If you are planning a mid-year move to Hong Kong, whether for a job or simply want to explore the hidden gems of the country, there are chances you are not making this decision considering your taxation liability. You are probably going to make the moving decision when the plan fits best with your schedule, which simply means there are certain provisions related to US expat tax in Hong Kong that you should be aware of before making a mid-year move otherwise your lack of awareness will cost you to the fortune.
Certain tax benefits apply to expats, which also can be affected by the time of the year you expatriate. Here are the detailed of the crucial US expat tax provision which you need to know while planning a mid-year move to Hong Kong.
US Expat Taxes & Your Mid-Year Move
By now you may get to know that the US taxes its citizens based on their worldwide income. This means you need to hire USA tax services in Hong Kong which may help you to report all income earned regardless of the state where you earned it- even if the Hong Kong tax authority already taxed you on the income you earned while living there. Luckily, there are US expat tax experts who help the expatriates in utilizing the exclusion available the best way possible- to prevent double-taxed in Hong Kong earned income.
One of these benefits is the FEIE, Foreign Earned Income Exclusion, which allows the expatriates to eliminate a portion of their Hong Kong earned income from their US taxes. For the current 2020 taxation year, FEIE exclusion for US expats is $107,600. However, in order to exclude this amount from your US taxes, you must meet one of the two important eligibility as a US taxpayer: one is the Bona Fide Residence Test and the second one is the Physical Presence Test.
Bona Fide Residence Test
To qualify for US expat tax exclusion using the Bona Fide Residence Test, a taxpayer must meet three requirements:
- Expats mush have a “taxable home” in Hong Kong
- Must have foreign earned income including salaries, wages, bonuses, and self-employment income
- Must have been a bona fide resident of Hong Kong for an entire taxation year, i.e. April 1 to March 31.
Physical Presence Test
When moving to Hong Kong for the very first time, it is much easier For US expats to qualify under the physical presence test with the US Tax Service for Americans in Kong Hong to prevent double taxation. However, to qualify for this exclusion, the taxpayer requires to live for at least 330 days out of 365 days and it can be any period leading up to filing your US tax return. Here, it is important to note that the amount of foreign income you are eligible to exclude will be prorated, based on the number of days you were physically present in Hong Kong during the calendar year.
Impact on State Taxes
As an expat whether or not you file expat tax, it will completely depend on the individual state’s requirements. Generally, if you are required to file state taxes, you are only taxed on income earned in that particular state- not on the income you earned worldwide. It means income excluded from the FEIE will also be excluded from the state tax provision.
With proper tax planning and quality tax results of USA tax services in Hong Kong, you should be able to make your mid-year move successful.