Malaysia and US Expat Taxes

Malaysia is a place where the old and new coexist together in an interesting fashion. It is slowly becoming one of the richer nations in the region.

If you are planning to become a U.S. Expat in Malaysia, or have been one for a while, it’s important to know the tax laws of Malaysia and the potential impact on your U.S. tax return. Expat taxes can be complicated. Fortunately, we have outlined the key points below.

Photo by: amrufm

Taxation in Malaysia

The first thing that you need to know is: who needs to pay taxes in Malaysia. You will be considered a resident for tax purposes, if you fall within any of the following categories:

• You have been present in Malaysia for 182 or more days in a given year;
• If you have present in Malaysia for 182 days during the 6 months preceding or following the tax year; or
• You have been present in Malaysia for 90 days or more in the current tax year and was also present in Malaysia for 90 days or more in any three years out of the previous four years; non-residents.

The good news is that you will only have to report taxes on income derived in Malaysia.

When it comes to income tax, the rates are:

• Employment Income for Residents: 0% – 26%
• Employment Income for Non-Residents: Generally 26%
• Taxation on Interests: Generally none
• Taxation on Dividends: 0% – 26%
• Taxation on Capital Gains: Generally none

Note that Malaysia and the U.S. do not have a social security tax agreement in-place. This means that certain U.S. expats will be required to pay into both social security programs.

How Living in Malaysia Impacts US Taxes

As a U.S. citizen or permanent resident (Greencard), you are required to file U.S. taxes even if you live in Malaysia. Plus, if you have assets in foreign financial accounts (e.g., foreign banks), there are informational reports you may be required to file. For example, U.S. Expats living in Malaysia with $10,000 or more in foreign banks must file the FBAR (now known as FinCen 114).

Fortunately, the U.S. government provides various forms of tax relief that can lower or eliminate U.S. tax obligations:

• The Foreign Earned Income Exclusion – It allows you to exclude a certain amount of income earned outside the U.S.
• The Foreign Housing Exclusion/Deduction – This one relates to additional income that can be excluded for household-related expenses tied to living abroad.
• The Foreign Tax Credit – It allows you to offset foreign taxes paid against U.S. tax obligations.

In most cases, the foreign earned income exclusion is preferable to the foreign tax credit if you live in a country with a lower tax rate than the U.S. (assuming your income is not above the applicable threshold). However, it’s a good idea to speak with an expat tax specialist to discuss the best application of these tax reliefs.

FATCA and Malaysia

The U.S. government is increasingly interested in knowing about the foreign assets held by its citizens and residents. As a result, it has been busy inking deals with other countries whereby foreign financial institutions (FFIs) will be required to:

• Identify accounts of U.S. persons;
• Report certain information to the IRS regarding those accounts;
• Withhold a 30% tax on certain payments to non-participating FFIs and account holders unwilling to provide the required information

As of the publication of this article, roughly 100 countries have either signed intergovernmental agreements with the United States or are in discussions. It is important to know that Malaysia does have a FATCA agreement in-place with the U.S.

If you have any questions regarding your U.S. expat taxes, contact us today. We are here to help.