Ricedoll's Issues with US Taxation

[maneo]

Oh, as far as Singapore's CPF is concerned, I've always reported as income the total put into CPF every year on my US return (inclusive of the Employer's share) and I've always reported all the Interest earned on the CPF account on my US return as well.

You're not alone.
I do the same -- this is what the regulations say we're supposed to do.

It doesn't matter whether I cash out or not? I can't cash out unless I give up my PR, but when I do, I will have already paid the taxes, if any, on the 'income' as well as on the 'interest'. I'm probably one of very few who has done this and it could very well blow up in my face (the US taxing it twice) ....

When I checked with tax preparers and a tax attorney they confirmed that no tax will be owed on CPF funds cashed out or paid out as retirement.
They said this is your own, post-tax money being returned to you.
Think of it as being the same as if you withdrew the full balance of a savings account from a bank.

... or I may get reduced SS payments (but again, I don't think cashing out of a saving's account is taxable) - BBC & I are at differing viewpoints on this but I'll let everybody know what happens as I'm closer to retirement than most (7 or 8 more years at most) I'm already 68.

Since CPF is not a "qualified retirement plan" I would think that CPF payouts should not be counted as income for the formula reducing Social Security payments.
Any payments received should be considered return of principal.
Time to use their definitions against them.

Yes, do let us know how this SS deal goes down for you.
Am not that far behind you.

[BBCWatcher]

OK, here are the details. According to the IRS:

1. There is no failure to file penalty if you are owed a tax refund per Tax Topic 153 (and other sources), even if the refund is $1. That could be via the Additional Child Tax Credit or American Opportunity Tax Credit, as examples. (Both are refundable tax credits.)

2. If you are a U.S. person living overseas, fail to file, owe zero U.S. tax, and otherwise lead a reasonably exemplary life (not known to be cheating the other country's tax system, for example), the IRS says it won't levy a failure to file penalty. You're deemed to have "reasonable cause" in not filing. But that "one time" forbearance is not unlimited. (Read on.)

3. The IRS can certainly demand that you file a tax return if you're obligated to do so (meet the filing threshold), even if you genuinely owe zero U.S. tax. If you then still fail to file, the IRS can impose a minimum $135 failure to file penalty (periodically adjusted for inflation), assuming your tax return is more than 60 days late. Once assessed you have 60 days from the date of notice to pay the penalty. If you still don't pay the penalty, interest can accrue on the penalty. If your failure is particularly egregious and notorious then the IRS might be able to add another statutory penalty on top of that even if you genuinely owe zero U.S. tax, although that's quite rare. (Don't send your child's crayon drawing in response to a notice from the IRS, to pick an example. If you're a jerk the IRS may reciprocate.)

4. There is no statute of limitations if you fail to file a tax return. For that reason it's still in your legal interest to file a truthful, timely return if you're obliged to do so. In other words, the IRS has options #2 and #3 available, in sequence, with no IRS time limit if you fail to file. For example, hypothetically the IRS could send you a letter in the year 2032 demanding that you file a missing 1998 tax return. That'd be awkward and inconvenient because you probably won't remember what you did in 1998 after 34 years have passed. In contrast, it's at least very hard for the IRS to pursue any tax matter more than six years after you file. (The statute of limitations rules are a bit complicated, but that's a fair oversimplification.)

[BBCWatcher]

When I checked with tax preparers and a tax attorney they confirmed that no tax will be owed on CPF funds cashed out or paid out as retirement.

Right. The general consensus seems to be:

1. Every year you have to include all your employer's CPF contributions in your gross income. Per an old (but still apparently most current) IRS ruling those contributions are, unfortunately, not excludable under the Foreign Earned Income Exclusion. So the employer's contributions are taxable on the inbound. (Of course your contributions are part of your income, too, but those appear to be excludable via the FEIE since they come out of your paycheck.)

2. You report the interest paid on your CPF funds each year on Schedule B, and that's taxable.

3. THEN, upon withdrawal, no tax is owed. The U.S. has already had the opportunity to tax the incoming funds, and you've also paid tax on the interest along the way.

This is still pretty good, though. For a lot of people, maybe most people, the employer's contributions slide under their personal exemptions and standard deductions, and they're spreading out the interest income in a similar way. Taxable doesn't necessarily mean taxed -- there's still a 0% tax bracket in the mix.

Think of it as being the same as if you withdrew the full balance of a savings account from a bank.

Yes, it's quite like that. It's "just another account" from the U.S. point of view. It at least wouldn't hurt to report your CPF account via FinCEN Form 114 and/or IRS Form 8938, if/as applicable, although as I read it you don't have to.

