Avoiding California State Income Taxes Moving Abroad

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.

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 ddnelson@gmail.com.

IRS INFLATION ADJUSTMENT - DEDUCTION INCREASES FOR 2013

• The foreign earned income exclusion will go from $95,100 to $97,600 for 2013.  Remember if both spouses work they can each claim up to that amount on their separate foreign wages on form 2555.
• The gift tax exclusion (threshold after which you must file a gift tax return) is increased from $13,000 to $14,000.  If a husband and wife both give the gift (and both are US taxpayers) they can claim a combined exclusion of $28,000 in 2013.  Gifts for education costs and health care are not subject to gift tax.
• The maximum contribution limits by an employee to a 401K plan increases to $17,500 in 2013.
• The social security ceiling for wages subject to that tax increases to $113,700 in 2013 from the current $110,100. Their is no ceiling on the 2.3 percent medicare tax.

GUILTY OF WILLFUL FAILING TO FILE FBAR(TDF 90-22.10)?

If you sign your return and check "No" on schedule B indicating you have no foreign bank accounts that need to be reported (when you actually did have accounts) the Court has held that act alone shows willful failure to file the FBAR form. The taxpayer was fined $200,000 for failing to file the FBAR for tax year 2000.  READ MORE HERE           

Another issue we are often asked about if how far back will the IRS go to seek information from Foreign Banks on US holders of accounts. The IRS is now asking Liechtenstein Landesbanks for records going back to 2004. This is the first announcement that clearly indicates if you have not been filing FBAR forms for past years it is best to go back and file those forms now. The statute of limitations is six years on FBAR forms for the IRS to seek civil and criminal penalties.

We recommend if you are required to file the form all taxpayers immediately file their FBARs before the IRS gets lists from foreign banks.  They will be cross-checking the information on the banks lists with those who have filed FBARs.  Anyone who has not filed is subject to criminal penalties and monetary penalties up to 1/2 the highest balance in each account for each year that the FBAR is not filed.

Expats Can Extend Tax Return Due Date Up Until 12/15/12 If Previous Extension Filed

All taxpayers are generally entitled to an automatic 6-month extension of time to file their returns by filing Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, , with the Internal Revenue Service.

In addition to this 6-month extension, taxpayers who are out of the country (as defined in the Form 4868 instructions) can request a discretionary 2-month additional extension of time to file their returns (to December 15 for calendar year taxpayers).

To request this additional 2 month  extension, you must send the Internal Revenue Service a letter explaining the reasons why you need the additional 2 months to complete your tax return. Send the letter by the previously  extended due date (October 15 for calendar year taxpayers) to the following address:

Internal Revenue Service CenterAustin, TX 73301-0215USA

You will not receive any notification from the Internal Revenue Service unless your request is denied for being untimely.  Therefore it is best to send this letter extension request by Certified Mail Return Receipt or another method where you have proof the request was sent in timely.  If you are sending your request by DHL, UPS or Fed Exp from abroad, the street address for delivery is on our website at www.taxmeless.com.

The discretionary 2-month additional extension is not available to taxpayers who have an approved extension of time to file on Form 2350 (for U.S. citizens and resident aliens abroad who expect to qualify for special tax treatment).

UAE to Join the Network to Exchange Tax Data with US and Other Countries

The UAE is expected shortly to join the  OCED which is the network of countries that join have joined together to share economic data which includes tax data on residents of those countries with other members of the OCED.  The USA is a member of the OCED which means US expats living in those other countries will have their income and other  financial information reported to the US International. Do not make the mistake of thinking because the United Arab Emirates has no income taxes information on your will not be sent to the IRS.. READ MORE HERE ABOUT THE UAE tax information sharing arrangement.

For an up to date list of the OCED members who are sharing tax information with each other CLICK HERE.  If you live and work on one of these countries, your income and financial information will ultimately or may have already been shared with the IRS.

NO FBAR PENALTY FOR TAXPAYER WHO OPTS OUT OF IRS OFFSHORE DISCLOSURE PROGRAM

One Taxpayer who opted out of the administrative nightmare of the IRS Offshore Disclosure Program has been assessed no penalties for late filed FBAR forms.  The taxpayer was a 12 year US resident with unreported  offshore assets equal to about $120,000 at the peak. The taxpayer was ignorant of the special forms required to report offshore assets and the requirement he needed to report the income from these offshore accounts.

This may provide some guidance to those expatriates who are still trying to decide whether to enter the 2012  IRS Offshore Voluntary Disclosure Program or just proceed with a regular disclosure.  READ MORE DETAILS  ON JACK TOWNSEND (CRIMINAL TAX ATTORNEY) BLOG.

Another Tax Professional reports the following:  One of the  firm’s clients opted out and received no penalties whatsoever and another is opting out and may receive just one $10,000 penalty over 8 years even though the taxpayer had $1M+ overseas financial accounts .This professional fees the reason for these successes is  that OVDI penalties are mandated by the National Office and agents are mandated to assess penalties, whereas if someone opts out then the local office has the authority to close the case (and is typically motivated to do so to clear inventory).

New 2013 IRS Figures Of Interest to all Nonresident and Expatriate Taxpayers

Some of the new figures for 2013 which will come into play if you are a US expatriate, nonresident, or have international tax concerns are as follows:

Unified estate and gift tax exclusion amount. Under the sunset provisions of EGTRRA, for gifts made and estates of decedents dying in 2013, due to a law change, the exclusion amount will be $1,000,000 (down from $5,120,000 for gifts made and estates of decedents dying in 2012).

Gift tax annual exclusion. For gifts made in 2013, the gift tax annual exclusion will be $14,000 (up from $13,000 for gifts made in 2012).

