This is part 3 in my 8-part guide to your financial life in Hong Kong. It is mostly intended for foreigners (especially US citizens and green card holders) living in or moving to Hong Kong looking to better understand “the system” and better manage their money both in and outside of Hong Kong. Let me know if you have any questions.
Taxpayers from most other developed countries are likely to be amazed by how low, few, and simple Hong Kong taxes are. Hong Kong basically taxes salaries at a flat 15% with a few simple allowances, and many employees can complete their salaries tax return in minutes. Hong Kong does not tax dividends, capital gains, nor the interest on your bonds or bank deposits. Hong Kong also has no sales tax, no use tax, no VAT, no gift tax, no estate tax, no social security, and no Medicare. I even find the customer service of Hong Kong’s Inland Revenue Department (IRD) to be very efficient and user-friendly.
As a reminder, GFM is an investment management firm and we do not give tax advice. The below pointers are for information and discussion purposes only, and are not to be used to calculate or avoid any US or Hong Kong taxes. Please consult with your tax professional for advice specific to your circumstances, or ask us for a referral to a tax professional we work with who specializes in US taxes for Americans living in Hong Kong.
Getting Paid – No Tax Withholding
Unlike in the US, Hong Kong employers generally do not withhold any taxes. This means if your salary is HK$100,000 per month, your monthly paycheck (many employers here pay monthly) may be reduced by retirement fund contributions or other benefit arrangements, but not for taxes. This means you’ll need to save up your money and pay your taxes directly, as annual checks to the Hong Kong government, plus quarterly estimated tax payments for many US taxpayers.
Hong Kong tax basics
Your tax year for the Hong Kong salaries tax will typically end on March 31st of each year. This means when you see reference to the 2016/2017 tax year, that means the period between April 1st 2016 and March 31st 2017. After the end of each tax year, you file your salaries tax return, which can be done online using the IRD’s eTax system and then the IRD will send you a tax demand notice for the amount of tax need to pay. Your first salaries tax demand notice will typically also include a provisional tax which is basically your second year’s estimated tax liability paid in advance.
The system of traditional taxes and no tax withholding is exactly why many banks offer specialized Tax Loans specifically to finance these taxes up front against their next year’s salary payments at competitive interest rates.
Filing and paying your US taxes
As of January 2017, US citizens and green card holders meeting minimum income levels are required to file an annual US tax return and pay US taxes on their worldwide income, wherever they live, work, or earn money. This includes not only your salary in Hong Kong (on which you’ll also pay the Hong Kong salaries tax, and will have to deal with a mismatch in tax years and offsetting tax credits), but also any income from investments and other sources which Hong Kong does not tax.
As there’s no tax withholding in Hong Kong, Americans here generally pay quarterly estimated tax payments on form 1040 ES.
Foreign earned income exclusion, Foreign tax credits, etc.
In 2017, each individual US taxpayer working outside the US may be able to exclude the first US$102,100 of their salary from US taxes. To qualify, you will either need to spend 330 days per year physically outside of the United States, or you will need to prove that you are a “bona fide resident of a foreign country”. For both of these “tests” (called the “Physical Presence Test” and the “Bona Fide Residence Test” respectively), you would need to have your “tax home” in a foreign country, which if you are reading this, may be Hong Kong.
There’s also a foreign housing exclusion or deduction which lets you further take off some of the relatively high cost of living here. The foreign earned income exclusion, combined with the foreign housing exclusion/deduction typically means that the higher US income tax rates typically kick in only above the level of those exclusions, which could be a threshold above around US$120k/year depending on your circumstances.
To avoid double taxation, US taxpayers are generally allowed a credit for taxes but they’ve already paid to foreign governments like Hong Kong, but only on income that is not excluded by one of the above exclusions.
Some of the main ways US salaried employees reduce their taxable income is through workplace tax-deferred savings programs like the 401K and deferred compensation plans. Some employees may also have the flexibility to time / postpone payments of bonuses or other compensation in ways that can improve their tax situation. Unfortunately, as will be discussed in the next post on retirement and college savings, most MPF/ORSO plans offered by Hong Kong employers are not US-qualified tax deferral plans. Deductible IRAs are one way high-income US expats can still defer a few thousand USD per year in US taxes, as described in this earlier post and in our next one about retirement savings.
Until next time,
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