My Personal Finance Journey

Personal finance observation, musing and decisions in a journey toward financial independence by 2020 with at least $3 million.


By Topics

Overall:
0. About (10)
1. My Progress (139)
2. Car & Home (107)
3. Credit (138)
4. Banking (33)
5. Saving (49)
6. Investing (308)
7. Taxes (89)
8. Spending (74)
9. Misc (97)
A. Archive (49)



MONTHLY ARCHIVE

Feb 2014 (3)
Jan 2014 (6)
Jan 2012 (1)
Apr 2011 (1)
Mar 2011 (1)
Feb 2011 (1)
Jan 2011 (1)
Dec 2010 (1)
Oct 2010 (1)
Sep 2010 (1)
Aug 2010 (1)
Jul 2010 (1)
Jun 2010 (1)
May 2010 (1)
Apr 2010 (1)
Mar 2010 (6)
Feb 2010 (2)
Jan 2010 (7)
Dec 2009 (3)
Feb 2009 (4)
Jan 2009 (8)
Dec 2008 (1)
Jun 2008 (2)
May 2008 (2)
Apr 2008 (5)
Feb 2008 (3)
Jan 2008 (15)
Dec 2007 (32)
Nov 2007 (6)
Oct 2007 (8)
Sep 2007 (9)
Aug 2007 (24)
Jul 2007 (2)
Jun 2007 (1)
May 2007 (3)
Apr 2007 (4)
Mar 2007 (4)
Feb 2007 (13)
Jan 2007 (6)
Dec 2006 (3)
Nov 2006 (7)
Oct 2006 (7)
Sep 2006 (6)
Aug 2006 (4)
Jul 2006 (10)
Jun 2006 (1)
May 2006 (3)
Apr 2006 (2)
Mar 2006 (6)
Feb 2006 (6)
Jan 2006 (3)
Dec 2005 (1)
Nov 2005 (9)
Oct 2005 (8)
Sep 2005 (13)
Aug 2005 (25)
Jul 2005 (16)
Jun 2005 (17)
May 2005 (19)
Apr 2005 (20)
Mar 2005 (24)
Feb 2005 (23)
Jan 2005 (36)
Dec 2004 (40)
Nov 2004 (34)
Oct 2004 (17)
Sep 2004 (21)
Aug 2004 (59)
Jul 2004 (37)
Jun 2004 (31)
May 2004 (29)
Apr 2004 (52)
Mar 2004 (49)
Feb 2004 (49)
Jan 2004 (31)
Dec 2003 (48)
Nov 2003 (52)
Oct 2003 (29)
Sep 2003 (8)
Aug 2003 (5)
Jul 2003 (2)
Jun 2003 (2)
May 2003 (5)
Apr 2003 (2)
Mar 2003 (2)
Feb 2003 (3)
Jan 2003 (29)



 

What Did I Learn from My 2005 Tax Return?

Contributed by mm | January 29, 2007 5:29 PM PST

I always have a passion for tax. If you recall, I self-filed my tax in 2003 and 2004, and wrote a few dozen articles on various tax topics in this blog. Therefore, you probably cannot believe that I just filed my 2005 tax return only days ago.

If you follow this blog, 2005 is the year in which our tax situation got really messy: first, our business income really shot up during that year, and second, we moved from Seattle to Shanghai in late 2005, exposing us to tons of new tax rules.

Gladly, as part of the expatriation benefits, KPMG was hired to file tax for us for four years (tax year 2005 to 2008). Although I am fairly personal-finance-literate, I have to admit without KPMG running the show I will not be able to navigate the convoluted tax laws governing foreign residents.

Earlier in 2006, we were advised by our tax preparer KPMG to wait till January 2007 to file for the 2005 tax, so we can be entitled to some tax benefits with regard to foreign taxes. This month, KPMG notified us a tax return has been prepared, and we are due for almost $6,000 in refund! (In retrospect, the tax refund is probably due to the generous tax gross-up for some relocation benefits. In my accounting book, I was expecting to owe $500 in tax at the end of 2005.)

Apart from the temporal happiness of (re)gaining a sizable chunk of money, a study of the final return by the pros (a total of 45 pages) is actually a good learning experience. More importantly, I have two important findings that may affect how I manage our household finance in the future.

