Articles tagged with: Expatriate

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. 

Expatriation tax

on Wednesday, 01 July 2015.

What's New

The IRS has created a page on IRS.gov for information about Form 8854 and its instructions, at 
www.irs.gov/form8854. Information about any future developments affecting Form 8854 (such as legislation enacted after we release it) will be posted on that page

Purpose of Form

Expatriation tax provisions apply to U.S. citizens who have relinquished their citizenship and long-term residents who have ended their residency (expatriated). Form 8854 is used by individuals who have expatriated on or after June 4, 2004.  The date on which you are considered to have expatriated determines which Parts of the form you must complete. You are considered to have expatriated on the date you relinquished your citizenship (in the case of a former citizen) or terminated your long-term residency status (in the case of a former U.S. resident). If you expatriated after June 3, 2004, and before June 17, 2008, complete Parts I, II, and V. If you expatriated after June 16, 2008, and before January 1, 2011, complete Parts I and III. If you expatriated in 2011, complete Parts I, IV, and V.

Expatriation.   Expatriation includes the acts of relinquishing U.S. citizenship and terminating long-term residency.

Date of relinquishment of U.S. citizenship.

You are considered to have relinquished your U.S. citizenship on the earliest of the following dates.

  1. The date you renounced your U.S. citizenship before a diplomatic or consular officer of the United States (provided that the voluntary renouncement was later confirmed by the issuance of a certificate of loss of nationality).

  2. The date you furnished to the State Department a signed statement of your voluntary relinquishment of U.S. nationality confirming the performance of an expatriating act (provided that the voluntary relinquishment was later confirmed by the issuance of a certificate of loss of nationality).

  3. The date the State Department issued a certificate of loss of nationality.

  4. The date a U.S. court canceled your certificate of naturalization.

 

Date of termination of long-term residency.

If you were a U.S. long-term resident (LTR), you terminated your lawful permanent residency on the earliest of the following dates.

  1. The date you voluntarily abandoned your lawful permanent resident status by filing Department of Homeland Security Form I-407 with a U.S. consular or immigration officer, and the Department of Homeland Security determined that you had, in fact, abandoned your lawful permanent resident status.

  2. The date you became subject to a final administrative order for your removal from the United States under the Immigration and Nationality Act and you actually left the United States as a result of that order.

  3. If you were a dual resident of the United States and a country with which the United States has an income tax treaty, the date you commenced to be treated as a resident of that country and you determined that, for purposes of the treaty, you are a resident of the treaty country and gave notice to the Secretary of such treatment. See Regulations section 301.7701(b)-7 for information on other filing requirements if you are such an individual.

 

Long-term resident (LTR) defined.   You are an LTR if you were a lawful permanent resident of the United States in at least 8 of the last 15 tax years ending with the year your status as an LTR ends. In determining if you meet the 8-year requirement, do not count any year that you were treated as a resident of a foreign country under a tax treaty and did not waive treaty benefits applicable to residents of the country.

Lawful permanent resident.

You are a lawful permanent resident of the United States if you have been given the privilege, according to U.S. immigration laws, of residing permanently in the United States as an immigrant. You generally have this status if you have been issued an alien registration card, also known as a “green card.

ExpatriationAfter June 3, 2004,and Before June 17, 2008

The rules in this section apply to persons who are considered to have expatriated after June 3, 2004, and before June 17, 2008.

Date of Tax Expatriation

For purposes of filling out Part I, the date of your expatriation is the later of the date you notified the relevant agency of your expatriating act or the date Form 8854 was first filed in accordance with these instructions. Apply the rules of section 7502 to determine the date on which this form is filed. Generally, the postmark date is the filing date.

 

Until you file Form 8854 and notify the Department of State or the Department of Homeland Security of your expatriating act, your expatriation for immigration purposes does not relieve you of your obligation to file U.S. tax returns and report your worldwide income as a citizen or resident of the United States.

Who Must File

You must file Form 8854 to:

  • Establish that you have expatriated for tax purposes; or

  • Comply with the annual information reporting requirements of section 6039G, if you are subject to tax under section 877.

Note. If you were a naturalized citizen, but lost your citizenship because a federal court revoked your naturalization under section 340 of the Immigration and Nationality Act, you do not need to complete this form if, after the revocation, you hold the status under the Immigration and Nationality Act of an alien lawfully admitted for permanent residence. You must complete this form, however, if you were a naturalized citizen and you gave up your citizenship by expatriation under section 349 of the Immigration and Nationality Act.

