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Tax Guide for Chinese Expats in the U.S.

Tax Guide for Chinese Expats in the U.S.
Ines Zemelman, EA
12 October 2021

If you're thinking about moving from China to the United States, you undoubtedly have many concerns. Will you be subject to income tax in the United States, and how much will it be? What kinds of papers are you required to submit? What does the Internal Revenue Service (IRS) think of your assets in China, particularly your retirement fund? Here are the most crucial U.S. tax issues that Chinese expats should be aware of to make their relocation go smoothly.

1. Immigrant or Nonimmigrant

The tax obligations of Chinese expatriates in the United States are determined mainly by their visa type when they are allowed into the country.

There are two types of visas available to people wishing to reside in the United States: immigrant and nonimmigrant (also known as permanent and temporary). Visas for nonimmigrants are given to tourists, students, researchers, and short-term employment. Nonimmigrant visas allow government staff and diplomats to enter the United States. Non-immigrants paying tax solely on income from U.S. sources file nonresident tax returns and pay tax only on their income earned in the United States.

Immigrant visas grant permanent residency in the United States, making them very desirable among Chinese expats in the country. Immigrant visas are either employment-based or family-based. The basic principle is that U.S. tax obligations begin on the first day you cross the border, but some exceptions exist. The details can make a big difference.

2. Resident or Nonresident

The length of stay in the United States is the second aspect determining the scope of U.S. tax obligations. The IRS uses the Substantial Presence Test to determine whether a Chinese expat is a resident or nonresident for tax purposes.

Even if you don't have a green card, becoming a resident for tax purposes is straightforward if you pass the Substantial Presence Test. As a result, they will be subject to the same tax filing obligations as lawful permanent residents. Students, researchers, employees of the Chinese government, and envoys are exempt. They are considered nonimmigrants even if they fulfill the Substantial Presence Test. So are family members (including spouses and children).

3. U.S. Green Card

Chinese citizens who obtained a U.S. Green Card or fulfilled the Substantial Presence Test are U.S. resident aliens. The basics of filing income, estate, and gift tax returns and paying estimated taxes are the same for resident aliens as they are for U.S. citizens.

The distinction between Green Card holders and individuals who obtain resident aliens by meeting the Substantial Presence requirement is that while a Green Card holder has to fulfill all of their filing obligations, a person who becomes a resident alien only has to demonstrate economic presence in the United States for 365 days during the tax year.

4. What Are the Basics of the U.S. Tax?

The first step is to learn about the many levels of taxation in the United States. The following are some of the most important things to know about living in the U.S. as a Chinese expat:

Federal Income Tax

The government of the United States collects income taxes aka federal income tax. Income is taxed at seven tax rates, starting at 10% and ranging up to 37%.

State Income Tax

It's critical to understand how state tax laws will influence your decision to reside. Most states impose a personal income tax, except Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. The majority of states charge income taxes, which range from 0 to 12.3 percent.

Local Income Tax

An additional city or county tax is charged in certain cities and towns. Local taxes are generally less than 1% to 2%, except for New York City.

Social Security Tax and Medicare

The IRS defines "earned income" as compensation paid to an employee or a sole proprietor's profits. The United States Social Security tax rate of 6.2% is applied to wages up to a maximum of $142,800 (for 2021). Medicare tax is 1.45 percent on your gross income (there is no limit). This is only half of the total tax burden, which the employer subsequently shares. If you are a single business owner, you must pay both the employee and employer portions of SECA tax.

The following people are not subject to Social Security and Medicare payroll taxes in the United States:

  • Diplomats
  • Members of the Chinese government
  • Their families
  • Nannies and housekeepers who work at their homes

5. What Are Taxpayer Identification Numbers?

Every person who files a tax return must have a Social Security number (SSN) or an individual tax identification number (ITIN). The ITIN is not only for tax filing purposes; it's also your unique U.S. government identifier that you'll need to sell a house, get a driver's license, open certain bank accounts, and so on. Every five years, you must renew your ITIN.

6. Sale of Assets and Capital Gains Tax

When you sell a property in China or anywhere else in the world, your profits will be included in U.S. taxable income on your U.S. tax return as part of your worldwide revenue. Under IRS guidelines, there's a special provision to exempt the first $250,000 of capital gains from U.S. tax if your house qualifies as a primary residence.

Consider the disposal of your Chinese assets and the tax consequences carefully. The cost basis for the property will be the historical purchase price, not the asset's current value as a U.S. tax resident. If you aren't vigilant, you may find yourself in a bind where your gains were taxed in the United States before you arrived here.

7. Retirement Accounts

Non-U.S. retirement accounts follow different tax rules than U.S.-based retirement accounts. Chinese expatriates who became U.S. Resident Aliens are not permitted to “roll over” money from Chinese retirement accounts to U.S. retirement accounts. Even if the funds are exempt in China, they will be fully taxable in the United States.

You must pay taxes on funds transferred to the United States or kept in China, regardless of whether you move them there. Take these measures cautiously and consult a U.S. tax professional before taking them.

8. Reporting Requirements: Banks, Financial Accounts and Assets

FinCEN 114 (FBAR) is a “Report of Foreign Bank and Financial Accounts”. The FBAR form is submitted electronically to the Financial Crimes Enforcement Network, a division of the United States Department of Treasury (not part of your tax return, which is sent to the IRS). This form is required for any U.S. citizen or resident Alien with signature authority over non-US financial accounts with a balance of $10,000 or more on at least one day during the year.

Banks, investment accounts, and insurance policies are all examples of foreign accounts. The $10,000 balance on non-US retirement accounts (in China or any other country) is also calculated and must be disclosed. If you have a joint bank account with your spouse, who is not a U.S. citizen and resides in China, it must be reported.

9. Can Chinese Citizens Claim U.S. Tax Treaty?

The US-China Tax Treaty was enacted in 1987 and signed in 1984. Unlike many other U.S. tax treaties, it has not been updated or supplemented since its inception. The agreement's objective is to prevent double taxation for Americans who reside in China and Chinese nationals who live in the United States. The most significant way it does so is by allowing expatriates to claim Chinese tax credits against U.S. taxes paid on US-sourced income, as well as U.S. tax credits against Chinese source income.

Ines Zemelman, EA
Founder of TFX