U.S. Income Tax for Expatriates, Nonresidents & US International Tax Matters
US IRS rules, regulations and laws, for US Citizens, Americans, green card holders, and nonresidents living abroad or moving to the US or out of the US.... valuable information on IRS rules concerning U.S. expatriates and their tax returns, and tax planning.... by an experienced International Tax Attorney
The IRS says it is not bound by oral advice. Ignoring that rule, we did received the statement below from an IRS agent by email.
Digital currency like Bitcoin would only be reportable if it is held in account with a financial institution or someone acting as a financial institution. It is digital currency held in a digital wallet, not in a financial institution. The digital wallet is not a foreign financial account. In that form. it is not reportable on FBAR. Need FBAR help, email an experienced tax attorney with your questions at firstname.lastname@example.org
This is often called the California Safe Harbort Rule for Expatriates.
It is often difficult to give up your obligation to pay California taxes when starting to work abroad. California is an "Intent State." That California wants to continue to tax you until you show the intent of moving your tax domicile to another country or state. They look at all of the facts and circumstances in retrospect years later to determine if you actually had the "intent" to move your tax residency to another country.
There is a solution to the ambiguities involved with successfully giving up your California residency for tax purposes. That is the Safe Harbor Rule which can be used. Under that rule:
You must remain living and working outside of California for at least 546 days under a contract of employment;
You do not have more than $200,000 in investment income;
You do not return to California more than 45 days during any calendar year.
If you meet these criteria, you are automatically deemed to be a California nonresident for the period you work abroad even though you may still have a California drivers license, voter registration, etc.
It is important to successfully avoid California tax domicile status when living abroad since California does not allow the foreign earned income exclusion or foreign tax credits. If means if you remain a California tax resident a lot of taxes may be due. If you originally move abroad and later move back to California before the 546 days passes you will owe tax returns for all of the years you were claiming this exception as well as any applicable penalties and interest. If California deems you a resident you owe it taxes on your worldwide income.
Some states make it even tougher to give up the obligation to pay state taxes when working abroad. Virigina and New Mexico are just a few.
We can help you avoid continuing having to pay state taxes when you move abroad to work or retire. Contact us if you have questions or concerns at email@example.com. Visit our website at www.taxmeless.com Our US phone is 949-480-1235
Form 5471 must be filed by those who own 10 percent or more of a foreign corporation. It contains information on other US owners, an income statement and a balance sheet. Failure to file it can cause the nonfiler (if caught) to incur a $10,000 penalty from the IRS. You must file form 926 also in the initial year to report your capital contribution to the foreign corporation.
If your foreign corporation is inacive and has less than $100,000 in assets and little if any income you may be eligible to file just page one of form 5471. Read more about the filing requirements and special rules that apply if you have failed to file this form at www.taxmeless.com. Email us with questions at firstname.lastname@example.org . We are attorneys and CPAs with the expertise you need.
If your earnings from whatever source and from anywhere in the world exceed a certain minimum
amount you must file a US tax return with the IRS. Also there are many special forms which must be filed to report foreign financial accounts, foreign corporate or partnership ownership, foreign trusts, foreign gifts and inheritances, and earnings from foreign mutual funds. If you fail to file these forms you can be prosecuted and go to jail. If you file a return you cannot go to jail for failure to pay the taxes due.
READ MORE ABOUT IRS CRIMINAL LAW FOR TAX MATTERS HERE The statute of limitations for filing returns and collecting taxes never runs out if you fail to file a required IRS income tax return. If you need help email Don D. Nelson, US Tax Attorney at Law at email@example.com for a consultation.
If you wages or self employment earnings abroad exceed the foreign earned income exclusion, do not forget the expat housing deduction or exclusion. It allows you to deduct your rent, utilities, maid, and repairs if you rent abroad exceeds a certain minimum amount. The maximum amount that can be claimed varies by the cost of living in various countries.
