Tax Guide for US Expats Living and Working in Guam
Who Is Liable For Income Taxes In Guam
Guam residents are subject to tax on all income, regardless of source. An individual who is not a citizen or permanent resident of the United States or a resident of Guam is subject to tax on Guam-source income only.
A nonresident alien is subject to Guam tax on income that is effectively connected with a Guam trade or business and on Guam source fixed or determinable, annual or periodical gains, profits and income (generally investment income, including dividends, interest and rental income).
Foreign nationals who are not lawful U.S. permanent residents (that is, who do not hold green cards) are considered Guam residents if they meet both of the following requirements:
- They are present in Guam for at least 31 days during the current year.
- They are deemed present in Guam for at least 183 days during a test period of three consecutive years, including the current year, using a formula weighted according to the following percentages:
— Current year: 100.00%.
— 1st preceding year: 33.33%.
— 2nd preceding year: 16.67%.
Among the exceptions to the test outlined above are the following conditions:
- An individual may claim to be a nonresident of Guam in the year of departure from Guam by having a closer connection to a foreign country.
- Under certain circumstances, it may be beneficial for an individual to be considered a resident of Guam for income tax purposes. If certain conditions are met, an individual may, for tax purposes, elect to be a resident in the year of arrival (first-year election).
Because Guam is a U.S. territory, U.S. citizens and permanent residents with Guam income are taxed somewhat differently from nonresidents. At present, Guam is using the U.S. Internal Revenue Code in “mirror-image” fashion, with the word “Guam” substituted for “United States” wherever it appears. Citizens and permanent residents of the United States who are bona fide residents of Guam must file their individual tax returns with the government of Guam instead of with the U.S. Internal Revenue Service.
For tax years ending after 22 October 2004, citizens or permanent residents of the United States are generally considered bona fide residents of Guam if they satisfy both of the following conditions:
- They are physically present in Guam for 183 days or more during the tax year.
- They do not have a tax home outside Guam during any part of the tax year and do not have a closer connection to the United States or a foreign country during any part of the tax year.
Income subject to tax
Employment income. Gross income and deductions in Guam are determined under the same rules as those in the United States. Taxable income from personal services includes all cash wages, salaries, commissions and fees paid for services performed in Guam, regardless of where the payments are made. In addition, taxable income includes the value of an employee’s expenses paid by the employer and the fair-market value of noncash goods and services provided by the employer, including housing and vehicles.
A nonresident alien who performs personal services as an employee in Guam at any time during the tax year is considered to be engaged in a Guam trade or business. A limited exception to this rule applies to a nonresident alien performing services in Guam if the services are performed for a foreign employer, if the employee is present in Guam for no longer than 90 days during the year and if compensation for the services does not exceed US$3,000.
Compensation is considered to be from a Guam source if it is paid for services performed in Guam, regardless of where the income is paid or received. If income is paid for services rendered partly in Guam and partly in a foreign country and if the amount of income attributable to services performed in Guam cannot be accurately determined, the Guam portion is determined based on a workday ratio. A Guam or foreign employer is responsible for withholding Guam income tax from payments made to nonresident alien employees.
Educational allowances provided by employers to their local or expatriate employees’ children 18 years of age and younger are taxable for income tax and social security tax purposes.
Self-employment and business income. Every Guam resident who operates a business is taxable on the worldwide income of the business. Nonresidents are taxable on business income from Guam sources only. The rules for the computation of an individual’s taxable income from a business are similar to the U.S. rules. A 4% gross receipts tax applies on all income earned by an individual in connection with a business in Guam, with certain exceptions, including income from wholesale sales, real property sales and export sales.
Investment income. In general, dividend and interest income of residents is taxed at the ordinary rates. Non-resident alien individuals are subject to special rules.
Dividends received by individuals from domestic corporations and “qualified foreign corporations” are treated as net capital gains for purposes of applying the capital gain tax rates for both the regular tax and alternative minimum tax. Consequently, dividends are taxed at a 15% rate (0% for taxpayers with income in the lower brackets). To qualify for the 15% rate, the shareholder must hold a share of stock for more than 60 days during the 120-day period beginning 60 days before the ex-dividend date.
Guam-source investment income received by nonresidents is ordinarily taxed on a gross basis at a flat 30% rate, which may be withheld by the payer.
Portfolio interest received by nonresidents is exempt from the 30% tax rate. An election to tax rental income on a net basis is available.
