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Expat Tax Issues and
Questions
Disclaimer: The responses provided in this column are general in nature, are
provided for informational purposes only and should not be relied. No actions
should be taken without reviewing your particular factual situation with your
tax advisor.
Should you wish to
contact Jason directly for a personal consultation, please click here.
US/UK Tax Obligations following return to UK as US
citizen
IRS obligations after inadequate maintenance of green
card requirements
CGT Tax Implications for British family in US
Are Tax Penalties
deductible?
Tax Equalization for US employee in China
Foreign Earned Income
Exclusion for Green Card Holder
Expat Tax Rules in
China
Overseas Tax Agreements
Can any foreign income be deducted as expenses?
Marriage to Non-US Citizen-Is Filing as Married
Advantageous?
Primary Residence Determination for Capital Gains
Earned Income
Exclusion
Capital Gains Taxation of foreign property
Tax
Filing/Marriage to Non-US resident
Tax
Filing Requirements for US citizens
Tax Liability of Income to Nonresident Spouse
Can I avoid the capital gains on a home I am selling in
the U.S.?
Offshore Investment
Filing
Status when living separately
Subject:
US/UK Tax
Obligations following return to UK as US citizen
Question:
I am a UK
subject who is a US citizen who has lived and worked in the US since I was 18.
I am now 56 and am planning on retiring in my native UK. My home will be sold
before the move. My other assets are in 403 (b) and 457 accounts as well as an
individual brokerage account. I plan on drawing on these assets while in
retirement in the UK as well as receiving my Social Security. I will probably
not work in the UK. I know I must file tax returns in both countries for the
rest of my life. What are my tax obligations and does the foreign tax credit
apply here?
Response:
You are correct you will be liable for both US and UK
tax. The United States tax law provides for a unilateral tax credit
foreign taxes imposed on foreign source income. Under the US-UK Income tax
treaty both countries agree to provide a tax credit for taxes imposed in
the other country on income sourced in that country. In other words the US
will allow a credit for UK taxes imposed on UK investment income The results
are that you pay the higher of your home country tax or the source
country tax. In your case you have 2 home countries, the US as a result
of citizenship and the UK as a result of residency.
With some types of income the treaty often restricts the
right of one of the parties to tax the income. Such provisions in regard
to pensions and social security can be found in Articles 17 and 18 of
the treaty.
In addition, as I understand it certain types of
income earned outside of the UK may not be taxable until repatriated to
the UK. You should speak with a UK tax adviser in regard to this
Subject: IRS obligations
of green card holder who has not properly maintained legally status.
Question:
I was a
green card holder when I moved to HK from the US in 1994. I was not
aware of the legal requirements in maintaining the green card, so never
visited the US every 6 months or file with the US govt.papers
registering my physical absence as reqd. The last time I used my green card to
visit the US was in 2002. Would the IRS accept the position that I've
effectively lost my green card status since 1998 for income tax
purposes?
Response:
Most likely not. Since you did nothing to relinquish your green card and
in fact used it in 2002, the IRS expects you to file an income tax return and
pay US tax on your world wide income Although you remain at risk to having
your "green card" taken away from you at some point when you try to enter the
US with it, until that happens or you take positive steps to relinquish it,
you remain a US taxpayer.
Subject: CGT Tax Implications
for British Family with US green card status.
Question:
I have a query
re: CGT. I wonder if you can shine some light over our
situation. We are a British family and in August 2002 moved to US due to my
husband's job transfer. Prior to this in August 2001 we had just moved homes
in UK before any talk/idea of transfer. So we had only been in our new house
in UK for just under a year, before moving to US. We then rented our house in
UK until march 2005.At present we are trying to sell it as we have very
recently been given permanent residence status( green card).
We are trying to find the implications of CGT in US/UK, as we are hoping to
bring the money left after the mortgage to US to if possible buy to rent a
flat and if any left, to start some kind of a small business slowly god
willing. I'm so worried there may be too much taxes imposed on us. Also we
have purchased a home in US but it's heavily mortgaged. Do we have to pay CGT
even though we are going to reinvest? and if so how badly would it be?
