Whether you’re here permanently or just for the foreseeable future, change of this magnitude can be overwhelming – especially from a financial planning perspective. Most of our clients feel that way at first, so we totally understand.
There are a few important things you should know about US taxation as an American overseas. To give you a rough idea of what we mean by this, the below case study highlights some of the areas where we have been able to help a client, allowing them to benefit from the following:
- Excluding a portion of their earnings from US taxation
- Maximising the use of the Hong Kong tax that they paid
- Avoiding hefty penalties for non-compliance, especially with respect of Foreign Bank Account Reporting Forms
Excluding a portion of their earnings from US taxation
When one of our clients decided to move from New York to Hong Kong, we were obviously concerned about her US tax position, especially in relation to the tax on her earnings. As an American living abroad you will still be taxable in the US on employment income but you can use the foreign earned income exclusion to exclude up to USD104,100 of earned income from US tax. In addition, for those residing in Hong Kong a further exclusion is available for the amount spent on certain housing costs (e.g. rent), up to maximum of USD114,300. For those earning in excess of this amount (including the Foreign Housing Exclusion), taxes paid in Hong Kong can be used to offset more of the US tax due - more on this below.
In the case of our client, even though she had moved to Hong Kong, she had been spending a lot of time travelling between Hong Kong and the US. In order to qualify for the exclusion, you need to be out of the US for a certain number of days in a fixed period. Due to the client’s travel pattern, she did not qualify for the exclusion for the 2017 US tax year (January to December). However, we were able to analyse her travel over several 12 month periods which straddled the US tax year and hence were able to claim a partial exclusion for her in the part of a period where she would qualify.
Maximising the use of Hong Kong tax against your US tax liability
In addition, we were able to reduce her tax liability further by firstly recommending that she claims to be on the “paid” basis for foreign tax credits. This meant that any Hong Kong tax she paid in the relevant US tax year, would be taken on that year’s US tax return against her US tax liability. Secondly, we advised her to make her Hong Kong tax payments before December 31st to ensure that that Hong Kong tax that she paid on her employment income matched the year in which the income would be taxed on her US return.
Avoiding hefty penalties for non-compliance, especially with respect of Foreign Bank Account Reporting Forms
One important issue that affects US person overseas is the requirement to file Foreign Bank Account Reports (FBARs). FBAR compliance is required where the aggregate balance of all non-US accounts exceeds USD10,000 at any point during the year, whether or not the non-US account has any income. Failure to file these forms where required can result in large penalties. Our client not only had a new Hong Kong bank account but was also a member of a Hong Kong Mandatory Provident Scheme (MPF) which also needed to be reported on the FBAR. We collated the necessary information and prepared the FBAR reports for her, together with her US tax returns.
The full Stepping Stones Hong Kong series can be found here.