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taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 341
Experience:  Licensed CPA, MA, MST with 29 year's experience. Teach Accounting and Tax courses at Masters level.
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Hello, I am an US citizen working in China for the past 3 years.

Resolved Question:

Hello, I am an US citizen working in China for the past 3 years. On my fourth year now. My monthly salary here is 5500RMB (about 900USD) each month. I get a pretty good bonus at the end of the year which makes my annual salary roughly about 306000RMB (~50,000USD) Last year, with the help of families, I have purchased an apartment here in China for around(NNN) NNN-NNNNMB (~163,400USD). For the past 2 year's tax filing, I have only reported my salary and not my bonus. I was mindless to ask about rather I should file my bonus or not therefore I didn't. My question now is - will there be any complications regarding my home ownership in China while I have only filed my annual salary of just 66000RMB (10784USD) without the bonus for the past 2 years? The reason why I am asking this is that I have recently heard a very vague but concerning rumor saying of this sort: if your filed income is fairly low as a US citizen working aboard, and you have purchased an apartment in China, the gov't will have the right to take the apartment away from you. Any insights and thoughts would be greatly appreciated.
Submitted: 8 months ago.
Category: Tax
Expert:  taxmanrog replied 8 months ago.

Welcome to Just Answers! Thank you for giving me the opportunity to assist you! I will do my best to help!

 

I currently have several clients working in China right now. Are you worried about the Chinese government or the US government? Have you been filing tax returns in the United States while you are in China?

 

I can better address your issues when I receive your answers to mine.

 

I look forward to your reply! Thanks!

 

Roger

Customer: replied 8 months ago.

Dear XXXXX,


 


For the past 2 years, I have been filing taxes in the US. I work in China the entire year and I only go back to US, New York for roughly a month during the winter. That is when I do my filing. As mentioned in my writing before. In my tax filing, I only filed my salary income but not my annual bonus that I get at the end of the year.


 


Since I am completely clueless about this potential issue, I am worried about both, the US govt as well as the Chinese gov't. It was a very vague news that I have gotten hence I am not clear myself. This is why I wish to get more info and insight on this matter if this is indeed a fact or I might have just heard it all wrong. Thank you. I hope I made myself clearer now.

Expert:  Robin D. replied 8 months ago.
Hello and thank you for using Just Answer,
Your bonus is taxable compensation for US purposes.
Generally, you are considered to have earned income in the year in which you do the work for which you receive the income, even if you work in one year but are not paid until the following year. If you report your income on a cash basis, you report the income on your return for the year you receive it. If you work one year, but are not paid for that work until the next year, the amount you can exclude in the year you are paid is the amount you could have excluded in the year you did the work if you had been paid in that year. So if you received the bonus for one year in the next, you would still report the bonus on your US return for the year it was tied to.
You will need to amend your US tax returns for each year you omitted the bonus payment.
Classification of Types of Income by the US for Foreign Earned Income includes:
Salaries and wages
Commissions
Bonuses
Professional fees
Tips

If you do not amend your US returns and the IRS comes to you first then you could lose the ability to benefit from the Foreign Earned Income Exclusion.

I sincerely XXXXX XXXXX information is helpful.

My goal is to give you excellent service. If you are satisfied, please rate me. If you have follow-up questions on this same topic, use the reply box below. To start a new conversation with me on a new topic request me again.


Expert:  taxmanrog replied 8 months ago.

Hi! I answered this question this morning for you, but I am not sure how my answer disappeared and the other expert's answer is here! However, I don't think that your question was answered. .

 

If I understand your issue correctly, you are not asking about how to file your US tax return, but rather are asking if purchasing a house in China will be an issue if you failed to report your bonus income on both tax returns. Is this a correct summary?

 

Let's look first at the US side. As a US citizen, you are required to file a tax return for EVERY YEAR you work, regardless of the location. So while you may have to amend the prior two tax returns to report the bonus, you also need to file for the two years that you did not file at all. I don't think you will owe anything, though, as the Foreign Earned Income Exclusion allowed under IRC §911 of the tax code allows foreign wages, including bonuses, allowances, items provided on your behalf, and reimbursed expenses to be excluded. The Exclusion amount is increased every year, ranging from $91,400 in 2009, $91,500 for 2010, $92,900 for 2011, $95,100 for 2012, and $97,600 for 2013. So reporting the full wages won't have any effect on the taxes you pay in the United States. By not filing, the IRS can assess their own tax, and can disallow the exclusion if doing so results in a greater tax than just using Foreign Tax Credits (the Chinese tax you pay). They can also assess penalties and interest on the underpayment.

