Job Discussion Forums

[Volodiya]

What possible reason would someone living in China and working as an English teacher, for a Chinese employer; or earning money teaching private lessons, in China, have for filing a U.S. tax return, and paying the taxes due, based on that return?

Here it is, for those American citizens who would like to know-

Time to file:
June 15, for taxpayers living abroad. Income tax returns can be filed electronically, so it's not too late to take care of it. www.irs.gov

Who is required to file:
1) single taxpayers, under age 65, who earned more than the equivalent of $7,950 USD; and,
2) married taxpayers, both under 65, filing jointly, whose combined earnings were more than $15,900;
3) taxpayers who earned more than the equivalent of $400 USD in "self-employment" income. [Monies earned from private teaching would be an example of self-employment income.]

If you are living abroad, aren't you exempt from filing?
No, but you may include with your tax return a Form 2555, Exclusion of Foreign Earned Income, which will allow most English teachers to avoid income tax on all earnings received for work abroad (even if it was paid to your account in the U.S.)

If you had self-employment income which exceeded $400 USD, then you will owe self-employment taxes. These amount to 15.3% of your net earnings from self-employment. Self-employment earnings are reported on Schedule C; self-employment taxes are calculated and reported on Form SE.

What possible reason would someone living and working as an English teacher, for a Chinese employer; or earning money teaching private lessons, in China, have for filing a U.S. tax return, and paying the taxes due, based on that return? There're just two that I know of. First, U.S. law requires it, when the earnings exceed the sums mentioned above. Second, and perhaps important to some people, it keeps you involved in the U.S. system of social security, guaranteeing you a place at the trough when you reach retirement age (currently, at least 62).

How much will this cost me? As I mentioned, your earnings as a teacher will in all likelihood be 100% exempt from income taxes, if you file, and claim the exclusion for foreign earned income. The amount of earnings you report as self-employment income (from private teaching you may do) will determine the amount of tax you pay, each year.

Suppose you had $2,000 USD net earnings from self-employment last year: the first $400 is exempt, leaving you with taxes to pay on $1600. At 15.3%, well, you figure it (in round numbers, it's $240). That would be the cost of your continued participation in Social Security. Even the minimum guaranteed social security benefit (which President Bush promises to protect) makes participation well worth it in retirement benefits. Your check will be wired to an account designated by you, almost anywhere in the world, beginning when you reach retirement age.

I've filed every year since I went abroad. Because of the generous exemptions, I've never owed any income tax, but I've owed, and paid, depending on my earnings, self-employment taxes, every year.

There is no other retirement plan that I know of which pays off like this one for FTs, with modest incomes.

For those who would like to know more about what you could expect at retirement age, please have a look at- www.ssa.gov

[Noelle]

Volodiya


Great information. Thanks for the link. I wish I'd seen your post sooner. I did not have to pay in after I came home from China but I wasn't there for very long. 2001-03, I did pay in after working my way through college in Sydney. I got a nice return each year from the Australian Tax Office but I think I payed half of it back in the U.S.

I hope our social security is still protected by the time I get to retire!

By the way, I'm just curious... do you file online?

[Volodiya]

Glad you found it helpful. I haven't yet filed online although it must be pretty easy to do for people who are used to using the internet. I'm a little old-fashioned, in this regard, and prefer to mail in a paper return.

[Noelle]

Hi.

Doesn't filling out the paperwork require some sort of record of payment in China or wherever? I was fortunate that my employers in China provided an end of year statement in English when I left the country in emergency and I had always payed actual taxes in Australia and had a payment summary to turn in to the IRS each year.

I know this doesn't always happen for everyone. You've obviously got a pretty good handle on this whole thing. What do you send in with your tax return to show earnings and find out what is actually tax deductible and what isn't?

By the way, this is an awesome topic and it's great to hear from someone who knows what they're doing. Thanks and keep sharing the wealth!

[Volodiya]

Noelle, if a record of payment of your wages and the Chinese taxes you paid exists, you could attach it to your return, just as you would do a W-2, if you were working in the U.S. In any case, you will need the numbers, even if you don't have a document to go with them, to complete the forms.

