US Tax FAQ
Do I need to file a federal income tax return?
1) Your tax home must be in a foreign country;
A return must be filed by a US citizen or a resident alien who has at least minimum amount of gross income. A single taxpayer must file if his or her 2004 gross income is at least $7,950, (2005-Projected, $8,200) and married taxpayers who are entitled to file a joint return must file only if their combined 2004 gross income is at least $15,900, (2005-Projected, $16,400). A child who is claimed as a dependent on the parents?ˉ return must file his or her own return if the child?ˉs unearned and investment income exceeds $800 or if the child?ˉs earned income exceeds $4,850 (2005-Project, $5,000). In determining these amounts, all compensation earned abroad is included in gross income. US citizens and resident aliens living abroad must continue to follow the above standard rules for filing US income tax returns. A tax return must be filed even when the taxpayer?ˉs foreign exclusions or deductions equal or exceed gross income, or when credits, such as the foreign tax credit, completely eliminate US tax liability.
When do I need to file my 2005 federal tax return?
No later than April 17, 2006! If you are a US citizen or resident and you live outside US and Puerto Rico on April 17, 2006, you may qualify for an automatic two-month extension to file and pay tax. But interest will be charged from the original due date of the return on any unpaid tax.
What should I do if I need additional time to file the federal income tax return?
You can get an automatic four-month extension if, no later than April 17, 2006, you either file for an extension by phone or file Form 4868.
Do I need to pay estimated tax for year 2005?
Estimated tax payments are required if the amount of taxes due with the return after withholding is expected to exceed $1,000.
2005 estimated tax payment dates are:15 April, 15 June, 15 September 2005 and 16 January, 2006. If there is an underpayment of the estimated tax and none of the exceptions to the penalty applies (i.e., payments are equal to 100% of last year's tax if adjusted gross income is less than or equal to$150,000, or payments are equal to 110% of last year's tax if adjusted gross income is greater than $150,000), a penalty is imposed at the interest rate that applies to assessments of tax. This penalty is not generally deductible for income tax purposes. Interest is not charged for the late payment of estimated tax.
Do I qualify for the foreign earned income and housing exclusion?
In order to qualify for the foreign earned income exclusion and foreign housing exclusion, the following three requirements should be satisfied:
2) You must have foreign earned income;
3) You must establish qualified residence in the foreign country through either the bona fide residence test or the physical presence test.
What is your foreign earned income?
Foreign earned income includes wages, salaries, professional fees and other amounts received as compensation for personal services actually rendered when the bona fide residence or physical presence test. Earned income also includes allowances and reimbursements you receive such as cost of living allowances, overseas differential, home leave allowances, reimbursements for moving etc. Foreign earned income does not include amounts:
(1) paid by the United States or its agencies to its employees;
(2) received after the close of the tax year following the tax year in which the services were performed;
(3) received as pensions, annuities or social security payments;
(4) included in income from a nonexempt trust or nonqualified annuity;
(5) included in income as recaptured moving expenses; or
(6) allowances for meals or lodging furnished by an employer and excluded from the employees' gross income
- What are your qualified housing expenses
Generally, housing expenses are the reasonable costs paid or incurred during the tax year for providing housing for the taxpayer and his family (if they live with the taxpayer). Qualified expenses include rent, utilities (other than telephone charges), real and personal property insurance, household repairs etc. Disqualified expenses include costs considered capital expenditures, cost of purchased furniture or household accessories, domestic labor expenses (maids, gardeners, etc.), mortgage payments (both principal and interest), depreciation expenses etc.
- Bona Fide Residence test
You meet the bona fide residence test if you are a bona fide resident of a foreign country (or countries) for an uninterrupted period that includes a full tax year. You can use the bona fide residence test to qualify for the exclusions and the deduction only if you are either:
(1) a U.S. citizen; or
(2) a U.S. resident alien who is a citizen or a national of a country with which the United States has an income tax treaty in effect.
- Physical Presence test
You meet the physical presence test if you are physically present in a foreign country (or countries) for 330 days out of any consecutive 12-month period. The 330 days do not have to be consecutive. This test is based only on how long you stay in a foreign country (or countries) and does not depend on the kind of residence you establish or the nature and purpose your stay abroad.
- Election for the exclusions
A qualified individual must make a separate election regarding the foreign earned income and housing exclusions by filing Form 2555 (or Form 2555-EZ). The Form 2555 (or Form 2555-EZ) needs to be filed with the taxpayer's timely-filed income tax return (including extensions), amended return etc.
