YEAR END TAX PLANNING - DOWNLOAD OUR EXPAT TAX PLANNING NEWSLETTER

There is still time to save taxes prior to the end of 2012. It is very clear taxes are going up in 2013 and therefore taking steps now to recognize income and accelerate deductions may be of benefit.  There are numerous other things you can do now to reduce your taxes which are included in our newsletter. DOWNLOAD OUR YEAR END TAX PLANNING NEWSLETTER HERE.

US Expats in Mexico and Denmark on 1/1/13 Will Have Their Financial and Tax Information Disclosed to US

The United States has entered into its second and thir  bilateral exchange of financial and tax information agreements regarding the implementation of FATCA with  Mexico and Denmark.  This new agreements target non-compliant U.S. taxpayers owning foreign accounts.The agreemenst will be  become  on January 1, 2013.

The reciprocal nature of the United States' agreement with  Mexico and Denmark will allow the countries to use the automatic exchange of information to discover non-compliant taxpayers. The good old days of "what happens in Mexico, stays in Mexico" are almost over.

Now is the time to start reporting to the IRS all of your previously unreported Mexican and Denmark business and financial activities before these new programs are geared up.  If in the future the IRS discovers you have unreported income or assets in Mexico or Denmark, and you have not been filing the proper reporting forms with your tax return, it most certainly will impose high monetary penalties and will most likely also seek criminal penalties. The average prison sentence for tax evasion usually runs 3-4 years.  

We can help you catch up. Email us at ddnelson@gmail.com or visit our website at www.TaxMeLess.com  

Investment income tax under healthcare law- Explained

The U.S. Internal Revenue Service has released new rules for investment income taxes on capital gains and dividends earned by high-income individuals that passed Congress as part of the 2010 healthcare reform law.

The 3.8 percent surtax on investment income, meant to help pay for healthcare, goes into effect in 2013. It is the first surtax to be applied to capital gains and dividend income.

The tax affects only individuals with more than $200,000 in modified adjusted gross income (MAGI), and married couples filing jointly with more than $250,000 of MAGI.

The tax applies to a broad range of investment securities ranging from stocks and bonds to commodity securities and specialized derivatives.

The 159 pages of rules spell out when the tax applies to trusts and annuities, as well as to individual securities traders.

The  new regulations include a 0.9 percent healthcare tax on wages for high-income individuals.

Both sets of rules will be published on Wednesday in the Federal Register. The proposed rules are effective starting Jan. 1. 

Together, the two taxes are estimated to raise $317.7 billion over 10 years, according to a Joint Committee on Taxation analysis released in June.

To illustrate when the tax applies, the IRS offered an example of a taxpayer filing as a single individual who makes $180,000 in wage income plus $90,000 from investment income. The individual's modified adjusted gross income is $270,000. The 3.8 percent tax applies to the $70,000, and the individual would pay $2,660 in surtaxes, the IRS said.

The IRS plans to release a new form for taxpayers to fill out for this tax when filing 2013 returns.

The new rules leave some questions unanswered, tax experts said. It was unclear how rental income will be treated under the new rules at this time.

This new tax will definitely increase the compliance burden on individuals as taxes become even more complex.

How The IRS will find you Abroad When you Have Not Been Filing US Tax Returns

We are often asked by expatriates living abroad who have not filed their US tax returns for many years (and have seemed to have dropped of any IRS list)  how the IRS could ever find them or determine they are not filing their US tax return each year.  Here are just  some of the ways:

1.  Applying for social security benefits or pension benefits

2. Opening US bank and financial accounts

3. Inheriting money from their parents or others and failing to report income generated by those funds.

4. A Whistle blower. The IRS pays finders fees for those who turn in tax evaders whether the snitch is a US person or a foreign person.  The largest whistle blower fee paid to date  is $104 million.

