International Flight Attendants & Pilots Use of Foreign Earned Income Exclusion is Limited

The Tax Court has held that an international flight attendant  (this ruling would apply to pilots also) could not use the foreign earned income exclusion to shield all of her wages from tax. Rather, she could only exclude that portion of her wages that was allocable to her flight time that occurred within or over foreign countries.

 A qualified individual may exclude foreign earned income from gross income. (Code Sec. 911(a)) Foreign earned income is earned income received by an individual from sources within a foreign country. (Code Sec. 911(b)(1)(A)) Code Sec. 911 does not define “foreign country.” But the regs provide that the term “foreign country” when used in a geographical sense includes any territory under the sovereignty of a government other than that of the U.S. They go on to provide that the term includes the territorial waters of the foreign country (determined in accordance with the laws of the U.S.), the air space over the foreign country, and the seabed and subsoil of those submarine areas which are adjacent to the territorial waters of the foreign country and over which the foreign country has exclusive rights, in accordance with international law, with respect to the exploration and exploitation of natural resources. (Reg. § 1.911-2(h))

Consistent with this reg, the Tax Court has held that a U.S. taxpayer is allowed the foreign earned income exclusion only for wages earned while in or over foreign countries and not for wages earned in international airspace or in or over the U.S. (LeTourneau, TC Memo 2012-45)

Facts. Yen-Ling K. Rogers was a U.S. citizen and a bona fide resident of Hong Kong. She worked as a flight attendant for United Airlines (United) on international flights based out of Hong Kong International Airport. Under an agreement between United and the union for flight attendants, (1) Yen-Ling accrued nonflight time, such as sick and vacation hours, based on the period of her flight attendant service; and (2) United compensated her for additional categories, such as required training and meetings and the performance incentive program.

United required Yen-Ling to perform preboarding and postarrival services on every flight on which she worked. She was required to report to work 1 hour and 45 minutes before the departure of a flight and to perform approximately 30 minutes of postarrival services. The flight time begins at “out time,” when the plane's brake is released and the plane pushes back from the airport. The flight time ends at “in time” when the plane's parking brake is set after landing. Yen-Ling was not separately compensated for the time spent performing preboarding and postarrival services.

In 2007, Yen-Ling worked the following flights: 16 flights between Hong Kong (HK) and San Francisco (SFO); 16 flights between SFO and HK; 14 flights between HK and Chicago (CHI); 14 flights between CHI and HK; 5 flights between HK and Ho Chi Minh City; 5 flights between Ho Chi Minh City and HK; 2 flights between SFO and Nagoya; and 2 flights between Nagoya and SFO.
The percentage of Yen-Ling's flight time within or over foreign countries during 2007 was as follows:

• HK-SFO-HK, 63.38% foreign flight time,
• HK-CHI-HK, 86.05% foreign flight time,
• HK-Ho Chi Minh City-HK, 100% foreign flight time, and
• SFO-Nagoya-SFO, 29.19% foreign flight time.

United reported $41,762 of wages to Yen-Ling for 2007 on Form W-2, Wage and Tax Statement. United provided her a duty time apportionment for her flights during 2007 that apportioned the minutes of her flight times within or over the U.S., international waters, and foreign countries.

Yen-Ling excluded 100% of her United wages as “other” income on a joint return she filed with her husband for 2007. The “other” income reported on her Form 1040 was specified by reference to the attached Form 2555EZ, Foreign Earned Income Exclusion. On the Form 2555-EZ, she reported $41,762 as the total amount of foreign earned income she earned and received in 2007 and the same amount as their foreign earned income exclusion.


Exclusion limited. The Tax Court observed that even though Yen-Ling excluded wages as foreign earned income, she stipulated that only a percentage of her flight time occurred within or over foreign countries. Therefore, the Court concluded that only a percentage of her United wages qualified for the Code Sec. 911(a) exclusion.

The  Tax Court concluded that her stipulated flight time percentages applied to any of her wages that are allocable to nonflight time that was based on international flight attendant services she performed for United. The Court said that there was no rational basis for allocating these forms of compensation 100% to foreign earned income.

Visit our website at www.expatattorneycpa.com to learn more about IRS International Tax Rules that affect pilots, flight crews, and crew who work on ships, cruise lines, etc. Let us help you with your tax returns.

How Nonresidents can Obtain an IRS ITIN from Abroad

If you are a nonresident who needs to file a US nonresident tax return or you have a spouse who is a nonresident and wish to make the election to file a joint return with them (it can often reduce your US income taxes) you need to get an ITIN (Individual Taxpayer Identification Number) because they are not eligible to get a social security number. You must have this number to file a tax return, and many banks and others require it before you an open a US bank or financial account.

