15 US 2012 Tax Facts for Americans Living and Working Abroad

By Don D. Nelson, Attorney, C.P.A.

Kauffman Nelson LLP

If you are a US Citizen you must file a US tax return every year unless your taxable income is less than $15,700 - for a joint return or $ 9,750 - for a single return (these amounts are for 2012 and are lower amounts for earlier years) or have self employment-independent contractor net self employment income of more than $ 400 US per year. You are taxable on your worldwide income regardless of whether you filed a tax return in your country of residence. You must file a tax return each year if you income exceeds the amounts stated above even if you owe no tax.

• As an US expatriate living and working abroad 4/15, your 2012 tax return is automatically extended until 6/15 but any taxes due must be paid by 4/15 to avoid penalties and interest. The return can be further extended until 10/15/10 if the proper extension form is filed.

• For 2012 if you are a qualified expatriate you get a foreign earned income exclusion (earnings from wages or self employment) of $95,100, but this exclusion is only available if you file a tax return. You must qualify under one of two tests to take this exclusion: (1) bonafide resident test or (2) physical presence test. You can read more about how to qualify in IRS Publication 54.

• If your spouse works and lives abroad, and is qualified, she or he can also get at $95,100 foreign earned income exclusion.

• If your foreign earnings from wages or self employment exceed the foreign earned income exclusion you can claim a housing expense for the rent, utilities and maintenance you pay if those amounts that exceed a minimum amount of $15,216 up to a maximum amount which varies by your country of residence.

• You get credits against your US income tax obligation for income taxes paid to a foreign country but you must file a US tax return to claim these credits.

• If you own 10% or more of a Foreign corporation or Foreign partnership (LLC) you must file special IRS forms each year or incur substantial penalties which can be greater including criminal prosecution if the IRS discovers you have failed to file these forms.

• If you create a foreign trust or are a beneficiary of a foreign trust you may be obligated to file forms 3520 and /or 3520A each year to report those activities or be subject to severe penalties. Foreign foundations and non-profits which indirectly benefit you may be foreign trusts in the eyes of the IRS.

• Your net self employment income in a foreign country (earned as an independent contractor or in your own sole proprietorship) is subject to US self employment tax of 15.3% (social security) which cannot be reduced or eliminated by the foreign earned income exclusion. The one exception is if you live in one of the very few countries that have a social security agreement with the US and you pay that countries equivalent of social security.

• Forming the correct type of foreign corporation and making the proper US tax election with the IRS for that corporation may save you significant income taxes and avoid later adverse tax consequences. You need to take investigate this procedure before you actually form that foreign because it can be difficult to make that election later.

• If at any time during the tax year your combined highest balances in your foreign bank and financial accounts (when added together) ever equal or exceed $10,000US you must file a FBAR form with the IRS by June 30th for the prior calendar year or incur a penalty of $10,000 or more including criminal prosecution. This form does not go in with your personal income tax return and is filed separately to a different address.

• In the past several years the IRS has hired thousands of new employees to audit, investigate and discover Americans living abroad who have failed to file all necessary tax forms. These audits have begun and will increase significantly in the future. The IRS gets lists of Americans applying or renewing for US passports or entering the country. They will compare these lists with those who are filing US income tax returns and take action against those who do not.

• Often due to foreign tax credits and the the foreign earned income tax expats living abroad who file all past year unfiled tax returns end up owing no or very little US taxes. The IRS has several special programs which will help you catch up if you are in arrears which will reduce or possibly eliminate all potential penalties for failing to file the required foreign asset reporting forms. We can direct you to the best program for your situation, prepare the returns and forms and represent you before the IRS.

• Beginning in 2011 a new law went into effect which requires all US Citizens report all of their world wide financial assets with their personal tax return if in total the value of those assets exceed certain minimum amounts starting at $50,000 . Failure to file that form on time can result in a penalty of $10,000.

• Certain types of income of foreign corporations are immediately taxable on the US shareholder's personal income tax return. This is called subpart F income. The rules are complex and if you own a foreign corporation you need to determine if these rules apply to you when you file the required form 5471 for that corporation.

• If you own investments in a foreign corporation or own foreign mutual fund shares you may be required to file the IRS forms for owning part of a Passive Foreign Investment Company (PFIC) or incur additional, taxes and penalties for your failure to do so. A PFIC is any foreign corporation that has more than 75% of its gross income from passive income or 50 percent or more of its assets produce or will produce passive income.