Taxation Under Section 877

You are subject to taxation under section 877 if you are a former U.S. citizen or former LTR and any one of the following applies to you.

  1. Your average annual net income tax liability for the 5 tax years ending before the date of your expatriation is more than the amount listed next.

    1. $124,000 if you expatriated in 2004.

    2. $127,000 if you expatriated in 2005.

    3. $131,000 if you expatriated in 2006.

    4. $136,000 if you expatriated in 2007.

    5. $139,000 if you expatriated in 2008.

  2. Your net worth is $2 million or more on the date of your expatriation.

  3. You fail to certify on Form 8854 that you have complied with all of your federal tax obligations for the 5 tax years preceding the date of your expatriation.

 

If you are subject to tax under section 877, you are no longer taxed as a citizen or resident on your worldwide income. However, you must compute your tax as a nonresident according to the special rules of section 877. These rules expand the categories of income and gain on which you owe tax. You are also subject to special rules for gift and estate tax purposes that differ from those applicable to other nonresident aliens.

Tax consequences of presence in the United States after expatriation.  If, for any tax year during the 10-year period in which you are otherwise subject to section 877, you are present in the United States for more than 30 days in a calendar year ending in such tax year, you will be treated as a U.S. citizen or resident for that tax year. You will be subject to U.S. tax on your worldwide income unless the following exception applies.

Exception.

You can be present in the United States for up to 60 days without being treated as a U.S. citizen or resident if you are performing personal services in the United States for an employer who is not related (within the meaning of sections 267 and 707) to you and you meet either of the following requirements.

  • You were a U.S. citizen and, within a reasonable period following your expatriation, you became a citizen or resident fully liable to tax in the country in which you, your spouse, or either of your parents was born; or

  • For each year in the 10-year period ending on the date of expatriation, you were physically present in the United States for 30 days or less.

 

See Pub. 519, U.S. Tax Guide for Aliens, for details about what constitutes a day of presence in the United States.

When To File

File your initial Form 8854 as soon as possible after the date you relinquish U.S. citizenship or terminate your long-term residence. You remain subject to tax as a U.S. citizen or resident until you both file your initial Form 8854 and notify the appropriate authorities of your expatriating act. See the Caution in Date of Tax Expatriation, earlier.

In most cases, you must file your annual Form 8854 by the due date for filing Form 1040NR, U.S. Nonresident Alien Income Tax Return, regardless of whether you are required to file Form 1040NR. If you are required to file Form 1040NR, attach Form 8854 to your Form 1040NR and file your Form 1040NR at the address in the Instructions for Form 1040NR. Also send a copy of Form 8854 to the address under Where To File below. If you are not required to file Form 1040NR, send your Form 8854 to the address under Where To File below.

If you are present in the United States following your expatriation and are subject to tax as a U.S. citizen or resident under the rules described in Exception, earlier, file Form 8854 with your Form 1040 by the due date for filing Form 1040. Also send a copy of Form 8854 to the address under Where To File below by the due date for filing Form 1040.

Where To File

Send your Form 8854 (or a copy of your Form 8854 if you are required to attach the original to a Form 1040NR or a Form 1040) to this address.

Department of the Treasury 
Internal Revenue Service 
Philadelphia, PA 19255-0549

 

ExpatriationAfter June 16, 2008

The rules in this section apply to persons who are considered to have expatriated after June 16, 2008.

Who Must File

If you expatriated after June 16, 2008, the expatriation rules apply to you if any of the following statements apply.

  1. Your average annual net income tax liability for the 5 tax years ending before the date of expatriation is more than the amount listed next.

    1. $139,000 for 2008.

    2. $145,000 for 2009.

    3. $145,000 for 2010.

    4. $147,000 for 2011.

  2. Your net worth was $2 million or more on the date of your expatriation.

  3. You fail to certify on Form 8854 that you have complied with all federal tax obligations for the 5 tax years preceding the date of your expatriation.

  4. You expatriated before 2011 and you:

    1. Deferred the payment of tax,

    2. Have an item of eligible deferred compensation, or

    3. Have an interest in a nongrantor trust.

 

Covered expatriate.    You are a covered expatriate if you meet (1), (2), or (3), earlier.