As for self-employment income, you should have some kind of records of money in and money out (as expenses) should IRS ask to see them. These should be sufficient to show the basis for your calculations of the self-employment income you report in your return (Schedule C, and Schedule SE will be required). You will need to keep these records until either three years from the date the return was due, or the date you actually filed, whichever is the later date. Audits must be done within this three year time period, or the matter is considered closed, except in a case in which IRS should formally accuse you of tax fraud, which, although theoretically possible, as a practical matter will never happen to an English Teacher who has an uncomplicated tax situation. Audits, on the otherhand, which can occur during this three year period, are possible; thus, the need for keeping your records at least that long.
_____________________________

How do you qualify to exclude your foreign earned income?

To be eligible to exclude your foreign earned income from U.S. income taxes, you must have been physically present (for example, in China, if you live and work there) during 330 days out of any 365 day period of time; or, be a bona fide resident of a country, other than the U.S.

If you qualify under the first test, your earnings can be excluded from your taxable income for income tax purposes; likewise, if you meet the requirements of the second test. To get this benefit, you must include the completed Form 2555 with your tax return.

There is one advantage to you to qualify as a bona fide resident. Then, if you travel to the U.S., you don't have to be so concerned how long you may be gone from your residence abroad. A person living abroad, long term, will generally be able to qualify as a bona fide resident, for U.S. tax purposes. I, for example, am a bona fide resident of China. I have a Chinese residence permit and am liable to Chinese taxes. I can travel to the U.S. and stay for any reasonable amount of time without having to count the days I'm out of China. Say, for example, I'm in the U.S. for 45 days, then return to my foreign residence, this will not jeapordize my privilege of claiming the exclusion for foreign earned income.

To meet the minimum requirements for bona fide foreign residence, you must have been a resident of a foreign country for an entire calendar year. Once qualified as having a "bona fide foreign residence" this tax status can continue, from year to year, and from country to country, until the chain is broken by the taxpayer's returning to the U.S. with the intention of living there and abandoning the foreign residence.

[Noelle]

Thanks!

You sound like an accountant.
Appreciate your help.

[Volodiya]

Sorry if what I wrote sounds wordy, or convoluted. I've done my best to keep it simple, but you can't simplify it too much, without risking making it inaccurate, or misleading.

Without going into further detail, I'd like to also mention that taxpayers with self-employment income are required to pay their estimated taxes due for any given tax year, in quarterly installments. See www.irs.gov

[Noelle]

I understand. I meant the accountant remark in a good way! It's nice to have someone help who knows what they're talking about.

By the way, where are you in China and where in the states do you live? I read that you can wait until June to post your tax return?

[Volodiya]

Thanks for the nice remarks.

If you live abroad, the "regular" time to file your return is not April 15, but June 15 (ours, not to reason why!).

Kunming is my home. I last lived in the U.S. in 1992.

[Itsme]

Can anyone give me some advice on the issue?

If I make under $7,950 USD should I still file?

The 2055 forms say that you are only allowed an exemption if you pass the physical presence test or the bona fide residence test, which basically means that you have to be in the foreign country for 330 days. How many foreign teachers out there actually stay in China for 12 months as opposed to 9 or 10, depending on how long the school term is???


If I should file then should I use the 2055 form or the 1040???

[Mytime]

[brsmith15]

Itsme...the only reason for filing if you made less than the minimum is if you have a refund coming or you could qualify for the earned income credit.

Jeepers. I forgot I used to prepare tax returns in the US. Yucch! One year I had a Dave Barry day-to-day calendar and when I tore off the page for April 14, the next one read:

"In Washington there's something known as the US Tax Code. Every year at this time they throw meat at it."

[Itsme]

brsmith15 wrote:

[Itsme]

Anyhow. I asked a person who does taxes for a living and he said that I don't really have to file since I didnt make more than the min amount.

If your employer does not give you the proper w2 forms then you have to pay about %15 on your earnings because you have to fill out the form as if you were self-employed!!!

[brsmith15]

Itsme.....If you worked for a US company at any time in 2005, they must mail you a W-2 by Jan31. On the form it will show gross wages, and any federal tax(and state) tax withheld. As far as the EIC is concerned, there is a table in the instructions for Forms 1040A and 1040 that will tell you if you're eligible.

I'm assuming, though, that you only had wages from China and if that's the case, forget filing. It'll only open a can of worms you don't want opened. I remember one client I had who underpaid his payroll taxes by $2 one quarter. We spent a year going back and forth with the IRS even after we sent them the 2 bucks. They threatened all manner and kind of visitations on my client, his assets, his family and his honor.

Most IRS employees are sub-human trolls with frozen nitrogen for hearts, incapable of any form of creative thought. They belong in Dante's ninth circle!