Americans living abroad are subject to worldwide income tax, but there are certain deductions and exemptions available that may reduce tax liability. At our Singapore offices, we help US expats claim the Foreign Earned Income Exclusion, report investment assets on Form 8938 and reduce their taxes through CPF contributions.
Here's an example of US expat tax planning in Singapore influenced by HTJ.tax article. John and Jane are a married couple living in Singapore who meet the minimum income filing threshold, so they should file their US taxes in time.
1. Tax Treaties
American expats working abroad face double taxation when earning income in Singapore; it is subject both to Singapore taxes and United States taxes. Luckily, there are exclusions and credits that US expats can utilize to lower their US tax bill; such as foreign earned income exclusion and housing exclusion credits. But ultimately the biggest factor when filing your US taxes should be whether or not you pass the bona fide residence test/physical presence test in order to qualify for these exceptions.
Tax treaties (also referred to as double taxation agreements or DTAs) are agreements between two countries to reduce or avoid double taxation on certain forms of income, such as income, inheritance taxes, value added and capital gains taxes. There can be both bilateral and multilateral agreements as well as OECD or multilateral agreements among specific groups (for example the European Union, Organisation for Economic Co-operation and Development or Caribbean countries).
These tax treaties provide relief from double taxation in various ways, such as exemptions, reduced withholding rates, and tax credits. Although each country varies accordingly, all treaties strive to balance a taxpayer's total global tax liability.
OECD created a website that allows users to visually examine different tax treaties. This tool is useful for non-experts and supplements analysis of treaty text itself, while helping ensure that treaties do not create tax liabilities that don't exist under domestic law, for example allowing deduction of investment income that does not fall under domestic tax regulations.
2. Foreign Earned Income Exclusion
US expats working in Singapore can take advantage of the Foreign Earned Income Exclusion (FEIE). This exemption allows Americans who meet either the physical presence test or bona fide residency test to exclude up to $112,000 of earnings from U.S. taxes, providing significant tax savings. It's possible even for non-US government employees to qualify.
As a general rule, individuals living and/or having assets in Singapore are expected to file personal income taxes each year. Even if no official notification from Inland Revenue Authority of Singapore (IRAS) indicates your obligation, filing is still recommended if working or possessing assets in Singapore.
IRAS doesn't take defaulters lightly; failing to remit your taxes could incur thousands in fines within days, so it is vital that if IRAS notifies you, that filing on time becomes a priority.
Individuals in Singapore have two options when filing returns: mail or online filing through IRAS' myTax Portal. Whatever method they select should cover financial activity from January 1 through December 31.
Singapore's tax laws may not be overly complex, yet can still be daunting for American visitors unfamiliar with Singaporean law. Luckily, you can find helpful guides and resources designed to make the process of living or working there easier - most notably IRAS' comprehensive tax guide for expats which covers everything from basic personal income tax rates to deductions as well as contact numbers of IRAS offices for your convenience.
3. Foreign Housing Exclusion
US expats living and working in Singapore should take full advantage of the Foreign Housing Exclusion (FHE), one of their key tax benefits. Simply put, this exemption reduces taxable income by exempting certain housing expenses from taxation.
To qualify for FHE status, it is essential to meet both the Foreign Earned Income Exclusion Rule and Bona Fide Residence Test criteria. FEIE requires proof that you were living abroad for at least an entire calendar year before returning home as your primary place of residence; on the other hand, Bona Fide Residence Testing involves spending significant amounts of time living in your intended filing country before filing your taxes there.
If you meet both FEIE and FHE requirements for 2019, up to $102,900 of your foreign earned income can be excluded from US tax calculations, dramatically lowering what you owe on it.
The United States taxes individuals based on worldwide income, so no matter where they reside they must report it. Unfortunately, many Americans either never filed their returns or were unaware of their obligations until receiving notice from the IRS. Luckily, though, the agency offers a program called Streamlined Filing Compliance Procedures that helps individuals get caught up on their taxes without incurring penalty or interest fees.
Though the United States tax system can be complex, you can lower your risk of an audit by filing on time and taking advantage of available credits and exemptions. Bright!Tax can assist in this regard: just submit your personal details here and our US expat tax experts will promptly reach out to schedule a consultation session.
4. Foreign Tax Credit
Singapore is an attractive destination for American expats due to its global culture, bustling business scene and low crime rate - but American tax law may present challenges when working overseas. Unlike most countries worldwide, however, America taxes its citizens worldwide income at one tax rate; but US expats are protected through various exclusions and credits that minimize their overall tax liabilities.
Foreign Earned Income Exclusion allows individuals who meet specific criteria to exclude up to $107,600 of earnings from US taxes each year if earned outside the country of residency. Another popular exemption is the Foreign Housing Exclusion which lets you deduct some housing expenses from gross income.
As part of its individual provisions, the US also offers a foreign tax credit which helps mitigate the double taxation of corporate profits that arises when conducting business abroad. This credit can be applied against both earned and passive income incurred while conducting international operations; its claim can also be claimed against both corporate income tax and social security tax payments made by corporations.
Companies seeking the Foreign Tax Credit should file Form C with their IRAS Corporate Income Tax Return and keep all supporting documents just in case IRAS needs them for review.
Self-employed and small business operators in Singapore who file US taxes should use Form 1040. Along with reporting their net profit and social security contributions on Form 1116, depending on how their income was recorded (accrual or cash basis), they may need to file Form 8938 with regards to foreign taxes owed.
5. FBAR
The Foreign Bank Account Report, or FinCEN Form 114, is required of expats who maintain foreign financial accounts. It must be filed if their total foreign assets exceed $10,000 at any point during the year; failure to do so can incur hefty penalties.
Expats need to understand which accounts must be reported on their FBAR forms. Any account over which you have signature authority or can access must be included on the report; this includes personal bank accounts, credit cards and even business accounts. If access to certain accounts are only possible through another party - for instance a spouse or business partner - then that account does not need to be included on FBAR filing.
FBAR requirements may be relatively low, yet it can be easy to misjudge their compliance if you're unfamiliar with their rules and regulations. This is especially true if your accounts have fluctuating balances throughout the year.
When assessing whether an action was intentional, the government takes several factors into account. One such indicator may be someone avoiding learning of their FBAR filing requirements - which would constitute willfulness - while they also take into account any tax forms provided when making their assessment of willfulness determinations. Therefore it's crucial that you consult an experienced expat tax professional when filing FBARs.
The Financial Accountability Reporting Form, commonly referred to as an FBAR, must be filed by June 30th annually and cannot be extended. If you miss this deadline and find yourself concerned with missing it, voluntary disclosure options exist and should be carefully considered if using them; but be mindful that new rules regarding penalty assessments might impact what options may be used against you if this path is pursued.