IRS or IRAS: Who's Taxing You Now? (Part II)
By Cheri Mersey

Last month in IRS or IRAS: Who's Taxing You Now? (Part I) we talked about how Singapore taxes are determined, procedures for filing your Singapore income tax return, and the ways in which you can pay your taxes once you have been assessed by the IRAS.

This month's article will address the impact that those Singapore taxes have on your U.S. return and will answer the question of whether you are being taxed twice on the same income.

Before we get to the topic at hand, however, I wanted to briefly mention the Not Ordinarily Resident (NOR) Scheme which was announced by the Singapore government in May 2002. Under the NOR Scheme, a qualified individual may (among other things) elect to apportion his Singapore employment income using the “days in and days out” basis which could, potentially, lower his Singapore income tax liability. Details of the NOR Scheme can be found at http://www.iras. gov.sg/data/etax/attachment/circular_on_NOR_Scheme.pdf, however, it is worthy to note that an individual will only qualify for the time apportionment concession if, in a given year, he has spent at least 90 days outside Singapore for business reasons.

Returning to the main topic of this month's article, then, let us take a look into how Singapore taxes are taken into account on your U.S. return.

You are probably familiar with the fact that the U.S. allows U.S. citizens and green card holders to exclude from income up to $80,000 of their foreign earnings as well as to take a deduction for much of the foreign housing costs which they incur while living abroad. These exclusions are commonly known as the Section 911 exclusions after the section of the Internal Revenue Code under which they are granted.

Were it not for these exclusions, figuring out how much foreign tax credit you could take for the Singapore income taxes which you pay would be relatively easy for the simple reason that Singapore tax rates are generally lower than U.S. tax rates.

Let's take an example (from this point forward, all figures will be stated in US dollars unless otherwise noted):

Assume John Smith (a single individual) earned $200,000 working in Singapore for the year 2002 and did not qualify for the NOR scheme. Although $200,000 may seem high, remember that foreign earnings include not only your wages, but many other types of payments made by your employer as well, such as housing costs, cost of living allowances, car allowances, children's tuition, club membership fees and the cost of home leave air tickets.

Under this scenario, John's Singapore income tax liability would be $30,628 (S$53,600) and his US tax liability (before taking into account any exclusions or tax credits) would be $55,123.

Since John's U.S. tax ($55,123) is higher than his Singapore tax ($30,628), John would be entitled to take a credit against his U.S. taxes for the full amount of his Singapore taxes and would, therefore, only pay $24,495 ($55,123 - $30,628) to the IRS.

Unfortunately (or fortunately as you will see shortly), the exclusions which I mentioned earlier complicate the calculation of the credit; the reason being that you cannot take a credit for foreign income taxes paid on earnings which you excluded from tax.

Continuing on with the above example, assume that John's exclusions amounted to $90,000 ($80,000 general exclusion plus $10,000 housing exclusion). John would still have the same Singapore income tax liability ($30,628), however because his U.S. taxable income is reduced by $90,000, his U.S. tax liability (before credits) would drop down to $25,005 (from $55,123).

Here's what John's U.S. tax computation looks like up to the point of calculating his foreign tax credit:

Foreign Earnings............................................. $200,000
Exclusions ........................................................(90,000)
Adjusted Gross Income.....................................110,000
Standard Deduction.............................................(4,700)
Personal Exemption.............................................(3,000)
Taxable Income................................................$102,300

Tax liability before foreign tax credit..................$ 25,005

Consequently, since John's U.S. taxes ($25,005) no longer exceed his Singapore taxes ($30,628), a complication arises in determining the amount of foreign taxes which John can take as a credit against his U.S. taxes.

So now let's calculate the foreign tax credit by only allowing a credit for that portion of John's earnings which were not excluded from tax. The formula is:

Foreign earnings not excluded x foreign taxes paid or accrued = foreign tax credit allowed
Total foreign earnings

or

$110,000 x $30,628 = $16,845
$200,000

Therefore John's U.S. tax liability, after the credit, is only $8,160 ($25,005 - $16,845).

Now let's look at the two scenarios side by side:

Singapore Tax US Tax Total Tax
Tax without exclusions
$30,628
$24,495
$55,123
Tax with exclusions
30,628
8,160
38,788

As you can see, while the exclusions complicate the computation of the allowable foreign tax credit, in the end, the US taxes are substantially reduced as a result, making it worth the while to take them.

So are you being taxed twice on the same income? The answer is “no” in both cases – you're just paying to the IRS the additional amount caused by the U.S. having higher tax rates than Singapore.

Following on this topic, next month's article will take a closer look at Section 911, the debates which were waged both in support of (and against) eliminating it earlier this year, and the risk that Congress may yet still decide to eliminate the exclusions in the near future.



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