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Expat Tax Blog

Feb 14

How to Avoid an IRS Audit

by julie

Even if you follow the law as best as you can by paying your tax bills on time and filing your tax return every year, you are always potentially subject to an IRS audit. No one knows for sure what criteria the IRS uses to trigger an audit, and you can never eliminate the risk entirely, but there are generally accepted practices that will minimize that risk. In the event of an audit, taking the following advice to heart will also make the audit go much more smoothly.

Don’t Forget To Turn The Lights Off

It may seem obvious, but it is often simple errors that lead to an audit. Make sure you use the correct tax forms, and fill them in completely and properly. Double check all of your math. Many audits are the result of simple math errors. Tax preparation software will help tremendously with avoiding these mistakes. If the IRS does catch a math error, you will probably get an IRS notice correcting the error. The less attention you draw to yourself, the better off you’ll be.

Cross Your T’s, Dot Your I’s

There are many tax forms that are sent to taxpayers. What many people don’t realize is that these same forms are sent to the IRS. Any form that is received by the IRS must be properly reported to the IRS on your tax return. When the IRS finds discrepancies, red flags go off – this you want to avoid.

This is the easy part. All Forms 1099, W-2, 1098 – forms that taxpayers receive to report interest earned, retirement distributions, wages earned, etc – failure to properly report these items will make your life hard. Make sure all of the income on these forms are included on your tax return.

Whole Story at TFX.

Feb 14

New IRS Identity Verification Requirement – How to Comply And What This Means For Overseas Americans

by julie

Starting from the 2016 tax year, the IRS and state revenue agencies require tax practitioners to verify client identity and to document the methods used. 

“Just doing my job” – Please do not get angry with your tax preparer.  The IRS, in an effort to tackle identity theft, is stepping up compliance efforts and requiring identity verification on tax returns. Tax practitioners must now complete a ‘due diligence’ form, submitted with the tax return, indicating that the client identity was verified, and which methods were used to do so.

Why does the IRS need my driver license?

Aside from cracking down on identity fraud, the concealed goal of this process is to identify taxpayer state residency. The primary documentation method is Driver License or State Issued Id. The latter is  similar to a driver license, but you don’t need to take a driving test. A non-driver State ID can be used as “proof of identity.”

  • Details of Driver License or State ID are entered in the federal tax return, and this information will be passed on to the state that issued the document. Sharing of information with the state occurs regardless of whether a state tax return is filed.

Importantly – not all U.S. expats residing abroad have state tax filing requirements. Many states accept foreign assignment as a valid reason for interruption of state residency.

Therefore, we do not require that you upload a U.S. Driver license.

You may be fully entitled to avoid filing a state tax return, but providing a US driver license with your tax return may open up a can of worms and require you to (correctly) argue that you do not need to file a state tax return.  To avoid this headache, use alternative forms of verification we describe below.

Whole Story at TFX.

Jan 25

The State of California – Can Expats Ever Leave (Tax-Wise)?

by julie

In California, when Proposition 55 passed it extended the “temporary” tax of 13.3% on higher income earners through 2030. It is applicable to approximately 1.5 percent of people in California – single filers earning USD 263,000 and joint filers earning USD 526,000. This tax rate is higher than any others in the United States. The anticipated federal tax cuts coming in 2017 will make California’s taxes appear even higher by comparison. For many people, states like Washington, Florida, Nevada, and Texas that do not have income taxes will be appealing.

Can We Utilize the Foreign Earned Income Exclusion?

Former California residents living abroad do not have a privilege of the foreign earned income exclusion of income earned abroad. They must add back a special “ CA adjustment” of foreign income excluded on the federal return when they report their state taxable income.

Jeez – Is there Nothing We Can Do?

Whole Story at TFX.

Jan 20

7 Important Issues to Consider For Overseas Americans Repatriating to the US In the Middle of the Year

by julie

Moving back to the US in the middle of the year is the most common way anybody makes their move back. If you think about it, nobody is going to plan their move to happen on Dec-31st. Aside from readjustment to life in the US and the burden of relocation, moving in the middle of the year is certain to have an impact on your taxes. The below tips are essential reading during your repatriation planning.

1. US Expat Taxes: Foreign Earned Income Exclusion for Part-Year Residents

While working abroad you likely have got used to the Foreign Earned Income Exclusion. US citizens who return home after working abroad during the middle of the year still qualify for partial exclusion of their income earned during the part of the year spent abroad.

US citizens must report and pay taxes on their worldwide income to the US government on their annual tax return. That said, US citizens who live abroad are eligible to exclude a portion of their foreign income by qualifying for the Foreign Earned Income Exclusion (FEIE).

– As the name implies, the Foreign Earned Income Exclusion is only available for foreign earned income. You cannot use the this exclusion to exclude any US sourced income.

For 2016, this exclusion is capped at $101,300. To be eligible for FEIE, you must pass one of two tests – Bona-Fide Residency Test (BF Test) or the Physical Presence Test (PPT)

– If you have previously qualified for the Bona Fide Resident Test you can continue claiming the exclusion based on the Bona Fide Resident Test, even if you moved back to the US in the middle of tax year.

– To qualify for the Physical Presence test, you must live abroad for at least 330 days out of a 12 consecutive months period.

If your foreign work assignment was a contract with a defined ending date then the Physical Presence test should be used to claim the exclusion.

Note that the 12-months calendar period utilized to obtain PPT does not need to coincide with the actual date of return to the U.S. It can be any period leading up to the filing of your tax return. The amount of foreign income a taxpayer is eligible to exclude will be prorated based on the number of days in the calendar year that he or she was physically present in a foreign country.

2. Keep Record of Moving Expenses

Moving expenses related to your return to the U.S. may be a powerful tax deduction. When first moving abroad, your moving expenses were adjusted for the amount related to excluded foreign income. When returning to the US there is no such adjustment and you can deduct the full amount. There are special rules that allow you to split the deduction between two years if this can benefit your bottom line.

Whole Story at TFX.

Jan 19

2017 Roth IRA Rules You Should Be Aware Of

by julie

#1 Contribution Limits Stayed the Same

Standard Roth IRA contribution limits stayed the same as last year, with $5,500 being the limit any individual can contribute. In addition , plan participants ages 50 and over still have a limit of $6,500, which is commonly referred to as the “catch up contribution.”  You can also contribute to your ira up until tax day of the following year.

CONTRIBUTION YEAR 49 AND UNDER 50 AND OVER (CATCH UP)
2009 $5,000 $6,000
2010 $5,000 $6,000
2011 $5,000 $6,000
2012 $5,000 $6,000
2013 $5,500 $6,500
2014 $5.500 $6,500
2015 $5.500 $6,500
2016 $5.500 $6,500

#2 Roth IRA Phase-Out Limits Have Increased

Although contribution limits stayed the same, other information released in the 2017 Roth IRA rules show some changes.

For example, the AGI phase-out range for taxpayers making contributions to their Roth’s is now between $184,000 and $194,000 for couples who file jointly. While this range is slightly higher than the year before, it’s not a huge change.

A similar increase took place for singles who file taxes and contribute to a Roth IRA. As of 2017, the range where phase-outs begin now starts at $117,000 and ends at $132,000. Meanwhile, married individuals who file separately and have been actively participating in an employer-sponsored retirement plan should see no changes in the phase-out range.

Whole Story at TFX.