1. Taxation of U.S.
As a U.S. citizen or greencard
holder, you are taxed on your worldwide income regardless of
residence, and regardless of how you are being paid (U.S.
dollars versus foreign currency) or where you are paid
(directly to you, deposited into a foreign bank account, or
deposited into a U.S. bank account). This includes
compensation as well as investment income. Therefore, if you
are not on a U.S. payroll, you will need to be sure to track
the amount and dates of salary payments from foreign employers
that are subject to U.S. taxation, and also track other items
paid by foreign employers, such as pension plan contributions
and interest, dividends, and capital gains on foreign
investments, as those too may be subject to U.S.
Because you are generally going to
be subject to the income tax laws of the foreign country as
well as the U.S., several provisions exist to help mitigate
any double taxation:
Foreign earned income and housing exclusions:
- You must establish foreign tax
home (tax home being where you earn your primary subsistence
- The maximum exclusion for income earned in foreign
country for 2013 is US$97,600.
- You must qualify under Bona Fide
Residence (BFR) or Physical Presence Test (PPT).
- Even if you go on assignment
mid-year, you still can qualify for a prorated exclusion if
qualifying days are less than 365 (qualifying days being
days in the foreign country).
- Expatriates may also elect to
claim the housing exclusion. The exclusion consists of
foreign housing costs (such as rent, utilities, insurance),
less a predetermined base amount. The 2013 base housing
amount is US$15,616.
Bona Fide Residence (BFR)
- Based on calendar year.
- Can use subsequent year to
qualify, but return is not filed until qualifying period
ends. Example: For 2013 returns, this is within 30 days
after end of 2014, or between 1/1/2015 and 1/30/2015. You
are using the subsequent year, 2014, to qualify you for the
foreign earned income exclusion for 2013.
Physical Presence Test (PPT)
- Must spend 330 days in a foreign
country during any 12 month period.
- Therefore, maximum days in U.S.
is 35, for any purpose (36 days in leap years).
Foreign Tax Credit
- Taxes paid or accrued in foreign
country (see Note below).
- Credit allowed to extent foreign
income is not excluded (no double benefit on same dollar).
- Limited to U.S. tax rates.
- Other considerations:
Alternative Minimum Tax limitations, separate baskets for
different types of income.
cash, or "paid" method is elected, the foreign tax available
for credit is the total amount of qualifying foreign taxes
actually paid during the year. If the accrual method is
elected, a taxpayer claims the foreign tax credit in the
year the related income is reported and in which the foreign
tax liability accrues, regardless of when it is actually
paid. Once the accrual method is elected, it must be used in
subsequent years. A taxpayer may change from the paid method
to the accrual method and claim credit both for foreign
taxes "paid" for a prior year and taxes "accrued", but
unpaid, for the current year.
Some foreign jurisdictions (such
as Hong Kong) determine taxable income using a year that is
other than a calendar year. The IRS takes the position that
foreign taxes accrue on the last day of the taxable year of
such foreign jurisdictions (March 31 for Hong
If you anticipate qualifying for the
exclusions and the foreign tax credit, and you have remained
on your employer's U.S. payroll, in most cases you may cease
actual federal withholding. You would accomplish this by
giving your employer Forms 673, Statement for Claiming
Benefits Provided by Section 911, and W-4 (as "exempt" from
U.S. tax withholding due to exclusions/foreign tax
As a U.S. citizen or greencard
holder, you are still required to file U.S. tax returns, even
though your income level may be less than the exclusion
amounts (the exclusion amounts are considered "elections" made
on timely filed returns - you DO NOT automatically get them by
virtue of being on foreign assignment). Following are
important dates you must be aware of with respect to your U.S.
- Automatic extension to June
15th, if tax home out of country on April 15th.
- Interest still accrues from
April 15th on any balance due, but late payment penalties do
not start accruing until after June 15th.
- Your returns can be extended
until August 15th, December 15th, or January 30th of the
following year, depending on circumstances, using Form 4868
or Form 2350.
- If BFR (see above), Form 2350
filed to extend until qualifying period is met.
- If PPT (see above), Form 2350
can also be filed to extend until qualifying period is
As a taxpayer working and living
overseas, it is extremely important that you track all days
spent in U.S. for exclusion qualifying purposes. Also, you
need to track U.S. vs. foreign workdays to determine foreign
source income for exclusion and foreign tax credit reporting
purposes on your U.S. return.
Principal Residence Issues
While you are living and working in
a foreign country, you have several options with respect to
your principal residence in the U.S.:
- Renting it out - in which case
the rental income and expenses (including mortgage interest
and real estate taxes) are reported on your return using
Schedule E. Expenses deductible against rental income also
include depreciation and most other costs to own and
maintain the property. Also, if you rent it out for a period
of time, and then choose to sell the property, any gain
attributable to depreciation during rental/business use is
taxed at 25% - it cannot be excluded.
- Selling it - home sale rules
enacted in 1997 allow gain exclusion of US$250,000 per
person (Married filing jointly is US$500,000). However, to
qualify for the gain exclusion, you must meet the
ownership/occupancy test: You must have owned and occupied
the property as your principal residence for 2 out of 5
years prior to sale date. If you owned and lived in it for
less than 2 years, a partial exclusion is available if the
sale was due to employment, health, or unforeseen
circumstances. If test is not met, and the exception does
not apply, the gain is fully taxable.
State residency is determined by
many factors, which indicate whether significant ties to a
state exist or are broken.
Payroll vs. Foreign Payroll
If you remain on your employer's
U.S. payroll, you can continue to participate in the company's
401(k) plan, if applicable, you can continue participating in
company provided medical and other benefits, and you will
remain on the U.S. social system. Social security taxes will
continue to be withheld from
compensation, including the expatriate allowances and
reimbursements that are included in taxable wages.
Depending on your host country, if
you switch to foreign payroll, you will generally be subject
to the host country's social tax laws, but your social tax
contributions may be lower (however, it is questionable on
whether or not you will see a benefit for your contributions
upon retirement). If your host country is not a country with
which the U.S. maintains a reciprocal agreement on social
taxes, then social taxes potentially can be used for foreign
tax credit purposes.
If you are on a foreign payroll,
you generally cannot continue to pay into the U.S. social
You will want to speak with a tax
advisor in Hong Kong as soon as possible after arrival to be
sure you understand your filing and tax payment obligations in
Hong Kong during the assignment.
The total amount of contributions
made to the fund on behalf of an employee (both employer and
employee contributions) are includible in the employee's gross
income for the employee's taxable year in which the
contributions are made if the contributions are nonforfeitable
and there is no substantial risk of forfeiture of those
Also, when foreign provident fund
is funded, the funds are deposited overseas, which makes
reporting to the IRS the responsibility of the employee. If
the plan is set up properly, your earnings may grow free of
taxation by most countries, but not the U.S. In addition,
because of the structure of most foreign provident funds, your
investment may be classified as a Passive Foreign Investment
Company and taxed at an unfavorable rate.
You will want to find out if your
employer has any special tax policies for international
assignments. Many companies tax equalize employees working
overseas, or they provide assistance paying taxes on certain
types of company income such as housing or cost of living