Response:
Under the US-UK income tax treaty it
appears as if both countries have reserved the right to tax the others
residents with regard to real property located in a respective country. Thus
though you are resident in the US the UK can still tax you on the sale of real
property located in the UK. The United States will also tax it but will
provide a foreign tax credit for UK tax. Thus the result is that you pay the
higher of the US or UK tax but not both. The US tax will be 15% except to the
extent that you claimed depreciation during the rental period then the tax on
any gain up to the amount of depreciation will be 25%.
You may also be entitled to avoid US tax by claiming an exclusion of gain
attributable to the sale of a principal residence. To qualify for this you
must have lived in the property for 2 out of 5 years prior to the sale. You
do not appear to qualify for that but an exception exists to the two year rule
where a move occurred as a result of a change of job.
Subject:
Deduction for Penalties -
Question:
As a result of some
miscalculations I had to pay interest, penalties and
back taxes on previous year's taxes. Am I correct in presuming that I can
take credit for "taxes" paid during my next year's filing? And what of
the interest and penalties, should these be itemized expenses, or is there
a more advantageous place to indicate them?
Response:
You cannot deduct taxes, interest on underpayments
or penalties on your
Federal income tax return.
Subject: Tax
Equalization for U.S. employee in China
Question:
We are planning to send one of our
employees to China for a two year assignment. Is their a typical / prototype
agreement that I use to facilitate this? Could you direct me to a web-site
that may have more information about agreements? Do these agreements usually
cover financial assistance in his tax preparation? Can the assignment be
longer that two years without having him have tax issues?
Response:
A US citizen must pay taxes to the US government even if
they are living and working in a foreign country. Such person would typically
also pay taxes in the country in which he or she is working. To mitigate the
effects of paying taxes in two countries, many companies use tax equalization
policies.
The basic principle underlying such polices is that the
employee will pay no more tax then he or she would have, had the individual
remained working in the US.. Typically the more employees a company has
working abroad, the more complex these polices tend to be.
Companies with few overseas employees, often just have a
one or two paragraph statement setting out the equalization concept. In a
majority of situations that I have seen, companies provide the employee with
professional tax assistance in regard to US and foreign country tax
preparation.
The fact that the contract may be for longer than 2
years will generally not affect the US tax issues. However, it may affect
foreign country tax issues. For example, foreigners working in Japan only pay
tax on Japanese source income, if they have worked in Japan for less than 5
years. After remaining in Japan for 5 years, they become taxable on their
world wide income.
Subject: Foreign Earned Income
Exclusion for Green Card Holder
Question:
I am a U.S. green card
holder currently living and working in China. During 2004, I worked in MA
until March and spent the rest of the year working in China. I intend to
work in China for long-term and desire to maintain my PR status also.
My question is: 1. for 2004 tax year, am I eligible for U.S. tax
exemption? if so, will that be full amount or just partial year?
2. For state tax, should I file MA resident or non-resident tax? Should I
pay full year state tax or just partial year?
Response:
As a green card holder you can only qualify
for the foreign earned income exclusion using the physical presence test
unless you are a national of a country which has a income tax treaty with
the United States.
To qualify under physical presence you must
be outside the United Sates for 330 days in a 12 month period. Once you
qualify you would be entitled to a pro rata portion of the $80,000 exclusion
determined from when your foreign residence commenced.
Massachusetts imposes tax based on domicile.
If you continue to remain domiciled in Massachusetts you must file a
resident income tax return even if you do not live there. If you were
domiciled in Massachusetts prior to your move to China, you only lose such
domicile by establishing a new one.
Domicile is based on presence and intention.
If you maintain your green card Massachusetts would argue that you intend to
return to the United States and had no intention to change your domicile to
China.
