possibly receipt of tax credit benefit) in the home country.
Moreover, in addition to any immigration issues which might apply to working in a “foreign” country (i.e., not your home country), there could be tax requirements related to working beyond the mere fact of taxation and reporting, such as the need to obtain a proper tax identification number to allow one to work in the foreign country. These situations must be addressed on a country by country basis.

12.    What is the annual income one is allowed to earn outside the US tax free?  Does it matter if the income is earned in more than one country?

The US allows US persons to exclude certain amounts of foreign source earned income from US taxation, but this exclusion is based either on continued presence or actual residence in the foreign country and usually does not apply to performing artists present in a foreign country only for a limited engagement. If the US person, however, is present for extended periods in a foreign country, either 330 days during a twelve month period, or a period of at least one full calendar year (from January 1 through December 31), there is an exclusion amount which is adjusted annually for inflation. The exclusion for 2009 is $91,400. It does not matter if the income is earned in more than one foreign country as long as the foreign presence test is met.

Photo from picostation.com.