An American expat who has plans to work in Kenya must choose a health insurance provider, make arrangements for their housing and select a moving company. Yet, on the top of their list of things to do is learn of any potential tax issues that can arise from living in Kenya. There have been a number of questions posed to us from Americans planning on moving to Kenya, including how the Kenyan tax system is structured, the social security benefits and ways to minimize their US expat taxes. Of course they also ask if we are able to provide our expat tax services to them while living abroad. The following summary will provide answers to these questions from our expat tax experts as well as a few others that we thought would be of assistance.
Guide to Filing US Expat Taxes For Americans Living in Kenya
Does Your Firm Provide US Expat Tax Services to Americans Living in Kenya?
We are able to provide the full scope of expat tax services needed to American expats who are living in Kenya.
Are American Expats Living in Kenya Required to File US Expatriate Tax Returns?
Yes, even while living and living in Kenya, an American citizen is required by law to file their tax return with the Internal Revenue Service (IRS) every year. The forms must include all of their earned income for the respective tax year, including that which is derived from foreign employment even when it has already been taxed by the Kenyan Government. The US expat does have the chance to reduce their US expat taxes by using certain tax credits and deductions from the money which was earned in Kenya.
How Can Americans Living in Kenya Minimize US Expat Taxes and Avoid Double Taxation?
The IRS offers a few provisions to American expats that could help with avoiding double taxation on income that was earned in Kenya. These provisions include:
• Foreign Earned Income Exclusion (FEIE)
• Foreign Housing Exclusion or Deduction
• Foreign Tax Credit
When an American expat qualifies for FEIE, they may decrease their taxable income earned in Kenya by excluding the first $101,300 for the 2016 tax year. For the 2015 tax year, that amount was $100,800. In order to qualify, the US expat must successfully meet the physical presence test or the bona fide residence test. The physical presence test requires the expat spend at least 330 days of a 365 day period in the foreign country, and have earned a foreign based income. The bona fide resident test is used by a long tem expat, where they have not resided in the US for over a year and have no immediate plans to return.
A US expat who qualifies for FEIE may also be able to exclude certain living expenses from their foreign earned income, such as rent and utilities.
Foreign tax credit or deduction applies to the taxes paid to Kenya on foreign earned income. This may reduce the expat taxes in the same way that US tax credits work. For every dollar of credit, the US tax is reduced by a dollar. The foreign tax credit is limited to the taxes paid to the Kenyan government on earnings which are subject to being taxed by the IRS. In other words, taxes from income that was excluded by FEIE, the foreign housing exclusion or because of a Kenya tax laws cannot be included when calculating the US foreign tax credit.
Who is Considered a Resident of Kenya for Tax Purposes?
An expat who can meet the following criteria is considered a Kenyan resident for the purpose of taxation:
1. Has a permanent home in Kenya and has been present in the country for any part of a particular tax year.
2. Does not own a permanent home in Kenya but does either:
• Has been present in Kenya for more than 183 days during a given tax year
• Has been present in Kenya in each of the two preceding tax years for periods that average 122 days or more for each tax year.
An expat who is leaving Kenya permanently will no longer be classified as a resident.
Is Foreign Income Subject to Taxation in Kenya?
Residents of Kenya are obligated to pay taxes on any earned income regardless of where it was earned. An expat who has met the requirement that deems them a resident will therefore have to include all world wide income earned. Non-resident US expats will only be required to pay taxes on the income that was earned in Kenya.
What are Personal Income Tax Rates in Kenya?
For the 2013 tax year, the national income rates for expats as reported by the Kenyan Revenue Authority (KRA) are as follows:
Annual Earnings in Kenyan Shillings (KES) Applied tax Rate by Percentage
1-121,968 – 10%
121,969-236,880 – 15%
236,881-351,792 – 20%
351,793-466,704 – 25%
466,705 and above – 30%
There is also a personal relief of KES 13,944 that is considered to be tax-free for each individual yearly.
When are Tax Returns Due in Kenya?