You need advice on your ability to retain
your green card while living outside the United States for an extended
period of time
Subject: PRC
Taxation
Question:
I have
been offered a position with an international Company in China. What
are the residency requirements for income taxes? I understand that if
you spend more than 181 days in China you are subject to Chinese income
tax and US income tax in accordance with the US China tax treaty. Is
that correct?
If you
spend 330 day in china you are subject to Chinese income tax but only
Social Security and Medicare US taxes. Is this correct?
Response:
If you are a US citizen or resident
you will be subject to PRC tax if you spend more than 183 days in a
calendar year in China under the US-China income tax treaty.
No matter how many days you work
outside the United States you are still subject to US income tax.
However if your tax home is outside the United States and you are
physically present outside the US for 330 out of 365 days in any 12
month period or are a bona fide resident of a foreign country for an
entire calendar year, you may exclude up to $80,000 and a portion of
your housing expenses.
Whether you are subject to social
security taxes depends of who your paymaster is. If you are paid by a
US entity you will be subject to social security taxes. Generally, if
you are not paid by a US entity you will not be subject to US social
security taxes.
Subject:
Expat Tax Rules in China
Question:
What are the tax rules on expats working in China? Income? I would be paid by
my present company for a three year assignment. Should I have a contract? Are
there any tax breaks for current property if I choose to keep my home here in
the US? How will I report taxes for the three year period? What would you
recommend as far as my current portfolio management?
Response:
If you are working in China you will have
to pay tax there as well as US tax. China will only tax your income arising in
China; the US will tax you on income wherever it arises. The section
911 exclusion and the US foreign tax credit help ameliorate the double tax
burden. I have discussed qualifications of the section 911 exclusion in prior
issues. You must file a US return on an annual basis. In China you generally
file on a monthly basis but you can arrange with the tax bureau to file on a
quarterly basis If you choose to keep your home you could obtain some tax
shelter benefits depending on your income level it you are able to find a
tenant . See also Subject:
Tax Filing Requirement for US Citizens below.
Subject: Countries not part of
US tax agreement.
Question:
Please
name the overseas countries suitable for a retiring American that do not
have a tax agreement with USA IRS.
Response:
The United States has over 50
double taxation agreements and several more limited in scope exchange of
information agreements. Agreements exist with most European and many
Asian and Oceania countries. There is no agreement with Malaysia,
Singapore or Hong Kong. The US does not have any agreements with South
American countries nor many with countries located in the Caribbean
(although there are some exchange of information agreements with the latter
group). There are no agreements with the islands in the Pacific.
Which country is suitable for a retiring American is beyond my comprehension
Subject: Can any foreign income be deducted as expenses?
Question:
Last year I took a job in
Kuwait for 6 weeks then continued to work for the same company another
four weeks in the states. They broke out my pay into three sections:
1) Salary 2) Expat allowance and 3) Housing.
They found me an apt. to live in but I paid the rent with what they paid me.
I'm at a total lost on what I can deduct under expenses vs what I must claim
as income.
Response:
The entire amount of remuneration received from your employer
is taxable whether designated as salary, allowance, housing, or hardship. You
are entitled to a deduction for meals, lodging, transportation, et. al. if you
are traveling away from home on business. Whether you are traveling away from
home depends on where your tax home is located. Your tax home is generally
considered located at your principal place of employment. If you were
hired specifically to work in Kuwait your tax home is there and you would not
be allowed any deductions. If you were hired in the US with the idea that the
principal position was in the US, but you would be sent to Kuwait for a short
period and then return to the US to complete your assignment, perhaps your tax
home is in the US in which case expenses incurred in Kuwait could be
deductible. A thorough analysis of the facts would need to be undertaken to
arrive at the appropriate decision.
Subject: When married to
Non-US resident, is filing "Married" advantageous?
Question:
I was married in the Philippines on November 21, 2003. I am waiting for my
wife to have her Visa approved. Is there a way that I can file my tax
return for year 2003 as Married? I see on the tax form there is a place for
the spouse's SSN. Of course, my wife doesn't have on yet.
