| Tax Saving
Ideas on Foreign Assignment How To Save Taxes Overseas |
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| First rule
in financial management is maximizing cashflows. For most expats, the biggest
cash outlays are taxes (accounting anywhere from 25% to 50% of their
income, or more, if they are being taxed in both countries). As such,
proper tax planning to minimize cash outlay is critical in building one’s
wealth. |
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| Tax
planning ideas generally fall into following three strategies: |
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1.
Deferring Income
2.
Accelerating Expenses, and
3.
Changing character of income and/or expenses |
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| The first
two strategies involve using accounting methods to push out the income
to future years and/or pull in expenses from future years. However, a more
interesting way to save taxes is the third strategy, which involves using
definitions in tax law to recharacterize income and/or expenses. |
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| US
tax laws have been developed through collaboration with various lobbying
groups requesting specific carve-outs. Once such carve outs or tax
incentives have been created, it must be offered to all taxpayers. However,
the tax law would be written in fairly esoteric ways to only apply under
specific fact patterns (to minimize tax revenue loss). It would
be the CPAs’ and attorneys’ role to mold your fact patterns to fit into
these laws. |
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| For example,
US government gives significant tax benefits to US citizens and US resident
aliens working overseas, as they mostly likely are also being taxed in
foreign countries. Although foreign tax credit provides some equity, additional
incentives are provided to encourage US taxpayers to explore opportunities
overseas. |
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| Let’s take
an example of Jim and Judy Adams with two years overseas assignment in
Hong Kong. During their foreign assignment, Jim would receive $100,000
of annual salary, $25,000 cost of living and overseas differential, $25,000
for family allowance, $15,000 for education allowance, $5,000 for home
leave allowance and $30,000 for housing allowance, totaling to $200,000
in compensation package. As Jim is the sole company representative in Hong
Kong, Jim maintains both an executive office and a home office, which Judy
helps out. |
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| They may be
able to exclude their entire foreign earned income of $200,000 from US
taxation, if they properly structure their compensation and income. |
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| If this couple
were working in US with the same amount of income, they would have to pay
$55,000 in income taxes (not counting FICA and Medicare taxes). |
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| In addition
to US taxation, they now have to consider Hong Kong taxes on their income.
Assuming that no tax planning is done and the Adams may exclude the standard
$80,000 of foreign earned income plus housing allowance, the Adams would
be paying $21,000 in US taxes (not counting FICA and Medicare taxes). |
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| Instead of
calling the entire $200,000 as salary and commission for Jim, since Judy
is helping out in the office, Jim may be able to split the salary between
himself and his wife as much as 50/50 or other reasonable basis. In addition,
since they are incurring $30,000 in housing expenses, if they recharacterize
(third tax planning strategy) or reclassify their salary into housing
allowance, they may be able to exclude a higher amount of foreign earned
income. |
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| This is
possible since each working spouse would be able to deduct the standard
exclusion amount of $80,000 plus housing allowance. If Jim was the
only person receiving the salary, then they would be limited to $80,000
exclusion plus housing allowance. The Adams would still receive the same
amount of money ($200,000), but now they have recharacterized their income
to maximize allowable exclusions. |
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| Using the
definitions provided in the law, you could benefit by exploring ways
to fit your fact patterns into the ones paved by others. Such exercise
will allow you to organize your finances and improve your cashflows. |
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