Posted by
sxc
18 yrs ago
Hi there
A friend of mine from California is considering a job in HK and wants to know how his fater tax income is going to compare. The salary in HK is going to be approximately US65,000 annually.
How does income tax in the US work as I'm not from that part of the world?
Thanks!
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Not a US citizen, so I don't know for a fact but from what people complain about on here it seems there is double taxation, you have to pay taxes on income both in Hong Kong or the US, unless the income is paid outside of Hong Kong and in the US. So when your friend is assessing the salary he should calculate what taxes are at the US rate and the Hong Kong rate which is flat 15 or 16%. I dont think there are any deductions either for double taxation.
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That is not my understanding. As I have been told, US citizens are subject to US Federal Income Tax wherever the income is earned (global taxation). However, taxes income taxes paid locally in most places can be deducted from this. In other words, total tax rate is effectively at US Federal Income Tax level.
However, note that I am not a US citizen either, hence, take the above with a good pinch of salt (as you should for most information obtained from internet fora). Also, I understand that the technicalities can be quite complex (e.g., how things like housing allowance are treated), so you should probably consult an expert/professional in the field.
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Agreed a professional should be consulted, because it does seem quite complex. just stating what I have gathered on here and from people moaning. Even if there is a deduction for local taxes paid, your effective tax rate is still going to be far higher than the Federal Income Tax rate. You are being taxed on the same 85% of your income twice. I dont see how there could be parity.
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Isnt a double taxation a crime? Hong Kong tax system is so simple and clear so may be I am spoiled in that sense. If you are not earning in Hong Kong, you dont need to pay tax. Even if you are working in China and the number of days in Hong Kong is less than XX days, then you will be taxed in China ONLY. 65K is not a lot, and how can one survive if he has to pay double tax! Anyway, USA is never a country that I want to understand but I just feel sorry and so unfair for sxc's friend.
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"A friend of mine from California is considering a job in HK and wants to know how his fater tax income is going to compare. The salary in HK is going to be approximately US65,000 annually.
How does income tax in the US work as I'm not from that part of the world?"
As mentioned above the US kindly levies income tax even if you are out of the country and are not paid in the US. Only Federal income tax. Basically they take percentage x as usual minus what you pay in HK.
Note that housing costs in (urban) HK are much much higher than in the US unless you compare with the very highest cost areas of Manhattan and the like. Even Southwestern CT, traditionally a very costly area, seems cheap in comparison. Your friend will probably live smaller.
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"Even if there is a deduction for local taxes paid, your effective tax rate is still going to be far higher than the Federal Income Tax rate." --- Why would that be?
"You are being taxed on the same 85% of your income twice." --- Could you please explain how that would be the case?
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OK this is the way I see it. so you deduct for the 15% tax that you pay on 100% your income that is levied as local taxes (excluding the tax free deduction that you get for arguments sake which is negligible) then you are taxed again on the remainder 85% of your income that the HK government lets you keep as disposable income at the Federal Tax rate for which you have already paid tax upon to the HK government. Even if there is a further tax free deduction for living, like in Hong Kong unless it is really high, How could your effective tax rate be the same as the federal tax rate, unless I have got something wrong or I am missing something?? do correct me if I am wrong, but I really don't get that.
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Again, not an expert, as we've just moved in December and haven't done all the tax stuff yet, but this is basically how I understand it from how it was explained to us.
The US taxes on all income of green card holders and citizens regardless of where it is earned. But it is only after the first 80,000 US. Unfortunately, though they used to tax the 80,001st dollar as 1 dollar for tax bracket purposes, now you pay taxes on that dollar as if you for in the 80,001 tax bracket.
You also will get credit for the HK taxes that you pay (so it's not double taxation). Hence, if you were in a country that had higher taxes than the US, you wouldn't owe any taxes to the US...but because Hong Kong's taxes are lower, you usually end up owing them.
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That is a pretty high tax free allowance, is that allowance only for overseas residents? So what you are saying is you pay the difference between the two tax rates rather than being taxed twice on your local disposable income. i.e. if your tax bill was say US$10,000 had you been living in the US, and you only paid US$2,000 in taxes to the Hong Kong government as local taxes, then the US government would levy US$8,000 in taxes, so your effective tax rate is the same as the US Federal rate regardless of whether you lived there??
that makes sense then.