Download your 2012 US tax return questionnaire prepared expressly for Americans living abroad at www.TaxMeLess.com or at www.ExpatAttorneyCPA.com Please send us your completed questionnaire for a fixed fee quote for the preparation of your return.

Don D. Nelson, US Attorney, CPA

Kauffman Nelson LLP

Dana Point, California 92629 USA

US Phone: (949) 481-4094, US Fax: (949) 218-6483

Email:ddnelson@gmail.com

Skype: dondnelson

Visit our International Tax Blog for the Latest Expat and International Tax Developments at www.usexpatriate.blogspot.com.

We have been preparing tax returns and assisting US clients located in over 50 countries around the the world for over 30 years. We also assist US Nonresidents meet their US tax obligations and return filing requirements. Email, skype or phone us for immediate assistance. We offer mini consultations (with attorney client privilege) to answer your tax questions and resolve your tax issues.

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Disclaimer and Conditions: The information contained herein is general in nature and is not to be construed or relied on as tax or legal advice with respect to you individual tax situation or questions. Your use of this material does not create any attorney/CPA relationship between you and this firm or any other obligation. You are advised to retain competent tax professionals help with your individual tax matters and for appropriate answers your specific tax questions.

FATCA- Using a non US passport to open your foreign bank accounts will not work!

FATCA requires foreign banks to conduct due diligence to see if there are US persons with foreign bank accounts.  The fact you did not give a foreign bank your US passport still does not mean they might not report your foreign bank, financial and other accounts to the US and IRS.

FATCA was enacted to expose those US citizens and green card holders who are trying various tricks such as dual passports, etc. to avoid reporting and paying taxes on their foreign financial accounts.

Under the FATCA law  in order to stay in good graces of the IRS, the foreign banks  must put into place procedures to weed out account holders who are Americans and US green card holders even though the passport they opened the account with said otherwise. These are the questions you need to ask yourself before you take the HUGH risk of not reporting those accounts on form TDF 90-22.1 (FBAR form). 

• Are there any US address associates with your account?
• Are there any US phone numbers with your account?
• Is your birthplace listed as somewhere in the US?
• Have you made more than one wire in or out form the US?
• Any other item that may make the bank suspicious you are a US person.

If any of the questions above you answered yes, there is a significant chance the your bank will disclose your account to the IRS. If you are detected by the IRS before you made an Offshore Voluntary Disclosure, you must expect the harshest penalties both criminal and civil. The IRS has invested everything in this program. It operates by fear and intimidation. It has the law, the political clout (in Congress, no one is standing up for international community).

This form (TDF 90-22.1) for 2012 is due  on 6/30/13 (must be received by IRS as of that date).   It cannot be extended. The statute of limitations for prosecution or huge monetary penalty imposition for not filing this form goes back for 6 years.

Bank accounts in the Central and South America, the Mideast and the Far East — Panama, Ecuador, Argentina, Venezuela, Taiwan, South Korean, Thailand, Dubai, Malaysia, Singapore, Hong Kong, China, India — these are the targets of FATCA.  The US is signing up other countries daily to participate in the program. Remember, the US already had information sharing agreements with European banks. FATCA was put in place to find out  US account holders everywhere in the world.

 

Abandoning US Citizenship or Green Card and Moving to Lower Tax Jurisdiction

We assist many US Citizens and green card holders surrender their status in order to live abroad and avoid the US taxes. If you are considering taking these steps, but are not sure where to go, this  article from The Altantic will my help you decide to where to live or convince you that US taxes are not so bad.

Of course to take these steps you must first have citizenship in a foreign country (which can be purchased in many countries) and may pay taxes if your net worth (individual net worth and not the joint married net worth) exceeds $2 million. Visit www.TaxMeLess if you wish to learn more.

Summary of The “American Taxpayer Relief Act” — tax changes included in the fiscal cliff legislation (with California Tax Law References)

We are sure you’ve heard and read about the New Year’s Day passage of the American Taxpayer Relief Act. Here is a rundown of the items that may affect you when we prepare your 2012 taxes and plan for 2013.

Individual tax issues
Payroll tax holiday: The 2% cut in the Social Security tax for all earners will not be extended into 2013. For wages paid on or after January 1, 2013, the Social Security tax will return to 6.2% (along with the Medicare tax) and the total employee share of the tax will be 7.65%. This means your paycheck will be 2% lower in January.

