[cocobernes]

Dear all,

Would you recommend using an accountant in HK to file for US tax? ( if so, any recommendation??) Or in your experience it is not difficult to file the income tax return yourself?

I understand that US citizens are taxed globally, even so any exemption allowed? I am not an expat per say because the local office pays my salary after the transfering from US, however, I have all the expat benefits including relocation and housing allowance.

Thanks in advance!

-Stephanie

[nina_70]

Hmmm...the taxes are not that easy...I would recommend a tax accountant or (at a minimum) buy software. Don't try to fill-in the forms by hand.

The forms you file are the standard forms (1040, Schedule A (for itemized deductions), Schedule B (for Capital gains), etc...) PLUS you fill-in these special forms:
1/ Form 1116 - Foreign Tax Credit
2/ Form 2555 - Foreign Earned Income
These two forms are the ones that give you extra deductions when you live abroad. The 1st one gives you a credit for any HK tax paid. The 2nd one gives you the Foreign Earned Income Exclusion (i.e. you're not taxed on the 1st $80K you make in HK). The 2nd form is also where you fill-in your housing allowance and other benefits.

In addition to this, the 1st year you move to HK from USA you will have to split your income between what's earned in the USA and what's earned in HK and file accordingly (that makes the 1st year particularly tricky).

Last thing...remember to keep a detailed calender of all days you travel to the USA. You need this for the Physical Presence Test to qualify for the $80K exclusion.

So...I guess if you've used tax software before and feel confident about software you can try that route. Otherwise get an accountant. Unfortunately I can't recommend one. We used our company accountant 1st 2 years (PWC) and they were terrible. This year we will be hunting for a good accountant ourselves...so, recommendations from other Geoexpater's please!

[cocobernes]

That's very helpful!

Just drill down a little bit detail here : regarding the exemption of US $80k -do you mean that regardless how long have you stayed in HK as long as your HK earned income ending on Dec. 31 2006 exceeds US $80k then you are qualified for the exemption? or you have to be physically here in HK for at least 330 day during the calendar year of 2006 ? I was officially transfered from NYC to HK on Oct. 3 2006.

Love this site - hopefully more people can benefit from all the information exchanged here!!

-Stephanie

[nina_70]

You have to break residency in the USA before you can claim the exclusion. You have to pass one of 2 "tests":

1. bona fide resident - You meet the bona fide residence test if you are a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year

OR///

2. physical presence - You meet the physical presence test if you are physically present in a foreign country or countries 330 full days during a period of 12 consecutive months. The 330 days do not have to be consecutive

If you pass one of these 2 tests you are eligible for the exclusion. Based on your transfer date, doesn't sound like you will qualify until '07 tax year.

By the way I just read that the exclusion will be increased to $82,400 for 2006 tax year and will increase again in '07. So, for example, if you qualified for '06 this means 1st $82,400K of your income would not be taxed by the USA (Note/ you would still have to pay tax in HK of course). If you earned $100K, 1st $82,400K would be exempt from USA tax, while remainder $17,600K would be taxed in USA. If you earned less than $82,400K you wouldn't have to pay any tax in USA (but you would still have to file!)

You might want to read this publication (that is, if you can force your way through it without passing out):
http://www.irs.gov/publications/p54/index.html
Publication 54 (2005), Tax Guide for U.S. Citizens and Resident Aliens Abroad

Alternatively, about.com has a smaller write-up which is easier for the average person to understand and read:
http://taxes.about.com/od/taxhelp/a/ForeignIncome.htm

[cocobernes]

For the property I rent out to my tenant in NYC, will I still be able to decare it as primary residency therefore get tax deductable on the mortgage interests?

-Stephanie

[nina_70]

Not exactly....if you rent out then you can no longer officially deduct mortgage interest in your itemized deductions (Schedule A). Instead what you now have to do is fill out form 1040 Schedule E which is called "Supplemental Income and Loss". This form is where you fill-in your rental income, and it also has a space to fill-in your mortgage interest. If your mortgage interest is higher than what you can rent it out for you'll end up showing a "loss" on this form (i.e. you spend more money to keep the place than you're getting back in income from renting it out). If your mortgage interest is lower than what you get back in rental you'll end up showing a "gain" on this form.
-> If you show a loss, the IRS nets it out to zero and, you don't pay tax on the extra rental income.
-> If you show a gain, you have to add this to your income and pay taxes on it.

Now, this is how it's officially done. I've known people who managed their own property, didn't declare the rental income, and so continued to claim the big, fat mortgage interest on their itemized deductions. When we rented out in CA we used a property manager so all our stuff was "official" (the property manager declared any revenue to the IRS)....just FYI...

Now...given all this I'm not a tax expert and only speaking from what I've learned through filing taxes in HK past 2 years.....hope it helps....

[cocobernes]

As long as I can deduct the mortgage interest I am happy.. Nina you have been a great help! Thanks again!

-Stephanie

[nina_70]

Just as a clarification.... If you're renting out you can only use your mortgage interest to off-set rental income on 1040 Schedule E. You don't get to deduct the full mortgage interest as an itemized deduction in 1040 Schedule A. So, you still get a benefit from your mortgage interest, but you don't get the full deduction like you would if you were living in the apartment. Hope that's clear. Good luck with the move!

[thewongs]

I happened to take a cooking class in tokyo with a woman who does expat taxes. Our situation is similar to cocobernes where we moved from NYC to Japan in June06 and then HK in Nov06. The Tax Acct advised that we get an extension for the 2006 taxes until we meet the physical presence test, then file the 2006 taxes. Being a rookie at this thing, that sounded like a good idea to me...does anyone have an opinion on this?

Thanks.

[nina_70]

Yes, that's what our tax accountant did for us the 1st year we were here (we originally moved mid-year out of USA just like you). Apparently it's quite common to extend the first filing until you can meet the physical presence test. Now, don't ask me exactly how it works. I'm pretty sure move-date has something to do with it (for example, not sure it would make sense to do this if you moved out of USA at very end of tax year...or even if it's possible in that scenario). Unfortunately, this is about the point where my understanding of the tax law reaches it's limits so can't advise you too much further than that....