The housing exclusion applies only to amounts considered paid for with employer-provided amounts, which includes any amounts paid to you or paid or incurred on your behalf by your employer that are taxable foreign earned income to you for the year (without regard to the foreign earned income exclusion). The housing deduction applies only to amounts paid for with self-employment earnings.
Your housing amount is the total of your housing expenses for the year minus the base housing amount. The computation of the base housing amount (line 32 of Form 2555) is tied to the maximum foreign earned income exclusion. The amount is 16% of the maximum exclusion amount (computed on a daily basis), multiplied by the number of days in your qualifying period that fall within your tax year.
Housing expenses include your reasonable expenses actually paid or incurred for housing in a foreign country for you and (if they lived with you) for your spouse and dependents. Consider only housing expenses for the part of the year that you qualify for the foreign earned income exclusion.
Housing expenses do not include expenses that are lavish or extravagant under the circumstances, the cost of buying property, purchased furniture or accessories, and improvements and other expenses that increase the value or appreciably prolong the life of your property.
You also cannot include in housing expenses the value of meals or lodging that you exclude from gross income (under the rules for the exclusion of meals and lodging), or that you deduct as moving expenses.
Also, for purposes of determining the foreign housing exclusion or deduction, your housing expenses eligible to be considered in calculating the housing cost amount may not exceed a certain limit. The limit on housing expenses is generally 30% of the maximum foreign earned income exclusion, but it may vary depending upon the location in which you incur housing expenses. The limit on housing expenses is computed using the worksheet on page 3 of the Instructions for Form 2555.
Additionally, foreign housing expenses may not exceed your total foreign earned income for the taxable year. Your foreign housing deduction cannot be more than your foreign earned income less the total of your (1) foreign earned income exclusion, plus (2) your housing exclusion.
Although the foreign housing exclusion and/or the deduction will reduce your regular income tax, they will not reduce your self-employment tax.
Your housing expenses may not exceed a certain limit. The limit on housing expenses varies depending upon the location in which you incur housing expenses. The limit on housing expenses is computed using the worksheet on page 3 of the Instructions for Form 2555.
By using the “Where’s My Refund?” tool available on IRS.gov and on the official IRS mobile app, IRS2Go, taxpayers can easily find the most up-to-date information about their tax refund. Taxpayers can start checking on the status of their return within 24 hours after the IRS acknowledges receipt of a taxpayer’s e-filed return or four weeks after the taxpayer mailed in a paper return. The system is updated daily, so there’s no need to check more often.
Getting a tax return transcript?
Those who need a copy of their tax return can use the online tool, Get Transcript. It’s free and available on IRS.gov. Taxpayers can view, print or download their tax transcripts for the most current tax year after the IRS has processed the tax return.
Instant answers to tax law questions.
Many tax law questions can be answered quickly when using any of several tools on IRS.gov:
Publication 17 is a comprehensive, encyclopedia-like tax reference tool for individuals.
The IRS Tax Map allows searches by topic or keyword for single-point access to tax law information.
Need to make a payment?
IRS Direct Pay offers taxpayers the fastest and easiest way to pay what they owe. This free online system allows individuals to securely pay their tax bills or make quarterly estimated tax payments directly from checking or savings accounts without fees or pre-registration. See IRS.gov/Payments for information on this and other payment options.
Can’t pay a tax bill?
For taxpayers concerned about a tax bill they can’t pay, the Online Payment Agreement tool can help determine if they qualify for a payment plan with the IRS.
The Offer in Compromise Pre-Qualifier can help determine if a taxpayer qualifies for an Offer in Compromise. An Offer in Compromise is an agreement with the IRS that settles a person’s tax liability for less than the full amount owed.
Questions about an amended return?
The “Where’s My Amended Return?” tool provides the status of an amended tax return, Form 1040X. Taxpayers can check on the current year 1040X and up to three prior years. Allow up to three weeks after filing to check on the initial status, and up to 16 weeks for processing.
