If you worked on a luxury superyacht this past summer, receiving a lucrative tip at the end of the charter (and splitting this cash among the crew) is often the highlight of the season. So how would you report this income, especially if you are sailing out of the United States and received the money overseas? Let’s break down the tax rules and implications for those stews, chefs, and deckhands on national and international waters.
Federal law requires U.S. citizens and resident aliens to report their worldwide income. Now, that doesn’t mean that all the income will be taxable, but you are required to report it all – whether you receive tax forms or not at the end of the year.
Earnings made as a crew member will be taxed according to how the money is earned or received. Depending on their employment or contract agreement, crew members are paid in various ways.
How will I get paid while working as a crew member on a yacht?
Crew members of private yachts are likely getting paid in various ways, commonly:
· A W-2 employee with taxes withheld. This is typical in a traditional employee situation. Taxes are withheld from your paycheck and reported to you at the end of the year on a W2.
· An independent contractor. Generally, will receive a 1099 at the end of the year. There are different types of 1099s you may receive depending on how the money is categorized or how it was received.
· Via Cash or check. While you may not receive a tax document for income received via cash or check, you should report all income on your tax return regardless of the amount.
Do I have to pay taxes on prize money?
If you win a cash prize from a game show or a reality TV competition, you will need to include that prize as part of your income on your tax return – regardless of the amount.
The IRS even considers noncash prizes as part of your income. Let’s say you won a new house or a vacation – you would have to include the fair market value of that prize as other income on your tax return.
Will I have to pay taxes in the United States and a foreign country while working as a crew member on a yacht?
The amount of taxes you pay to the United States and/or a foreign country will depend. The United States has tax treaties with many foreign countries to reduce the rate of tax or exempt foreign taxes on certain items of income.
Crew members (and other taxpayers alike) may be able to claim a credit for certain taxes paid to foreign countries against the US federal taxes they owe when filing their taxes.
However, it is important to meet with a tax expert to determine your tax home. If your tax home is in a foreign country, you may qualify for Foreign Earned Income Exclusion, but one of the requirements is that you must meet the physical presence test. Meaning you must be physically present in a foreign country (or countries) for at least 330 full days during any 12 month period.
If you meet all the requirements to claim the Foreign Earned Income Exclusion when you file your tax return the maximum that you can exclude is the lesser of the foreign income earned or $120,000 per person for 2023.
When are my taxes due if I am living abroad?
If you are an American (or US resident) living in the United States your federal income tax return for 2023 is due April 15, 2024.
If you are an American (or US resident) living abroad, you are granted an automatic additional two-month extension for filing your U.S. federal tax return.
Maybe you aren’t a crew member working on a superyacht, but have your own boat (or future plans for one) there are also tax benefits you could qualify for.
How do taxes work if you live on a boat?
A boat can qualify as your primary residence or a second home as long as it has sleeping accommodations (berth), a bathroom (head), and a kitchen (galley). You can take a mortgage interest deduction if your boat is financed.
If you were self-employed, you could even take a home office deduction if you had a dedicated workspace from your boat.
Navigating the waters of the sea and your taxes as a yachtie can be intricate, but with careful planning and the right expertise you can steer your financial ship to smoother waters.
So whether you’re a deckhand or an armchair captain – living vicariously through the TV screen, always keep an eye on the horizon and the tax challenges to come. Fair winds and smooth tax sailing!
But don’t worry about knowing these tax rules. Meet with a TurboTax Full Service Expert who can prepare, sign, and file your taxes, so you can be 100% confident your taxes are done right. Start TurboTax Live Full Service today, in English or Spanish, and get your taxes done and off your mind.