Tax reporting of Chinese spouse assets in China

[CowBoE 429]

For those of you that have Chinese spouses with sufficient assets to declare them in US tax filing,

what specific documents do we need to acquire from China?

How does one go about acquiring those documents if my spouse is in US?

Her mother, sister, and cousins are in China, so in theory they could help,

but I'm not sure what's required?

It's little bit confusing because their system is different than in US,

but as far as I can tell, she has...

1. Savings account

2. Social Insurance (kind of like our IRA / Social Security)

3. Housing fund (can only be used to purchase housing in China, so I'm not sure if this also has to be reported)

4. Health insurance fund (kind of like our medicaid tax contribution)

5. A small house in center of Shanghai given by her father's company with government subsidiary (don't know the value)

many many years ago. Government has been trying to buy this land so that they can tear it down and build high rise or sell it.

Thanks

[RandyW 149]

Publication 519 - U.S. Tax Guide for Aliens

The Tax Guide for Aliens (Publication 519) is complex and hard to follow. It doesn't spell out what you need to do in situations like ours, especially where one spouse is in China. Please read this publication yourself and/or consult a paid tax professional. What follows is my own interpretation of what it contains.

As long as you are married on the last day of a tax year, you may file as Married, whether jointly or separate. You may choose to treat the nonresident spouse as a U.S. resident. Publication 519 says, "If you make this choice, you and your spouse are treated for income tax purposes as residents for your entire tax year. . . . You generally make the choice when you file a joint return." I believe this means that in order to file jointly, you must report your nonresident spouse's income. Use Form 2555-EZ Foreign Earned Income Exclusion and Inst 2555-EZ to exclude up to $91,500 (for 2010) of her earned income while in China.

My interpretation of the phrase "treat as a U.S. resident for tax purposes" is to bring that person under the jurisdiction of the U.S. tax laws as if they were a U.S. resident. I further interpret that by filing jointly you are making this choice. She does not qualify for the First Year Choice (since "you and your spouse are treated for income tax purposes as residents for your entire tax year"), unless you are filing Married filing separately.

If your spouse has income which does NOT qualify for exclusion under Form 2555, you may wish to consider using the Married, Filing Separately status. This may allow a foreign-resident (alien) spouse to file as a dual-status alien, although you may "elect" to be considered a U.S. resident under some circumstances.

'Pub. 519' said

A nonresident alien usually is subject to U.S. income tax only on U.S. source income.
. . .
If you are a U.S. resident for the calendar year, but you were not a U.S. resident at any time during the preceding calendar year, you are a U.S. resident only for the part of the calendar that begins on the residency starting date. You are a nonresident alien for the part of the year before that date.

I don't see that there would ever be an advantage to taking the 'First Year Choice', which is available to aliens their first year of residency, unless the foreign-based income cannot be exclude on Form 2555. However, it's up to you to read and understand all applicable tax laws and to determine the method of filing which best serves your own situation. Please consult a tax professional to clear up any confusion.

When excluding foreign income, the instructions for Form 1040 say

'Form 1040' said

if you are filing Form 2555 or 2555-EZ,
you must use the Foreign Earned Income Tax Worksheet . . . instead.

when figuring the tax owed.

Another little gem, although I don't know where I had found this

Quote

Here is something most expats seem to forget or not know:

A common misconception that contributes to the international tax gap is that this potentially excludable foreign earned income is exempt income not reportable on a US tax return. In fact, only a qualifying individual with qualifying income may elect to exclude foreign earned income and this exclusion applies only if a tax return is filed and the income is reported.

Q: I already report my income to my foreign country of residence. The Foreign Earned Income Exclusion eliminates that income for U.S. tax purposes. So why should I report to IRS?

A: Because if you don't report your earnings - even though they are 100% excluded - the IRS can later deny you the exclusion and tax you on that income (even though the foreign country already taxed the income).

So it MAY be wise to report her overseas income (and EXCLUDE it using Form 2555) when you file jointly, even when it's unlikely that the IRS will be able to track this down. See the note above on using the Foreign Earned Income Tax Worksheet.

Foreign Bank Accounts - Report of Foreign Bank and Financial Accounts (FBAR)

If you or your spouse have a foreign bank account which has exceeded a total value of $10,000, this should have been reported to the IRS using a Form TD F 90-221 for the year(s) during which the event occurred, on or before June 30th. Your spouse's bank accounts may fall under this umbrella even if he/she is living in China (if you are filing married filing jointly).

Stiff penalties may apply, ranging up to 50% of the account value for each year it was not reported. The IRS has had "voluntary disclosure" programs where you can donate some of your overseas account money to the IRS. If you do not owe any tax money on the undisclosed accounts, my advice is to MAKE CERTAIN of what you're doing before you donate ANY money to their coffers. In other words, these programs and penalties (and the FBAR report itself) are supposed to apply to actual tax cheats - not people who simply have unreported non-taxable money outside the US tax system.