Directors’ fees. In general, directors’ fees are considered to be earnings from self-employment. A 4% gross receipts tax applies to directors’ fees earned in Guam.
Taxation of employer-provided stock options. The taxation of employer-provided stock options depends on whether the stock option plan is qualified (meets certain restrictions) or nonqualified. Options received under a qualified plan are not taxed at the time of grant or at the time of exercise. Gains derived from the sale of stock acquired under a qualified plan are subject to tax as a capital gain. An employee who receives a nonqualified stock option is subject to tax at the time of the grant on the difference between the fair market value of the option and the amount paid, if any, for the option. If the nonqualified stock option does not have a readily ascertainable fair market value, then the employee recognizes compensation income at the time of exercise of the option.
Capital gains. Net capital gains are taxed at ordinary rates, except that the maximum marginal rate of tax on long-term gains is 15%. Net capital gains equal the difference between net long-term capital gains and short-term capital losses. Long-term refers to assets held for longer than 12 months. Short-term capital gains are taxed as ordinary income at the rates.
In general, capital gains received by nonresidents from the sale of stock in a Guam company is exempt from the 30% tax rate described in Investment income. Gains received by nonresidents from sales of Guam real property interests are generally considered to be effectively connected income, and special complex rules apply.
Deductions.
Deductions and personal exemptions are allowed under the same rules that apply in the United States. In general, business expenses that are considered ordinary and necessary expenses of carrying on a trade or business may be deducted from gross income. Capital expenditure may not be deducted, but generally may be depreciated over a specified life.
Rates. The applicable Guam tax rates, like the U.S. rates, depend on whether an individual is married and, if married, whether the individual elects to file a joint return with his or her spouse. Certain individuals also qualify to file as head of household. The graduated tax rates listed below apply in Guam for 2011.
Guam also imposes an alternative minimum tax (AMT) at graduated rates on alternative minimum taxable income. For alternative minimum taxable income of up to US$175,000 (after deducting the exemption amount), the applicable AMT rate is 26%. For amounts exceeding US$175,000, the AMT rate is 28%.The primary purpose of the AMT is to prevent individuals with substantial economic income from using preferential tax deductions, exclusions and credits to substantially reduce or eliminate their tax liability. After an individual computes both the regular tax and AMT liabilities, the higher of the two is the final liability.
Nonresidents are taxed on income effectively connected with a Guam trade or business after related deductions at the graduated rates of tax set forth above.
Relief for losses. Business losses not utilized in the year incurred may be deducted from taxable income earned in the 2 years preceding the year of loss or in the following 20 years.
Capital losses are fully deductible against capital gains. However, net capital losses are deductible against other income, up to an annual limit of US$3,000. Unused capital losses may be carried forward indefinitely.
Passive losses, including those generated from limited partnership investments or rental real estate, may be offset only against passive income. Limited relief is available for individuals who actively participate in rental real estate activities. Losses from these activities may offset up to US$25,000 of other income. This off set is phased out for taxpayers with adjusted gross income between US$100,000 and US$150,000, and special rules apply to married individuals filing separate tax returns. Disallowed losses may be carried forward indefinitely and used to offset net passive income in future years. Any remaining loss may be used in full when a taxpayer sells the investment.
B. Estate and gift taxes
Guam does not impose estate or gift tax. Non-U.S. citizens and U.S. citizens who obtained their citizenship by birth or naturalization in Guam are subject to U.S. estate and gift tax only on assets located in the United States, not on those located in Guam. U.S. citizens other than those who received their citizenship by birth or naturalization in Guam are subject to U.S. estate and gift taxes on all of their assets, including those located in Guam.
C. Social security
Guam is covered under the U.S. social security system. For 2011, the old-age, survivor and disability insurance component (6.2%) of the social security tax applies to only the first US$106,800 of an employee’s wages. The health insurance component (1.45%) applies to all wages. For 2011, the employee’s portion of the old age, survivor and disability insurance component of the social security tax is reduced by two percentage points (from 6.2% to 4.2%). The employer’s portion of the old-age, survivor and disability insurance component is not changed (remains at 6.2%). The health insurance component is not changed for both employers and employees (remains at 1.45%).
Social security tax is imposed on compensation for services performed in Guam, regardless of the citizenship or residence of an employee or employer. A Guam or foreign employer is responsible for withholding social security taxes from compensation paid to nonresident alien employees.
We have been preparing US income tax returns for US Citizens and permanent residents living in Guam for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Guam and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Guam.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email.