Tax returns and taxes must be handed in to the Kenyan Revenue Authority no later than June 30th and there are no extensions available. In cases where the US expat’s employer withheld the appropriate taxes, may not need to file a return. An expert in Kenyan tax law should be consulted by a US expat first to ensure that their obligation to file and pay taxes has already been met. As in the United States, a married expat has the option of filing jointly or separately.
What is the Tax Year-End for Taxpayers Living in Kenya?
As in the United States, the Kenyan tax year is the same as a calendar year, starting on the 1st of January and ending on the 31st of December. This is advantageous for a US expat, as they will not need to prorate income for their US expatriate tax return the way expats in certain other countries need to.
What Income is Considered Taxable Income in Kenya?
An individual is subject to taxation on their income in Kenya if they meet either of these conditions:
• They are a resident during the time in which they were employed, regardless of whether their work was carried out in or outside of Kenya.
• The employer is a resident or has a permanent establishment in Kenya in the case of a non-resident who is living in Kenya.
Employment derived personal income includes director’s fees and cash or non-cash payment, allowances and benefits that arise from employment.
Are Investment Income and Capital Gains Taxed in Kenya? If so, How?
Dividends and interest earned income from an investment in Kenya are subject to a separate withholding tax for the year in which it was received. For a Kenyan resident the tax rates are 5% on dividends and 15% on earned interest payments.
There are certain conditions where an investment income may be exempt from taxation:
- Interest that is earned from a savings account that is held by the Post Office Savings Bank.
- Up to KES 300,000 of the gross interest earned from investments made in savings bonds for an individual. This excludes a 10% withholding tax that is deducted at the source.
- Interest and dividend income earned by a resident from an investment held outside of Kenya.
- Interest that is earned on deposits of up to KES 3 million with a registered Home Ownership Savings Plan (HOSP).
- Capital gains are not taxed in Kenya. Property sales and transfers will have a stamp duty imposed on them at a rate of 4% on an urban property and 2% on a rural property.
What is the Social Security System in Kenya?
Kenya’s social security is a voluntary program where participation is encouraged by the government. Kenya has set-up low risk investments and it is suggested that all residents pay into this social security system starting at the age of 18. To apply, a resident will need to visit the social security fund office. A US expat has the option of just paying into their social security system instead.
Is There the Social Security Agreement or Tax Treaty Between the USA and Kenya?
No, no agreements exist between Kenya and the United States in regards to social security or taxes.
Are there Other Taxes Assessed on Expats Living in Kenya?
Besides the tax on direct salaries and payments made to employees in Kenya, other forms of income are also considered taxable. This includes benefits or taxes that are paid by an employee through their employer. There is no exception for this rule made to a foreign national. Kenya does not impose a capital gains tax, nor gift, wealth or inheritances taxes. They do however require that taxes be paid on income derived from an investment.
What are the FBAR and FATCA Requirements for Americans in Kenya?
Under the Foreign Bank Accounts Report (FBAR) legislation, a US citizen has no choice but to report their bank balances being held in a foreign financial account. This has no bearing on the country in which they reside in. If the expats bank account balance is in excess of $10,000 they are obligated to file Form FinCEN 114. If this form is not filed before the June 30th deadline, the expat will be subjected to a large fine. It is important to understand that no extensions are offered for filing this form.
The Foreign Account Tax Compliance Act (FACTA) is also US legislation which requires that financial institutions and US citizens around the world report bank balances. For example, a US citizen must file the FATCA form 8938 if the aggregate value of specified foreign financial assets is $200,000 or more on the last day of the tax year. If the balance reaches $300,000 or more at any point in the year, this must also be reported. Married expats will have a higher threshold to meet before being subjected to this tax filing requirement. For those expats who do qualify, they must file a completed Form 8938 along with their tax return.
Do You Need Help With Filing Expat Tax Returns in Kenya?
If you are in need of additional help with understanding and filing your US expat tax return while living in Kenya, do not hesitate in calling an expert on US expat tax laws and regulations. We will be happy to assist you with your various tax needs.