5. Renew a passport (you now must give the Government your social secuirty number) which is then sent to the IRS.

6. From a foreign countries tax agency exchanging information with the IRS under treaties or  FATCA.

7. Form public domain information on the internet, websites, Linkedin, Facebook, Twitter, etc.

8. Registering the birth of a child born abroad with the US Embassy.

9. Marriages or divorces (that are public record) that reveal your existence.

10. By entering the US with a foreign passport that shows you were born in the USA

11. Stolen information from foreign banks and financial institutions given to the IRS

12. When your older children apply to US colleges or learning institutions and list information about their payments who long ago dropped out filing tax returns.

13. From other Americans in the US or abroad who do business with you

14. From suspicious activities forms filed with the IRS (yes this is an actual IRS form often filed by Banks or other financial institutions, car dealers, etc ).

15. As a result of information provided to it by the Serious Organised Crimes Office (SOCA) or   the US Treasury's Financial Crimes Enforcement Network.

16. From data provided the IRS by other taxpayers entering the Offshore Disclosure Program.

17. Forming a corporation or LLC in a foreign country that requires you register yourself as the owner your US  citizenship.

An ever increasing number of countries are agreeing with the IRS (over 50 currently) that the best way for each of them to collect more taxes is to share information about their residents with other countrys' tax agencies.  Computers and the internet are making it easier to gather data and locate those who previously could successfully disappear into the world.  It is difficult to guess exactly when in the near future, but for sure within the next 5 to 10 years  there  will be no where to run and no where to hide.

We can help you surface with the IRS before its too late. Write for more information to ddnelson@gmail.com and our website at www.TaxMeLess.com 

US Tax Treaties May Allow Nonresidents to be Taxed at Lower Rates

Tax treaties may allow residents of foreign countries to be taxed at a reduced rate, or to be exempt from U.S. income taxes on certain items of income they receive from sources within the United States.  Whenever you are a US Nonresident and the US has a tax treaty with your resident country, you MUST review that treaty to determine if it has benefits.

Treaties rarely benefit US Citizens or Green Card Holders due to the savings clause contained in almost all treaties which state that the IRS can still continue to tax its US tax residents and Citizens under the regular tax law regardless of what a treaty might state.  A US taxpayer residing in a treaty country may be able to use the treaty to avoid adverse tax consequences in that country. There is no standard treaty so each applicable treaty must be reviewed to determine its consequences.  Unfortunately the language used in the treaties if often vague and unclear. The IRS has not done much to clear up the ambiguities and to explain those parts which are unclear.

• Tax Treaty Overview
• Researching Tax Treaties
• Claiming Tax Treaty Benefits
• Competent Authority Agreements
• Competent Authority Assistance
• Items of Interest
• Certification of U.S. Residency for Tax Treaty Purposes
• The Effect of Tax Treaties
• The Transition Rules Regarding Articles 19 and 20 of the USA-Japan Income Tax Treaty of 2004
• The U.S. Model Income Tax Convention and Model Technical Explanation
• Mandatory Tax Treaty Arbitration

Look here for the complete texts of many of the tax treaties in force and their accompanying Treasury Technical Explanations. For further information on tax treaties refer also to the Treasury Department’s Tax Treaty Documents page.

Why US Expats and Residents May want to give gifts or do Estate Planning Before Year End

It might be wise for everyone to consider making gifts before year end to their children or other loved ones and consider other estate planning strategies. Previously its was thought Congress might extend the currently generous annual gift tax exclusion and the lifetime estate and gift tax exemption which is until the end of 2012 over $5 million.  In 2013 the exclusion will go back to $1 million.

Nonresidents (not a US Citizen or permanent resident) only get a $60,000 exclusion with respect to estate taxes on their assets located in the US.

If Congress decides the funds are needed next year due to the "Fiscal Cliff" they may not extend the current exemptions and now is the time to act.  Read more in the following Forbes Article Will the Estate and Gift Tax Boomerang?