1. Our business income will be almost tax-free in the near future.

U.S. tax laws allow foreign tax credit that prevents a taxpayer with foreign residency from double taxing. Since income tax on salary income in China is much higher than that in the U.S., I almost don't have to pay any extra U.S. income tax on my China-based income. For 2005 when I only worked in China for a couple of months, I had accumulated a foreign tax credit carryover for almost $2,000 (read: the difference between higher China tax rate and lower U.S. rate, after applying maximum allowed foreign tax credit for tax year 2005).

When it comes to my business income, U.S. tax law says it is China-based income since I produced the income solely from working in China, even though all incomes are crediting to my U.S. bank account (and I was issued 1099-MISC forms every spring). What's better is I don't have to pay taxes on such income in China either since local tax authority considers it as earned outside of the country.

In summary, my job income will probably create a five-figure foreign tax credit every year that I cannot enjoy without extra non-job income. By recognizing my business income on my tax return, I will be able to apply these extra tax credits and effectively pay nothing extra on my business income. What a nice arrangement to ease my tax burden!

2. SE 401(k) contribution does not necessarily reduce my immediate tax by much.

In late 2006, I made a premature contribution to my Self Employed 401(k) account, in the belief I can reduce my immediate tax exposure. It actually didn't work out exactly as planned. By making a $3,000 contribution, my Adjusted Gross Income (AGI) dropped by the same amount, resulting in a tax gain of $840 (at 28% marginal tax rate). On the other hand, this move reduced my foreign tax credit by more than $500 (and therefore I'm entitled to $500 more in carryover to future years). In total, the immediate tax benefit for my $3,000 contribution is almost less than 10%.

In response to that, I will be more cautious in deciding my SE 401(k) contribution for the tax year 2006. I will calculate numbers in both ways and decide if and how much I should make my contribution.


Alas, the 2006 tax season is around the corner now! Will I be able to get some generous tax refund again?

This Post Has Received 55 Comments. Share Your Opinions Too.


Personal Finance Guide 101 Commented on January 29, 2007

Hello MM,

Congratulations on reaching your family net worth from $81,000 to $500,000 in 3 and half years.

A good post with detailed information on foreign taxes and US tax laws. All your posts have fully detailed information about everything related to finance/personal finance, thanks for sharing.


2million Commented on January 30, 2007

This doesn't sound right - You don't pay US taxes because you earned the income solely in China, you don't pay China taxes because you earned it outside the country? Can you elaborate on this?

If this is true then anyone with a web business should live in China and get their revenue deposited in US bank accounts and its all tax-free?


Guest Commented on January 30, 2007

Yes I agree with the guy above - that sounds dodgy at best and not in the spirit of the tax laws. The tax laws are written such that you should pay tax in either China or the USA - but you should pay tax. Playing one off against the other? I have seen it done before and it end badly. Be careful trying to manipulate the system, and having a third party doing your taxes does not give you immunity. If they mess up your taxes it is still your responsibility.

- Guest


CPA1298 Commented on January 30, 2007

I think MM is saying that he is 'harvesting' his foreign tax credits by recognizing his side business income. I don't think he's avoiding taxation altogether. I think it is similar to people who are engaged in 'passive' activities that generate losses; those losses are only beneficial if one has a passive activity that is actually generating income. In MM's case, the foreign tax credits wouldn't do him any good if he didn't have some tax-generating income. Does this sound right?


MM Commented on January 30, 2007

CPA1298, you are right. This will not be possible if I don't have a day time job that is being taxed almost twice as much in this side of the Ocean as if I would be taxed in the States.

I did report my business income on my federal tax return, and from IRS's standpoint, I did pay my fair share of the tax on my business income, so there is no tax evasion.

Of course, the near tax-free benefit for the extra business income is up to some limit.


2million Commented on January 31, 2007

Ok - recognizing business income to take advantage of foreign tax credits makes alot more sense.

Dang - guess my new plan of heading to China to avoid taxes is out the window ;-).


joewatch Commented on January 31, 2007

Even though you don't get an immediate tax benefit from your SE 401(k), you do get the great benefit of tax-free growth until withdrawal. It works the same for non-deductible IRAs. IMHO, as long as you can afford it (and it sounds like you can), you should always max-out your contributions to all tax-sheltered accounts including the SE 401(k).


helen Commented on February 5, 2007

May I ask you a question?
If all my salary and bonus is from China, and I
pay more tax in China(than in us).Is it going
to help if I try my best to increase my US income?(like investment income, assuming all gains, no lose)I think in that way, my foreign tax credits don't need to sit there. Then tax I should pay for gains will be offset by foreign tax credits.


