Expat Tax Blog
Individual retirement accounts can be a great tool for those saving for retirement. The combination of tax-deductible contributions and tax deferral often allows funds to compound faster than in a taxable account.
But the problem for expats is that the IRA rules were written for the U.S. tax code, which can often conflict with the tax codes of the countries where they live and work.
Here are some examples of the most common problems encountered when working with expats:
Making contributions with no un-excluded earned income.
To make a contribution to any type of IRA (traditional or Roth) you must have un-excluded earned income. This means that if you use the FEIE and housing deduction, to make IRA contributions, you must have earned income above the amounts you exclude. If you don’t and you have no other U.S.-sourced earned income, you cannot make a contribution to an IRA.
Contributing for an NRA spouse while filing as head of household.
Many expats file their taxes as head of household (if they have children) to keep a non-resident alien (NRA) spouse out of the U.S. tax system. Although this is often the best way to file for many expats, making an IRA contribution for an NRA spouse is not allowed.
Failing to realize that there are income limits on Roth contributions.
There are upper income limits on Roth IRA contributions. Many high-income expats who have sufficient un-excluded earned income make contributions to Roth IRAs without realizing this.
Not realizing income limits don’t apply for IRAs (not Roths) if you are not contributing to a qualified retirement plan.
Income limits for traditional IRAs do not apply if an expatriate is not contributing to a U.S. tax-qualified retirement plan. This opens the door for many high-earning expats to make IRA contributions.
Also, expats with un-excluded income can always make a non-deductible contribution to a traditional IRA. You won’t get the tax deduction on the contribution, but you will get tax-deferral on earnings. This may also be combined with a “backdoor Roth”—a technique for those who earn too much to get savings into a Roth IRA—or roll over to a Roth. This loophole in the U.S. tax code means that you cannot just roll your non-deductible contribution to a Roth; it must be rolled proportionally with your aggregate IRA balances.
Not considering double taxation when making deductible IRA contributions.
To avoid double taxation, the U.S. allows the foreign earned income exclusion of up to $101,300 for 2016 and foreign tax credits for amounts above this.
Failing to take required minimum distributions on inherited IRAs.
According to the IRS, the beneficiary of a non-spouse-inherited IRA must begin making annual required minimum distributions by Dec. 31 of the year following the death of the IRA account holder (the rules are different for IRAs inherited from a spouse).
This requirement applies to both inherited traditional IRAs and Roth IRAs. There is a specific formula that must be followed each year for calculating the required minimum distribution. Unfortunately, many brokers or custodians where the account is held will not do this calculation or distribution for you.
Overall, IRAs can be great savings tools for expats, but you must follow the rules and consider whether contributions make sense for your situation.
Original Story at WSJ.
Legal and financial fees are expenses we don’t choose to pay. Those payments are necessary expenses; therefore it seems logical to deduct them on your tax return. However, only certain types of financial and legal fees are deductible. The following article explains which fees are deductible on your US tax return and which ones are not.
The full story can be found here.
The IRS made it dramatically easier and cheaper for taxpayers who miss the 60 day deadline for rolling over retirement account money to fix their errors.
By law, money received by a taxpayer from an IRA, 401(k), or other workplace retirement plan, must be contributed (i.e. rolled over) to another retirement account within 60 days to escape immediate taxation. Otherwise, it is considered a distribution subject to regular taxes and (if you’re under 59 ½), a possible 10% early withdrawal penalty.
Till now, however, to get 60 day relief, you had to apply to the IRS for what’s known as a private letter ruling. That meant paying the IRS a stiff fee (which rose on January 1, 2016 to a stunning $10,000), plus shelling out another $5,000 to $10,000 for a tax pro to prepare the private letter ruling request. The ruling took six to nine months, and you couldn’t roll the money into a new account until the IRS gave the green light.
But in Revenue Procedure 2016-47, both issued and effective today, the IRS has created a new “self-certification” procedure that allows someone who misses the 60 day deadline to avoid the expense and delay of obtaining a private letter ruling. Thus, a taxpayer submits a model IRS letter to the new retirement account custodian, checking in that letter one of 11 acceptable excuses for missing the deadline. This isn’t an unconditional pass—the IRA custodian will report the letter to the IRS and should the taxpayer be audited, the IRS can still determine he didn’t quality for 60 day relief.
These 11 excuses include an error by a financial institution; a taxpayer misplacing (and never cashing) the retirement account distribution check; and a taxpayer mistakenly putting the check in a taxable account he thought was an eligible retirement account. There’s also lots of dispensation for personal problems, including a death or serious illness in the family; a home being severely damaged; and even a taxpayer being unable to complete the rollover because he was incarcerated.
Original Story at Forbes.
There are many ways to prepare an expatriate tax return with the goal of minimizing tax due. Some strategies should08202016 be used with utmost care – as the IRS is likely to reject them and place you under an audit.
The following article we just published goes over some of the more common approaches that you should stay clear from – as they may be more trouble than you expect.
The full story can be found here.
According to a spokesman for Liechtensteinische Landesbank AG (LLB), changes in Liechtenstein law allow the IRS to make group requests without providing the names of the specific individuals that the IRS is seeking. The spokesman also stated that in the Liechtenstein group request, U.S. authorities are also targeting lawyers, accountants, financial advisers, asset managers and those responsible for professional asset protection who “conspired” with U.S. taxpayers to commit tax evasion or other crimes. Apparently, the IRS may be seeking information all the way back to 2001.
LLB is Liechtenstein’s second largest bank. Tax problems for offshore bank account holders in Lichtenstein date back to 2008 when information stolen from LGT Group was used by German authorities to prosecute tax fraud.
The fallout extended to U.S. depositors at LGT who were investigated by the IRS. Since then the IRS has promoted several voluntary disclosure initiatives to attempt to convince U.S. persons who failed to file FBARs to settle up with the IRS. To date those programs have resulted in over 30,000 individuals making voluntary disclosures of the offshore bank accounts to the IRS. These programs have been accused by some tax lawyers as being too much stick and not enough carrot.
U.S. owners of these offshore accounts have difficult choices to make in a short period of time. Should they enter the IRS Offshore Voluntary Disclosure Program (OVDP) before it’s not too late? Should they appeal the turnover of information by LLB through the Liechtenstein court system? Should they wait and do nothing?
Each of these solutions has its own set of risks and rewards. Entering the OVDP will be expensive. Penalties of 27.5% of the offshore account balances can be expected. In addition, other non-financial assets may also be subject to the 27.5% penalty. Back taxes must be paid, generally going back to 2004. On top of that, expect additional penalties and interest.
On the other hand, not entering the OVDP can lead to FBAR penalties equaling 300% of the foreign bank account balances, as well as possible criminal tax evasion charges. The bottom line is that everyone’s situation is different, and only consultation with a tax lawyer experienced in these offshore issues will begin to help in coming to the right personal decision.