When you need professional assistance and guidance we offer a mini consultation by phone or skype where most of your questions can be answered and you can structure your US tax future to your personal benefit. It is subject to the absolute privacy of 'attorney-client" privilege. Email Don Nelson, Attorney at Law at firstname.lastname@example.org or call US 949-480-1235. Visits our website at www.taxmeless.com
As a US citizen (whether living abroad or not) must report foreign assets if the value exceeds certain amounts on their US Income tax return. And hopefully you know dual citizenship does not excuse you from this filing (which can be eliminated is you surrender your US citizenship which also involves complex procedures).
The following list includes some of the more common foreign assets that may have to be reported (and if you do not file the required form you will pay huge penalties)
foreign bank accounts
foreign mutual funds
foreign corporation ownership
foreign stock brokerage accounts
foreign pension plans
foreign insurance with cash surrender value
If you own foreign real estate and it is not rented out and title is in your own personal name it is not reportable on your personal tax return. This may explain why so much money is laundered through the purchase of expensive foreign real estate that sits empty much of the time.
Only some of the forms that may need to be included in your personal tax return include 5471, 8865, 8938, 114, 3520, 3520A, etc. Look them up at www.irs.gov and you are likely to decide your need professional expert help. Write us at email@example.com with questions, and to request assistance or a personal consultation. Don is a US licensed attorney and therefore under the attorney client privilege doctrine talking with him provides complete personal privacy.
The offshore disclosure program instituted by the IRS many years ago allowing expatriates to catch up on the filing of tax returns and foreign asset and bank account reporting forms is ending in
September. The benefit of the program is that it allows taxpayers to avoid some very high penalties and in most cases criminal prosecution. After that date in September, it is likely US expatriates who have not been filing will have to pay high penalties and are in more serious risk of criminal prosecution.
The program is complex and most expatriates need assistance with the forms, tax returns, and entering the program. We have assisted over 200 clients enter the program. If you have questions email us at firstname.lastname@example.org. We are attorneys and everything you tell us is subject to absolute attoreny client privilege. There is an alternative streamlined program that you may also qualify for depending on your factal circumstances.
You have an obligation to keep the IRS informed of your currrent address using their form 8822. If you do not, they can take any action they wish (audit, assessment, etc) and it is valid because you failed to keep them current on your address.
Your tax return can be audited for 3 years after it is filed and six years if you omitt more than 25% of your income.
The statute of limitations on assessing taxes NEVER runs out if you fail to the a US tax return. That means the IRS may make an assessment for any year you failed to file a return and were required to forever.
The statute of limitations for failing to file a foreign bank account report (FBAR form 114) is six years. The criminal and civil penalites are huge and the IRS is currently collecting those penalties and prosecuting non filers who clearly intentionally were hiding their funds and not reporting as income.
Dual citizenship does nothing for you as a US taxpayer. All rules are the same as if you were just a US citizen.
The IRS is currently receiving reports on US taxpayers funds held in foreign banks and stock brokers, etc. from over 78,000 foreign institutions around the world.
If you owe the IRS more than $50,000 in taxes and penalites when you enter the USA they can request the US Customs and Border Protection seize your passport.
The US has no regulations forbidding or making it illegal to own foreign real estate, stocks, or other property abroad including foreign bank accounts. The IRS does have special forms to report ownership on many of these items to the IRS with $10,000 or more penalties for failing to file these required forms.
Owning foreign real estate (so long as it is not a rental or income producing) in your individual name does not have to be reported to the IRS.
The rules and complex and Congress failed to include in the bill a complete explanation of how it is calculated. The IRS will publish guidance soon (we hope) so this tax can be calulated correctly. If you are a shareholder in a foreign corporation what is know todate about this tax on Earnings and Profits is stated below: The new provision states that all taxpayers who are U.S. shareholders of Specified Foreign Corporations (SFC) in 2017 will have an income inclusion to the extent they have allocable undistributed earnings from such corporation. While there is a reduced tax rate applicable to this income, at least a portion of the tax is due in 2017 and the liability must be calculated as part of the 2017 tax filing.