Exception for dual-citizens and certain minors.

Dual-citizens and certain minors (defined next) are not subject to the expatriation tax even if they meet (1) or (2), earlier. However, they still must provide the certification required in (3), earlier.

Certain dual-citizens.

You may qualify for the exception described above if you meet the following requirements.

  • You became at birth a U.S. citizen and a citizen of another country and you continue to be a citizen of, and are taxed as a resident of, that other country.

  • You were a resident of the United States for not more than 10 years during the 15-tax-year period ending with the tax year during which the expatriation occurred. For the purpose of determining U.S. residency, use the substantial presence test described in chapter 1 of Pub. 519.

 

Certain minors.

You may qualify for the exception described above if you meet the following requirements.

  • You expatriated before you were 18½.

  • You were a resident of the United States for not more than 10 tax years before the expatriation occurs. For the purpose of determining U.S. residency, use the substantial presence test described in chapter 1 of Pub. 519.

 

Taxation Under Section 877A

If you are a covered expatriate in the year you expatriate, you are subject to income tax on the net unrealized gain in your property as if the property had been sold for its fair market value on the day before your expatriation date (“mark-to-market tax”). This applies to most types of property interests you held on the date of your expatriation. But see Exceptions below.

Gains from deemed sales are taken into account without regard to other U.S. internal revenue laws. Losses from deemed sales are taken into account to the extent otherwise allowed under U.S. internal revenue laws. However, section 1091 (relating to the disallowance of losses on wash sales of stock and securities) does not apply. The net gain that you otherwise must include in your income is reduced (but not below zero) by $636,000.

Exceptions.  The mark-to-market tax does not apply to the following.
  1. Eligible deferred compensation items.

  2. Ineligible deferred compensation items.

  3. Specified tax deferred accounts.

  4. Interests in nongrantor trusts.

Instead, items (1) and (4) are subject to withholding at source. In the case of item (2), you are treated as receiving the present value of your accrued benefit as of the day before the expatriation date. In the case of item (3), you are treated as receiving a distribution of your entire interest in the account on the day before your expatriation date. See paragraphs (d), (e), and (f) of section 877A for more information.
Deferral of the payment of mark-to-market tax.  You can make an irrevocable election to defer the payment of the mark-to-market tax imposed on the deemed sale of property. If you make this election, the following rules apply.
  1. You make the election on a property-by-property basis.

  2. The deferred tax on a particular property is due on the return for the tax year in which you dispose of the property.

  3. Interest is charged for the period the tax is deferred.

  4. The due date for the payment of the deferred tax cannot be extended beyond the earlier of the following dates.

    1. The due date of the return required for the year of death.

    2. The time that the security provided for the property fails to be adequate. See item (6) below.

  5. You make the election in Part IV, Section C.

  6. You must provide adequate security (such as a bond).

  7. You must make an irrevocable waiver of any right under any treaty of the United States that would preclude assessment or collection of any tax imposed by section 877A.

When To File

If you expatriated after June 16, 2008, attach Form 8854 to your income tax return (Form 1040 or Form 1040NR) for the year that includes your expatriation date, and file your return by the due date of your tax return (including extensions). Also send a copy of your Form 8854 to the address in Where To File next. If you are not required to file Form 1040NR or Form 1040, send your Form 8854 to the address in Where To File next by the date your Form 1040NR (or Form 1040) would have been due (including extensions) if you had been required to file. (See Resident Alien or Nonresident Alien in the Instructions for Form 1040NR.)

Note.

If you elected to defer the payment of any tax due (see Section C—Deferral of Tax, later), you must file Form 8854 annually for each year up to and including the year in which the full amount of deferred tax and interest is paid. For each year that you are required to file a Form 1040NR (or Form 1040), attach your annual Form 8854 to your Form 1040NR (or Form 1040) and send a copy to the address under Where To File below. For each year that you are not required to file Form 1040NR (or Form 1040), send your Form 8854 to the address in Where To File below by the date your Form 1040NR (or Form 1040) would have been due (including extensions) if you had been required to file a Form 1040NR (or Form 1040).

Where To File

Send your Form 8854 (or a copy of your Form 8854 if you are required to attach the original to a Form 1040NR or a Form 1040) to this address.

Department of the Treasury 
Internal Revenue Service 
Philadelphia, PA 19255-0549