What is the tax implication on selling my home?
- What is your principle residence?
Usually, your principle residence is the main home you live for most of the time and can be house, houseboat, mobile home, cooperative apartment or condominium.
- Do you qualify for the exclusion from your income all or part of any gain from the sale of your main home?
You may exclude a maximum of $250,000 ($500,000 for married taxpayers filing joint return) of the gain on the sale of your main home if:
1) You meet the ownership and use test;
2) During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.
- Ownership and use test
To meet the ownership and use test, you must have owned the home for at least two years (the ownership test) and have lived in the home as your main home for at least two years (the use test) during the five-year period ending on the date of the sale. The required two years of ownership and use during the five-year period do not have to be continuous. Short temporary absences for vacations or seasonal absences are counted as period of use.
- What is the partial exclusion?
If you have owned and occupied a residence as a primary residence for less than two of the five years preceding sale, but has sold the residence because of a change of place of employment or health or other unforeseen circumstances (which will be specified by regulations), you are entitled to a pro-rata portion of the exclusion.
What is the tax implication on renting out my residential property?
- What information should you report if you rent out your principal residence during your foreign assignment?
You generally must include all your rent in your gross income. Meanwhile, you may deduct the rental expenses considered necessary for earning the income. Those expenses include depreciation, cost of repairs, advertising, cleaning and maintenance, utilities, mortgage interest, real estate tax etc.
- How to calculate the depreciation you may deduct?
You can depreciate your rental property when it is ready or available for rent. You cannot simply deduct your mortgage or principle payments, or cost of furniture and equipments, as rental expenses. Instead, the above cost should be depreciated on the tax return each year. The depreciation you can deduct will be determined by:
(1) your basis in the property;
(2) the recovery period for the property; and
(3) the depreciation method used.
You may have to use relevant form to calculate and report the depreciation.
Are my moving expenses deductible?
1) Your move is closely related to the start of work;
You can deduct moving expenses if you meet all three of the following requirements below:
2) You meet the distance test;
3) You meet the time test
- What are the deductible and nondeductible moving expenses?
If you are qualify for the moving expenses deduction, you can deduct reasonable moving expenses including the expenses of moving your household goods and personal effects and the expenses of traveling to your new home. But you cannot deduct any expenses for meal. Some other expenses such as expenses of selling or buying a home, home improvements to help sell your home etc. are also nondeductible for this purpose.
- Distance test
In order to meet the distance test, your new principal place of work must be at least 50 miles farther from your old residence than the old residence was from your old place of work. If there was no old place of work, the new place of work must be at least 50 miles from the old residence.
- Time test
If you are an employee, you must be employed full time for at least 39 weeks during the 12-month period immediately following the move. If you are self-employed, you must be employed or performing full time services for at least 39 weeks during the first 12-month period and at least 78 weeks during the first 24-month period immediately following the move.
Am I entitled to the foreign tax credit?
You may either deduct foreign income taxes paid or accrued as an itemized deduction on Schedule A of Form 1040 or may apply them as a credit against your U.S. income tax liability. The choice of taking a credit or deduction for foreign taxes is up to you. Generally, it will be more beneficial to take the credit because it is taken against your tax liability. On the contrary, foreign tax deduction merely reduces your income subject to tax.
- Can you take foreign tax credit?
You may take foreign tax credit if you are US citizen, resident alien or non-resident alien who paid foreign income tax and you are subject to US tax on your foreign source income.
- What foreign taxes qualify for the tax credit?
(1) The tax must be imposed on you.
(2) You must have paid or accrued the tax.
(3) The tax must be the legal and actual foreign tax liability.
(4) The tax must be an income tax
- What is the scale-down of the foreign tax credit?
Foreign income taxes are disallowed as credits to the extent that the taxes relate to earned income excluded under the special foreign exclusions. If foreign taxes are considered related to earned income that has been excluded, they are permanently disallowed as foreign tax credits (or as deductions). To determine the amount disallowed, an apportionment of the foreign tax is made between the excluded foreign net earned income and the total foreign net earned income subject to the foreign tax. This rule causes a higher disallowance of the foreign tax credit than might have been anticipated.
- What is foreign tax credit limitation?
The amount of foreign income taxes that may be credited in a particular year is limited to the lesser of (a) the allowable foreign taxes paid or accrued or (b) the amount of the applicable limitation. The limitation formula is based on foreign-source and US-source taxable income (before personal exemptions). To maximize the foreign tax credit, one must maximize the income that is considered foreign-source taxable income.
