I had a question regarding expat tax for US citizens. I currently live in the US, but am looking at starting a business in Singapore or Australia. My wife and I will move there and we would plan on becoming permanent residents for many years. My question is what happens when I make more than the current $85,700 exemption provided by the US Government. It looks like I would make over $300,000 per year and I do not want to pay double tax. For example, if we chose Singapore the tax rate is 15%, so I know I will owe the Singaporean government $45,000 ($300k x 15%). The US government I would owe:

$300,000k income - $80k deductions and expenses giving me $220,000 of taxable income for the US.
$220,000 - $87,500 US foreign earned income exclusion = $132,500 as income the US Government could tax.

I assume this would be around 28% leaving me with a tax bill of $37,100. However, I paid the Singaporean government $45,000, so would that offset the $37,100 I owe the US? That is basically my question…What happens when I make a lot more than the $85,700 exemption? Any help would be greatly appreciated.

OK, if you want the "official" explanation of all this, go to the IRS website and download Publication 54, which is what they send out to overseas residents.

Actually, the calculation is a bit different from what you indicate and it will depend on how you set up your business. Depending on the local laws wherever you wind up, you may do better to set up your business as a "company" there under the business rules and then set yourselves up as employees of the business. Then, there is no question about your salaries being "earned income" and subject to the earned income exemption. (Actually, you can just pay yourselves the amount of the exemption if you want and leave the rest of the money in the company or to cover company expenses.)

As a local employee, you'll be subject to local taxes and social insurances (health, retirement and whatever else there is) - which is actually not a bad idea at all. The good news is that the company itself is NOT a US resident and so is not subject to US taxes - just to the local business taxes.

If you set things up so that you're "self-employed" things get a bit more complicated, as there is the question of whether or not you have to pay US social security (at self-employed rates). Then again, some countries won't allow you to be "self-employed" for a serious business if you're going to be hiring other people and whatever.

In any event, if your earned income exceeds the current limit (and remember, if your wife is employed by the company she gets her own income exclusion in the same amount), you then take foreign tax credits for what you pay in income tax locally. The trick here is that foreign tax credits put you in line for the AMT (alternative minimum tax) calculation, which can lead to you paying tax to the US.

Basically, if you set it all up right, you shouldn't have much, if any, problem with double taxation.
Cheers,
Bev

Bev,

Thank you for the information. Yes, we were going to set up a foreign company and have the company pay both of us, so we would be able to exclude the first $171,400 of income. So, lets say I have $100,000 in earned income above the $171,400 that is paid to me. I assume I will owe the Singapore government around $15,000 on that and so I can deduct that $15,000 off of any tax I owe the US? Keeping it simple I assume I would owe the US 28% of that 100k, so $28k. I already payed 15k to Singapore and so I would only owe the US 13k?

The other question is if I left that extra 100k in the business and did not pay myself, I assume I would owe zero taxes in the US. I know that I would owe taxes to Singapore, but not the US. Is this correct?

OK, your example is ok - VERY roughly speaking. There are (as always) some tweaks and twerks in how you have to figure your income when you're dealing with the earned income exclusion and the foreign tax credit. For one thing, you have to apportion your deductions between your excluded income and your taxable income. (And you exclude your overseas earned income before any deductions or allowances.) And there may be things that are deductible in Singapore that aren't deductible for the US return, and vice versa.

In your second question, yes - you only have to declare and pay taxes on your salary (including any dividends or perks you pay yourself - like a company car) and on any dividends the company pays you. (Be careful, though, because dividends are not considered "earned" income and aren't excludable on form 2555.) Your company will pay Singapore tax on its net income (and your salary is an expense of the company), but unless you have a US subsidiary or branch or something, it shouldn't have to pay any US taxes.
Cheers,
Bev

I'm curious about what you have learned about moving to Singapore, getting a visa that allows you to set up a business, getting a business license and all that stuff. I know that you can't legally even rent an apartment unless you have the proper visa and ID.

Bev,

Thank you for your reply. Yes, I know that was a very rough example but I was trying to understand the basics.

Synthia,

We are looking at various cities to start our business. Specifically Auckland, Sydney and Singapore. Our decision will be based on Local Regulations, Taxes and Cost. It looks like we should be able to start a business in all three as we would employ others. They all seem pretty straight forward if you have a business that will have revenue and employ others. We have a long way to go in our research, but it looks like we will choose one of the three and get things set up within 6 months.