Some guys have all the luck
Some guys have all the pain
Some guys get all the breaks
Some guys do nothing but complain
– Rod Stewart
When it comes to taxes, some guys definitely have all the pain and may end up doing nothing but complaining.
How so? Well, let’s take the example of an American musician named Rob, who is a US tax resident and lives in California. Rob performs a one night only concert at the legendary Royal Albert Hall in London, UK. His compensation for the evening’s performance is £1,445,000, or about $2,167,500.
The UK employs a graduated tax rate system, which applies a 40% tax rate when income hits £32,010 and then 45% when it reaches £150,000. As a result, Rob will pay £636,069, or $954,000, on his UK earnings. That works out to about 44% of his UK earnings, leaving poor Rob with only 56% of his income after taxes but still better than the living he would make out of playing pool.
In addition to paying taxes in the UK, Rob also needs to pay US and California tax on his UK earnings.
Before Rob starts crying out Maggie May-day, there is some good news because Rob can claim a foreign tax credit on his US tax return so he is not double-taxed at the federal level on this income. The bad news, however, is that the foreign tax credit does not apply to his California taxes because California is not a party to the US-UK tax treaty. So, in addition, our raspy voiced Rob will have to pay 13.3% in California taxes on his gross UK earnings. Although Rob will receive a federal deduction for the California tax he pays, this deduction does not benefit him because by reducing his federal tax he also reduces his foreign tax credit. Indeed, Rob is still looking for a Reason to Believe.
So, without considering expenses, Rob will pay about 61% in taxes on his earnings, bringing his net take home down to about $842,000. When you factor in Rob’s expenses like first class airfare, the bill at The Savoy Hotel and agent fees, the rhythm of Rob’s heart may be beating a lot more faster when he realizes his net cash take home will fall to about only 30% of what he grossed. Granted, Rob still won’t need a friend to lend a helping hand.
As they say, Every Picture Tells A Story. In this case, the story is the first tax cut is the deepest when you are a US artist performing overseas. At Gedeon Law & CPA, we are available to assist musicians, actors and athletes with their tax planning and tax filings both in the US and in Canada.