Expat Tax Questions
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.
Giving up green card for tax savings?
Non-spouse - filing as head of household
Canadian working in Greece - Tax obligations?
Taxes on military retirement?
Working British spouse - US Income filing
US Tax Liability for US citizen working in PRC
Green card holder GCT tax for home sale profits
Joint tax filing for non US spouse?
Capital gains on VC investment in China?
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.?
Filing Status when living separately
Subject: Giving up green card for tax savings?
I will be moving to Singapore in a couple of months. Is there anything I need to do on the financial side to minimize my tax (greencard holder)?
Response: Give up your green card.
Subject: Non-spouse - filing as head of household
I got married on 11/6/08. My husband is not a US citizen and does not have a SSN. Should I file as head of household if I solely supported my household for the year 2008 or should I file married filing jointly?
You can only file head of household if you have dependents. If you do not have dependents you must file married filing separately unless your husband elects to be taxed as a US resident. If such election is made you must report all of your husband's income along with you own on from 1040. If you and your husband have earned income you both may be able to claim the earned income exclusion
Subject: Canadian working in Greece - Tax obligations?
I have a US green Card but I am a Canadian citizen. I am going to work in Greece for several years. Obviously I will pay tax on income in Greece. Do I have to do anything in US or in Canada? THANKS.
You will have a US obligation tempered by the foreign tax credit or earned income/foreign housing exclusion. You should not have any obligation to Canada
Subject: Taxes on military retirement?
I am a US citizen living in the Philippines. I moved here January 3rd 2008. My only income is my military retirement. Before moving here I lived in Alabama. Am i required to file state taxes next year. I have had no other income since October 2007.
Subject: Working British spouse - US Income filing
I am British, working for a US company. I live in Shanghai, on a Spouse's visa. I work from me, none of my work is related to anything in China. My office is actually in Houston. I visit the US < 20 days a year and am present in China for around 300 days a year. The US tax office tells me that I need only declare the US income received for my work while I am present in the States. How should the remainder of my income be taxed?
You need to file a US Form 1040NR with respect to your income attributable to the days you work in the US. Your total income is subject to PRC tax
Subject: US Tax Liability for US citizen working in PRC
I am a US citizen and am considering taking a position in Zhongshan China for a German based company owning a Chinese LLC in China. I would live and work there full time. I am looking at a base of about $95K. I have heard if I stay 335 days out of the US I will not pay US income tax on my first $80K. I would be renting an apartment there. Can you help me understand my tax responsibilities for the US and what I may be required to pay in tax to China? I am trying to estimate my actual annual take home and how it would differ from my position here in the US.
You will pay about 40-45% tax to the PRC. Between foreign tax credits or the earned income and housing exclusion it is not likely that you will have a US tax liability.
Subject: Green card holder GCT tax for home sale profits
My wife and I (aged 68 and 72) have just become resident aliens of the US (Green card holders). Because of current economic problems our house in the UK remains unsold, and we have returned to the UK to try and sell the house. We are depending on the money from the sale to fund our retirement in the US. There is no CGT to pay on the sale of one's principle residence in the UK. Would we be liable to CGT in the US even though we have never lived there? We stand to make a substantial gain as property prices have soared since we first bought the house.
You will have to pay CGT in the US on gain in excess of $500,000. If the sale occurs in 2008 the tax rate is 15%
Subject: Joint tax filing for non US spouse?
I am a US citizen residing in the US. My husband is a UK citizen still residing in the UK awaiting a visa. I want to file a joint tax return. I have the W7 paperwork and required documents of proof. I also have my husbands income information. Will this suffice to file the federal return?
You need to make a special election with your tax return to file a joint return with a "non resident alien". Unless your income is substantially higher than your husband's income I
question the wisdom of wanting to make such an election
Subject: Capital gains on VC investment in China?
if a US citizen forms a company in China and obtains local VC investment, is there going to be capital gain when he or she files annual US tax on the amount of investment? Is this going to be dependent on how long he or she stays there during that tax year?
Most likely you will have to pay tax at the time gain is realized. There needs to be done a fair amount of planning to be able to only pay tax at the capital gains rate rather than the ordinary income rate
Subject: US/UK Tax Obligations following return to UK as US citizen
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?
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: Deduction for Penalties -
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?
You cannot deduct taxes, interest on underpayments or penalties on your Federal income tax return.
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?
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
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?
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
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?
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
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?
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.
Please name the overseas countries suitable for a retiring American that do not have a tax agreement with USA IRS.
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?
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.
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?
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.
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.
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.
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.
Subject: Earned Income Exclusion
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.
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.
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?
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.
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?
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.
Subject: Tax Filing Requirements for US citizens
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.
(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?
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
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?
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.
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.
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.
Subject: Offshore Investment
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.
Subject: Filing Status when living separately
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.
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
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.
For more information, please contact us. We have association with one of the most experienced expat tax attorneys available.
Your tax situation is never overlooked in the creation of your planning portfolio.