Paying US taxes while living in Taiwan (work for US company)

I moved to Taiwan recently but retained the same position with an American company that I had while still living in the US. Other than my location, nothing has changed: I’m still paid US dollars, directly deposited into my US bank account, and all the same taxes still taken out of my paycheck. I also for the time being still have a US mailing address for my mail.

A friend of mine has told me that I may be entitled to a break on my taxes based on the fact that I do not live in the US. Is this true? Can anyone offer any insight into this situation? It is greatly appreciated.

Yes, if you qualify (through tax home or bonofide resident test) for the 2555 exclusion you can claim up to 82+ k USD, plus some housing rental expenses. However as of 2005 the AMT rules changed on some exclusions. You will also be liable for any ‘expat’ benefits you recieve like housing & cars.

Oh and thegood news is you may be viable to pay Taiwan taxes if you stay over 180 days. Whoopee!

Not in your case. Those working overseas for an American company are not able to use the Foreign Income Exclusion. You would need to work for and be paid by a local company to be able to use that. A branch office of an American company may qualify depending on the circumstances. At best you will be able to use the Foreign Tax Credit for any taxes paid here on your income.

Actually it would be the case if you spent more than 90 days here in any one calendar year. For income for services performed in Taiwan but paid overseas, the income is not taxable in Taiwan if you spend 90 days or less in Taiwan in a calendar year. If you spend more than 90 days then that income is taxable in Taiwan. From 91 to 182 days it would be taxed at the non-resident rate and at the resident rate if you spend 183 days or more in Taiwan in a calendar year.

As a foreigner, at some point you will probably be expected to show that you have been paying taxes in Taiwan if you wish to renew residency, or apply for permanent residency, etc. It is therefore a good idea to show at least some taxable income related to your stay to avoid any problems.

[quote]Not in your case. Those working overseas for an American company are not able to use the Foreign Income Exclusion. You would need to work for and be paid by a local company to be able to use that. A branch office of an American company may qualify depending on the circumstances. At best you will be able to use the Foreign Tax Credit for any taxes paid here on your income.
[/quote]

That’s not necessarily so. It has nothing to do with the ownership of the company, but whether or not the income was US derived and whether or not you claim your current country as your tax home - or you meet the bonifide resident test. Basically once you reach the point where you are liable for taxes in the local country, that is your tax home and you can claim the exemption. You can even delay your filing (but not payment of taxes due) so that you can meet this test.

How much of a break you get depends upon how much of the income is US sourced.

Looks like they changed it. When I was in that situation several years ago, whether you were paid by a US company or foreign company was an important factor. I can no longer find that requirement in the current tax guides.

Thank you very much for the responses.

Hmm…ok so let me see if I understand this correctly. I will definately be in Taiwan for more than 183 days this year. Therefore, I will have to pay taxes in Taiwan based on that income (meaning I have to report my income to Taiwan) in addition to the federal and state income taxes I’m already paying to the US. So would I be able to claim whatever amount I’m paying to Taiwan as tax credit when I file my US tax return, so as to avoid being “double taxed” on one income?

Right, this is the Foreign Tax Credit. Basically for any income which is US taxable and also was taxed by a foreign government, the foreign tax can be subtracted from your US tax due.

So just to make a simple hypothetical example, suppose for your income you had US$10,000 tax due to the US government but you also paid about US$4,000 tax to the Taiwan tax authorities for the same income. In that case you can take that US$4,000 off your US tax bill and only have US$6,000 to pay the US government.

The only catches are that the income you take a tax credit for is also US taxable. If you used the Foreign Earned Income Exclusion, which means that income is not US taxable, then you cannot also take a tax credit for foreign taxes paid on that same income. And if you paid more foreign tax than is due in the US on that income, you can’t take more tax credit than tax due on that income. The latter shouldn’t be a problem for you since in most cases your Taiwan tax rate will be much lower than your US tax rate.

The end result is that your total taxes paid between the US and foreign governments should be the higher of each country’s rate. Since Taiwan tax rates are lower than the US, that means you’d end up paying the same amount of tax, just you’d pay part of it to Taiwan and part to the US.

If at all possible if you can take your income locally then you will pay much less because that income will not be US taxable and the Taiwan tax rates are lower.

[quote=“Vertigo”]Thank you very much for the responses.

Hmm…ok so let me see if I understand this correctly. I will definately be in Taiwan for more than 183 days this year. Therefore, I will have to pay taxes in Taiwan based on that income (meaning I have to report my income to Taiwan) in addition to the federal and state income taxes I’m already paying to the US. So would I be able to claim whatever amount I’m paying to Taiwan as tax credit when I file my US tax return, so as to avoid being “double taxed” on one income?[/quote]

Not necessarily. This is best talked over with your accountant. You need to: a) meet the requirement for tax home or bonified resident of Taiwan for the tax year. Anything less your income will be apportioned or you not meet the test. b) Taiwan does not have global taxation - is your income Taiwan derived? Do you have expenses overseas like a mortgage? This can impact what portion of your income will be considered Taiwan and what portion they will let your company pay you overseas. You will be expected to have an income in Taiwan to get your visa. Typically they do not let you be 100% off of Taiwan payroll. Expect to get audited by Taiwan in yr 1. b) You won’t be able to claim the Taiwan tax on excluded income c) You may have ‘excess’ tax credits either because you hit the AMT limits on tax credits, or have income in excess of 82k, or you have expenses over the caps. c) The rules on getting credit for Taiwan taxes on the non-excluded portion of the income is getting past my understanding…sorry…

Thank you Jlick, that makes perfect sense to me. So the end result is, even though I’m being taxed by two governments on the same income, I don’t end up paying more that I would had I still been living in the US (assuming that what I pay to Taiwan is less than what I owe the US) since I can claim whatever I paid to Taiwan as Foreign Tax Credit when I file my US tax return. And since I arrived in Taiwan in late November of 2006 and therefore spent less than 90 days here during the 2006 calandar year, I won’t owe anything to Taiwan come May of this year. Is it recommended that I still file the paperwork to Taiwan though, and indicate that I don’t owe anything?