Here are the details of the new provision:
All U.S. shareholders of a SFC must include in their 2017 income their pro-rata share of accumulated post-1986 deferred foreign income. This income will be taxed in a manner that should result in the quoted federal effective tax rate on earnings of:
5% on cash and cash equivalents and,
8% on illiquid assets
The IRS has allowed the taxpayer to elect to pay the tax over an 8 year period, starting with the 2017 return, using a specific weighted installment calculation. However, the entire tax liability or the first installment is due by the original due date of the shareholders tax return.
A taxpayer’s pro-rata share of accumulated post-1986 deferred foreign income is considered Subpart F income. For future taxation purposes, this income generally will be considered previously taxed income. Thus, the future actual cash repatriation of these earnings will not trigger any additional tax consequence as the cash will not be considered taxable income.
What is the definition of a U.S. shareholder for this purpose?
A U.S. person who owns (directly, indirectly, or constructively) 10% or more of the total voting stock.
A U.S. person includes US citizens and residents, domestic partnerships, corporations, estates and trusts.
What is the definition of a Specified Foreign Corporation for this purpose?
A controlled foreign corporation (CFC), or
A noncontrolled foreign corporation that has at least one domestic corporate shareholder.
Calculation of Income Inclusion:
The income inclusion amount is the greater of the shareholders share of the accumulated post-1986 deferred income (Earnings and Profit or E&P) as of November 2* or December 31, 2017. Thus, for all U.S. shareholders of SFCs the accumulated E&P will need to be calculated. This will need to be allocated to pre and post-1986 deferred income as applicable and/or pre and post date of becoming an SFC. If there is an accumulated E&P deficit, there are special rules that will allow U.S. shareholders to aggregate their total allocable E&P from all sources for this purpose, but not below zero.
The effective tax rate is achieved via a mechanical calculation. The U.S. shareholder includes the applicable deferred income (E&P) into income but is allowed a deemed dividend, which when the applicable highest corporate tax rate is applied to the income (currently 35%, since this is for the 2017 tax year) the effective federal rate will be 15.5 or 8% on the income inclusion amount. The ultimate tax paid on the income inclusion may be further reduced in certain circumstances due to available foreign tax credits (primarily C Corporations). Given the mechanism of this calculation, should the shareholder be a U.S. individual, the effective federal tax rate may be slightly higher or lower than those applicable to corporate shareholders. Individual shareholders will also need to review the application of net investment income (NIIT) tax to the deemed dividend based on their facts and circumstance. If NIIT is applicable, an additional 3.8% tax will apply at the federal level.olders of 10% or more of foreign corporations to pay a tax on the accumulated earnings in the corporation at year end.
Passive Foreign Investment Company (PFIC) filing requirements are one of the most complex tax matters on your personal tax return. Read the article below which lays out the US tax treatment of various items in Canada which do not exist under US tax law and often end up being PFICs and are taxable in the US. Click the link below for details.
Your vote counts! Did you know that many U.S. elections for house and senate seats have been decided by a margin smaller than the number of ballots cast by absentee voters? All states are required to count every absentee ballot as long as it is valid and reaches local election officials by the absentee ballot receipt deadline.
Follow a few simple steps to make sure that you can vote in the 2018 U.S. elections:
1.Request Your Ballot: Complete a new Federal Post Card Application (FPCA). You must complete a new FPCAafter January 1, 2018 to ensure you receive your ballot for the 2018 elections.The completion of the FPCA allows you to request absentee ballots for all elections for federal offices (President, U.S. Senate, and U.S. House of Representatives) including primaries and special elections during the calendar year in which it is submitted. The FPCAis accepted by all local election officials in all U.S. states and territories.