We can help you with revise or amend your living trust, wills, and successfully make last minute gifts to tax advantage of the current rules which may end 12/31/12. Email us at ddnelson@gmail.com. 

U.S. engages with more than 50 jurisdictions to curtail offshore tax evasion

The US Treasury, announced that it is engaged with more than 50 foreign country jurisdictions to improve international tax compliance as part of efforts to implement the information reporting and withholding tax provisions under the Foreign Account Tax Compliance Act (FATCA).

 The U.S. has already signed a bilateral agreement with the government of the U.K. Treasury is in the process of finalizing intergovernmental agreements and hopes to finish negotiations in this respect with: France, Germany, Italy, Spain, Japan, Switzerland, Canada, Denmark, Finland, Guernsey, Ireland, Isle of Man, Jersey, Mexico, the Netherlands, and Norway.                                                                                                       

Treasury is also maintaining an active dialog with several countries to conclude an intergovernmental agreement. Jurisdictions include: Argentina, Australia, Belgium, the Cayman Islands, Cyprus, Estonia, Hungary, Israel, Korea, Liechtenstein, Malaysia, Malta, New Zealand, the Slovak Republic, Singapore, and Sweden. The government expects to finalize the agreements with many of the listed countries by the end of the year.

Additionally, Treasury is discussing viable options for intergovernmental cooperation with: Bermuda, Brazil, the British Virgin Islands, Chile, the Czech Republic, Gibraltar, India, Lebanon, Luxembourg, Romania, Russia, Seychelles, Saint Maarten, Slovenia, and South Africa.

The government stated it will continue exploring ways of engaging other interested jurisdictions in intergovernmental cooperation including at a meeting of senior government officials and financial institutions.

WHAT DOES THIS MEAN TO US TAXPAYERS LIVING ABROAD? Now is the time to file all past unfiled US tax returns and report all foreign bank accounts, financial accounts, foreign corporations and partnerships, foreign mutual funds, etc.  If you wait until the IRS gets your information from a foreign source, the risk of high monetary penalties and criminal prosecution increases dramatically.  We can help you get compliant and avoid these problems before it is too late.  Email us at ddnelson@gmail.com for further assistance or with questions.

  

CALIFORNIA 2011 RETROACTIVE TAX INCREASE

The California voters have spoken. They passed 

Proposition 30  which retroactively increases income taxes effective January 1, 2012 for those with high incomes. The following rate increases are effective for seven years:

Governor's Ballot Initiative
10.3% (1% increase) on income of:	$250,001–$300,000 for single/MFS; $340,001–$408,000 for HOH; and $500,001–$600,000 for MFJ.
11.3% (2% increase) on income of:	$300,001–$500,000 for single/MFS; $408,001–$680,000 for HOH; and $600,001–$1,000,000 for MFJ.
12.3% (3% increase) on income of:	More than $500,000 for single/MFS; More than $680,000 for HOH; and More than $1,000,000 for MFJ.

(Note: Income in excess of $1 million is also subject to the 1% mental health surcharge.)

Chief of IRS Criminal Investigation Divisions Comes After Those No Disclosing Foreign Accounts and Assets

 On October 18th, the chief of the IRS’ Criminal Investigation Division, Richard Weber, stated that his 4000 special agents will continue to focus on unreported foreign bank accounts.

You do not want to see one
of these in person

The requirement to file FBARs (Report of Foreign Bank and Financial Accounts) dates back to the Bank Secrecy Act in the 1970′s. No attempts were made to enforce this until until the last 4 to 5 years.  Failure to report a foreign account is a felony punishable by up to 5 years in prison. Civil penalties can include the greater of $100,000 or 50% of the high account balance for each year an account is unreported. Even “innocent” violations can result in penalties of up to $10,000 per year.

The  IRS has been looking at banks outside of Switzerland (where they originally began their enforcement efforts). Those banks includes several Israeli banks as well as financial institutions in the Bahamas, India, China, Australia,  Hong Kong, Liechtenstein and others not yet announced.