- Carryover of the unused foreign tax credit
Due to the above-mentioned foreign tax credit limitation, you cannot fully use the amount of qualified foreign tax paid or accrued in the tax year. The excess may be carried back to the two preceding tax years and then carried forward to the five succeeding tax years. According to 'The American Jobs Creation of 2004', the carryover periods are modified, limiting the carryback period to one year, and extending the carryforward periods to 10 years.
Should I disclose foreign bank accounts information?
The Department of the Treasury requires that every US citizen or resident with an interest in or signature authority over foreign bank accounts, securities, or other financial accounts that exceed $10,000 in aggregate value at any time during the calendar year must report that relationship no later than 30 June of the following year, regardless of whether your income tax return is extended. Since IRS is stepping up its enforcement effort in this area, failure to timely file the form or supply accurate and complete information may result in significant penalties. Please note that this form is only a information reporting rather than income reporting.
I will take three-year assignment in China. I'd like to know what are the tax policies normally offered to an expatriate like me?
Tax rates vary greatly throughout the world. An American considering whether to accept a foreign assignment is generally unfamiliar with the tax laws of the foreign country and would often hesitate to move abroad if he or she were unsure of the tax consequences. For this reason, many US companies with operations abroad have adopted tax equalization policies for US employees on foreign assignment. Under tax equalization, an assignee pays no more and no less tax as a result of the assignment.
- Theory of tax equalization policy
Under the tax equalization policy, your employer will undertake responsibility for your actual US and foreign income taxes. Meanwhile, you will pay the company a hypothetical tax equal to the amount you would have paid in federal, state, and local income tax had you remained at home.
- What belongs to hypothetical income?
In general, your hypothetical income includes the company's compensation you would have received had you not on any foreign assignment, such as base salary, annual bonus and equity and other incentive compensation etc. It also covers your outside income including portfolio income as per the actual US tax return, your pre/post company's compensation etc. Those allowance specifically paid for your foreign assignment, such as housing allowance, cost of living differential, home leave, education allowance, are not considered hypothetical income.
- Implementation of tax equalization policy
(1) The Company will deduct a hypothetical U.S. federal and state tax from your compensation. The hypothetical withholding is based on the projected tax you would have incurred on compensation in the home country, assuming no foreign assignment benefits.
(2) The Company will reimburse your actual Foreign and U.S. income tax liabilities as well as Foreign Social Security tax, if any. This reimbursement may be considered income in the host and/or home jurisdictions and so may be subjected to a tax gross up.
(3) At the year-end, there will be a reconciliation prepared called a Tax Equalization Calculation (TEC). The TEC will be the basis of a final settlement between you and the Company of that year's income tax obligation.
What about other international assignment policy other than tax equalization?
Generally, the international assignment policies include tax equalization, tax protection, modified policy, gross-to-net tax calculation. The first two options are the most common methods utilized by some multinational companies. Tax protection plans are designed to reimburse an employee to the extent that the employee's combined total income and social security taxes exceed the amount that he/she would have paid if he/she remained in the home country. In this regard, an assignee's total income tax burden (host and home countries' tax) is limited to the hypothetical home country's income tax. In case the actual home and host countries' income tax are less than the home country's hypothetical income tax, the assignee could keep the benefit. Each policy has its own pros and cons. Should you request more details and advice, please contact us.
Chinese Tax FAQ
Do I need to pay Chinese individual income tax?
You are required to pay Chinese individual income tax on your income derived from sources within and outside China if you have a domicile in China or you have no domicile but have stayed in China for one year or more. If you have no domicile in China and do not stay in China, or you have no domicile in China and have stayed in China for less than one year, you should pay individual income tax for your China-sourced income.
What does it mean by 'staying in China for more than one year'?
It means to have resided within the People's Republic of China for 365 days in a tax year. When counting the number of days resided in China, no deduction shall be made from the total days for temporary trips out of China. 'Temporary Trips out of China' means the absence from the People's Republic of China for not more than 30 days during a single trip, or not more than a cumulative total of 90 days over a number of trips, within the same tax year.
What kind of personal income the individual income tax should be levied on?
(1) Income from wages and salaries;
(2) Income from production or business operation derived by individual industrial and commercial households;
(3) Income from contracted or leased operation of enterprises or institutions;
(4) Income from remuneration for personal service;
(5) Income from author's remuneration;
(6) Income from royalties;
(7) Income from interest, dividends and bonuses;
(8) Income from lease of property;
(9) Income from transfer of property;
(10) Contingent income; and
(11) Other income specified as taxable by the finance department of the State Council.
