Foreign Health Tax and Social Security Tax


L

Larry Israel

Although I am a long-term foreign resident, this is the first year that
the following question might affect the tax.

A US citizen residing in a foreign country and employed by a foreign
company has to pay income tax, health insurance tax, and social security
tax. The latter two are only paid on income up to a certain amount. The
medical services you get from the health tax are the same for everybody,
even those who were had no income to pay on. Social Security payments
are based on years worked, and not on income earned. There is no Social
Security totalization agreement with the US.

Now for the question. Are these taxes considered as taxes that can be
used for the foreign tax credit? Is the health tax considered as a valid
expense for calculating the personal deduction in figuring the US tax?
 
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D

D. Stussy

Larry Israel said:
Although I am a long-term foreign resident, this is the first year that
the following question might affect the tax.

A US citizen residing in a foreign country and employed by a foreign
company has to pay income tax, health insurance tax, and social security
tax. The latter two are only paid on income up to a certain amount. The
medical services you get from the health tax are the same for everybody,
even those who were had no income to pay on. Social Security payments
are based on years worked, and not on income earned. There is no Social
Security totalization agreement with the US.

Now for the question. Are these taxes considered as taxes that can be
used for the foreign tax credit? Is the health tax considered as a valid
expense for calculating the personal deduction in figuring the US tax?
It appears to be an income-based tax, so I would say yes. I compare it to
California's SDI, which is accepted as a state income tax for purposes of a
deduction under IRC 164.
 
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R

Robert Daniels

D. Stussy said:
It appears to be an income-based tax, so I would say yes. I compare it to
California's SDI, which is accepted as a state income tax for purposes of
a
deduction under IRC 164.
It might help to know which country is involved, because tax treaty terms
could affect the answer. In the absence of a treaty, one looks to IRS
Regulations Sec. 1.901-2 to see whether a foreign tax is creditable against
regular tax (AMT rules may differ) as an "income, war profits or excess
profits tax." See in particular Regs. Sec. 1.901-2(a)(ii)(C), which says: "A
foreign levy imposed on individuals to finance retirement, old-age, death,
survivor, unemployment, illness, or disability benefits, or for some
substantially similar purpose, is not a requirement of compulsory payment in
exchange for a specific economic benefit" [so could qualify as a "tax"] "as
long as the amounts required to be paid by the individuals subject to the
levy are not computed on a basis reflecting the respective ages, life
expectancies or similar characteristics of such individuals."

These "social insurance" taxes on income wouldn't be creditable vs. income
tax if there's a social security totalization agreement with the US -- but
you've indicated there is no such agreement involved here.
 

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