In addition, Scedule B says:

Use Schedule B if any of the following applies.
. . .
• You had a financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account in a foreign country or you received a distribution from, or were a grantor of, or transferor to, a foreign trust. Part III of the schedule has questions about foreign accounts and trusts.
If you checked the “Yes” box on line 7a, file Form TD F 90-22.1 by June 30, 2011, with the Department of the Treasury at the address shown on that form. Do not attach it to your tax return.
▲! CAUTION
If you are required to file Form TD F 90-22.1 but do not do so, you may have to pay a penalty of up to $10,000 (more in some cases).

Foreign income is taxed - foreign holdings (i.e., property) I don't think are. It's up to you to find out for sure.

[Nich-Nick 3,354]

For those of you that have Chinese spouses with sufficient assets to declare them in US tax filing,

what specific documents do we need to acquire from China?

Thanks

Because you were married in 2014, you can elect to file jointly with your Chinese spouse. If she earned any income during all of 2014, it should be reported, but should be eligible for foreign income exclusion (Form 2555 or 2555EZ). No document is required from China. It is self reported and converted to USD.

Assets in China:

If any earned interest in 2014, then that is reported as income on the tax return, just like interest or dividends you earn on your savings accounts in the US. No documents have to be mailed with the tax return.

Two additional forms might apply. They are reports of foreign assets and are not part of figuring out your income tax. They are informational only. Do study all of the IRS details so you know what accounts must be reported.

FATCA is for assets, pensions and such exceeding $100k (in USD) on a joint return. No Chinese documents are required. It is self-reported. You list the bank, pension, address where held, and amount. Start reading the details of what is included as far as what has to be reported here http://www.irs.gov/Businesses/Corporations/Foreign-Account-Tax-Compliance-Act-FATCA The report is filed with the tax return. Again, it is a report of assets and not something that is taxable income (unless it earned interest in 2014).

FBAR is also a report of foreign accounts. It is for things exceeding $10k. For example if she had several bank accounts in China during 2014 with total deposits exceeding $10k any time during 2014, she names the banks and amounts. It is not income to be taxed. It is a report. Highest value during 2014 is reported to the US Treasury (not IRS) by June 30, 2015. IRS guidance http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Report-of-Foreign-Bank-and-Financial-Accounts-FBAR

Even though no documents are required for reporting wages (taxable) or assets (reports), it is a good idea to keep records or notes of how you came up with the amounts to save with your 2014 records in case of audit.

Edited January 11, 2015 by Nich-Nick

[CowBoE 429]

Thanks. You two have been great help. I have plenty to read now.

Hopefully my tax software can handle this.

[Nich-Nick 3,354]

Thanks. You two have been great help. I have plenty to read now.

Hopefully my tax software can handle this.

I've done all of the above with TurboTax Basic desktop version. However this year they are cutting back on what forms Basic includes, forcing me to buy something more than the $20 version to do my tax return. Check what forms come with the edition you purchase. I also like to install the software rather than do an online version.

Don't depend on the software to guide you. Read what the IRS says so you have a grasp of the requirements and know how to answer the software "interview". The foreign income exclusion is the trickiest because it is more geared for Americans who might be working abroad, so sometimes confuses those with immigrant spouses.

One TurboTax question I run across that people get mixed up on is something like "do you have a visa to the foreign country?" So people want to say yes because they have a K1 or CR1. The foreign country is NOT the USA. The question is determining if an American working abroad actually has a visa to work in China for example and exclude their Chinese earned income. Your wife would not need a visa to work in China. She qualifies because she was a bonafide resident and citizen of China. So remember they are not just speaking to new immigrants on the form, but mostly to Americans. It is valid for either situation.

[CowBoE 429]

I've done all of the above with TurboTax Basic desktop version. However this year they are cutting back on what forms Basic includes, forcing me to buy something more than the $20 version to do my tax return. Check what forms come with the edition you purchase. I also like to install the software rather than do an online version.

Don't depend on the software to guide you. Read what the IRS says so you have a grasp of the requirements and know how to answer the software "interview". The foreign income exclusion is the trickiest because it is more geared for Americans who might be working abroad, so sometimes confuses those with immigrant spouses.

One TurboTax question I run across that people get mixed up on is something like "do you have a visa to the foreign country?" So people want to say yes because they have a K1 or CR1. The foreign country is NOT the USA. The question is determining if an American working abroad actually has a visa to work in China for example and exclude their Chinese earned income. Your wife would not need a visa to work in China. She qualifies because she was a bonafide resident and citizen of China. So remember they are not just speaking to new immigrants on the form, but mostly to Americans. It is valid for either situation.

Yup...doing a lot of reading. And yes, I have to keep in mind that she is still a Chinese citizen. Thanks.

Edited January 12, 2015 by DualityOneness