You can complete the FPCA online at www.FVAP.gov. The online voting assistant will ask you questions specific to your state. We encourage you to ask your local election officials to deliver your blank ballots to you electronically (by email, internet download, or fax, depending on your state). Include your email address on your FPCA to take advantage of the electronic ballot delivery option. Return the FPCA per the instructions on the website. FVAP.gov will tell you if your state allows the FPCA to be returned electronically or if you must submit a paper copy with original signature. If you must return a paper version, please see below for mailing options.
2.Receive and Complete Your Ballot: States are required to send out ballots 45 days before a regular election for federal office and states generally send out ballots at least 30 days before primary elections. For most states, you can confirm your registration and ballot delivery online.
3.Return Your Completed Ballot: Some states allow you to return your completed ballot by email or fax. If your state requires you to return paper voting forms or ballots to local election officials, you can use international mail, a courier service such as FedEx or DHL, or you may also drop off completed voting materials during regular business hours at the U.S. Consulate General in Tijuana. Place your materials in a postage paid return envelope (available under “Downloadable Election Materials” on the FVAP homepage) or in an envelope bearing sufficient domestic U.S. postage, and address it to the relevant local election officials.
4.New this year – email to fax service by FVAP! - the Federal Voting Assistance Program (FVAP) will provide an email-to-fax conversion service for voters who have difficulty sending election materials to States that do not accept emailed documents. Get more information here.
Researching the Candidates and Issues: Online Resources. Check out the FVAP links page for helpful resources that will aid your research of candidates and issues. Non-partisan information about candidates, their voting records, and their positions on issues are widely available and easy to obtain online. You can also read national and hometown newspapers online, or search the internet to locate articles and information. For information about election dates and deadlines, subscribe to FVAP's Voting Alerts (email@example.com). FVAP also shares Voting Alerts via Facebookand Twitter.
Learn more at the Federal Voting Assistance Program's (FVAP) website, FVAP.gov. If you have any questions about registering to vote overseas, please contact U.S. Consulate General in Tijuana's Voting Assistance Officer at VoteTIJUANA@state.gov.
The President has signed the biggest tax changes in over 30 years. When you file your 2018 tax returns — about a year from now — your tax return will look very different. And because most changes don’t happen until then, we have some time to learn about the changes and plan for next year. Here are a few of the biggest changes that may affect you.
Tax rate changes: Both individual and corporate rates have changed. The maximum individual rate is reduced to 37% and the corporate rate is now a flat 21%. The rate chang could benefit you — or in some cases cause your tax liability to go up.
Standard deduction increases: However, there are no more personal exemption deductions allowed. So this may help you — or hurt you.
Increased Child Tax Credit and new Dependent Credit: The credit is increased for each child to $2,000 (up to $1,400 of which is refundable for each child) and each non-child dependent can now receive a new credit of $500. But you will have no exemption credit or deduction for yourself, your spouse, or your depenDeardents.
The phaseout thresholds for these credits are drastically increased. Married taxpayers filing a joint return can claim the full credits if their adjusted gross income is $400,000 or less ($200,000 for all others). The credits are fully phased out for married taxpayers filing a joint return when their adjusted gross income reaches $440,000 ($240,000 for all others). This means that many more taxpayers will be able to claim these credits in 2018 and beyond.
Disappearing deductions: Beginning with the 2018 tax year, you will no longer be able to deduct:
State income tax and property taxes above $10,000 per year in total;
Moving expenses (with an exception for certain military);
Employee business expenses such as mileage, travel, entertainment, home office expenses, union dues
, tax preparation fees, and investment fees, among others;
Mortgage interest beyond interest on $750,000 of acquisition debt, if you purchase a new home; and
Mortgage interest paid on equity debt (this is no longer deductible for any taxpayers).
Some new benefits for individuals: These new benefits include:
The medical expense AGI threshold will temporarily drop to 7.5% of AGI for 2017 and 2018;
The AMT threshold is increased, so fewer middle-income taxpayers will be subject to AMT;
The estate tax exclusion has nearly doubled, to $10 million (adjusted for inflation); and
The annual gift tax exclusion remains the same ($14,000 for 2017 and $15,000 for 2018)
but the maximum rate on gifts is 35%.
