Reply To: Shanghai Expat Medical Insurance: Typical Premiums & Fees

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Large multinational U.S. employers usually offer a tax assistance package that includes paying for U.S. and foreign income tax preparation fees. Many smaller employers will do this as well if they consider the employee a valuable asset and are asked to do so. U.S. expatriate employees should also see if their employer has a tax protection or tax equalisation policy where the employer will pay any income tax over that which the employee would have paid in the U.S. on base salary if not assigned abroad.

U.S. taxpayers who qualify under IRC Section 911 can exclude foreign sourced compensation of up to $87,600 in 2008 and $91,400 in 2009. If they pay foreign income tax it can be deducted, or taken as a foreign tax credit against U.S. tax on foreign sourced income but only to the extent that the taxes are attributable to income that is not excluded or to deductions against foreign sourced income.

There is a catch. If a U.S. taxpayer files a tax return and elects out of the FEI exclusion it cannot be claimed for 5 years. Therefore a U.S. taxpayer with foreign sourced compensation who files a tax return without electing the FEI exclusion can be deemed to have made an election not to claim the Section 911 benefits.

Also, if a U.S. taxpayer files a statement with a foreign government stating that they are not responsible for paying foreign income tax otherwise due, and as a result they are exempted from paying foreign income tax, they can be denied using the Bona Fide residence test for Sec. 911.

Final point. It does not matter where the compensation is paid to get the exclusion. What matters is where the services are performed that determines foreign or U.S. sourcing. Also, IRC Section 61 states that all income from all sources are included in income, which is why the exclusion determined on Form 2555 is carried over to line 26 of Form 1040 as a negative number to reduce all of the income reported on Form 1040 above that line.

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