Response:
Generally a US citizen or resident married to a person who is neither must
prepare the US tax return as "married filing separately". This subjects the
income to higher marginal rates than a joint return filing. However the
taxpayer can elect to file a joint return. This means that the non US taxpayer
will have to report his or her income and pay US tax even though he or she
would not otherwise have to. Thus if the non US person has income of his or
her own the election might not be advantageous. If you are going to make the
election you should apply for a social security number for your spouse.
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topic list
Subject:
Primary Residence
Determination for Capital Gains
Question:
What
determines my home qualifying as my permanent residence when I go to sell it
in regards to capital gains taxes?
We do not rent our home out while we are away for part of the year and we do
not pay state taxes here in AZ. We will probably realize a $150,00 profit
since the time we purchased 5 years ago.
Response:
The Internal
Revenue Code allows a taxpayer to exclude $250,000 of gain($500,000 in the
case of a joint return) from the sale of a property. That has been used for 2
out the last 5 years as the taxpayer's principal residence.
Where a person has used
more than one property as a residence, whether the property sold was the
taxpayer's principal residence depends on the facts and circumstances. The
regulations list several factors that will be taken into account in making
such a determination. These factors include:
place of employment, address on driver's license and tax returns , and
location of taxpayer's bank, religious, and recreational organizations.
Claiming not to be
resident in Arizona by not filing a tax return there would certainly hurt your
case that the property there was your principal residence.
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to topic list
Subject:
Earned Income Exclusion
Question:
Just wanted to ask the total days I can be
in the US during any 12 month period (not necessarily calendar year) to be
able to obtain the $80,000 exclusion.
Response:
Generally, to qualify for the earned income exclusion, you must either meet
the physical presence test by being outside the United State for 330 out of
365 days in a 12 month period (PPT) or be a bona fide resident of a foreign
country or countries for a an entire calendar year (BFT).
However, if you are a permanent resident of the United States, then can only
qualify under PPT. Thus, under PPT you cannot be in the US for more than 35
days in any 12 month period.
However, it is possible to be
flexible in looking at 12 month periods. For example, if a 12 month period
starts on February 1, 2003, a person could be in the US from January 1, 2004
through March 9 (assuming no days in the US prior to January 1) and still
qualify for the exclusion for 2003 and portion of the exclusion for 2004 as
long as the person did not return to the US before February 1 2005.
If you qualify under BFR there is no limit to the number of days you can be in
the US as long as you retain your status as resident in another country.
However, it is possible to maintain your status under BFR, but not be able to
use the full $80,000 exclusion. This is because the exclusion only applies to
foreign source earned income. The source of the income is determined by where
the services are provided. So for example, if your compensation was $100,000
for the year, and during the year you worked 72 days in the US out of a 240
day work year (30%) you would only have $70,000 of foreign source earned
income and that is all that you could exclude.
On the other hand, if the 72 days spent in the US was on personal business and
all your work time was spent outside the United States you would be able to
use the full exclusion.
If you are a US citizen and in the first year you move abroad you can not
qualify under PPT because of the number of days you spend back in the US and
you subsequently quality under BFR then your BFR status will relate back to
the beginning of your residency period.
For example if you were to move to England on April 1, 2004 and between April
1, and March 31., 2005 you are back in the US for 40 days, you would not
qualify under PPT for the exclusion during 2004. However if you continued
residing in England through December 31, 2005 you would qualify as a bona fide
resident for an entire calendar year January 1, 2005 through December 31 2005
and such status would relate back to the beginning of your residency period
April 1 2004 and you could thus use a portion of the exclusion for the 2004
tax year.
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Subject:
Capital gains Taxation of
foreign property
Question:
I am a UK citizen but have been living in the US for nearly 10 years as a visa
holder/permanent resident. About 3-4 months before I left the UK. I
inherited some property from my mother (the property is solely in my name). It
therefore became our home in the UK. (I had never owned property in the UK
prior to this). Since we left the UK it has been rented out and we have not
resided there.