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So basically to answer the poster question, because the individual is earning less than US$80,000 he will only be paying local Hong Kong taxes??
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"That is a pretty high tax free allowance, is that allowance only for overseas residents? "
I think it's for everyone. But note that this is "only" federal income tax. Many states also levy state income tax which you would pay if you were resident. And then you have state and local property tax depending on location.
"so your effective tax rate is the same as the US Federal rate regardless of whether you lived there??"
Yepp.
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I don't know that I'd say the tax rate is the same just because of all the complexities involved in calculation...but I would think it wouldn't be significantly more or less. Also, the 80,000 exclusion is just if you're abroad...not in the states.
We're from Florida...so no state taxes. If you've sold your home and don't have ties to a state, I wonder if you'd owe tax to a state, though. Our accountant never mentioned anything to us about state taxes.
I found further clarification on this site: http://www.globaltaxhelp.com/taxbasics.htm
Foreign Earned Income Exclusion
If you are a full time resident abroad for a full calendar year, or live there for 330 days out of any consecutive 12-month period, you can exclude up to $80,000 of earned income from U.S. Income Taxation for 2003, 2004, and beyond. If you are married, and both of you earn income and reside abroad, you can also exclude up to another $80,000 of your spouse’s income from taxation. These exclusions can only be claimed by filing a tax return and are not automatic if you fail to file your Form 1040 for the year it applies (as well as the appropriate forms claiming this exclusion). Earned income is income you earn for your work or services and does not include rental income, dividend or interest income, or other types of income that are not paid for your own personal efforts. You can also claim an additional exclusion or deduction for your foreign housing expenses exceeding a standard amount established by the Federal Government.
Foreign Tax Credits
You may have income for which you’ve paid foreign tax, but that cannot be excluded from U.S. taxation. GlobalTaxHelp.com can help you to claim Foreign Tax Credits that can be used to partially or completely offset U.S. taxes that accrue on this same income. In higher tax countries, you’ll accrue such tax credits faster than you’ll ever be able to apply them; in lower tax countries, you will likely be able to apply most or all such tax credits against U.S. tax liability on this same income.
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I see, so basically they devised the rules, such that they give you a high tax free allowance, so you can have for most people, some high fraction of income paid at the lower local tax rate, but once exceed the allowance you start to pay US federal Tax you are automatically in the high tax bracket and the tax rate is quite high, but you would be paying that tax rate even if you lived there if you earned that amount and they deduct your bill with the amount in local taxes paid. hmm, well it would seem to me that would end up paying the same level of taxes or thereabout, some people pay less some more depending on the situation,
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"but you would be paying that tax rate even if you lived there if you earned that amount "
Indeed. However most countries don't levy tax on income earned in another country. The US system just seems a bit greedy to me. ;)
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sxc
18 yrs ago
Sounds like it will work out well for my friend as long as his salary doesn't reach $80,000.
What I'm unclear of from the helpful advice above is once the salary goes over $80,000, whether he will be taxed as per US from $1, or whether he still gets a "tax free threshold" of $80,000 and then gets taxed the appropriate tax rate from $80,001?
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It's taxed at the higher tax bracket.
From: http://usexpatriate.blogspot.com/search?updated-min=2008-01-01T00%3A00%3A00-08%3A00&updated-max=2009-01-01T00%3A00%3A00-08%3A00&max-results=5
2007 Foreign Earned Income Exclusion Rises to $85,700
The foreign earned income exclusion for 2007 has been increased to $85,700. That is the good news. Under the new law came into effect in 2006, all of your foreign earned income above the exclusion will be taxed at the effective rate for that level of income as though the excluded amount had also been taxed. That means for each additional dollar above the exclusion the Federal tax rate will be at least 28% or more, though may be offset if you pay any foreign taxes by the foreign tax credit. One solution is to open an IRA by 4/15 if you earned more than the exclusion and deduct as much as the IRA will permit based on your age. Remember you can only open an IRA if you foreign earned income exclusion and foreign housing exclusion or deduction taken together are less than your total foreign earned income (from wages or self employment income) and the amount contributed to the IRA does not exceed the difference.
