Tips for U.S. Taxpayers with Foreign Income

Did you live or work abroad or receive income from foreign sources in 2013? If you are a U.S. citizen or resident, you must report income from all sources within and outside of the U.S. The rules for filing income tax returns are generally the same whether you’re living in the U.S. or abroad. Here are seven tips from the IRS that U.S. taxpayers with foreign income should know:

1. Report Worldwide Income.  By law, U.S. citizens and resident aliens must report their worldwide income. This includes income from foreign trusts, and foreign bank and securities accounts.

2. File Required Tax Forms.  You may need to file Schedule B, Interest and Ordinary Dividends, with your U.S. tax return. You may also need to file Form 8938, Statement of Specified Foreign Financial Assets. In some cases, you may need to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts. See IRS.gov for more information.

3. Consider the Automatic Extension.  If you’re living abroad and can’t file your return by the April 15 deadline, you may qualify for an automatic two-month filing extension. You’ll then have until June 16, 2014 to file your U.S. income tax return. This extension also applies to those serving in the military outside the U.S. You’ll need to attach a statement to your return to explain why you qualify for the extension.

4. Review the Foreign Earned Income Exclusion.  If you live and work abroad, you may be able to claim the foreign earned income exclusion. If you qualify, you won’t pay tax on up to $97,600 of your wages and other foreign earned income in 2013. See Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion, for more details.

5. Don’t Overlook Credits and Deductions.  You may be able to take atax credit or a deduction for income taxes you paid to a foreign country. These benefits can reduce the amount of taxes you have to pay if both countries tax the same income.

You can get more on this topic in Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad. IRS forms and publications are available on IRS.gov. 

Additional IRS Resources:

• Taxation of U.S. Resident Aliens
• Publication 514, Foreign Tax Credit for Individuals
• International Taxpayer

The best resource is Kauffman Nelson LLP. We prepare returns for expats and nonresidents and have done so for over 30 years.  We know the law and we know the the forms.  Want a consultation?  Email ddnelson@gmail.com  and ask for Don Nelson, Attorney, CPA.

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