Effective January 1, 2013, new ITIN procedures took affect for the Individual Taxpayer Identification Number (ITIN) application process. Some of the information below, including the documentation requirements for individuals seeking an ITIN, has been superseded by these changes. Taxpayers and their representatives should review these changes, which are further explained in these Frequently Asked Questions, before requesting an ITIN.

Alien taxpayers who need an Individual Taxpayer Identification Number (ITIN) may be able to secure one from outside the United States.

The IRS has permanent staff available that is able to help process Forms W-7, IRS Application Number and Instructions (PDF) at the following U.S. embassies overseas: Beijing, Frankfurt, London, and Paris. The addresses and phone numbers of these overseas offices may be found a tContact My Local Office Internationally. In addition, there are public accounting firms overseas in certain countries which are Authorized Acceptance Agents for ITIN numbers. You will find their names and addresses at the Acceptance Agent Program page.

US Embassy Beijing, China - IRS has
agents in almost every US embassy.

The IRS also accepts a Form W-7 by mail accompanied by ORIGINAL documents or certified copy of the document from the issuing agency establishes the identity and foreign status of the ITIN applicant.

The Instructions for Form W-7 list 13 documents that can be used to prove foreign status and identity. A foreign passport is the only one that can stand alone (i.e., establishes both foreign status and identity). If a passport is submitted, there is no need to submit any other documents. If a passport is not submitted, a combination of at least two other documents, with at least one containing a photograph, must be submitted with the ITIN application. The IRS will accept copies of original documents, if the copies have been properly certified by:

1. the government agency (foreign or domestic) which issued the documents, or
2. employees of the U.S. State Department located in U.S. embassies and consulates abroad.

More Information:

• Taxpayer Identification Numbers (TIN)

If you need help filing your US nonresident tax return or filing an expat tax return with your nonresident spouse, we can help. We have been assisting US nonresident clients for over 30 years. Email us at ddnelson@gmail.com.  Skye: dondnelson or wisit our website at www.TaxMeLess.com

Thanks. KAUFFMAN NELSON LLP CERTIFIED PUBLIC ACCOUNTANTS, Don D. Nelson, Attorney CPA

Deadlines in 2013 For Filing Expat Taxes for Tax Year 2012

• March 15, 2013.  Due date of Form 3520A which must be filed by Foreign Trusts when a US person has ownership or control. This form can be extended with Form 7004 until September 15th
• April 15, 2013 – US tax return filing deadline for those living in  the US and due date for all taxes owed whether you are an expat or resident. If any taxes are owed after this payment, those amounts are subject to penalties and interest.
• June 17, 2013 – US tax return abroad deadline for expats but can be extended by filing form 4868 prior to this date with IRS
• June 30, 2013 – Foreign Bank Account Form is due (FBAR, or Form 90-22.1) - Must be received by IRS on this date (not date of mailing)
• October 15, 2013 – Final tax deadline for US tax returns for expats abroad IF you have already applied for an extension. NOTE. There may be one more extension available until December 15th, if you file a letter request with the IRS under certain circumstances.
• Forms 5471, 3520, 886,5, 8621 and most other foreign entity and special reporting forms are due on the extended due date of your personal tax return for 2012. If filed late, you may be subject to substantial penalties which are usually $10,000 or more.

Kauffman Nelson LLP, Certified Public Accountants have extensive experience over the past 30 years with US International, Nonresident  and Expatriate Taxation.  Visit our website at www.TaxMeLess.com or email us at ddnelson@gmail.com.  Our skype address is: dondnelson.   Thank you. Don D. Nelson, Attorney, CPA.

Filing US Income Tax Returns in US Territories Such as Guam, Puerto Rico, Virgin Island, and Samoa

If you live in the US territories of  American Samoa, Puerto Rico, Mariana Islands, Guam or the US Virgin Islands you will be required to file US  income tax returns in that territory  and may or may not have to also file a tax return with the IRS. The rules and forms used may vary in each  jurisdiction. The filing requirements also are different if you are a US Citizen or Green Card Holder or a Nonresident.

The IRS has published an excellent guide explaining the filing requirements of each territory where can be READ HERE.    If we can help with the return preparation email us at ddnelson@gmail.com or go to our websites at www.TaxMeLess.com or www.ExpatAttorneyCPA.com. 

Everything You Wanted to Know about the Foreign Earned Income Exclusion (IRS Form 2555)

One of the best tax benefits in the tax code is the foreign earned income exclusion.  If you live abroad in a no tax or low tax jurisdiction it allows you to save many thousands of dollars in US income taxes.