Tax rates: Beginning in 2013, the top tax rate of 39.6% (up from 35%) will be imposed on individuals with taxable income of more than $400,000 a year, $425,000 for head of household, and $450,000 for married filing joint. These thresholds are indexed for inflation. Other than the top rates, other rates remain the same as 2012.
Capital gain rates: Beginning in 2013, the maximum capital gains tax will rise from 15% to 20% for individuals taxed at the 39.6% rate (taxable incomes above $400,000, $425,000, or $450,000 depending on filing status as noted above). The treatment of qualified dividends taxed at capital gains rates is made permanent. (Act §201(a))
AMT: No matter what you thought of the fiscal cliff issue, most of us are relieved to have final resolution to the annual problem of the alternative minimum tax (AMT). Each year Congress has raised the exemption amounts to match inflation. This Act finally puts a permanent fix to the problem.
The amounts are permanently increased and contain an annual inflation adjustment. The 2012 exemption amounts are: $50,600 for unmarried taxpayers, $78,750 for joint filers, and $39,375 for married persons filing separately.
In addition, many refundable credits may be used to offset the AMT.
Phaseout of itemized deductions and exemptions: Beginning in 2013, itemized deductions and personal exemptions will be reduced for higher-income taxpayers. The phaseouts begin at: $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers, and $150,000 for married filing separate. Those who have adjusted gross income at these levels will lose the benefit of itemized deductions and personal exemptions based on 3% of the excess.
This will play into our planning for 2013.
Other benefits extended: Many of the tax benefits we have been taking advantage of will continue. Here are a few of them:
·         The $250 educator expense deduction is continued;
·         The cancellation of debt exclusion for qualified principal residence indebtedness will continue for federal purposes. California has its own law that also expired December 31, 2012. The Legislature must extend California’s law;
·         Child and Dependent Care Credit on up to $3,000 of expenses for one dependent or $6,000 for more than one;
·         Exclusion for employer-provided educational assistance;
·         The IRA to charity exclusion, which expired after 2011, has been revived for 2012 and continued through 2013. Because of its late passage, the Act provides two special rules:
o    A taxpayer may make a charitable distribution in January 2013 and it is deemed to have been made in 2012; and
o Any portion of a distribution from an IRA to the taxpayer in December 2012 may be treated as a qualified charitable distribution to the extent that the distribution is transferred to a qualifying charity before February 1, 2013.
Business provisions
Depreciation: The Act extends the bonus depreciation and special expensing (IRC §179) provisions for businesses. This will expand our choices when deciding how when to elect the bonus depreciation and how much §179 expense we should elect for this year.
Small business stock: The 100% exclusion of gain on the sale of qualified small business stock has been extended through 2013. California has a similar provision for exclusion of gain. However, that provision has been found unconstitutional and the FTB is disallowing exclusions taken in prior years. If you took advantage of this exclusion in the past four years, we will need to discuss this California turn of events.
Business tax credits: Many business tax credits that were set to expire will continue. We will talk about any that might benefit you and your business.
Energy provisions
Many of the energy credits, including the nonbusiness energy credits for energy-saving improvements made by individuals to their principal residence, have been extended. The $500 lifetime cap remains in place.
Estate tax provisions
The Act permanently provides for a maximum estate tax rate of 40% for estates of decedents dying after 2012, with an exclusion of $5 million, adjusted annually for inflation using 2010 as a base year. The Act also provides a 40% tax rate and a unified estate and gift tax exemption of $5 million (inflation-adjusted) for gifts made after 2012. The exemption amount for 2012 is $5,120,000. Although it’s not yet released, the inflation-adjusted exclusion amount for 2013 is projected to be $5,250,000.
Expatriate and International Tax Provisions:
The new law has made no significant changes to the expatriate income exclusion, foreign tax credit provisions, housing exclusion or to most IRS international business and investment tax laws and regulations.
This is a limited list of the provisions included in the Act. We will talk about these and others that apply to you and your tax situation when you come for your tax appointment or a pre-planning appointment. We have attended seminars and read up on the new tax law and are prepared to make sure you take maximum advantage of any benefits.