MM Commented on February 12, 2007

Helen, unfortunately, your U.S. based income cannot be used to monetize your foreign tax credit.


remunh qnxbt Commented on November 7, 2007

mfqovpu lajoy hrdgak hmlq dqxaokjym rmadlpqgw zxuflsvtb


CharlesLiede Commented on September 14, 2017

Erythromycin Online more bupropion xl 300


Bennyanymn Commented on September 15, 2017

vardenafil indocin hydrochlorothiazide 25 mg tab


MichaelNub Commented on September 15, 2017

inderal 10 mg azithromycin anafranil


MichaelNub Commented on September 16, 2017

cialis indocin cialis generic tadalafil levitra-canada


MichaelNub Commented on September 26, 2017

advair coupons usa metformin er and metformin hcl


AaronSit Commented on October 11, 2017

wh0cd2457780 abilify medication abilify http://abilify.world buy diflucan diflucan http://buy-diflucan.shop


DannyTok Commented on December 17, 2017

can one buy viagra online
viagra without prescription
safe website buy viagra
viagra without prescription
safe place to order generic viagra
viagra no script
sildenafil generico precio en mexico
viagra no prescription
generic viagra suppliers in south africa


Jameswaymn Commented on December 17, 2017

sildenafil generico reacciones secundarias
viagra without prescription
online purchase of viagra in india
viagra without a doctor prescription
where to order viagra
viagra without prescription
canadian viagra pills
viagra no prescription
20mg levitra vs 100mg viagra


MichaelBed Commented on December 18, 2017

sildenafil generic over the counter
viagra cost
compare prices generic viagra
viagra cost
herbal viagra sale


Coreycip Commented on December 19, 2017

how long does a viagra pill take to work
viagra cost
what pills work like viagra
cheap viagra
generic viagra deals


StaceySwoks Commented on December 19, 2017

cialis and viagra for sale
viagra cheap
free sample of viagra online
viagra cost
most reliable online pharmacy for viagra


ShawnBop Commented on December 19, 2017

buy original viagra
viagra without prescription
cheap viagra in usa
viagra without a doctor prescription
50 mg viagra how long does it last
viagra no prescription
price of levitra vs viagra
viagra without a doctor prescription
cheap viagra uk next day


DavidAtown Commented on December 20, 2017

buy cheap viagra cialis
order cialis online
cialis sale canada
cialis online
cialis tadalafil buy online


Eugeneadape Commented on December 21, 2017

buy viagra cialis line
cheap cialis
cheap cialis next day shipping
buy cialis
afgan pills cialis index


EdwardVof Commented on December 22, 2017

cheap cialis melbourne
order cialis online
cialis sale manila
buy cialis online
buy cialis canada online


Jamesmax Commented on December 23, 2017

buy cheap levitra canada
levitra prices
buy levitra cialis
levitra 20mg
buy generic levitra uk
levitra 20 mg
meds sale levitra
levitra
levitra discount canada


EbonyAmold Commented on December 23, 2017

payday loans no credit
payday loans online no credit check
payday loans no credit check
payday loans online no credit check


NormaFaw Commented on December 24, 2017

payday loans no credit check
payday loans no credit
payday loans no credit
payday loans no credit check


Gregoryfeard Commented on December 26, 2017

buy viagra in spain
buy viagra online pharmacy
would half viagra pill work
buy viagra online
comprar viagra online net
cheap viagra online
viagra buy bangalore
viagra online
viagra generics names


MichaelexCar Commented on December 26, 2017

viagra 100 mg versus levitra 20 mg
buy viagra online pharmacy
can i take half of a viagra pill
viagra online
pfizer annual sales viagra
online viagra
wirkung viagra 100 mg
viagra online pharmacy
ordering viagra from canada


Eliseolex Commented on December 26, 2017

cheap cialis online australia
cialis price
cheap viagra cialis levitra
cialis prices
can cialis pills cut
cialis cheap
do you need a prescription to buy cialis
cheap cialis
best website buy cialis


