How are you filing taxes?

[kdavid]

I'm an American teaching English in China. If I were to report just my official language teaching (no moonlighting, etc.), I could report I made ~US$12,000 for the '08 - '09 year.

All of this is paid in cash, and it all goes into (no comments/flaming needed about this next line) my wife's bank account. I therefore have no paper trail here.

I want to do everything by the book as I do plan on going back to the States at some point to buy a home and raise my children.

Last year ('08 - '09) I opened up an IRA account (obviously in my name) and maxed it out, so the IRS knows/will know I'm making money somewhere. I also plan on maxing out my IRA this year, as well as opening a side brokerage account for savings which will eventually produce an A 1099.

According to IRS Publication 54, I can file a 2555 and get all of my income (under 80,000) exempt from taxes as it is all foreign-earned income.

My question: does anyone have experience filing taxes/the 2555 form from abroad? If so, your sagely advice is greatly appreciated.

Thanks in advance.

[zhwj]

Filing the exemption isn't all that difficult.

When I was teaching, my school provided my housing, which the administration in charge of foreign experts assessed at a particular per diem. I remember that I filled in a line on one of those forms, and then wrote up a signed statement explaining that the housing was part of the job, and was able to subtract it out again.

This was back in '03, I haven't been provided housing since then, so things may have changed in the meantime.

If you're not working for a foreign company but are freelancing instead, you need to file one of the self-employed forms to pay Social Security and Medicare. If you're working for a foreign company, you don't have to do this, but you'll have to suffer the shock of receiving a notice every few years which will show a long column of zeroes under your Social Security contributions.

[anonymoose]

The irony is, the US fought for independence from the UK to avoid having to pay taxes, and yet we from the UK have none of this filling out tax form crap to do.

[self-taught-mba]

Well said. But how else would we pay for our 700 military bases and our neighbors mortgage on the house they couldn't afford? The US is the only industrialized country in the world to do that to its expats.

[roddy]

OP asked how, not why ;-)

[ABCinChina]

The last time I remembered, I did not have to report my earnings because I made under $80,000 overseas. I remember my mom mailed that tax form to me and after reading that specific sentence about 5 times, my understanding if that you don't have to file. Those tax forms have such complicated language and they really should make it simpler to understand.

[DrWatson]

For the OP:

It really is easy. I've been doing it for years and have not had issues yet. It is good you are filing though. I know someone who never bothered to file and when he went back stateside to start life there he was under tax investigation which screwed up his financial life for years.

If you haven't yet, check out Publication 54 from the IRS. It has more than you need to know. Basically, you need to file f2555-EZ claiming the exemption ( income < $87k ), and then on your f1040, you deduct the total on the f2555 from the base tax. You'll come up with a negative number, which means you owe zero tax. Normally you submit something equivalent to the W2, and since it would be in Chinese you just circle income before taxation (in China) and provide an explanation of the income (Chinese employer, etc.) and also convert the number from RMB to USD. You can get the yearly average exchange rate from the US Embassy web page usually.

HOWEVER, if you have not been outside of the US for 330 days of the 2008 tax year, there is a possibility you can be double-taxed. There is another form for this situation, but I don't know it as I've never had to file it. Check out Publication 54 for that situation.

Also, for reference, if your spouse doesn't have a social security number, on f1040 you just write her name on the form, put "non-resident alien" in the space for her SSN, and then mark that you are filing as "married; filing separately". She doesn't need to file anything of course.

So far the IRS has not said anything...but then again I'm going back in two months so we'll see!

[Shuiwu Daifu]

Filing and claiming the exclusion is not that difficult, apart from computing the "physical presence test" if you haven't spent the whole year overseas. You do have to file a return and claim the exclusion. If you don't file a return, then your foreign earned income isn't excluded and you're subject to tax on it.

You are required to declare all your income -- including tutoring income -- and pay social security tax at self-employed rates on tutoring and other self-employment income. ("I want to do everything by the book . . . .")

Generally, you're not subject to social security tax on salary you receive as an employee of a foreign company overseas. But if your employer has American ties, your overseas salary may be subject to social security tax (for example, if you work overseas for a firm incorporated in America, or for an unincorporated entity -- partnership or sole proprietorship -- controlled by Americans).

Your main problem, however, is that IRA. If all your earned income is excluded as foreign earned income, then you're not eligible to make any IRA contribution. If you nonetheless do make an IRA contribution, then you're subject to a 6 percent penalty tax on it each year until you withdraw it.

You can avoid that penalty on your 2008 contribution by withdrawing it before April 15, 2009 (or the due date for filing your 2008 return, if later). If you make this withdrawal -- and you should -- you'll still be liable for a 10 percent penalty tax on any income your 2008 contribution earned while in the IRA.

Finally, under the US-China Tax Treaty, China can ask the IRS for tax information on Americans in China. Whether this happens, I don't know.

