Expat Tax Blog
The following article will discuss the requirements that must be met in order to claim children as dependents, and requirements if non-custodial parents want to claim the exemption.
We will also discuss the rules for “breaking ties”, how custodial parents can voluntarily release the exemption to the other parent and also a recent decision by the Tax Court that considered this issue.
What are the Requirements to Claim the Exemption?
A taxpayer must meet all the following requirements, or the IRS will disallow the exemption. The child that is being claimed as a dependent must:
- Have resided with the taxpayer over half of the year. Absences of a temporary nature (such as being away for school) do not get considered. The exemption can be claimed for children born within the tax year if that child was living with the taxpayer after being born for more than half of the remainder of that year. Children who are stillborn cannot be claimed, but children who lived for even a moment outside the womb do qualify.
- Have been under the age of 19 as of December 31. (Birth date is considered as December 31 when born January 1.) The age is 24 for a child who is a student full time (according to school rules), for at least five months out of the year. These do not need to be consecutive.
- Be younger in age than the person claiming the exemption, including a spouse if filing jointly. These age requirements are not applicable to a child who is totally and permanently disabled.
- Not have provided over half of their support themselves. The parents are not required to provide over half the support of the child. This tests only for relatives who are being claimed. The definition of support includes things like room and board both at home and at school, health care, education expenses, clothing, transportation costs (cars must have been registered under the name of the child’s), expenses for operating a car that is registered to the parents, equipment for recreation and athletic events, wedding expenses, entertainment, music and dancing lessons, musical instruments, and summer camp. Included in the child’s support are savings as well as other income (like social security and other government payments), if the money is spent by the child themselves for purposes of supporting themselves.
- Have their social security number or taxpayer identification number (for non-resident and resident aliens) reported on the income tax return. Without this number, the IRS disallows the exemption.
- Not file a return jointly if they are married, unless it is filed only to get a refund when no taxes are due.
- Be a citizen of the US, a resident alien, resident of Mexico or Canada, a United States national owing allegiance to US (a person born within the North Mariana Islands or American Samoa who isn’t a naturalized citizen of the US).
Whole Story at TFE.
When deciding to retire abroad, the factors most often considered include political stability, weather, quality of life and affordable healthcare. These are certainly important, but you also need to figure out a way to pay for this glorious next stage of your life. You’ve saved for retirement for years – don’t take your eye off the ball now that you’re finally there. Hint – not all countries are equal with regards to taxing American retirees. Let’s look at some key tax factors to consider when planning to retire abroad.
1. Will my U.S. pension be taxed?
A. Distributions from a U.S. employer pension and from Traditional IRA’s will remain fully taxable by the IRS regardless of the country you reside in. The good news – pension distributions will be exempt from U.S. state taxation. If you received those distributions while living in the US, then state tax rate would depend on the tax rules of the state where you live upon retirement, not by the state where you earned it.
I.E., if you earned pension in NY and moved to CA, you would pay state tax on pension in CA, based on your CA tax bracket. If you earned pension in CA and moved to FL your pension would not be taxable because Florida does not levy a state tax. Same exemption from the state taxation will take place if you live abroad. However, pension may be taxable by your new country of residency. Please consult a tax specialist in your new country of residency.
If your U.S. pension is taxed by the IRS and by the country where you live you will be protected from double taxation through the foreign tax credit mechanism.
B. Distributions from ROTH IRA will remain non-taxable by the IRS and by your new country of residency. ROTH IRA was funded with after-tax money and therefore will never be taxed again.
Whole Story at TFE.
The following article aims to answer the following questions:
1. Is there a penalty for moving retirement funds from the U.S. to abroad?
2. If so, how can these penalties be avoided?
3. Are there any cases where the penalty is waived?
4. How can TFX help me find out my cost of doing this?
Can I move funds between my U.S and non-U.S. financial accounts?
Technically, moving funds across border can be done in either direction – to and from the U.S. In general, there are no U.S. tax consequences or penalties associated with the actual cross-border funds transfer.
Cross-border transfer of retirement accounts is far more complicated
Withdrawal of funds from a U.S. employer retirement plan (i.e. 401K, 403b) or U.S. Traditional IRA is ALWAYS treated as ordinary income because Traditional IRA was funded with pretax money. If you are younger than 59 ½ then you will pay 10% early withdrawal penalty in addition to your regular tax rate.
Only a rollover (i.e. transfer of funds to another U.S. Traditional IRA account) is a tax-free and penalty-free event, regardless of the amount of funds transferred and regardless of your age. The best way to ensure the tax-free character of funds transition is to initiate a direct rollover.
If you accidentally made a withdrawal not knowing about the direct rollover option, you can deposit these funds to a new account or return it to the original account. However, take note that this must be done within 60 days avoid tax and penalties. The designated account must be a U.S Traditional IRA. Retirement plan established in any country outside of the United States does not qualify for a tax-free rollover to or from the U.S.
Original Story at TFE.
Congratulations – you’re married! If you are a US citizen and your spouse is not, you may want to obtain a Green Card or Immigrant Visa for your new spouse. In order to do so, you must certify that you are up to date with your US tax returns and attach transcripts to show proof.
In addition to the tax transcripts, it is helpful to provide proof of current employment. Either a summary of payslips or an employer letter stating your current position, salary, and how long you have been there should suffice.
How do I know If I was required to file a tax return?
All US citizens and GC holders are required to file a US tax return declaring their worldwide income (question 20 in the I-864 application above refers to worldwide income). Please see Minimum Filing Requirements to determine if you were not required to file.
Whole Story at TFE.
Putting some earnings away to save for retirement is common throughout the world. But for US citizens, as well as
permanent residents, who live abroad, the world of retirement accounts and pensions is hard to navigate because of complicated Internal Revenue Service regulations. Any type of foreign account, including pensions and retirement accounts, can be either a significant benefit, or a tax nightmare.
Whole Story at TFE.