Hmm, I’m still slightly confused about my original question though, and Elegua’s response:

I just did a quick google search and it seems that the 2555 Exclusion applies to foreign wages, not US wages while living abroad. (taxes.about.com/od/taxhelp/a/ForeignIncome.htm) Because I’m still paying full federal and state income taxes but I’m living in Taiwan, is there any way I’m able to get a break on my US tax return?? I’ve only been in Taiwan for a little over a month now (I was in the US approximately 11 months of 2006) so it won’t make much of a difference this year when I file my US tax return, but I will be here through all of 2007, so come 2008 it will matter when I file my return. All of the help is greatly appreciated!

The good thing about the Foreign Tax Credit is that you do not have to meet tax home or bona fide foreign resident tests. However, your income does need to be considered foreign income, so it might be hard to split it up for partial years. In general though if the earned income is taxable as by Taiwan then the US will allow you to take a tax credit for the same income. If your tax return gets complex then you should probably have a competent tax preparer familiar with foreign income US tax returns do it for you.

I’m definately going to speak to an accountant regarding this situation. Here’s some more insight based on your questions: My income is not Taiwan derived in any way. The US company I work for has no branch office in Taiwan, my pay is direct deposited from the US into my US bank account. (Until I find a better way, I use ATM’s to transfer money here when needed) Sadly, my income is less than 82k/year. I am here on a multiple entry Visitor visa for the next few weeks or so until I get my resident visa, based on being married to a Taiwanese citizen. All of our bank accounts here are in my wife’s name. And other than apartment rent, I have no expenses here. Does any of this impact my situation? Your help is greatly appreciated!

I’m definately going to speak to an accountant regarding this situation. Here’s some more insight based on your questions: My income is not Taiwan derived in any way. The US company I work for has no branch office in Taiwan, my pay is direct deposited from the US into my US bank account. (Until I find a better way, I use ATM’s to transfer money here when needed) Sadly, my income is less than 82k/year. I am here on a multiple entry Visitor visa for the next few weeks or so until I get my resident visa, based on being married to a Taiwanese citizen. All of our bank accounts here are in my wife’s name. And other than apartment rent, I have no expenses here. Does any of this impact my situation? Your help is greatly appreciated![/quote]

Taiwan has a very broad definition of “Taiwan Derived”. If you are performing the work while in Taiwan the income is “Taiwan Derived” regardless of where paid. If your income is less than 82k, then should should be able to get a 100% exemption.

[quote]The good thing about the Foreign Tax Credit[/quote] I think you’re right on this one. I should have said exemption. In year 1 you have to devide between credit and exemption. Normally credits are for investment income where you have taxation, but no residence.

Taiwan considers your foreign income taxable to the extent that it is payment for services performed in Taiwan. Who you work for and where you get paid only matters if you stay in Taiwan less than 90 days a year. So the question then is where do you actually do the work which your income is based on, and how much of that income is directly related to any work performed in Taiwan? If the work is done by you while you are in Taiwan and you are here more than 90 days a calendar year then it is taxable.

As a foreign spouse, you will not be expected to show tax forms to apply for or renew your resident visa/ARC under current practices. However, other types of residents have been asked in some cases to show that they are paying taxes before they are able to renew their ARC. It is possible that in the future foreign spouses may also have to go do this.

However, if you ever want to apply for a Permanent ARC or ROC Citizenship, then you be required to show three years worth of tax forms or a certificate of no tax due. The tax office really does not like to give certificates of no tax due without carefully examining your foreign tax returns. They will try really hard to try to get you to pay Taiwan taxes on earned income on your foreign tax returns for any year in which you were considered a resident for tax purposes (183 days or more). On the other hand, if you’ve filed a tax return for three consecutive years then it’s no problem getting the tax certificate showing tax paid. In addition you will also have to show sufficient assets or income to support yourself to get permanent residency or citizenship.

It therefore will make things easier in the future if you claim at least some reasonable amount of taxable income to satisfy authorities in the future if you intend to be a resident long term.

Thanks again for the responses. :notworthy: Based on those definitions of “Taiwan derived income” then my income is certainly taxable in Taiwan, as all my work is performed here physically in Taiwan on a computer, then sent back to the USA via the internet. In 2006 I was only here for approximately 1 month, so is it recommended that I file income tax papers with Taiwan in May, even though I would be exempt from paying based on being here less than 90 days of 2006? Or should I not bother filing anything this year?

Because you were here less than 90 days in 2006 and paid outside of Taiwan, you should not have any Taiwan tax due for 2006. If I were you I would not file a tax return in Taiwan for the 2006 tax year. You should file next year for the 2007 tax year though.

I was hoping you would say that. Thanks for the help!

On a somewhat related note, do US citizens still get the automatic filing deadline extension (i.e. until June 15) if they live overseas?

Thanks.

Yes. See IRS Publication 54 for all the details that apply to foreign residents.

Stupid question re: my situation, can I file electronically online (i.e. Turbo Tax, H&R Block, TaxACT)? Difference is now I’ve got a spouse with declarable income who’s worked in the US.

Should this be done by an accounting professional?

Recommendations, advice.

TIA