If you meet certain requirements, you may qualify for the foreign earned income and foreign housing exclusions and the foreign housing deduction.

If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude from income up to an amount of your foreign earnings that is now adjusted for inflation ($91,400 for 2009, $91,500 for 2010, $92,900 for 2011, $95,100 for 2012). In addition, you can exclude or deduct certain foreign housing amounts.

You may also be entitled to exclude from income the value of meals and lodging provided to you by your employer. Refer to Exclusion of Meals and Lodging in Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, and Publication 15-B, Employer's Tax Guide to Fringe Benefits for more information.

• Requirements
• Can I Claim the Exclusion or Deduction?
• Tax Home In A Foreign Country
• Bona Fide Resident test
• Physical Presence Test
• Exceptions to Tests
• Figuring The Exclusion
• Choosing The Exclusion
• Revocation
• Which Form to File
• Foreign Housing Exclusion or Deduction
• Individual Retirement Arrangements
• Extension to Claim Foreign Earned Income Exclusion
• Application of Foreign Earned Income Exclusion and the Combat Zone Exclusion to Civilian Contractors Working in Combat Zones (PDF)

If you live in a foreign country where you must pay foreign income taxes, you can avoid double taxation by taking foreign tax credits which offset your US tax on that foreign income dollar for dollar.  We have over 30 years experience in assisting US expatriates, green card holders and nonresidents pay the lowest US income taxes possible. We can often help you avoid having to pay US state taxes also.  Email us at ddnelson@gmail.com or visit our websites at www.TaxMeLess.com or www.expatattorneycpa.com 

Expats Avoid State Taxes -Five States with Highest Income Tax Rates

As an US expatriate living and working or retired abroad, you can avoid paying state taxes and save substantial amounts of  income taxes.  It is very important because state laws do differ, that you take the proper steps to abandon you state tax domicile. Some states often allege you have still maintained that status if you keep sufficient contacts with the state or have an intent to return to that state in the future. It is only after you return from your assignment abroad, and that state asks about your unfiled state tax returns, that this issue usually arises.  By then, it could be too late to take the proper precautionary steps to avoid the problem.

CNBC has named the five states with the highest state and local income taxes as California, Hawaii, Vermont, Oregon and New Jersey.

California has a rule which allows you to claim non-residency status  for state tax purposes while living abroad even if you keep contacts with the State which is known as the "safe harbor rule."  To qualify you must:

• Live and work under a written contract abroad for at least 545 days
• Not earn more than $200,000 in investment income
• Not return to California more than 45 days during any calendar year.

Under states have other various schemes to determine if they can still hit you with state income tax while you are abroad. You need to review the rules of the state you live in to determine how difficult it will be to cut state income tax ties.  Need help with this important tax planning step?  Email us at ddnelson@gmail.com. 

10 Things that Cause Tax Audits of US Expatriates

1. Not Reporting All Of Your Taxable Income: The IRS cross checks your income sources with 1099s and W-2s. If your income has dropped, that may be a red flag. Do not under report your income, no matter how tempting. If you have some self-employed income, report it and then use every deduction or write off you can find.  They have tax treaties with many countries and may find out what you actually made abroad even though you thought they could not find out.

2. Filling Out Forms 2555 Incorrectly:  Leave boxes or lines blank, or fill out this form wrong you may cause an audit, an IRS letter of Inquiry, or perhaps a letter disallowing your foreign earned income exclusion.  Be careful if you use a program and do your return yourself. Best to have a professional review it before you file.  The IRS has found that many people are claiming this exemption are not eligible. Therefore, the number of audits has increased substantially.

3. Form 1116 (foreign tax credit) not done correctly: This is a difficult form to prepare and if done incorrectly, the IRS may disallow any foreign tax credit at all.

4. Taking Higher Than The Average Deductions: If the deductions on your return are disproportionately large compared to your income, the IRS audit formulas will go “tilt”. So if you have large medical deductions be sure you can prove them if need be.

5. IRS Finders Fee Program: The IRS does pay rewards to those who turn in US taxpayers for not reporting substantial amounts of income on their returns. If you have a co-worker, etc. who no longer likes you and knows your secrets, you may be in danger if those individuals learn about the big rewards that the IRS pays for turning you in.

6. Business Meals, Travel And Entertainment: Schedule C is filled with tax deductions for the self-employed individual. And the IRS has figured out that often some self-employed individuals tend to claim excessive deductions. They then make the assumption that all such individuals may cheat so Schedule C will get a review.

7. Claiming 100% Use Of Your Car For Business: If you are self-employed and use your car for business be honest with how much you actually use the car for business. Keep very good records of the miles you drive. I know it’s a nuisance, but necessary.

