Living in Malaysia has a wealth of upsides, from the thriving urban sophistication of Kuala Lumpur to the beautiful beaches and islands nearby. However, one of the downsides of being an American living in Malaysia is having to juggle both US and Malaysian tax returns. Here’s what you need to know.
US expat filing obligations
All Americans who earn at least $10,000 a year, or just $400 of self-employment income, are required report their worldwide income on a federal tax return wherever in the world they live.
While in theory Americans living overseas are still liable to pay US taxes on their worldwide income, the good news is that there are two major exclusions available that take most American expats out of US tax liability. While which you claim depends on your personal circumstances; they do need to be actively claimed when you file your federal return.
The first is the Foreign Earned Income Exclusion, which allows Americans living and earning abroad to exclude the first around $100,000 of their income from US tax liability. It doesn’t matter whether your income is from employment or self employment. To claim the Foreign Earned Income Exclusion, you have to prove either that you are a permanent resident abroad (perhaps using domestic utility bills, or Malaysian tax or residency evidence), or that you spent at least 330 days outside the US in a 365 day period that overlaps with the tax year.
The second exclusion is the Foreign Tax Credit, which allows Americans to claim a $1 tax credit for every dollar of tax paid to a foreign government. This is a better option for Americans paying tax in Malaysia at a higher rate than the US income tax rate, as if you claim more tax credits than your US tax liability you can carry the excess credits forward for future use.
Extra US filing requirements for expats
Americans who have a minimum aggregate total of $10,000 in foreign bank or investment accounts (including accounts that they have an interest in or signatory authority over) at any time during the tax year also have to file a Foreign Bank Account Report, or FBAR, to report them.
Also, Americans living overseas who have assets worth over $200,000 (not including tangible assets such as property and cars) have to to declare them by filing form 8938 with their tax return, as required by FATCA (the Foreign Account Tax Compliance Act).
Due to the extra filing requirements many US expats face, including claiming exclusions and filing FBARs, while any tax due still needs to be paid by April 15th, expats have until June 15th to file. A further extension to October 15th can be requested if required.
FBARs meanwhile should filed online directly to FinCEN (so not to the IRS), however the filing date from 2017 is April 15th with an automatic extension applied until October 15th, leaving this later date as the actual deadline.
Penalties for not filing, or for incomplete or inaccurate filing, are steep, particularly penalties relating to FBAR. Worse still, around 200,000 foreign financial institutions (including banks) are currently reporting their American account holders to the IRS, including details such as account balances, and the Malaysian government is exchanging taxpayer information with the IRS. This means that the IRS is aware of which Americans in Malaysia are and aren’t filing.
For Americans living overseas who weren’t previously aware of their filing obligations however, there is an IRS amnesty program called the Streamlined Procedure that allows you to catch up and claim any exclusions without facing any penalties. In contrast, if the IRS contacts you before you have caught up, you may not be able to claim the exclusions mentioned above.
To catch up using the Streamlined Procedure, you have to file your last three tax returns and last 6 FBARs (where applicable), pay any taxes due, and certify that your previous non-compliance was non-willful.
The Malaysian tax year is the calendar year like the US tax year; however, Malaysian returns are due on either April 30th or June 30th depending on your residence and employment status. Tax returns can be filed entirely online. The Inland Revenue Board of Malaysia (the Malaysian equivalent of the IRS) has an English language website, and if your situation is straightforward, you should be able to file online yourself. As you input your income and expenses, the forms calculate tax due automatically.
Malaysian residents are taxed on a sliding scale up to a maximum of 28%. Individuals are generally considered residents if they spent at least 182 days in a calendar year in Malaysia.
Malaysia has a territorial tax system, and so only taxes income sourced or paid in Malaysia. There is no capital gains tax, other than on property, which is taxed at a flat rate of 5% of any profit made in the sale. The US and Malaysia do not currently have a tax treaty, and neither a social security tax agreement.
We strongly recommend that if you have any doubts about your tax situation as an American expat living in Malaysia, that you contact a US expat tax expert for some advice.
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