ShirleyJally Commented on December 27, 2017

real money casino
п»їcasino online
п»їcasino online
п»їcasino online


EdwardJug Commented on December 28, 2017

free casino games
real money casino
online casino
online casino


Myrnareild Commented on December 29, 2017

free casino games
casino games
casino games
casino games


FrankEvato Commented on December 30, 2017

real money casino
real money casino
free casino games
online casino


Paulineled Commented on December 30, 2017

real money casino
casino online
online casino
casino online


Teresajew Commented on December 30, 2017

casino games
free casino games
real money casino
casino games


BarbaraRep Commented on December 31, 2017

online casino
free casino games
real money casino
real money casino


Jackiecouby Commented on January 2, 2018

live online casino baccarat
casino online
best signup bonus bingo
online casinos
online casinos echeck deposits


Judithcruip Commented on January 6, 2018

free casino games no download
slots casino
casino free games
free slots no download no registration


WilbertGom Commented on January 6, 2018

casino slots
slots games
free slots games
online casino games


Mariamus Commented on January 7, 2018

free slots no download
online casino real money
free slots online
free slot games


PamelaWhipt Commented on January 10, 2018

loans no credit
payday loans online no credit check
loans no credit check
payday loans no credit check


BrianFak Commented on January 11, 2018

autocad r14 full download
autocad student
where to buy autocad 2014
autocad student
autocad india price list
auto cad
autocad product key 2012
autodesk
autocad 12 product key


Josephrew Commented on January 11, 2018

autocad gratis descargar
autocad software
serial number autocad lt 2011
autocad download
autocad download mac
cad
autocad 64 bit full
autodesk autocad
buy autocad 2012


DebraCrank Commented on January 12, 2018

payday loans online no credit check
payday loans no credit
loans for bad credit
loans no credit check


JamesGedly Commented on January 14, 2018

price of a viagra tablet
viagra online
is there pills like viagra for women
order viagra online
how to buy viagra online in canada
lowest prices on viagra
price viagra tablet
cheap viagra
sildenafil lowest price


EdwardNiz Commented on January 17, 2018

cheap cialis in uk
cialis prices
where to order cialis online safe
cialis prices
buy cialis online with mastercard
generic cialis
buy cialis walmart
cialis price
many pills cialis


PatrickFeado Commented on January 18, 2018

buy cialis in usa
cheap cialis
cialis cheap paypal
cialis online
cialis canada buy
cialis cost
cialis generic cheapest
cialis tablets
how to buy generic cialis online


ParisBom Commented on January 18, 2018

buy autocad uk
autodesk inventor
autocad architecture for mac student
inventor
autocad 2011 serial number
auto cad
buy autocad 2017 online
download autocad
downloading autocad 2011


Logannup Commented on January 18, 2018

autocad architecture 2012 for sale
autodesk 360
autocad online projects
autodesk 360
activation codes for autocad 2017
autocad download
download autocad 2011 64 bit
autocad download
autocad delete key not working


Jamesgrert Commented on January 19, 2018

download autocad lt 2000i
autodesk inventor
2011 autocad serial number
autodesk revit
autocad serial number
download autodesk autocad
autocad car design software
download autodesk autocad
autocad 2011 software for sale


Thomasjed Commented on January 19, 2018

autocad online jobs
autodesk revit
autocad 2011 cd key serial number
autodesk student
cd key autocad 2011
download autocad
autocad 5 user license
autocad
download autocad


Jimmypaurb Commented on January 20, 2018

cialis canada mail order
cialis online
buy cialis online overnight
buy cialis
can you buy cialis mexico
tadalafil generic
cheap cialis online pharmacy
tadalafil generic
cheap cialis in sydney


PamelaDex Commented on January 21, 2018

list of all harrah's casinos
real money casino online
slots for money online
list of all harrah's casinos


Add Your Comments










Remember personal information?




(It will take a few moments for your comment to be published. Please do not close the window until then.)


Read More ... 92 Posts In The Same Category










This page was last rebuilt at January 21, 2018 03:49 AM PST. (696 Words)
 

RSS FEED





PERSONAL FINANCE BLOGS I READ

Consumerism Commentary
Get Rich Slowly
My Money Blog
All Financial Matters
The Simple Dollar






.



Copyright 2003-2014, PFBlog.com. All Rights Reserved. (Privacy Policy)