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Expat Tax Blog

Three Things About U.S. Taxes Expats in Hong Kong Should Know

Written by Gregory A. Fallon on Wednesday, 02 November 2016.

Common tax issues for American Living in Hong Kong

Three Things About U.S. Taxes Expats in Hong Kong Should Know

Having spent years helping U.S. citizens living and working in Hong Kong to manage their taxes, I have encountered three common misconceptions about foreign tax credits, Hong Kong retirement schemes, and foreign asset reporting. These can lead to costly errors and absurd IRS penalties. Here are three tips to help U.S. citizens living in Hong Kong avoid these common tax mistakes.

1.    How Hong Kong taxes are accrued for the foreign tax credit.

Taxpayers in Hong Kong who cannot exclude all their income through the foreign-earned income and housing exclusions should take advantage of the foreign tax credit to prevent double taxation. 

The foreign tax credit requires taxpayers to make a major decision: whether to take paid or accrued taxes. For most taxpayers, the consequences of this choice will last a lifetime, as they must use the same tax method for all future years.

Accrued taxes are a straightforward concept: An accrual results when an item has been incurred but not paid for. However, many taxpayers choose this option without being aware of how the IRS determines when taxes accrue.  While working in a country with the same tax year as the United States, expats can accrue all the foreign taxes owed for that year. However, in countries with a different tax year, taxpayers cannot split and prorate the taxes that accrue. According to the IRS, foreign taxes cannot accrue until the tax year ends. Therefore, taxpayers in Hong Kong are unable to accrue Hong Kong taxes from April to December, since the Hong Kong tax year ends in March, which is after the U.S. tax year.

Here’s an example: Jim decides he wants to accrue his foreign taxes in Hong Kong for the 20X5 year. He will be allowed to accrue the Hong Kong taxes only from April 20X4 to March 20X5. The Hong Kong tax on income earned from April to December cannot be accrued, since the Hong Kong tax year ends on March 31, 20X6, which is after the US tax year of December, 31 20X5.

Taxpayers who are in their last year in Hong Kong and are accruing foreign taxes also should be aware that they will not get credit for the Hong Kong tax on income earned from April to December. This may mean they need to file an amended return so they can carry back the Hong Kong taxes that will accrue in March of the following year. 

U.S. Character and Sourcing of Software Sales

Written by Gregory A. Fallon on Tuesday, 14 July 2015.

U.S. Character and Sourcing of Software Sales

When U.S. companies are involved in international transactions they need to understand where their income will be sourced and how it will be characterized before they can develop effective tax strategies.  These two factors will also be important when taxpayers take advantage of the Foreign Tax Credit.  This article will be focusing on sourcing and character of international and US software sales for “shrink wrap” software.  When classifying software transactions it is important to first determine what rights have been transferred.  The character of software sales is not based on the form adopted by the sellers and buyers or controlled by copyright law it is determined by IRS regulations.  Treas. Reg. 1.861-18(g) focuses on the rights that are acquired by the buyer in determining the type of income.

Low-risk Noncompliant Expatriates

on Tuesday, 14 July 2015.

Low-risk Noncompliant Expatriates

On September 1, 2012 the IRS detailed a new streamlined filing compliance procedure for non-resident US taxpayers who have failed to comply with income tax and FBAR filing requirements.

The new procedure will allow non-resident non-compliant taxpayers to get compliant without facing "penalties or follow up actions" by the IRS if they  have a low compliance risk.  A taxpayer with a low compliance risk is someone who's tax liability does not exceed $1,500 for any year filed.

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