Small business benefit: Beginning in 2018, there will be up to a 20% deduction from net business income for a sole proprietorship, LLC (excluding those taxed as a C corporation), partnership, S corporation, and rental activity. The rules are incredibly complex but there is a lot of planning that we can do to maximize this deduction for you. More on this later
For expatriates, the foreign earend income exclusion, housing exclusion and foreign tax credits have not been changed at all. As stated above, you will have some changes with respect to any foreign corporations you own all or part of, but the exact nature of those changes awaits IRS interpretations and regulations.
Remember all of these changes take effect in 2018 and your 2018 tax return. All of the old rules still apply to your 2017 tax returns which you will need to file shortly.
President Trump has signed significant U.S. tax legislation into law today, namely the “Tax Cuts and Jobs Act”.
There are many favorable tax provisions that will benefit many taxpayers, for individuals and businesses. But there are also some quite unfavorable international tax provisions which may adversely impact business owners of non-U.S. corporations.
One specific new provision relates to U.S. persons who own an interest in a non-U.S. corporation.
Under prior law, U.S. shareholders generally are taxed on all income, whether earned in the U.S. or abroad. Foreign income earned by a foreign (non-U.S.) corporation generally is not subject to U.S. tax until the income is distributed as a dividend to the U.S. shareholder.
Under this new law, certain U.S. shareholders owning at least 10% of the foreign corporation generally must include in income starting in 2017 the shareholder’s pro-rata share of the net post-’86 historical earnings and profits “E&P” (i.e. accumulated unrepatriated earnings) to the extent it hasn’t been previously taxed in the U.S. This is a one-time tax as the U.S. attempts to transition from a worldwide tax system to a territorial type of tax system.
The portion of the historical earnings comprising of cash or cash equivalents is taxed at a reduced rate of 15.5%, while any remaining E&P is taxed at a reduced rate of 8% (it works out to a bit higher rate in some cases). The lower tax rate is intended to recognize that non-cash assets are illiquid and/or in productive use in the business. Nonetheless, this could be a significant tax hit for this upcoming tax season, although there is an option to elect to defer the payment over eight years.
Another problem with this tax is that it’s on deemed income. There isn’t an actual dividend. Rather, it’s deemedincome for U.S. purposes. In most foreign countries, this deemed income isn’t considered taxable income. The challenge then is that it’s taxed in the current year for U.S. purposes but not in the foreign country. And when the money is distributed in the future, it typically is treated as a dividend in the foreign country, but not in the U.S. It causes a mismatch and often the lack of use of foreign tax credits, resulting in true double taxation.
What to do by year-end?
If you have significant retained earnings, it’d be worth contacting us to see if there are some planning moves to be made prior to year-end. Perhaps it makes sense to withdraw money from the company before year-end to trigger an actual dividend in the U.S. and the foreign country. This will trigger income in both countries to allow for utilization of foreign tax credits. Furthermore, simply withdrawing the money by year-end will allow for us to then determine after year-end how to classify the withdrawal (as a dividend, wage or loan for example).
If there remains tax exposure after considering foreign tax credits, it could make sense to gift shares to a non-resident alien spouse before year-end to a smaller ownership percentage level to avoid this tax.
This is a very new tax concept and not a lot of time has been granted to us to plan around this matter. Yet, it makes sense to look at this before year-end to see if any moves can be made prior to year-end to put you in a better tax position.
If you require additional information on any aspect of these complex rules, please contact Kyle Lodder CPA at 360.599.4340 or firstname.lastname@example.org. You can also contact Don D. Nelson International Tax Attorney at email@example.com or 949.480.1235. Kyle works with our firm.
The material appearing in this communication is for informational purposes only and should not be construed as legal, accounting, or tax advice or opinion provided by Lodder CPA PLLC. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials have been prepared by a professional, the user should not substitute these materials for professional services, and should seek advice from an independent advisor before acting on any information