I now wish to return to
the UK and sell this property so we can buy a bigger house as our principal
residence. Will I be liable for CGT? Since I intend to relocate around May,
should I sell the property before April 1 as I will still be an expat?
Response
Whether you will be subject to US
capital gains tax on the sale of your UK property will depend on whether you
are either a permanent resident of the United States or considered to be
"substantially present" in the United States. If either applies you are taxed
in the same manner as a US citizen. That is all your income is taxable
wherever it arises. However if you are not a permanent resident nor considered
to be substantially present in the US then you are essentially taxed only on
your US source income.
Accordingly, if you sell the UK
property while you continue to live in the US, you will be subject to US
capital gains tax. However such tax may be offset by any income tax or capital
gains tax that you may pay in the UK. However if you terminate your permanent
residence and substantial presence status and then sell the UK property you
will not be subject to capital gains tax in the US.
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to topic list
Subject:
Tax Filing/Marriage to Non-US
resident
Question:
I am a UK citizen with permanent residency in the US. I am recently married to
a UK citizen who is still living in UK pending her visa issuance, and I have
returned to the US. Should I file as married filing separately, head of
household, or single?
Response
As a US permanent resident you
file your return in the same manner as a US citizen. If you are married you
must file either a joint return or file "married filing separate". You cannot
file as a single person if you are married even if your spouse is not subject
to US tax. The rates applicable to income reported in a joint return are lower
than those applicable to income reported in a "married filing separate"
return.
It is possible for a US taxpayer who is married to a non US
taxpayer to elect to file a joint return This will make your income subject to
more favorable rates; however it would require you to include your spouse's
income in a US tax return. If your spouse has little income or most of her
income is subject to UK tax (and thus you would have foreign tax credits} this
may not be an issue. However if your spouse has significant income that is not
subject to UK tax, it would most likely not be advantageous to allow it to be
subject to US tax.
Another advantage of filing a joint return would be the
ability to claim your spouse and her two children as dependents on your tax
return giving you additional deductions To determine what is the best approach
you have to calculate your tax liability under the two scenarios.
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Subject:
Tax Filing Requirements for
US citizens
Question:
I am a US citizen working in Britain for at least two years. I am paid in
pounds sterling.
I work for a British non-governmental organization, and pay British taxes.
I also continue to own my home in the US, have rental income derived from that
home, pay property
taxes and mortgage while deriving some tax benefit from the mortgage interest
and a student loan interest write-off.
My questions:
(1) Should I file both US and UK tax returns, and
(2) Is there any way I can get my British taxes refunded and am I entitled to
a US tax refund if I file a US return?
Response:
It is not a question of whether you should file both US and UK tax returns.
You are required by law to do so. As a US citizen you are required to
file a US tax return irrespective of where you live. As a person residing and
working in the UK you are required to pay tax there as well.
In calculating your US tax liability you
may be able to exclude up to US$80,000 of earned income as well as to reduce
your taxable income by the amount of your housing expenses in excess of about
$11,000. Further you may also be able to credit at least a portion of the UK
tax you pay against your US tax liability. A credit is a dollar for dollar
offset against what you may owe.
Whether you are entitled to a US tax refund
generally depends on whether you have been subject to tax withholding or paid
estimated taxes. If you have not paid in in any taxes for the year there will
be no refund.
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Subject:
Tax Liability of
Income to Nonresident Spouse
Question:
I am an American living abroad for last 20 years. My wife has a green card. We
have no plans on living in the USA again. We are business owners in Asia. Our
US-generated income is small. We have thought, for tax reasons only, of having
my wife give up her green card, then shifting almost all corporate income to
her name. With her being a non-resident, no green card spouse of an American,
she would have no US tax liability. Am I correct?
Response:
I have often told my clients that one
of the last great tax shelters is a "non resident alien" spouse. That means a
person who is not a US citizen and one who does not possess a "green card".
Such a spouse does not need to pay US tax unless physically present in the
United States for an extended period of time.