Posted by Don D. Nelson, Attorney, CPA at 10:01 AM
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It might be unfair compared to other countries tax regime but It's not as bad as I initially thought, I actually thought from the way people were complaining, that it was double taxation or your effective tax rate was far higher than if you lived and earned in the US, so you were being penalized for working abroad . Obviously you aren't consuming US public goods and services if you don't reside there, so its debatable whether you should pay anything in taxes except perhaps to contribute something towards defence and diplomatic services.
I read somewhere that there was a rush to renounce citizenship before a certain date because of some law being enacted where US expats would be taxed retroactively at a higher rate if they chose to renounce citizenship. i.e if you renounced citizenship you owed the government money, and if you did not pay you would have problems entering the country. Apparently to counter the rising numbers of people who were renouncing citizenship to avoid paying Federal taxes in the future. I am not sure where I read that because I cant find it on the internet, but its definitely not something I imagined.
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I saw that, too. Here's an article (click on "ANOTHER ARTICLE BY UK LAW FIRM ON NEW US TAX LAW ON EXPATRIATION AND SURRENDER OF CITIZENSHIP")
http://www.taxmeless.com/USCitizenRenounce.htm
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Oski
18 yrs ago
As a Californian, your friend will save taxes from 3 sources if she comes to Hong Kong.
the first is already mentioned by many people here. the Foreign Income Exclusion. for tax year 2008, the exclusion is 87600. Rules of qualification is as windexus wrote. In addition to the exclusion, rent paided above USD 1000 pm or so is also excluded. For most of US citizens in HK earning under $150k per year, their federal tax obligation is minimal. So on the excluded portion of income, she pays HK tax only. at that income bracket, on my back of a napkin estimate, her Feder tax rate is approx 16-18%, HK effective rate would be about 10. so save about 6-8% there.
Second source. Social security and medicare payroll tax. We don't have to pay those since we are overseas. FICA is 7.65%, medicare is about 1%, total savings, another 8.6% (most people forget about this one.)
Third, California state income tax. at her income, she pays roughly 6% state tax.
So total tax savings comes to about 21%
However, cost of living increase in HK over Cal can easily eat up this entire savings.
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"I read somewhere that there was a rush to renounce citizenship before a certain date because of some law being enacted where US expats would be taxed retroactively at a higher rate if they chose to renounce citizenship. i.e if you renounced citizenship you owed the government money, and if you did not pay you would have problems entering the country. Apparently to counter the rising numbers of people who were renouncing citizenship to avoid paying Federal taxes in the future. I am not sure where I read that because I cant find it on the internet, but its definitely not something I imagined."
As I have heard it, to renounce citizenship or residency you need to pay an amount equivalent to seven years of tax.
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I am not sure what the current regulation is, I am not American, nor am I an accountant, I think you are liable to pay tax on income for ten years after you have renounced, but I would be very surprised if they made you pay that in a lump sum. That would be to much of a liability for an average joe who might have reasons other than tax evasion when renouncing citizenship. What I read was there is new legislation being enacted where there is retroactive taxation involved on the income you have already earned and paid taxes upon, and taxation is liable now on all assets worldwide, not just those in the US. Namely they are going after capital gains and estate duties.
from what I saw on a website
"One caveat: U.S. tax law seeks to impose taxes on former U.S. persons who expatriate for a period of ten years after they end citizenship. This current tax scheme, in theory, tries to collect taxes on all income or gains after expatriation. But if you have no income from U.S. sources and no assets there, there’s nothing for the IRS to collect."
They are trying to change that by including all your assets and income worldwide and they are tying to discourage it further by retroactive taxation. To be honest the actual numbers of people that renounce citizenship is very small, but the people that actually do it are typically seriously wealthy and do so for tax evasion purposes people of are worth US$100 million or more, so it's not small amounts of cash the US government is quibbling over, and that is why there is a rush to renounce before the legislation is enacted.
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I have been using form 2555 from IRS for my taxes in the last 4 years. Pretty as what windexus has described.
check out direct source from IRS - http://www.irs.gov/pub/irs-pdf/f2555.pdf
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"To be honest the actual numbers of people that renounce citizenship is very small, "
Indeed. However the numbers of people renouncing/losing permanent residency is probably higher.
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