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The Bill to block tax increased has been signed into law by President Obama on Dec 17th, 2010, which has extended the tax cuts for 2 more years.

There are not too many significant tax changes from 2009 into 2010. However, the IRS has heightened tax compliance among US taxpayers with foreign financial assets. We would like to bring to your attention the new disclosure requirement for 2010.

Foreign Financial Assets Reporting ¨C New and Important
The Foreign Account Tax Compliance Act (FATCA) became effective for tax years beginning after March 18, 2010, taxpayers with specified foreign financial assets will have to file a disclosure statement with their income tax return if the value of all such assets is greater than $50,000.

This disclosure is in addition to the Report of Foreign Bank and Financial Accounts (FBAR), which is filed with the Treasury Department separately by June 30 each year.

A ¡°specified foreign financial asset¡± is:

  1. any depository or custodial accounts maintained by a foreign financial institution:
  2. any stocks or securities issued by foreign persons;
  3. any other financial instrument or contract held for investment that is issued by or has a counterparty who is not a U.S. person;
  4. any interest in a foreign entity.

The minimum penalty for failing to submit the required disclosure with the income tax return is $10,000 per tax year. The penalty increases by $10,000 for each 30-day period following notification from the Treasury Department, with a maximum penalty of $50,000.

There also exists a new accuracy related penalty of forty percent on underpayment of tax attributable to a taxpayer¡¯s failure to disclose interest in foreign bank accounts. (Sec. 6662(j)).

However, it is not clear yet whether the IRS will create a new form on which this disclosure will be made or whether it is up to the taxpayers to make the disclosure in the way they deem best.

Foreign Earned Income Exclusion and Foreign Housing Exclusion:

  • Maximum Foreign Earned Income Exclusion (FEIE) has been increased
    from $91,400 to $91,500.
  • Foreign Housing expense-base amount has also been increased from $14,624 to $14,640.
  • 2010 maximum foreign housing expenses can be claimed for living in most cities in China has been increased from $27,420 to $27,450.
  • 2010 limits on foreign housing expenses for living in high-cost localities, Shanghai and Hong Kong remain the same as 2009, but has been much increased for living in Beijing. Here is the daily and annual limit set as following:

Location             Daily limitation        Annual limitation       Maximum Exclusion
                           US$                        US$                          US$
Beijing:               195.07                    71,200                      56,560
Shanghai:          156.17                     57,001                     42,361
Hong Kong:        313.15                   114,300                     99,660

Use Form 2555 to report your foreign earned income and foreign housing exclusion. You can download a blank from the IRS website: http://www.irs.gov/pub/irs-pdf/f2555.pdf, and refer to the filing instructions: http://www.irs.gov/pub/irs-pdf/i2555.pdf.

Please find out more 2010 US federal income tax update in IRS Publication 17 ( http://www.irs.gov/pub/irs-pdf/p17.pdf ) and the IRS newsletter http://www.irs.gov/newsroom/article/0,,id=217792,00.html.

For 2010 tax rate and quick facts, please check out http://1040-cn.com/forms_publications.html.

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State Administration of Taxation
Beijing Local Taxation Bureau
Shanghai Taxation Bureau