Tax
Saving Ideas on Foreign Assignment
How To Save
Taxes Overseas ~ By Steven Y.C. Kang
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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.
Tax planning
ideas generally fall into following three strategies:
1.
Deferring Income
2.
Accelerating Expenses, and
3.
Changing character of income and/or expenses
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.
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.
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. 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.
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). 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). 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.
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.
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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| Steven
Y.C. Kang, CPA & Associates offers extensive online services, including
financial calculators, tax return reviews, and a large library of informative
articles. To learn more about these services - Click
Here - |
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