What amount to report from foreign income: gross or "taxable"?

Forum|Forum|6 years ago
December 16, 2019
2 replies
57 views

The United States resident needs to report worldwide income from
United States and from foreign sources. The wage from United States
is reported in W-2, and we take the box 1 amount. The wage from
foreign countries are not reported in the format, can we take some
pretax deductions and derive the box 1 amount? Let us take a Chinese
paycheck stub as an example to make the question more clear.

Monthly salary: 24,000
Food allowance: 220
Retirement ("401K"): 2,000
Medical fund ("HSA"): 500
Provident housing fund: 3,000
Taxable income: 13,720

The taxable income per Chinese law is calculated as:

24,000 + 220 - 2,000 - 500 - 3,000 - 5,000 ("monthly standard deduction") = 13,720

When we report the foreign income in US tax return, do we report:

[a] Gross income: 24,200
[b] Taxable income per Chinese law: 13,720
[c] "Box 1 amount" computer per US law: 24,000 + 2,000 - 2,000 - 500
[d] Other

On one hand, the US law does not apply to China, and the pretax
items in China are not mapped exactly to the ones in the US. For
example, the 401K in the US is elective and in China is mandatory,
and there is no "High Deductible Health Plan". On one
hand, it would not be fair to report the gross income ("box 5
amount"). How to solve this dilemma?

Also the exchange rate used should be at the time of the income,
at the end of year, or at the reporting time?

ProConnect Tax Online

This topic has been closed for replies.

itonewbie

Level 15

You have a number of concepts confused.

For US tax purposes, worldwide income is reportable and taxable based on US tax law (regardless of how an income or benefit, including pension, is or is not subject to tax in a foreign jurisdiction) unless otherwise excepted or exempted by domestic statutes or modified by an income tax treaty provision.

Instead of looking at how Chinese IIT is computed, which is based on a standard formula, you need to determine whether he is a domicile or non-domicile tax resident because the scope of taxation is different and that determines how his foreign tax credit should be computed.

Exchange rate for income and expenses would generally be spot rates unless it is ratably earned or incurred. QBU is handled with functional currency being the foreign currency and §988 will apply. Exchange rates for foreign tax credit gets a bit more complicated - you can refer to F.1116 filing instruction as well as §§905 and 986 for details.

In case you are not familiar with international taxation, you may be well-advised to farm out this type of work to a specialist, especially one who understands both US tax and the taxation system of the country in which your client is based.

---------------------------------------------------------------------------------Still an AllStar

puravidaptoAuthor

Level 7

There are pretax items similar to "401K" and "HSA" which will be excluded based on US law, that is basically what I am asking.

-- Click here to vote.

sjrcpa

Level 15

OP is asking this on another forum, too and not liking the same answer.

The more I know the more I don’t know.

itonewbie

Level 15

I see that too. Seriously, I would really think twice about preparing expat returns if I were the OP.

The foreign pension question Is a whole different ballgame. Before even getting to that, the OP needs to understand how compensation is structured in China and how its social security scheme works.

---------------------------------------------------------------------------------Still an AllStar

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