US Expat Taxes Explained: Filing Taxes as an American Living in Hong Kong
Hong Kong is among the most popular destinations for American expats, but how does living there affect their US expat taxes? As an economic hub of China and South East Asia, Hong Kong is respected as one of the most important cities in the world. Combining the financial importance with the beautiful skyline, organized city center and undeniable energy makes it a great choice as an expat destination. Living in Hong Kong as an American, you will surely think about your home country now and again, and rest assured that it has not forgotten you, especially when it comes time to file US expat taxes. This guide will help you understand your tax responsibilities as an American expatriate living in Hong Kong.
US Expat Taxes in Hong Kong
If you are a citizen or permanent resident of the United States, then you are obligated to file US expat taxes with the federal government each year regardless of where you live.
In addition to the regular income tax return, you could also be required to file an informational return on your assets held in foreign bank accounts with Foreign Bank and Other Account Reporting (FBAR) Form 114, in addition to Form 8938 Statement of Specified Foreign Financial Assets.
While the US is one of the few governments that tax the international income of their citizens and permanent residents who reside overseas, it does have special provisions to help protect them from double taxation including:
- The foreign earned income exclusion allows you to decrease your taxable income on US expat taxes by the first $108,700 for 2021 ($107,600 for 2020) earned as a result of your labors while a resident of a foreign country.
- A foreign tax credit that could allow lower your tax bill on your remaining income by certain amounts paid to a foreign government, and
- A foreign housing exclusion that allows an additional exclusion of income for certain amounts paid for household expenses that occur as a consequence of living abroad.
With proper planning and quality tax preparation, you should be able to take advantage of these and other strategies to minimize or even eliminate your liability on US expat taxes. Please do note that even if you do not believe that you owe any US expat taxes you will need to required to file a return. For more information, see US Expat Taxes Explained: An Overview of Our New Series.
Who is a Hong Kong Resident?
Hong Kong residency is based on a territorial system of taxation — domicile, citizenship and residence do not apply. Only income arising from activities in Hong Kong is liable for Hong Kong taxation. Generally speaking, income in Hong Kong is Hong Kong sourced if the employer is in Hong Kong or if the contract was negotiated, signed and enforceable in Hong Kong. Likewise, if a taxpayer is paid in Hong Kong, the income is taxable in Hong Kong. If you are in Hong Kong for a short term (less than 60 days), you are exempt from Hong Kong salaries tax.
Hong Kong Income Tax Rates
Another reason Hong Kong is popular among both corporations and expatriates for their headquarters is the favorable tax system. Hong Kong has a progressive tax rate, which is capped at 17% — much lower than most western taxes, including US expat taxes.
The salaries tax is levied on a taxpayer’s income, minus allowable deductions, personal allowances and charitable donations. The maximum tax payable is limited to the standard rate on a taxpayer’s from employment, minus allowable deductions. The standard rate is 15% as of March, 2018.
The income tax rates from Hong Kong’s Inland Revenue Department are as follows:
|Income (HK$)||Tax Rate (%)||Tax Value (HK$)|
|On the First||40,000||2%||800|
|On the Next||40,000||7%||2800|
|Total: 80,000||Total Tax: 3600|
|On the Next||40,000||12%||4800|
|On the remainder||120,000+||17%||8400+|
Property tax and profits tax is charged at the fixed standard rate of 15% at the end of the tax year. There are no deductions or personal allowances.
There are no regional or state taxes in Hong Kong.
Hong Kong Tax Due Date
Hong Kong’s tax year begins April 1st and Ends March 31st. You should be issued your return from the Inland Revenue Department in early May. These must be completed within one month of receipt. If you do not receive a return from the Inland Revenue Department and you know you owe taxes, you are required to notify the IRD by July 31st. When there is a good explanation, the IRD will allow for an extension on the due date, but note that the application to extend must be filed before the original deadline.
Hong Kong does not withhold taxes from income. Payment is paid in two installments. The first is 75% and is due of the final quarter of the year of assessment, with the remainder due just after the year end. Note that these are different payment dates than your US expat taxes.
Social Security Treatment
Hong Kong does not have a traditional social security system. They instead require a Mandatory Provident Fund which provides the framework for a privately managed fund to accrue financial benefits for the workers in Hong Kong when they retire. Currently, the minimum contribution is 5% of income (including cash equivalents) from both the employer and the employee, and is also subject to a maximum annual contribution of HK$12,000 (from each party). If a taxpayer earns less than HK$5,000 each month, no payment is required.
If you are on temporary stay in Hong Kong, or pay into the US Social Security scheme, you are not required to pay into the Mandatory Provident Fund.
Note that contributions to MPF and other recognized occupational retirement schemes are tax-deductible (up to HK$12,000).
Is Foreign Income Taxed in Hong Kong?
You are used to US expat taxes and assume the same in Hong Kong, right? Not exactly.
An individual with employment outside of Hong Kong is only subject to the salaries tax on income earned from events occurring in Hong Kong. It is calculated on a days-in-Hong Kong versus days-out-of-Hong Kong basis. Non-Hong Kong employment is defined by the IRD by three characteristics:
- Contract of employment negotiated and signed outside of Hong Kong (and where is it enforceable?)
- Employer resident outside of Hong Kong
- Employee’s remuneration is paid outside of Hong Kong
Hong Kong – US Tax Treaty
While the US does have a tax treaty set up with China, Hong Kong does not apply to this treaty. Currently, there is no tax treaty for set up for the US and Hong Kong.
Taxes in Hong Kong
Hong Kong is a very favorable destination for tax purposes, as many taxes that exist in other jurisdictions are absent in Hong Kong. This includes any kind of VAT, withholding taxes, capital gains taxes, sales taxes, or wealth taxes. There is also no sort of estate or gift tax in Hong Kong.
Hong Kong does have a stamp duty imposed on transactions in relation to property and stocks. The rate is 4.2%, though it is planned to be abolished in the coming years.
Living in Hong Kong alone does not mean you are exempt from all taxes internationally. The IRS is going to want a piece of the pie. Keep in mind that because taxes are lower in Hong Kong, you may owe more on US expat taxes than expats living in higher tax areas as they are able to deduct the taxes paid to their host country. For Hong Kong expats, the taxes paid to Hong Kong are likely to be lower than what you will owe on your US expat taxes, and those individuals may end up owing the IRS money.