What belongs to 'wages and salaries'?
'Income from wages and salaries' includes base salary, bonuses, profit shares, allowances, subsidies, stock option, income from restricted stock purchase plan, tax paid by the employer and any other income related to your position and employment
Are there any special treatments for the expatriates working in China?
- What if I stayed in China for more than one year but less than five years?
As mentioned above, if you do not have a domicile in China and have stayed in China for more than one full year, you will be subject to Chinese individual income tax on your income derived both within and outside China.
As a concession, being an expatriate, if you have lived in China for more than one year but less than five years, upon the approval of competent tax authorities, your foreign-sourced income may be exempt from taxation. This exemption is based on the condition that the foreign income is not paid or borne by any Chinese individuals or enterprises. Your compensation income received in the form of salary, wages, bonus, or subsidies for working in China under an employment contract, will be subject to Chinese taxation, regardless of whether you are paid in China or outside China, or whether the payer is a domestic entity or a foreign person. Meanwhile, time-apportionment method for income tax calculation may be applied if you meet the requirements.
- What if I have stayed in China for more than five years?
If you have lived in China for more than five years, from the sixth year, all your worldwide income derived from whatever sources inside or outside China is subject to the individual income tax. You are considered to be residing in China continuously for 5 years if you have been present in China consecutively for a full year in each of the past 5 years. As mentioned above, that temporary absence of less than 30 days in a single trip or an aggregate period of less than 90 days in a calendar year cannot be deducted in the calculation of the full-year residence period. However, you can break the 5-year residence after it is established only if you reside in China for less than 90 days (or less than 183 days for treaty residents) in any year after the fifth year.
- What if I have stayed in China for less than one year?
If you have resided in China for less than one year, only your China-sourced income will be subject to Chinese individual income tax. And ?°China-sourced income?± usually means employment payments paid for your actual working period within China, regardless of whether the payer is located in China or a foreign country and whether the payments are made inside or outside China.
Moreover, if you live in China temporarily for less than 90 days in any one tax year, or less than 183 days when a tax treaty applies, you will be exempt from personal income taxation for your employment income derived from sources within China. Such relief will be available only where you are paid by an overseas entity and the payment is not borne or deemed to be borne by the overseas employer?ˉs establishment in China. This relief will be not applicable under some special circumstances.
How shall I calculate my individual income tax payable?
If you have income from different categories, your individual income tax should be calculated and paid separately.
For wages and salaries, individual income tax is imposed at progressive rates ranging from 5% to 45%. A standard deduction of RMB4,000 is available for expatriates and foreign permanent residents. Special calculation methods apply to annual bonus and stock option income.
For other categories of income, different deductions and methods are applied.
Is it possible that my compensation package can be structured so that I could achieve tax savings? 2006-5-30
(1) reasonable housing subsidies, relocation allowances, reimbursement for sundry expenses received by foreign individuals;
Yes, it is possible depending upon how your employment contract is worded and your pay is administrated. For expatriates, some allowances can be exempted from the individual income tax in accordance with rational standards. In most cases, relevant tax bureaus?ˉ approval is required. Allowances exempted from PRC individual tax include but are not limited to:
(2) reasonable traveling allowances inside and outside China received by foreign individuals;
(3) reasonable home leave allowances and children?ˉs education allowance gained by foreign individuals, examined and approved as reasonable by the local taxation authorities.
When do I need to pay my Chinese individual income tax?
Generally, you are required to complete the tax registration within 30 days after your arrival in China. The procedures are various according to the competent tax authorities and you may need to consult with the tax officials for the documents requested. For employment income like wages and salaries, the tax shall be levied on monthly basis. In general, the tax shall be withheld by the withholding agent to the state treasury within the first seven days of the following month together with the tax returns filed with the tax authorities.
What are the risks for not reporting my income and not paying any Chinese income tax?
As a general rule, employers are required to withhold the individual income tax on salaries and wages for the employees. If the employers do not fulfill this responsibility, they will be audited and penalized by the local tax bureaus according to the tax administration regulations. Meanwhile, in absence of such withholding agents, the expatriates should complete the tax registration at local tax bureau and file the tax returns on their own. There will be late payment interest of 0.05% per day on the underreported taxes. Additionally, penalties up to five times of the taxes underpaid will be charged by the tax authorities for the tax evasion.