Overview of US Expatriate Tax Requirements Living in China

Guest post by I.J. Zemelman, EA. Tax Operations Director at Taxes for Expats.

Bottom Line:  File Your Taxes Every Year

As a US expatriate working overseas you must file your US federal taxes annually just as you would if you were living in the United States.  Why?  Because your total world income determines your tax liability – not simply the income you receive in the states.  As an American expatriate, though, you have more tax saving options than those with a stateside residence. Such provisions include:

  • The foreign earned income exclusion, which allows you to exclude up to $92,900 of foreign earned income from your US taxes,
  • The foreign tax credit, which allows you to offset the taxes you paid in your host country with your US expat taxes dollar for dollar, and
  • The foreign housing exclusion, which allows you to exclude certain household expenses that occur as a result 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 US expat taxes.  Please note that even if you do not believe that you owe any US income taxes, you still have to file a return – or you may lost the deductions!  For more information, see our guide for US Expat Taxes and the list of US Expat Tax Deadlines for more information.

Tax Rules for US Expats Living and Working in China

Every individual who is working in China is subject to ITT (Individual Income Tax).  Additionally, any expat who is employed by a business or corporation in China which is sustained by foreign investments is subject to ITT upon their arrival in China.

IIT is typically withheld from employees’ wages by their employer and remitted to Chinese tax authorities every month.  All withheld taxes are due no later than the 15 of the month following the month in which wages or salaries were earned.  At the end of the tax year, employees are required to file an ITT declaration of all taxes withheld throughout the year to the Chinese tax authorities.  These declarations are due no later than March 31 of the following year, and late filing penalties of up to five times the amount owed can be assessed for late declarations.

ITT declarations are required to be filed annually by any tax payer who is liable for ITT in China and meets any one of the five conditions outlined below:

·         Earns an income in excess of RMB120K

·         Earns an income from 2 or more sources within the People’s Republic of China

·         Earns an income from any source outside of the People’s Republic of China

·         Earned taxable income from which ITT was not withheld

·         Meets any other condition established by the State Council

Types of Annual Income

·         Salaries and wages

·         Income derived from personally-owned commercial or industrial housing

·         Income earned as a subcontractor

·         Income earned from subleasing

·         Compensation for services as a laborer

·         Compensation for work as an author

·         Royalty income

·         Investment income (dividends, interest, etc)

·         Income derived from a transfer of property or lease

·         Incidentally earned income

·         Any bonus received

What are the ITT Rules on Expatriate Income?

Individuals who are working in China for a China-based employer through which all wages paid are considered to be Chinese-produced wages will be liable for ITT.  Individuals working in China for a foreign employer earning wages which are not considered to be China-sourced will only be subject to taxation after a certain period of time.

Expats who are working in China on a temporary assignment lasting less than 90 days out of a calendar year are exempt from Chinese taxes.  If the expat’s home country has an active double taxation treaty with China, the threshold for exemption is 183 days.  Individuals who remain in China for a period lasting longer than 90 days (or 183 days where applicable) will be subject to ITT on all income earned for work conducted in China, despite the source of the income.

Timeline of ITT Liability

Taxpayers who live in China for a period lasting greater than 1 year but not more than 5 years are not only subject to ITT on China-sourced income, but also foreign earned income which leads back to an organization located in China.  Expatriates who live in China for a period lasting longer than 5 years are subject to taxation on their worldwide income – no matter where in the world it is sourced.

If an individual lives in China for 5 years and on the 6th year spends less than 1 year in China, the 5 year calculation period will start over and the expat will once again be eligible for the 90 day/183 day tax exemption rule.  In order to be considered as ‘not living in China for a calendar year,’ an expat must be out of the country for a period lasting longer than 30 days or more than 90 days altogether.

ITT Rates

ITT is assessed according to progressive income levels, and the ITT rate ranges all the way from 3% to 45% of each month’s taxable income.  Taxable income is figured by subtracting a standard monthly deduction from employees’ actual monthly earned income.  The deduction is RMB3,500 for locals (except residents of Hong Kong, Macau, and Taiwan) and RMB4,800 for foreign nationals working in China.  If you have paid into China’s social insurance program, you may be able to deduct your contribution amount from your actual earned income, as well.

Monthly Calculation of ITT Liability

Calculating ITT is generally easier for residents of China than for expats working in China.  Expatriates need to consider the length of time they’ve spent working in China as well as the source of the income they earn.  See the chart below for help calculating your ITT liability.

Non-Taxable Employee Benefits

As indicated earlier, almost every type of income is considered taxable by Chinese tax authorities for the purpose of ITT.  Like the United States, however, there are certain expenses which may be exempt from taxation under ITT regulations assuming other criteria are met.  These expenses include:

·         Housing cost reimbursements

·         Travel fare for up to 2 home leave trips per year

·         Reimbursement for relocation expenses

·         Reimbursement of qualifying meals, language training or children’s education, and laundry expenses

Note:  Cash allowances paid to an employee to compensate for anticipated work-related expenses will be completely subject to employee taxation.  Tax liability may be reduced if other reimbursements are made for items such as entertainment, fees for a social or health club, communication expenses, and a variety of other reimbursements which are not covered by an allowance.

The article is merely an overview of an overwhelming amount of US expat tax information. For additional help, please contact the experts at Taxes for Expats today!

  • Jessica

    Thanks for this article!

    But quick question, what if I’m a student that has NO income at all but I do have a savings account back in the States that generated around $1000 in interest?

    From what I read on the tax form, it seems like unless I make more than $9000 or so, then I don’t need to file a return right?

    [Reply]

    Sara Jaaksola Reply:

    Thank you for the question Jessica, I will forward it to the Taxes For Expats.

    [Reply]

    Sara Jaaksola Reply:

    I just got a reply from Taxed for Expat:

    Short answer – No, you don’t to file a tax return.

    “Tricky Limits” for reporting are:
    Self-Employemnt over $400
    Capital Gains of any amount
    However – interest falls under the $9,000 threshold for ordinary income and so does not have to be reported

    You can find full details about these rules here: http://www.taxesforexpats.com/expat-tax-advice/minimum-filing-requirements.html

    [Reply]

    Jessica Reply:

    Thanks so much! I really appreciate it :)

    [Reply]

  • http://joysabroad.blogspot.com/ Joy

    Wow, this is a good article. Thanks for posting it. I’ve been ignoring the government back home thinking they didn’t really care about what I was doing in China. I guess I better look into this further. :-)

    [Reply]

    Sara Jaaksola Reply:

    I’m sure you’re not the only one :)

    [Reply]

  • http://www.sarajaaksola.com/ Sara Jaaksola

    Great!

    [Reply]

  • Kelby

    Finally got around to checking for tax information and I’m so glad to see it presented in such an understandable manner. Quick question though, is that ITT a Chinese tax or a US tax?

    [Reply]

    IJ Zemelman Reply:

    Thank you very much!
    ITT is indeed a Chinese tax.

    [Reply]

  • Mr D

    I work in China,and expect a Gratuity payment at the end of my contract. Over 250000 RMB. My contract does not mention Taxes. Am i required to pay ITT. And do i have to report this to IRS?

    [Reply]

  • Mr D

    What is the Tax rate for a lump sum like that in China??

    [Reply]