Increased annual exclusion for gifts to noncitizen spouses. For gifts made in 2013, the annual exclusion for gifts to noncitizen spouses will be $143,000 (up from $139,000 for 2012).

Reporting foreign gifts. If the value of the aggregate “foreign gifts” received by a U.S. person (other than an exempt Code Sec. 501(c) organization) exceeds a threshold amount, the U.S. person must report each “foreign gift” to IRS. (Code Sec. 6039F(a)) Different reporting thresholds apply for gifts received from (a) nonresident alien individuals or foreign estates, and (b) foreign partnerships or foreign corporations. For gifts from a nonresident alien individual or foreign estate, reporting is required only if the aggregate amount of gifts from that person exceeds $100,000 during the tax year. For gifts from foreign corporations and foreign partnerships, the reporting threshold amount will be $15,102 in 2013 (up from $14,723 for 2012).

Expatriation, Citizenship and Green Card Surrender. For 2013, an individual with “average annual net income tax” of more than $155,000 for the five tax years ending before the date of the loss of U.S. citizenship is a covered expatriate (up from $151,000 for 2012). Under a mark-to-market deemed sale rule, all property of a covered expatriate is treated as sold on the day before the expatriation date for its fair market value. However, for 2013, the amount that would otherwise be includible in the gross income of any individual under these mark-to-market rules is reduced by $668,000 (up from $651,000 for 2012).

Foreign earned income exclusion. The foreign earned income exclusion amount increases to $97,600 in 2013 (up from $95,100 in 2012).

IRS WHISTLEBLOWER EARNS $104 MILLION

A question we often get from expats living aboard is, "How can the IRS ever find out about my foreign assets or income?"  We always tell them that it is entirely possible the IRS will find out and we recommend they disclose all income and assets as required by US tax law.  Both US and foreign third parties can make a lot of money by turning in US taxpayers that are hiding their foreign assets and income from the IRS..

A UBS banker in Switzerland will receive $104 million as finders fee from the IRS in return for giving it names of US taxpayers that had secret accounts in Switzerland.  He is the banker that helped his US clients hide the money in Switzerland. .  In the course of his disclosures to the IRS he misrepresented some information and  had to spend a few years in prison for that crime.  He will still (despite his time in prison) collect his fee from the IRS which is a percentage of the taxes the IRS will collect from the US taxpayers he gave up to the IRS. READ MORE HERE

The IRS expects a lot more Whistleblowers to come forward and reveal the information they know about US taxpayers not complying with the law.  This is good reason to only discuss  your potential tax problems with a reputable US Attorney where all communication is protected from disclosure by "Attorney-client privilege." The law forbids an attorney from revealing any client information to the IRS unless that specific information goes into preparing a tax return for that client.  Do not discuss any problematic tax  information   to anyone but an attorney. Under most state laws, information given to Enrolled Agents and CPAs is not protected and those professionals can be forced to disclose client's disclosures by the IRS and the Courts.

Instructions for New Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer U.S. Taxpayers (Expatriates)

On June 26, 2012, the IRS announced new streamlined filing compliance procedures for non-resident U.S. taxpayers to go into effect on September 1, 2012. These procedures are being implemented in recognition that some U.S. taxpayers living abroad have failed to timely file U.S. federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs), Form TD F 90-22.1, but have recently become aware of their filing obligations and now seek to come into compliance with the law. These new procedures are for non-residents including, but not limited to, dual citizens who have not filed U.S. income tax and information returns.

Description of the New Streamlined Procedure

This streamlined procedure is designed for taxpayers that present a low compliance risk. All submissions will be reviewed, but, as discussed below, the intensity of review will vary according to the level of compliance risk presented by the submission. For those taxpayers presenting low compliance risk, the review will be expedited and the IRS will not assert penalties or pursue follow-up actions. Submissions that present higher compliance risk are not eligible for the streamlined processing procedures and will be subject to a more thorough review and possibly a full examination, which in some cases may include more than three years, in a manner similar to opting out of theOffshore Voluntary Disclosure Program.

Taxpayers utilizing this procedure will be required to file delinquent tax returns, with appropriate related information returns (e.g. Form 3520 or 5471), for the past three years and to file delinquent FBARs (Form TD F 90-22.1) for the past six years. Payment for the tax and interest, if applicable, must be remitted along with delinquent tax returns. For a summary of information about federal income tax return and FBAR filing requirements and potential penalties, see IRS Fact Sheet FS-2011-13. (December 2011).

Read the rest of the details of the program HERE

Download IRS Submission Questionnaire Used to Enter Program HERE

For Details of the 2012 Voluntary Offshore Disclosure Initiative click HERE.  This program is for those who wish to avoid criminal prosecution and have more complex returns and owe more than 1,500 for any of the past unfiled tax years.

Why You Need Expert Tax CPAs and Attorneys

The following items are some of the reasons you need expert tax help with your return and tax  planning:

• The US tax code and explanatory rulings and regulations has grown from   400  pages in 1913           to  73,608  pages today.
• The IRS by its own admission only answers 75% of the phone calls it receives from taxpayers.
• The IRS has over 100,000 employees and therefore has become a very complex and sometimes disorganized bureaucracy. 
• 4,428 changes have been made to the US Tax Code during the past 10 years. That averages over 1 change per day.
• Businesses and individuals spend 6.1 Billion hours each year complying with US tax filing requirements.
• Sixty percent of all individual taxpayers hire someone to do their tax returns.
• The IRS estimates each taxpayer in 2001 paid an average of $2,200 each year to make up for the taxes owed by those who did not file, or cheated on the tax return they did file.
• The US Expatriate and International tax forms, laws and regulation are so complex that most CPAs and Enrolled Agents do not know enough to help taxpayers with Expatriate or International Tax Deeds.