One caveat: I'm describing ordinary CPF fund allocations. If you steer any of your CPF funds into investment products, such as unit trusts (i.e. non-U.S. mutual funds), then you could run into PFIC and/or foreign trust rules. Those subaccounts are more complicated at least in terms of paperwork, so I don't recommend that. I don't consider that a loss since I think those vehicles are quite poor in comparison to U.S. vehicles, and I'd much rather take the 4+ percent guaranteed, simple yield.

BBC & I are at differing viewpoints on this but I'll let everybody know what happens as I'm closer to retirement than most (7 or 8 more years at most) I'm already 68.

I'm a bit concerned, that's all. You'll start collecting U.S. Social Security benefits no later than age 70, less than two years from now, so you should have a WEP answer fairly soon. I haven't been able to find any reports bearing on that question yet, probably because there aren't too many U.S. Social Security retirement benefit recipients who also have CPF. Yes, please let us know what you discover.

One interesting question is whether you can do anything with MediShield Life from a U.S. tax point of view. Probably not, but I haven't looked at it carefully enough yet. If you're doing all the above with regard to CPF tax treatment on the U.S. side then Medisave is treated the same way -- but that also means (as I understand it) you can still count the dollars you spent on medical expenses even if some/all of those dollars came from your Medisave subaccount. Meaning, if you qualify, you can take the itemized deduction for medical expenses on your U.S. tax return. Medisave is still money -- just another ordinary account from the U.S. point of view -- so I don't see why that wouldn't work.

[BBCWatcher]

Over the past decade it as amounted to an average of around 1200 a year in Singapore. Which translates to a way bigger percentage than the 4000/ex US/year.

Yes indeed. Let's use a 5,000 per year figure for the number of U.S. citizens renouncing or documenting relinquishment of their citizenships. (That might be high since the reported figure can include some exiting U.S. permanent residents, but let's go with it.) In 2014 Singapore bestowed its citizenship on 20,348 people, so Singapore's citizen inflow to outflow ratio is about 17:1. That includes all age groups.

In 2013 the United States bestowed its citizenship on 779,929 individuals age 18 and older (not counting their children who ordinarily receive derivative U.S. citizenship at the same time, so this number is quite understated). Thus the U.S. adult citizen inflow to outflow ratio is about 156:1.

OK, let's take a look at population ratios. The U.S. population in 2013 was about 316.5 million, so the total population to new adult citizen ratio was about 406:1. Singapore's population was about 5.4 million in 2014, so the total population to new citizen (all ages) ratio was about 265:1. If you correct for the missing American children, Singapore and the U.S. are "onboarding" new citizens at a very similar pace. (We tend to think of Singapore as being a country with a high rate of "onboarding," but statistically it's quite similar to the United States in that respect. U.S. "onboarding" was even higher about a century ago -- it's not a historic record or anything like that.)

Looking now at citizenship terminations, the U.S. total population to "outflow" ratio is about 63300:1. For Singapore it's about 4500:1. Singapore is currently "bleeding" citizens at a much, much faster rate relative to its total population than the U.S. is -- more than 10 times as fast.

If you're trying to look for explanations for this divergence, I'm sure you'd consider Singapore's intolerance of multiple citizenships -- a policy choice -- and perhaps also its compulsory national service. Singapore's introduction last year of "CBT" might have a marginal impact going forward, but my expectation is that its biggest impact (but still fairly small) will be to encourage "loosely attached" PRs to exit a bit sooner (before their next REP renewals) and "cleanse" the pool of future citizens a bit. If U.S. "CBT" is having any impact then it's quite tiny. Other policy choices are much more important.

I'm not trying to suggest that there's any existential crisis facing Singapore. That's simply not true. But this comparison does illustrate how ridiculous the breathless media reporting is about the U.S. citizenship statistics. Both of these citizenships are valuable, in much demand, and with a superabundance of wonderful people seeking them. If there's a global marketplace of citizenships, they're both doing quite well.

[ricedoll]

make a scroll

https://en.wikipedia.org/wiki/International_taxation

[ricedoll]

BBC, many of the people who wants to be in Sam's deal could be making average wage, middle income, and would not feel the burden of heavy tax. How do you not know they could be paying more taxes in their home country.

They might also be the ones who live and reside in the country FOREVER. This very aspect justify their payment of taxes. If you move to the US and plan to live and work there forever, i don't think taxes is the #1 thing that comes into their mind/calculation. I could care less if there are 99billion of people wanting to move into Uncle Sam's home. You can't compare this number to the number of people exiting because of unfair taxes. This is like comparing Laksa to Chicken rice.

http://www.washingtontimes.com/news/201 ... /?page=all

Take note, not just about filing taxes for the rest of your life. Some people can't even open a proper bank account!!