 

As far as the US finding out about you purchasing the house, I do not see any way for them to find out. It is not reported anywhere. There is a box on the Form 2555 that asks what kind of housing you live in, and you would check "purchased house or apartment", but it does not ask for any other information such as date, cost, etc., so from a US standpoint, this is not an issue at all. They can't seize your Chinese home!

 

From a Chinese standpoint, this is a totally different issue. One of my clients is an international construction company. They had a contract in China several years ago, and used a scheme called Offshore payroll. They paid the workers in Australia, and only paid Chinese tax on the amounts of money that were actually paid in China, which was a very small amount. The Chinese found out, and jailed (without trial or any judicial proceedings) the project manager until the company paid the proper taxes due, plus a huge penalty. So your not reporting the bonus to the Chinese could lead to huge problems, and may result in the seizure, or at least placing a lien, on your Chinese home.

 

I think this answers your actual question. If you have any more, please feel free to ask them! If you would like me, feel free to ask for me in the title. Most, but not all, of the experts will respect your request. If you have found my answer to be helpful, please rate me highly! I would really appreciate that!

 

Again, thanks! Have a great week!

 

Roger

Customer: replied 8 months ago.

Dear XXXXX,


 


Thank you for your reply. Your info/answer is definitely more inline to my question but still haven't addressed my concern 100%. I want to make this to your attention on the title not cannot seem to locate a specific place to do so. But this is for Roger. =)


 


Let me clear up my facts again. I have worked in China for the past 3 years only. I have filed my income taxes for all 3 years in NY, USA. Didn't get a bonus for the first year so the first year tax filing is 100% correct. The bonus part for the past 2 years was not filed since I thought it wasn't needed. Also since I learn of the bonus amount around march which is after I finish my filing.


 


So this leads to another question. How do I fix or correct my tax filing now for the past 2 years?


 



So from your US viewpoint, there shouldn't be much of a problem. Doesn't seem to be anything I should be concerned about here.


 


From your China's viewpoint, my situation isn't the same as your example. So let me clear this up again. I am working for a local Chinese company and they pay my salary 100% in Chinese yuan (RMB). My company here in China handles all the tax/salary reporting to the Chinese Govt for me so that shouldn't be a problem either.


 



I hope I have made my situation clearer now. So with that said, my concern is would my relatively low income shown in my US tax filing draw attention due to the home purchase here in China. Would editing or updating my tax return filing by adding/reporting my bonus for the past 2 years help fix this issue? If yes, how would I do so?

Expert:  taxmanrog replied 8 months ago.

You are correct as to the US returns. Amending the last two years to include the bonus probably won't cost you any US tax dollars.

.

.

 

I realize my client's situation is different than yours. It was only meant as an illustration to show that the Chinese are very different in their handling of tax matters than we are used to in the US. Chinese criminal law provides that the offense of tax evasion, if the amount evaded is between 10 percent and 30 percent of the amount of tax owed and is between RMB 10,000 and RMB 100,000, may result in a sentence of detention or imprisonment of up to three years. If the amount evaded is 30 percent or more of the amount of tax owed and exceeds RMB 100,000, the offense may result in a prison sentence of between three and seven years. Additional criminal fines may also accrue.

.

.

I estimate that the tax on your bonus will be about RMB 105,000 for each year, as your base salary alone puts you into the top 45% bracket. I didn't see anything where they would take your home, but in light of the above penalties, I would not doubt it. In China, I do believe that reporting a low income, then purchasing a home that costs 15 times your annual salary (RMB 1,000,000/ RMB 66,000) would draw attention, unless you had a large "cash horde" offshore that you brought in to purchase the house. That would be up to you to prove.

.

.

The Chinese tax system requires your employer to remit and withhold tax every month and remit the money by the 15th of the following month. There is also an annual return that is required to be filed by March 15 of the following year. So, if you were paid your bonus in December, your employer should have reported the bonus and withheld tax on it. If they did not, you should have reported it on the annual tax return and paid tax at that time.

.

.

There is a process for amending your Chinese tax returns. I suggest that you retain a local Chinese accountant and have them correct these returns for you. The seven year prison sentence for this (I believe that is per year of underreported tax) times two years would be enough to make me amend my returns!

.

.

I hope this answer has been more clear. If you have any more questions, please let me know. I am happy to answer! Again, if you found this helpful, please rate me highly! I appreciate that!

.

Thanks again! Have a great week!

.

Roger

taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 341
Experience: Licensed CPA, MA, MST with 29 year's experience. Teach Accounting and Tax courses at Masters level.
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