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Expat Tax Blog

Feb 26

U.S Tax Impact from portability between non-US retirement plans

by julie

Transfer of funds from one pension plan to another may be treated a taxable event in the US (there is no official document to substantiate the tax exemption).

Introduction

Many Americans are working abroad. Many of them will be participating in the retirement plan in a foreign workplace which they believe is similar to a section 401(k) plan in the US. Most taxpayers make crucial mistakes believing that IRS treats foreign retirement plans just like domestic ones as the IRS does not generally tax contribution to foreign plans, the accumulated yet undistributed income in foreign plans and distribution from foreign plans.

Normally US expats do the following steps on the suggestion of US accountant who lacks extensive experience with international tax matters

  1. Filing timely form 1040 reporting the wages from the foreign company
  2. Disclosing the existence and location of the foreign savings account on Form 1040 Schedule B(Interest and Ordinary dividends)
  3. Claiming the foreign earned income exclusion on Form 2555
  4. Reporting the interest income from the Foreign savings account
  5. Filing electronically an annual FinCEN form 114 to notify the IRS about the foreign savings account

A US accountant may mistakenly assume the foreign retirement plan is similar to sections 401(K) plan in the US and thinks will not have any issues until they start distribution from the plan. US expats will make the maximum annual contribution to the Foreign plan and the amount in the plan continues to grow and also gains on passive investments.

If the lack of tax deferral is not enough to get your attention, there should be a long-list of information reporting duties and the steep penalties for violations.

Based on a recent study by the US Government Accountability Office (GAO Report) criticizing the IRS and Congress for allowing the perpetuation of a complex, obscure and inconsistent system. The US tax and information reporting problem of US persons with foreign retirement plans are well documented in the GAO report issued in Jan 2018. The GAO reports start by underscoring the size of the problem, there are nearly nine million US citizens living abroad, many of whom have interests in local retirement instruments. It then describes the distinct way that the US tax system treats domestic versus foreign retirement plans. The GAO report says that – contributions by employees and employers and passive earnings such as interest, dividends and capital gains within a qualified retirement plan generally are not taxed until the employee receives the actual distribution from the plan. By contrast, the GAO report says that Foreign workplace retirement plans are not ordinarily considered “qualified plans” under the IRC so US expatriates working as employees do not receive the same benefits as their counterparts with “qualified” domestic plans.

Whole Story at TFX.

Feb 21

Gift Taxes Explained – are they really tax free?

by julie

1. Definition

The gift tax is a tax on the transfer of property by one individual to another while receiving nothing or less than full value in return.

For Example,  Father gave gifts to his daughter $600,000, for which she pays father $100,000. Then $500,000 (600,000 – 100,000) is considered a gift. Payments exceeding the legal obligation for transferring money to a given person is always a gift in the eye of the IRS, except for transferring money to a spouse.

2. When does the tax apply?

The Gift tax applies to transfers made while a person is living. The generation-skipping transfer tax is an additional tax on a transfer of property that skips a generation.

Whole Story at TFX.

Feb 17

Tax Reform impact for non-US citizen property investors – W-8BEN, W-9 which forms to file?

by julie

Situational analysis

Non-US citizen (Thai Citizen) owns rental properties in the US. These rental properties generate income, which is then deposited into US banks. The US bank has now begun taking backup withholding. What is happening, and what forms does the taxpayer need to complete to reduce withholding?

Summary

  1. Bank starts taking 30% backup withholding from interest earned by deposit accounts.
  2. The Taxpayer wishes to avoid backup withholding.
  3. The bank requests to provide form W-8BEN or W-9 in order to stop or reduce backup withholding.
  4. The form W-9 does not apply because the taxpayer is not a US person. The Taxpayer is under the impression that form W-8BEN also does not apply because the rental income they receive from US sources is considered effectively connected income (EIC). Bank informs taxpayers that they should be filing W-8ECI. Is this correct? What should the taxpayer file?

What is the bank withholding tax on? Interest, not rental income.

Albeit the bank deposits, which generate income, come from rental income, the bank is only taking backup withholding from the interests the deposits generate.

Therefore, form W-8ECI is not relevant. The taxpayer should file form W-8BEN and resubmit it annually only changing the date of signing.

Whole Story at TFX.

Jan 23

Requirement to File Informational Return Form 8621 Even If Below Filing Thresholds

by julie

Per the instructions for forms 8621, When and Where To File, Attach Form 8621 to the shareholder’s tax return (or, if applicable, partnership or exempt organization return) and file both by the due date, including extensions, of the return at the Internal Revenue Service Center where the tax return is required to be filed. If you are not required to file an income tax return or other return for the tax year, file Form 8621 directly with the Internal Revenue Service Center, Ogden, UT 84201-0201.

PFIC Background

Generally, a foreign corporation is a PFIC which exhibits either one of two conditions

  • Income test. 75% or more of the corporation’s gross income for the tax year is passive income (as defined in section 1297(b)). Which generally includes dividends, interest, rents, royalties, annuities and net gains from a certain property, commodities,  and foreign currency transactions
  • Asset test. At least 50% of the average  annual value of its total assets consist of income producing assets (determined under section 1297(e)) For example cash, working capital and non inventory investment in stock are generally considered to be passive income-producing assets

Whole Story at TFX.

Nov 4

IRS Relief For Former Citizens

by julie

Relinquishing United States citizenship is a serious matter, and involves decisions that are irrevocable. Of course, there are tax implications to doing this as well. Anyone considering this is encouraged to speak with a specialized legal professional prior to making final decisions. The IRS has procedures to handle these matters. To aid in decision making, below is some information about tax compliance and how to avoid becoming a “covered expatriate”.

Background

United States citizenship is defined by the US Constitution in the Fourteenth Amendment, where it states that “all persons born or naturalized in the United States” are United States citizens. While there are exceptions for high-level diplomats, everyone born within the US becomes a US citizen at birth. Similarly, people born to US citizens outside of the United States are almost always US citizens.

There are some United States citizens who are not even aware of their citizenship status because they were born to foreign parents in the US, or to US citizens outside of the United States. Even if they are aware of their citizenship status, they may not be aware of the tax implications. Every United States citizen, no matter where they live, must report their income and pay taxes on all of the money they earn everywhere in the world, even on foreign assets.

The Foreign Account Tax Compliance Act, commonly known as FATCA, became law in 2010. This act requires financial institutions throughout the world to determine if their clients are United States citizens, and report information to the Internal Revenue Service about their account. If their financial institution determines a customer is a US citizen, that customer must either provide their Social Security Number or provide documentation to counter that determination if they are not a US citizen. This is usually all done via a customer self-certification at the time of account opening.

Whole Story at TFX.