8 . Large Cash Transactions: The IRS requires reports  in the US to be filed for cash transactions in excess of $10,000 involving banks, casinos, car dealers and other businesses.  If they receive these reports from these places they may audit you.  The IRS also tracks wire transfers in and out of the Country.   Such transfers may result in an audit if your tax return fails to show the receipt of such money as income or the amount does not fit in with your financial resources.  If you receive a large gift from abroad, you my have to file form 3520 to report that gift (no tax is due if you file this form for gifts from nonresidents outside of the USA) or risk a huge penalty for not reporting the gift.

 9. Math Errors: If you do your tax return in long hand, check your math and be sure to sign the return and put in the correct social security numbers. A sloppy return can trigger an audit.

10. Failure to Properly Abandon your State Tax Domicile:  Many states like Virginia, New Mexico, California and other have state tax laws that make it difficult to move abroad and stop paying state taxes if one of these is your prior state of residency. This is aggravated if you keep using an address in that State or return to that state after spending 2 to 4 years abroad.  These states get your Tax information from the Federal return you file and because you are still using an address in that State on your return, send you an assessment or audit you for taxes they feel are due. Take precautions to properly surrender your tax domicile (which is often different than residency) to avoid this problem.

We are experts at help you avoid these problems. Visit our website at www.TaxMeLess.com or email us at ddnelson@gmail.com. 

An Overlooked Expat Deduction? - The Foreign housing exclusion or deduction.

In addition to the foreign earned income exclusion, you can also claim an exclusion or a deduction from gross income for your housing amount if your tax home is in a foreign country and you qualify for the exclusions and deduction under either the bona fide residence test or the physical presence test.

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.

READ MORE HERE

Read more about your expatriate and nonresident income tax benefits and rules at www.TaxMeLess.com.   We have  been preparing expatriate and US nonresident tax returns for over 30 years.

US Expatriate Entrepreneurs - States with No Income Tax

US Expatriates are not required by law to maintain a state of residency or pay state income taxes. However many expatriate entrepreneurs need to locate a corporation or other business entity for their  business, but do not want to have to pay state income taxes.  The following states have no income taxes and may be suitable to keep a US presence (and form a corporation or LLC located there for your business) but not subject yourself to state income taxes:

1. Nevada
2. Washington
3. Texas (does have a franchise tax on corporations)
4. Alaska
5. Florida
6. South Dakota
7. Wyoming 

We can assist you in forming a Corporation or LLC in these states, advise you on the best US tax elections to make (Subchapter S corporation election, etc) and the best way to utilize these entities with your offshore business operations.  We have helped hundreds of US Citizens doing business abroad in the same manner with great success.

If you went abroad, or are going abroad, and you live in California, Virginia, New Mexico and several other states that make it very difficult to give up your tax domicile (they want to keep taxing you after you have left the state to live outside the US) you may want to consider switching your legal residency (either before or after you have left) to one of these states and transfer all other indices of residency to one of these income tax free states.  It can avoid big potential problems later with the State you lived in (if it has tough rules on abandoning your tax domicile).

If you have questions email us at ddnelson@gmail.com or visit our website at www.TaxMeLess.com .

Counties Around with World With No Personal Income Tax - US Expat Tax Planning

US Entrepreneur expats are always asking us,  Which countries in the can I locate my business that have no personal income tax.  For a list of the fifteen countries CLICK HERE. If you set up your business in one of these countries and use the US foreign earned income exclusion along with the foreign housing deduction you can make in excess of $110,000 or more and not pay any income tax AT ALL on your business earnings.

For a list of the tax rates in various countries in the world go to this wikipedia link for a great table.

As a US citizen or green card holder you must report your worldwide income  on your US tax return no matter where you live in the world.  If you live in a country that has taxes, you can claim a credit for those taxes as a direct offset against the your US tax on the same income. However, if you earnings are from your own labors it is possible to earn the amounts set forth above and pay no taxes on your US tax return (or anywhere else) at all.  This is one of the greatest tax breaks around. If you spouse also works, he or she can also claim the foreign earned income exclusion against their earnings.

If you are self employed, you may have to pay US self employment tax (social security and medicare) on your earnings, if you live in a country with no social security agreement with the US. However, if you structure your offshore business correctly using a foreign corporation, it is even possible to avoid having to pay those amounts.

We can help you set up your business abroad for the optimum tax savings fully complying with all US tax laws.  If you need help email us at ddnelson@gmail.com or leave a message on skype at dondnelson.

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.

________________________________________________________________________

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

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.