Malaysia Taxes for US Expats: Everything You Must Know

Living as an Expat in Malaysia

Malaysia is an ideal destination for any expat interested in channeling their inner adventurer. This coastal nation on the Strait of Malacca is home to some of the most beautiful beaches in the world. It also has flourishing jungles that are great for hiking and exploring.

Moving to Malaysia can also help expats make their retirement earnings go much further, as the nation has a very low cost of living. According to some estimates, Malaysia’s cost of living is one-fourth the cost of living in the United States. 

For Americans working in Malaysia, filing taxes used to be complicated. Fortunately, it is much easier — thanks to Greenback Expat Tax Services and our country guides for expat taxes. So what is the income tax rate in Malaysia, and what is the tax rate for foreigners in Malaysia? 

Malaysia at a Glance

US Expat Taxes in Malaysia

Under US tax law, Americans who are working abroad in Malaysia and those who have retired there still have to pay US federal taxes because the US engages in what is known as citizen-based taxation.

However, you’ll also have to pay taxes to the Malaysian government because they use what’s known as residency-based taxation. Under a residency-based taxation program, you would only pay income taxes to a nation if you have established tax residency there. 

So, whether you are working in Malaysia or have chosen to spend your golden years there, you will have to pay taxes to both the US and the Malaysian government.

The good news is that there are some excellent programs to help you reduce how much you are taxed on your foreign-earned income. Additionally, Malaysia has some pretty favorable tax laws for expats that can help you further lower your tax liability. 

Who Has to File Taxes in Malaysia?

Even if you do not meet Malaysia’s tax residency requirements, you still have to file an annual income tax return if you generate any income from activities in Malaysia. 

Malaysia, like the United States, follows the standard calendar tax year, which runs from January 1 to December 31. The filing deadline is April 30. 

Failing to file by the set deadline could cause you to incur late fees or other penalties. Repeated offenses can lead to escalating fines and more severe penalties. Therefore, it is vital that you file all tax documents before the set deadline.

We recommend filing your tax documents as early as possible. This will give you ample time to correct any issues or make amendments before the deadline. 

Who Qualifies as a Tax Resident in Malaysia?

Malaysia has a straightforward approach to determining whether you are a tax resident or not. If you reside in Malaysia for at least 182 days during a given tax year, you will be taxed as a resident. Otherwise, you will be taxed at a higher rate.

It is important to note that the United States has different requirements. While meeting Malaysia’s requirements will give you access to a lower income tax bracket, you cannot take advantage of US programs like the Foreign Earned Income Exclusion (FEIE) credit unless you meet the IRS’s residence requirements.

In order to assess whether you are a resident of a foreign nation for tax purposes, the IRS will use one of two tests: the bona fide residence test or the physical presence test. You must meet all three criteria of at least one test to qualify for FEIE credits.

The requirements of the physical presence test are as follows:

• You have foreign income
• You have been physically present in Malaysia for 330 or more days over any 12-month period over the last two years
• You have established Malaysia as your tax home

The tax home and 330-day rules can be murky, so let’s break that down a bit.

To establish a tax home in Malaysia, you must have taken steps to integrate into society. For instance, you might have signed a long-term lease on an apartment, bought a house or condo, or purchased a vehicle. You do not have to sell your US residence, but you cannot maintain it as if it’s your primary dwelling.

For the 330-day requirement, the IRS will examine where you lived over the previous two years. 

For instance, suppose that you resided in Malaysia for at least 330 days between June 1, 2022, and May 31, 2023. However, for the remainder of 2023, you alternated between the US and Malaysia. As long as you meet the other two physical presence test criteria, you could be classified as a Malaysian resident for tax purposes for the 2023 tax year (filed in 2024). 

The alternative method for establishing Malaysian tax residency is the bona fide residence test. This test is nearly identical to the physical presence test, except that it replaces the 330-day requirement with different criteria. 

Specifically, you must establish that you plan to stay in Malaysia for an indefinite length of time. You could demonstrate this by taking a long-term job, selling your US home and purchasing property in Malaysia, or making some other indefinite commitment. 

What Types of Taxation Does Malaysia Have?

Malaysia’s primary form of taxation is an income tax. While Malaysia has a social security program, expats do not have to pay into this program. Likewise, only citizens and permanent residents have to pay capital gains taxes. 

Therefore, as an expat, you will only have to pay income taxes on funds derived from employment in Malaysia, such as:

• Wages
• Salary
• Leave pay
• Bonuses
• Gratuities
• Allowances

Malaysia, like many nations, uses a variable tax bracket system that scales based on income. The Malaysia tax brackets are as follows:

If you are deriving income from activities in Malaysia but are not a tax resident, you will be taxed at a rate of 30%.

Does the US Have a Tax Treaty with Malaysia?

No, there is no Malaysia-US tax treaty. As such, you may be subject to double taxation. 

Tax treaties are designed to prevent US citizens from paying income taxes to both their host nation and the United States. Without a tax treaty, you will have to explore other programs to reduce your tax liability and avoid double taxation.

Fortunately, Malaysia will only tax expats on income generated from activities conducted in the country. Therefore, a pension or other income originating from outside of Malaysia is not subject to Malaysian income tax. 

Does Malaysia Have a Totalization Agreement with the US? 

No, there is no Malaysia-US totalization agreement. Totalization agreements were created to prevent expats from paying into both US Social Security and comparable institutions managed by their host nations. 

Malaysia does have a social security program, but it does not require noncitizens to pay into it. As such, you will not be subject to double taxation for social security programs, even though no totalization agreement is in place. However, US citizens living in Malaysia will still have to continue paying into the US Social Security program.

What Tax Forms Do Americans Living in Malaysia Have to File?

Taxes for foreigners in Malaysia will require specific forms that will vary based on your unique financial situation and your assets. These forms might include:

• Form 5471: Discloses ties to certain foreign corporations
• Form 2555: Foreign Earned Income Exclusion
• Form 1116: Foreign Tax Credit
• Form 8938: Discloses ownership of specified foreign assets

You must also file a standard Form 1040 to document taxable income. 

What Tax Deductions Are Available for Americans Living in Malaysia? 

You may be eligible for three primary deductions when it comes to income tax in Malaysia: the Foreign Earned Income Exclusion, the Foreign Tax Credit, and the Foreign Housing Deduction.

The FEIE allows you to exclude a set amount of foreign-earned income from US taxation. This limit is adjusted annually to account for inflation. For the 2023 tax year, the FEIE limit is $120,000. 

Suppose that you earned exactly $120,000 from your job in Malaysia in 2023; under the FEIE, all of this income could be exempt from US taxation, provided that you met the bona fide residence or physical presence criteria outlined above. 

Those same criteria are used to determine eligibility for the Foreign Tax Credit and Foreign Housing Deduction. The former allows you to claim credit for certain taxes paid to the Malaysian government. The latter allows you to exclude or deduct reasonable housing expenses from your US return.

Cumulatively, these three programs can significantly lower your overall tax liability. 

Navigating Tax Compliance for US Expats in Malaysia

While this guide can certainly provide you with a better understanding of taxes for Americans living abroad in Malaysia, the process of filing your taxes can be tedious, time-consuming, and frustrating. Why go through the hassle of filing your expat taxes on your own when you don’t have to? Let us take the burden off your shoulders and handle your Malaysia expat taxes for you.

Contact us, and one of our customer champions will gladly help. If you need very specific advice on your specific tax situation, you can also click below to get a consultation with one of our expat tax experts.