Taxing time for US expats in Hong Kong
In addition to paying local taxes, the 60,000-plus Americans living in Hong Kong are required to declare their foreign-earned income to the Inland Revenue Service (IRS). And they must also report the combined value of their foreign accounts, or ones which they have signing rights for, if it exceeds US$10,000 in aggregate during the year.
A law going through Congress is aimed at cracking down on Americans evading taxes overseas - by imposing financial penalties on banks that do not reveal their accounts to the (IRS).
With no tax treaty between Hong Kong and the US, American citizens and green-card holders, who are working here, have double taxes to worry about. While filing a return in Hong Kong is fairly straightforward, filing US taxes can be complicated. 'There are a number of exemptions and exclusions they might be able to claim, the most well known being the foreign-earned income exclusion and the foreign-housing exclusion,' says Alice Ko, director of TaxPro Executive Services.
If a person is working in Hong Kong, as long as they meet the requirements under section 911 of the Internal Revenue Code exclusion test, he or she will be able to exclude up to US$91,400 of earned income for last year. They should also be able to claim their housing, up to US$114,300, and can also claim the tax they paid in Hong Kong as a foreign tax credit in their US tax return, with one important caveat, according to Philip Dong, director, TaxPro Executive Services.
'With the foreign tax credit, the credit is not dollar to dollar. For any Hong Kong tax that is payable on the excluded income, you don't get a credit on that portion otherwise there would be double benefit on the US tax return,' he says. This means it's pertinent for US taxpayers residing in Hong Kong to find tax professionals who can help. Ko highlights examples of clients who knew of the exemptions and foreign tax credits but didn't know whether they met the requisite tests or how they could claim deductions. For those unsure of which deductions they may be eligible for, they may end up over-claiming some of the exclusions or foreign tax credits, or under-claiming their deductions.
'If you over-claim of course you lose money, but if you under-claim you can be subject to penalties,' she says.
Ko says that changes in US tax laws provide another reason for people to seek professional help. 'US filers are not well informed about changes to the tax laws. Over the years we have found there are many changes. Last year, we had a big issue about the reporting of foreign bank accounts, in particular what type of bank accounts were required to be disclosed to the IRS,' she says. 'Using professional services is not just a question of saving money or trying to be more cost effective. There are certain risks that American citizens may be exposed to and, when they end up going back to the US, matters can become complicated.'