Last updated: 16 August 2019
Whether you’re here permanently, for the foreseeable future, or just for a short term assignment change of this magnitude can be overwhelming – especially from a financial planning perspective. There are a few important things you should know about US taxation as an American overseas.
These include ways in which you can:
- Exclude a portion of your earnings from US taxation
- Use the Hong Kong tax that you have paid to offset US tax on your earnings
- Avoid hefty penalties for non-compliance, by filing your information reporting forms on time
Foreign Earned Income and Housing Exclusions
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 USD105,900 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). For 2019, using these exclusions, up to $203,256 of earned income can be excluded from US tax by an American living in Hong Kong but this can only be achieved if income is structured and reported in the optimal way.
Qualifying for the exclusions can be tricky, especially in the year of arrival. There are a number of criteria that have to be met. For example, you need to be out of the US for a certain number of days in a fixed period. If you continue to travel to the US after your arrival in Hong Kong, some analysis may be required in order to achieve the best result so keeping good travel records will be essential.
Maximising the use of foreign taxes to offset US tax liability
For those earning income in excess of the amounts that can be excluded, taxes paid in Hong Kong or other foreign jurisdictions can sometimes be used to offset some or all of the remaining US tax due. This is achieved by claiming Foreign Tax Credits. There are choices to be made about how to claim these credits and in particular whether you should use the ‘paid’ basis or the ‘accrued’ basis. The paid basis (whereby you claim as a credit only foreign tax that has actually been paid during the US tax year in question) often achieves a better result. If you are using this basis, then the timing of your Hong Kong or other foreign tax payments can be an extremely important factor in achieving the optimal result. The way your income is sourced on your tax return will also have a major impact on how much credit can be claimed and this can be a very complex aspect of tax return preparation.
Avoiding hefty penalties for non-compliance
One important issue that affects US citizens and Green Card Holders living 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 on time where they are required can result in large penalties. $10,000 per failure is a statutory minimum but the exposure can be much higher than this and in some cases will be based on the maximum value of the unreported account during the year.
In addition to the FBAR form, some Americans may face other information reporting obligations. This may be the case, for example, if you are a member of certain types of pension scheme, if you are the grantor or beneficiary of a trust, if you own your own business or if you have invested in certain types of collective investment schemes. Although these forms often do not have any tax associated with them, the penalties for non-compliance can represent a significant risk and so all Americans living abroad should make sure they are fully aware of the additional compliance obligations that they have.
Last updated: 16 August 2019
Whether you’re here permanently, for the foreseeable future, or just for a short term assignment change of this magnitude can be overwhelming – especially from a financial planning perspective. There are a few important things you should know about US taxation as an American overseas.
These include ways in which you can:
- Exclude a portion of your earnings from US taxation
- Use the Hong Kong tax that you have paid to offset US tax on your earnings
- Avoid hefty penalties for non-compliance, by filing your information reporting forms on time
Foreign Earned Income and Housing Exclusions
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 USD105,900 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). For 2019, using these exclusions, up to $203,256 of earned income can be excluded from US tax by an American living in Hong Kong but this can only be achieved if income is structured and reported in the optimal way.
Qualifying for the exclusions can be tricky, especially in the year of arrival. There are a number of criteria that have to be met. For example, you need to be out of the US for a certain number of days in a fixed period. If you continue to travel to the US after your arrival in Hong Kong, some analysis may be required in order to achieve the best result so keeping good travel records will be essential.
Maximising the use of foreign taxes to offset US tax liability
For those earning income in excess of the amounts that can be excluded, taxes paid in Hong Kong or other foreign jurisdictions can sometimes be used to offset some or all of the remaining US tax due. This is achieved by claiming Foreign Tax Credits. There are choices to be made about how to claim these credits and in particular whether you should use the ‘paid’ basis or the ‘accrued’ basis. The paid basis (whereby you claim as a credit only foreign tax that has actually been paid during the US tax year in question) often achieves a better result. If you are using this basis, then the timing of your Hong Kong or other foreign tax payments can be an extremely important factor in achieving the optimal result. The way your income is sourced on your tax return will also have a major impact on how much credit can be claimed and this can be a very complex aspect of tax return preparation.
Avoiding hefty penalties for non-compliance
One important issue that affects US citizens and Green Card Holders living 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 on time where they are required can result in large penalties. $10,000 per failure is a statutory minimum but the exposure can be much higher than this and in some cases will be based on the maximum value of the unreported account during the year.
In addition to the FBAR form, some Americans may face other information reporting obligations. This may be the case, for example, if you are a member of certain types of pension scheme, if you are the grantor or beneficiary of a trust, if you own your own business or if you have invested in certain types of collective investment schemes. Although these forms often do not have any tax associated with them, the penalties for non-compliance can represent a significant risk and so all Americans living abroad should make sure they are fully aware of the additional compliance obligations that they have.