[BBCWatcher]

I did a little more research on whether Singapore's MediShield Life premiums are deductible as medical expenses on your U.S. tax return (IRS Form 1040 Schedule A).

Yes, it looks like these premiums are deductible! (Thank you, IRS.) Refer to IRS Publication 502 for more information. This deduction works somewhat better if you're self-employed because then you can take your medical expenses deduction on the first page of Form 1040 (on line 29 in the 2015 edition), without using Schedule A ("Itemized Deductions"). If you have to use Schedule A then the medical expenses deduction is limited to your eligible medical expenses above 10% of your Adjusted Gross Income (7.5% if you're 65 or older, for a couple more tax years). However, Schedule A still might work pretty well when you're taking the Foreign Earned Income Exclusion, as most U.S. persons living in Singapore do. The FEIE (and Foreign Housing Exclusion) tends to drive down your AGI, so if you've still got some AGI left to tax then it's easier to clear the 10% (or 7.5%) hurdle over on Schedule A.

One key assumption is that you're paying your MediShield Life premiums from after tax (after U.S. tax) income. That would be the case if you're taking the consensus approach described upthread to handling your and your employer's CPF contributions.

So there you go. Singapore imposes a new tax (MediShield Life), but the IRS might give you a U.S. tax break in partial compensation even if you only owe tax on your U.S. source income. Fun how that works, isn't it? (Ricedoll will now explain to us why this too is "unfair." )

[BBCWatcher]

Some people can't even open a proper bank account!!

Have you met anybody in Singapore who hasn't been able to open a bank account solely because he/she is a U.S. person?

....Any trouble, SMS? Strong Eagle? I'll start: no, no trouble. And I have opened bank accounts (plural) post-FATCA.

[ricedoll]

Deductible or not, its EXTRA MONEY i'm forking out for the US taxes which I shouldn't need to.

Of course you might not have problem opening a bank account, I am referring to many others who have. Such as,

http://www.wsj.com/articles/expats-left ... 1410465182

http://www.englishforum.ch/swiss-politi ... ounts.html

http://world.time.com/2013/12/20/swiss- ... -accounts/

http://www.theguardian.com/money/2014/s ... k-accounts

[BBCWatcher]

Deductible or not, its EXTRA MONEY i'm forking out for the US taxes which I shouldn't need to.

No, you misunderstand. In this case, depending on how the math works, the IRS can reduce your U.S. tax even if you owe zero U.S. tax on non-U.S. source income. For example, if you work in Singapore and earn US$100,000 (including employer CPF contributions), pay $2800/month for an apartment, have $20,000 of passive income from U.S. investments (or even income from work in the U.S.), and have $4,000 in medical bills (including your MediShield Life premiums), then not only do you owe zero U.S. tax on your foreign (Singapore) income but you'll also get a tax reduction on the tax you owe on your U.S. income as partial compensation for Singapore's MediShield Life taxes. Somebody can check my math, but I'm pretty sure that's how it would all add up in this example.

Magical, isn't it?

I'm asking whether you've ever met anybody who has not been able to open a bank account solely because he/she is a U.S. person. I am not such a person, I have never met such a person, and I know a lot of U.S. persons around the world. I'm sure you can find press articles about somebody who got bitten by a shark in a swimming pool (or whatever), but where are these hordes of suffering Americans who can't get current (checking) or savings accounts?

[BBCWatcher]

Just to help everybody understand how this works, in the scenario I described all the Singapore income is U.S. tax free via the Foreign Earned Income Exclusion and Foreign Housing Exclusion. (Actually you don't even need the Foreign Housing Exclusion in this example.) But this hypothetical-yet-realistic PR still has some U.S. source income, and of course that's U.S. taxable. However, (s)he's also got US$4,000 in medical expenses, a piece of which is Singapore's MediShield Life premium (tax). His/her Adjusted Gross Income will be something less than $20,000 in this example, and $4,000 is quite a bit more than 10% of his/her AGI. Therefore, he can take the medical expenses deduction for the medical expenses above 10% of his/her AGI, including his MediShield Life tax. This deduction drives down his remaining U.S. taxable income, and thus (s)he saves money on his/her U.S. taxes.

What Singapore taketh, the U.S. gives back, in part. Not bad! Fun how this works, isn't it?