Note that Americans teaching at accredited Chinese schools may be exempt from Chinese tax on their salaries for up to three years in some cases under Article 19 of the treaty.

[kdavid]

Thanks so much for the help so far.

Question:

Is there anyway I can get around getting taxed for my IRA? I'd really rather not get taxed on it as that defeats the entire purpose of having one.

There's no way I can withdraw that cash now. I bought late summer last year and would lose (in addition to whatever I get taxed for pulling it out) 30% of what I put in given the current market condition. My wife would never trust me with another investment ever again.

[Shuiwu Daifu]

Is there a way? You don't have to exclude your foreign earned income, the election is voluntary. If you don't make the election -- and so pay whatever tax is due on your foreign earned income -- I suppose you can keep that 2008 IRA contribution.

Note that if you do elect the excusion and pull your IRA contribution, there'll be no penalty tax unless your IRA had earnings. But if you elect the exclusion and don't pull it, you'll owe a 6 percent penalty tax on the amount of the contribution this year and each year to come, until you do withdraw it.

[zhwj]

An American living overseas is not required to take the exclusion (it's "voluntary", according to the IRS explanation). So if you report your income and pay the appropriate tax rate, wouldn't that allow you to maintain the IRA?

[ABCinChina]

So you guys are saying that even though we make below taxable amount working for a non-USA company, that we still need to file? (It may be too late for me) Also, a bit of a technicality, but I hold both Taiwan and USA passports and came into China on a Taiwan passport.

[imron]

Also, a bit of a technicality, but I hold both Taiwan and USA passports and came into China on a Taiwan passport.

I don't think Uncle Sam cares. US citizens need to pay US taxes regardless of what country they are in. Given that you hold a US passport and are therefore a US citizen, you need to pay them.

[Shuiwu Daifu]

You must file a return and elect the foreign earned income exclusion. If you don't, you're not entitled to the exclusion.

If you haven't properly claimed the exclusion for prior years, the situation's a bit complex.

Here's what the IRS says:

Your initial choice of the exclusions . . . generally must be made with:

-- a timely filed return (including any extensions),

-- a return amending a timely filed return, or

-- a late-filed return filed within 1 year from the original due date of the return (determined without regard to any extensions).

You can choose the exclusion on a return filed after the periods described above provided you owe no federal income tax after taking into account the exclusion. If you owe federal income tax after taking into account the exclusion, you can choose the exclusion on a return filed after the periods described above provided you file before IRS discovers that you failed to choose the exclusion. . . . If you owe federal income tax after taking into account the foreign earned income exclusion and the IRS discovered that you failed to choose the exclusion, you must request a private letter ruling . . . .

http://www.irs.gov/businesses/small/international/article/0,,id=96994,00.html

[gato]

US citizens need to pay US taxes regardless of what country they are in.

US green card holders are subject to the same taxes.

http://www.irs.gov/businesses/small/international/article/0,,id=96796,00.html

If you are a U.S. citizen or resident alien living or traveling outside the United States, you generally are required to file income tax returns, estate tax returns, and gift tax returns and pay estimated tax in the same way as those residing in the United States.

[ABCinChina]

Ok, this doesn't sound good because I haven't filed for almost 3 years I've been living here. Is it possible to just say I was not working. (and lie) Would this be the easiest way or will there be repercussions.

[Shuiwu Daifu]

So what's not good?

The IRS hasn't come after you yet, and your foreign earned income is below the annual cap. You can still elect the exclusion. Maybe there'll be some interest and penalties to pay if you've got interest or other investment income. Plus social security tax if you're self-employed.

File the back returns and sleep well.

[DrWatson]

kdavid:

Do your 1040 and see what you come up with. From the tax schedules for 2088, it looks like $1200 is taxed at $1403 for "married, filing separately." Your standard deduction is over $3k I believe, so you'll still will come out with a negative number. I might be wrong, but if I were you I'd do the math rather than taking penalty fees or withdrawing from an IRA.

I suppose the penalties and what not are the reason why all of the hot shot finance guys in Tokyo, Singapore and Hong Kong have intl. tax accountants.

ABCinChina:

Yeah, dual citizenship won't get you out of US taxes. You can file tax returns for the past three years. You might have to pay penalty fees for filing late. Your best bet is to dial up the IRS and consult with them on how to handle the situation. They international tax division phone agents have always been very friendly and helpful to me.

The US Embassy in Beijing has some links and phone numbers for you.

http://beijing.usembassy-china.org.cn/acs_taxes.html

[Shuiwu Daifu]

On $12,000 of foreign earned income, Federal income tax would be about $300, filing separately with no other income.

As to the IRA, remember that the money you've lost so far you've lost. Taking it out or leaving it in, you've still lost that 30 percent.

[DrWatson]

On $12,000 of foreign earned income, Federal income tax would be about $300, filing separately with no other income.

From the tax schedules for 2088, ...

I was just...thinking of the future?