Speaking before a New York CPA group, Weber said that the IRS and Department of Justice would soon be announcing a new round of indictments involving unreported accounts. These prosecutions will involve banks outside of Switzerland.   The IRS has posted CID special agents around the world.  One indication is that they now have a field office in Panama which was a popular place for US taxpayers to hide their money and income.

There is presently an amnesty program to help taxpayers with unreported accounts. This includes those with foreign hedge funds, investments, bank accounts, CD’s and the like. The program, called the 2012 Offshore Voluntary Disclosure Program offers greatly reduced penalties and a promise of no criminal prosecution.  This program may not work for everyone. Some taxpayers may achieve lower or no penalties by negotiating directly with the IRS outside of the Disclosure program.  The important part is not to wait until the IRS discovers you first because it will then be too late to avoid higher penalties and criminal prosecution.

The procedures and rules for entering the program or surfacing with the IRS outside of the program are complicated.  You should speak with  a tax lawyer right away if you are one of the millions with unreported accounts (and other foreign assets that require reporting on your tax return such as foreign corporations, foreign partnerships and LLCS, passive foreign investment companies, etc.)

Don D. Nelson, Attorney, CPA with over 20 years of expatriate and international tax experience has represented or advises hundreds of clients with a wide variety of offshore reporting issues. His  clients include dual nationals, US permanent residents, taxpayers with offshore accounts, and expatriates who have businesses abroad or who have retired in other countries.

For more information, contact him at ddnelson@gmail.com.  All inquiries are protected by the attorney – client privilege and kept in strict confidence.

US Nonresidents Must Pay Tax on Their US Income

If you are a US nonresident (this is someone who does not have a green card or is not a US Citizen) and come to the US to work for a few months, you are obligated file a US tax return on your US source earnings (whether paid by a US company or a foreign company).  Your earnings might be exempt from tax under US tax treaty with your home country, but you still need to file the return to claim that  treaty exemption. Depending on the social security agreements in effect, it might even be subject to US self employment tax (social security) if you are an independent contract.

If you as a nonresident are going to file a US tax return, you need to secure a taxpayer identification number also. That process has recently become somewhat cumbersome and difficult.


A nonresident working in the US may under the laws of the state in which he or she works also be required to file a state tax return.

Failure to file a tax return will result in the statute of limitations for later requiring a return or tax to never run out.  Therefore, when in doubt you should as a nonresident always file a return.

The good news is that US nonresidents are not subject to tax on their interest income from banks, savings and loans and US treasury bills or on their capital gains from the sale of US stocks (so long as theses are investments and not connected with their US business).

Learn more about the US taxation of nonresidents at www.TaxMeLess.com 

List of IRS Tax Resources

The following IRS resources  listed on our website including  tax publications for US expatriates, US nonresidents,  US tax treaties, etc should answer most of your tax questions.  CLICK HERE TO GO TO RESOURCE PAGE.

If you have other questions, please email us at ddnelson@gmail.com.  Don D. Nelson, Attorney at Law, CPA.

NEW ZEALAND TO NEGOTIATE FATCA AGREEMENT WITH THE US

New Zealand will negotiate a FATCA agreement with the US. This means bank, stock broker and other financial information on US Citizens and green card holders living in New Zealand or with accounts there will be sent to the US IRS.

There will be no way to avoid extreme penalties and possible criminal prosecution once this agreement becomes effective. Now is the time to file all past due US tax returns and foreign account reporting forms. The IRS will not be as lenient once they receive the information from New Zealand and discover you have not filed these forms.  Dual Citizens and Green Card holders must still file a US tax return on their worldwide income regardless of their status.  Let us know if you need help.  We offer the privacy and confidentiality of  Attorney client privilege to all clients. Write us a ddnelson@gmail.com.  Visit our website at www.taxmeless.com  for more information on your US filing requirements.

READ MORE HERE.

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.