Don D. Nelson, Attorney, CPA
Charles Kauffman, CPA
Kauffman Nelson, LLP
Dana Point, California (USA)
Website: www.TaxMeLess.com
Blog: www.usexpatriate.blogspot.com
Email. dondnelson@gmail.com
Phone: US (949) 481-4094
Fax: US (949) 606-9627
Skype: dondnelson

Bad Marks given by the IRS Taxpayer Advocate on Voluntary Offshore Disclosure Program in Its report to Congress

The IRS National Taxpayer Advocate reported the following to Congress:


The IRS’s Offshore Voluntary Disclosure programs and their failure to distinguish adequately between “bad actors” and “benign actors.” The IRS has sought to increase enforcement of Foreign Bank and Financial Accounts (FBAR) reporting requirements in recent years and has offered a series of voluntary disclosure programs designed to settle with taxpayers who had failed to file required FBAR forms. However, the report says, the programs generally applied a “one-size-fits-all” approach that required the payment of significant penalties and did not distinguish between “bad actors” and “benign actors.” By generally requiring taxpayers who make voluntary disclosures to “opt out” of the disclosure program and submit to comprehensive audits in order to avoid draconian penalties, the report argues that the program has caused excessive burden and fear for taxpayers who had reasonable cause for not filing FBAR forms or whose failure to file was inadvertent.

This confirms the IRS has not created a fair and just  program to allow those middle class US Citizens living abroad who were unaware of their US filing and foreign assets reporting obligation to come forward and correct the problem without the risk of unfair civil and criminal penalties. Hopefully this report will encourage Congress and the IRS to soften the procedures and to take into account these citizens or green card holders were never effectively informed of their obligations by the IRS or the US Government.

We can help you catch up now and represent you before the IRS under the current offshore disclosure program. We have advised or represented over a hundred clients so far surface with the IRS with great success.

YOU CANNOT FILE YOUR TAX RETURN UNTIL JANUARY 30TH PER IRS NOTICE

Following the January tax law changes made by Congress under the American Taxpayer Relief Act (ATRA), the Internal Revenue Service announced today it plans to open the 2013 filing season and begin processing individual income tax returns on Jan. 30.

The IRS will begin accepting tax returns on that date after updating forms and completing programming and testing of its processing systems. This will reflect the bulk of the late tax law changes enacted Jan. 2. The announcement means that the vast majority of tax filers -- more than 120 million households -- should be able to start filing tax returns starting Jan 30.

The IRS estimates that remaining households will be able to start filing in late February or into March because of the need for more extensive form and processing systems changes. This group includes people claiming residential energy credits, depreciation of property or general business credits. Most of those in this group file more complex tax returns and typically file closer to the April 15 deadline or obtain an extension.

“We have worked hard to open tax season as soon as possible,” IRS Acting Commissioner Steven T. Miller said. “This date ensures we have the time we need to update and test our processing systems.”

The IRS will not process paper tax returns before the anticipated Jan. 30 opening date. There is no advantage to filing on paper before the opening date, and taxpayers will receive their tax refunds much faster by using e-file with direct deposit.

“The best option for taxpayers is to file electronically,” Miller said.

The opening of the filing season follows passage by Congress of an extensive set of tax changes in ATRA on Jan. 1, 2013, with many affecting tax returns for 2012. While the IRS worked to anticipate the late tax law changes as much as possible, the final law required that the IRS update forms and instructions as well as make critical processing system adjustments before it can begin accepting tax returns.

The IRS originally planned to open electronic filing this year on Jan. 22; more than 80 percent of taxpayers filed electronically last year.

Who Can File Starting Jan. 30?

The IRS anticipates that the vast majority of all taxpayers can file starting Jan. 30, regardless of whether they file electronically or on paper. The IRS will be able to accept tax returns affected by the late Alternative Minimum Tax (AMT) patch as well as the three major “extender” provisions for people claiming the state and local sales tax deduction, higher education tuition and fees deduction and educator expenses deduction.

Who Can’t File Until Later?

There are several forms affected by the late legislation that require more extensive programming and testing of IRS systems. The IRS hopes to begin accepting tax returns including these tax forms between late February and into March; a specific date will be announced in the near future.

The key forms that require more extensive programming changes include Form 5695 (Residential Energy Credits), Form 4562 (Depreciation and Amortization) and Form 3800 (General Business Credit). A full listing of the forms that won’t be accepted until later is available on IRS.gov.

Fiscal Cliff New Tax Bill Extends an Amazing Number of Tax Benefits

The new Fiscal Cliff Tax Bill passed yesterday extended over 100 special tax benefits for businesses and individuals through to 2013 and permanently extended many of those tax breaks permanently. The article linked below will allow you to see if your favorite tax provision was extended.

Read the details of the extended tax breaks in the JOURNAL OF ACCOUNTANCY ARTICLE HERE