The issue becomes how does one
shift income to such spouse. You say you are going to shift corporate income
to your wife. How is that to be done. If you pay her a salary it must be
reasonable in relation to the services that she is providing, otherwise the
IRS could attribute the income to you.
If you are going to give her the shares in the company you own, you have to be
cautious in regard to the transfer of such shares otherwise it might attract
gift tax. US citizens can give an unlimited amount in terms of gifts to US
citizen spouses without attracting gift tax. However if the donee spouse is a
non resident alien, gifts in excess of US$100,000 create gift tax
implications.
You also have to be careful about
the expatriation to avoid tax rules which apply to long term green card
holders as well as US citizens. In other words, care must be taken as you try
to implement your plan.
Back to topic list
Subject:
Can
I avoid the capital gains on a home I am selling in the U.S.?
Question:
I worked in Asia from 199-2002. I am now living in the U.S. During my overseas
assignment I rented my house (it is still rented). During my time overseas,
the IRS changed the cap(ital) gains rules so that you had to live in the house
for 2 of 5 years to have it treated as a primary residence. Is there any
grandfather clause for expats, or is there any way to avoid paying capital
gains if I sell this house?
My repatriation moved me 900 miles from my home-so I did not have the option
of moving back into it.
Response::
Unfortunately, you are in a situation that a number of long-term expatriates
found themselves after the law changed The new law substituted an objective
test ( 2 out of 5 years) for determining whether property was a principal
residence for the old subjective "intent" test.
Expatriates who had been away from their
homes for 5 years could no longer argue that they intended to return to their
old property and that it remained their principal residence. To be truthful
however I am not sure whether such an argument would really prevail upon an
IRS audit. However it did allow one to take position when filing a tax return.
However under the new law if you did not
live in the property for 2 of the last 5 years, ( with certain exceptions that
do not apply here) the property cannot qualify as a principal residence. There
are no grandfather clauses or loopholes to get around this requirement If you
wish to avoid paying capital gains on the sale of the property, you may want
to consider a " like kind exchange" It may be possible to sell your existing
property and purchase another property or properties of equal or greater
value. If done properly you can defer paying tax on the gain from the sale of
the old property.
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Subject:
Offshore Investment
Question:
I am a British national, domiciled in the UK and resident if HK, but married
to a US national. I have no US residence status. I wish to buy US corporate
bonds and would like to know if the coupon payments would be taxed by the IRS
before payment to me.
Is it tax efficient to own US corporate bonds or would it be better to go
through an offshore corporate bond fund?
Response: A person who is not a US citizen or resident may
derive interest from certain types of US corporate bonds without the
imposition of US withholding tax This type of interest is known as
portfolio interest.
However. from a US estate tax perspective it may be better to invest
through an "offshore" based bond fund than buying the US bonds directly.
If such bonds are held by a non US person on such persons death they could be
subject to estate tax depending on the amount of the investment.
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Subject:
Filing Status when living
separately
Question:
If my wife and the kids are in the US and I am working in the Middle East,
can we file our taxes jointly or does it have to be separately?
Also is there an advantage of filing one way over the other? What would be the
best way to file taxes (jointly or separately) if she has an income in US
versus if she doesn't have any income.
Thanks very much for
this opportunity.
Response:
If you are a US citizen or permanent
resident you must file a Federal income tax return even if you are not living
or working in the United States. The rules for filing a joint return with your
spouse are the same as if you were living in the United States. So the answer
is yes you can file a joint Federal return even if she lives in the US
(assuming you are not legally separated).
Generally filing a joint return is more beneficial because the rates are lower
than married fling separate. However in some circumstances married filing
separately can be more beneficial. This generally involves couples with large
income differences between them and unusual itemized deductions circumstances.
In such circumstances the only way to truly judge which approach is better is
to do the calculations under both methods.
The answer for State tax purposes may be different. If you have resided
out side of the US for more than 183 days in a calendar year it may be
possible to claim to be non-resident for State income tax purposes.
This, however, depends on the State you were residing in and a variety of
other factors.
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