[ricedoll]

Can't believe uncle Sam is spending so much money and manpower to set up all these FATCA, CBT laws. Could have better spent on tightening gun laws, better healthcare, less student loans, school security...etc? Oh wait, BBC, did you see ur US taxes being put to good use? Please list some specific examples to convince me so I can pay with all my heart. Thanks

[earthfriendly]

Deductible or not, its EXTRA MONEY i'm forking out for the US taxes which I shouldn't need to.

No, you misunderstand. In this case, depending on how the math works, the IRS can reduce your U.S. tax even if you owe zero U.S. tax on non-U.S. source income. For example, if you work in Singapore and earn US$100,000 (including employer CPF contributions), pay $2800/month for an apartment, have $20,000 of passive income from U.S. investments (or even income from work in the U.S.), and have $4,000 in medical bills (including your MediShield Life premiums), then not only do you owe zero U.S. tax on your foreign (Singapore) income but you'll also get a tax reduction on the tax you owe on your U.S. income as partial compensation for Singapore's MediShield Life taxes.

Hmnnnnn....not sure how this works. How is $2800 rent deductible? Rents are never deductible as far as I know. How is $4000 medical deductible based on $100k gross? One can only deduct the amount of medical that is over 10 % of AGI. I understand the 100k amount is gross. And also for my dental braces, I paid down payment in Dec and then spread the rest over 17 monthly installments. So much hassle just to try to get some $$$ back from IRA. Forget it .

[earthfriendly]

This complication of overseas American taxation and bank report is recent in nature. Under Obama's admin? So old timers like SMS and Strong Eagle might have opened their account before that. I remember someone had problem on this forum. Try asking zzzzm, who is a more recent transplant.

[BBCWatcher]

How is $2800 rent deductible? Rents are never deductible as far as I know.

Part of your rent is excludable from income via the Foreign Housing Exclusion (part of IRS Form 2555). In this particular example the result is the same without the rent, but I mentioned it for completeness.

Rent you pay in excess of US$16,128 (tax year 2015), up to US$83,000 per year (Singapore limit for tax year 2015 -- almost S$9700/month at current exchange rates!), is generally excludable income. In the example provided upthread somebody paying US$2,800 per month in rent would have US$1,456 per month in Foreign Housing Exclusion (assuming full-time residence in Singapore), or US$17,472. In effect this raises the maximum Foreign Earned Income Exclusion from US$100,800 (also tax year 2015) to US$118,272 in this example. So he/she can earn more than the US$100,000 in the example upthread -- about 18% more with these figures -- and it's still U.S. tax free income (all excluded). (Of course above your exclusions you still get the Foreign Tax Credit.)

For self-employed U.S. persons this works a bit differently (housing deduction instead of exclusion).

Tip: If you're a U.S. person, and you have relatively high (or more) foreign earned income, thanks to the Foreign Housing Exclusion it's generally tax advantageous to live in rented property rather than to buy property in Singapore. This is perhaps counterintuitive, so that's why I mention it.

How is $4000 medical deductible based on $100k gross? One can only deduct the amount of medical that is over 10 % of AGI.

Simple: the AGI (for Schedule A purposes at least) apparently doesn't include the Foreign Earned Income Exclusion and Foreign Housing Exclusion amounts. Somebody can check me on that more carefully, but that's certainly what it looks like to me. So in the example upthread the hypothetical PR's US$100,000 of foreign earned income is completely excluded and pulled out of AGI, leaving only part of his/her remaining US$20,000 as AGI. With US$4,000 in medical expenses (including MediShield Life taxes), the 10% bar is well cleared.

That said, the standard deduction might still be better. But as medical expenses increase (and MediShield Life taxes increase), maybe not. The point is that it's quite possible for the U.S. tax code to give back some of your Singapore MediShield Life taxes. (Surprise!)

Another way the Foreign Earned Income Exclusion and Foreign Housing Exclusion are quite helpful is if you have U.S. student loan debt and you switch to income-based repayment. Under current rules the income-based repayment is based on your AGI without the excluded income. So you can be earning a rather hefty amount of foreign income, and your monthly loan repayment amount can be zero or at least much closer to zero. You can't do worse with income-based repayment, but in this case you can do a heck of a lot better. How does a free (or heavily subsidized) U.S. university degree sound? (Actually it doesn't have to be U.S., and you could even attend a tuition free university. You can buy beer with your student loan money -- yes, really. Any university on the U.S. Department of Education's list is OK.) This is one of the perks of U.S. personhood, too. Just borrow as much as you can via the federally subsidized direct U.S. student loan program (not the profit/private stuff), head to another country to go work, switch to income-based repayment, and...well, you're really doing well. When the loan principle and accumulated interest is forgiven at the end of your income-based repayment period you'll only pay tax on the total value of that forgiven loan. Great deal!