Living and working in China can be a rewarding experience for U.S. citizens, as it is a worldwide center of manufacturing and well-known for its unique culture and beauty. Expats within the country will still have to consider some of the less exciting parts of residing overseas each year: filing tax returns. U.S. citizens will be required to file their individual tax return and foreign income filings with the IRS each year, as well as required forms to their country of residence. This can be a complicated process, especially for expats who have recently moved to China. The expat tax attorneys at Evolution Tax and Legal is here to help you understand expat taxes for Americans in China: tax treaties, social security and how to file your U.S. taxes from your country of residence.
Chinese Taxes for American Expats
American expats who live in China must pay Chinese income tax, among other taxes, each year when filing their tax returns. A U.S. – China Tax Treaty was put in place to protect citizens from double taxation as much as possible, although this does not cover taxes that pay into social security. The State Administration of Taxation is the governmental organization that is in charge of taxes within the People’s Republic of China, and it is important you are aware of the rules and regulations that must be followed, as a U.S. citizen or green card holder residing within the country. For the first five years as a resident of China, foreigners will pay income tax on Chinese-based income, and after 5 years they will begin to pay taxes on any income earned worldwide.
Chinese Income Tax Rates
Chinese income taxes are paid monthly, and they are on a progressive tax rate that caps at 45%. For foreigners residing in China, the tax rates are as follows:
- If your income is below 3,000 RMB, your tax rate is 3%.
- If your income is between 3,001 RMB and 12,000 RMB, your tax rate is 10%.
- If your income is between 12,001 RMB and 25,000 RMB, your tax rate is 20%.
- If your income is between 25,001 RMB and 35,000 RMB, your tax rate is 25%.
- If your income is between 35,001 RMB and 55,000 RMB, your tax rate is 30%.
- If your income is between 55,001 RMB and 80,000 RMB, your tax rate is 35%.
- If your income is above 80,001 RMB, your tax rate is 45%.
If you are employed in China, your employer should withhold taxes each month based on your individual tax rate. For income incurred on foreign stocks or investments, it is beneficial to speak with an international tax professional to ensure you are paying the proper taxes on this income.
Who Is a Resident of China?
China has a complicated system for determining residency and there are many tax treaties between the U.S. and China that can be reviewed when determining residency status. Typically, anyone who is physically present in mainland China for a full calendar year is considered a resident for tax purposes. If this individual spends more than 30 consecutive days of 90 cumulative days outside mainland China throughout the calendar year, they are no longer considered a resident. As a foreign resident, as soon as you qualify as a resident in China you are required to file with the State Administration of Taxation and begin paying taxes in the country. After 5 years as a Chinese resident, an individual will begin paying taxes on worldwide income to the SAT.
When Are Chinese Taxes Due?
China follows the same tax year as the U.S., from January 1 to December 31, but the taxes are required to be filed earlier in China than they are in the U.S. Taxes must be filed with the State Administration of Tax between March 1 and June 30 of the following year, and there are no extensions offered for these dates. Penalties are accrued for residents who fail to file their Chinese taxes within these dates.
U.S.-China Tax Treaty
The United States and China have a tax treaty in place, which helps both government’s tax agencies and citizens determine which taxes should be paid to which country, and when they should be paid. This tax treaty can be used as a guide for expats to ensure they are paying the proper taxes to each country. It is imperative that as a foreigner living in China, you register with the Chinese tax authorities to take advantage of the benefits of this treaty.
Social Security in China
Foreigners residing in China are required to pay into Chinese social security. There is no treaty between the U.S. and Chinese governments, so U.S. citizens and green card holders may end up doubling their social security payments, as they will have to pay into U.S. and Chinese social security.
Other China Taxes for Foreigners
Foreigners living in China will be paying income tax on any wages earned in the country, but there are also other taxes they are required to pay to the Chinese government. This includes a standard value added tax (VAT) of 16% on most consumer goods, with the VAT being reduced to 10% on goods such as food, books and utilities. Typically any exports are tax exempt.
Any Chinese-sourced investment income (royalties, rental income, interest and capital gain) is taxed at a flat rate of 20%. If an individual resides in China for more than 5 years, they will begin getting taxes on any investment income worldwide, not just Chinese-sourced. In China, there is no inheritance, wealth or estate tax for foreigners and residents to worry about.
How To File U.S. Taxes From China
As a citizen or green card holder residing in China, you are still required to file an income tax return with the IRS each year. In addition to the tax return, it may be required of you to file various forms to report on your foreign income and any foreign bank accounts you hold. There are ways you can save on your tax returns, as a U.S. citizen living overseas. The key considerations include:
- The Foreign Earned Income Exclusion, which allows expats to exclude their wages from U.S. income reporting, provided the individual meets certain time based residency requirements.
- A Foreign Tax Credit, which allows citizens to claim tax exemption on income that has been taxed by a foreign government.
- The Foreign Housing Exclusion, which allows expats to exclude housing costs that exceed a certain percentage of their foreign income from their taxable income each year.
Taking advantage of these tax reduction possibilities and filing necessary forms, such as the FBAR, from abroad can be a complicated process. We recommend speaking to an international tax expert before beginning the process to file your tax returns online, to ensure proper filing is accomplished in a timely manner.
File U.S. Taxes With Evolution Tax and Legal’s U.S. Expat Tax Services
The Expat Tax Services team at Evolution Tax and Legal has experience helping U.S. citizens and green card holders living and working overseas file their tax returns in a seamless and timely manner, while also saving them money utilizing foreign income saving strategies. Contact the team at Evolution Tax and Legal to get our help in preparing your U.S. and foreign tax returns today.