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?
Foreign Health Tax and Social Security Tax
May 18, 2009
2 Replies
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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