Tuesday, April 10, 2018

I - Income Tax (as an American in China)

My wife and I just finished doing our taxes last week. Just like many of other people all across the States. However, ours were a little different this year.

No part of our income came from America. We live in China and were here for the entire 2017 calendar year. Nevertheless, we still have to file taxes in the States.

Didn't know that, did you?

I didn't.

Apparently, there are only two countries in the entire world that make you pay taxes to your home country even if you aren't living there.

The United States and Eritrea.

Eritrea is not one of the lands of Middle Earth or a planet from the Star Wars universe. It's a real place that agrees with America on bleeding its citizens regardless of where they live. For many expats around the world, this means double taxation since we are already paying taxes in the country we reside in.

Luckily, we do not fall in the double taxation group because of the FEIE (Foreign Earned Income Exclusion). It can get a little complicated, but if you qualify and we do it means you don't have to pay any taxes for money earned abroad unless your income is over $101,300. And I didn't even come close. But you still have to file. Income has to be reported regardless.

There are two ways to qualify to get this exclusion. There is the Physical Presence Test which typically applies to those people who are jumping from country to country all the time and don't really have a home base, but the paperwork can get quite complex. For us, we passed the Bona Fide Residence Test. This was easier because we were able to establish that we had been in China for most of the year. However, it took some proving that we weren't just traveling. Here's some things the U.S. looks favorably on when trying to get out of paying taxes:
  • Establishment of a temporary home in a foreign country for an indefinite period (ie. by having a long term lease or owning a home there).
  • General assimilation; participation in communities on the social and cultural level. So go ahead and get that library card and gym membership.
  • Physical presence in the foreign country, meaning that you do have to be living there.
  • Marital status and residence of the family — if you have a local spouse or family members there, it helps.
  • Assumption of economic burdens and payment of local taxes.
  • Other documentation such as health insurance, local bank account info or a drivers license.
 Since we could provide documentation for all of this except for the gym membership, we were good to go. No taxes to be paid to the U.S. The amount we paid here were plenty high enough. I was grateful to get out of paying more.

6 comments:

  1. It's crazy that we had to file.

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    1. Yeah. It threw me at first, but was glad we were able to figure it out.

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  2. That's crazy! I sure didn't know you had to file taxes if you were not even living in the States.

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    1. It was news to me also. Taxes are never simple.

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  3. Like they say, the only two sure things in life are death and taxes! I'm glad you qualified for the FEIE.

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    1. I was glad also. Luckily, TurboTax has all this stuff right on their website. Didn't even have to pay a professional.

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