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Expat Tax Blog

Jul 1

Relief from Filing Forms 3520a/3520 for Certain Tax-Favored Foreign Trusts

by julie

IRS exempts certain plans from onerous trust reporting

Rev. Proc. 2020-17 exempts from section 6048 information reporting an eligible individual’s transactions with, or ownership of, an applicable tax-favored foreign trust. As a result, the penalties under section 6677 do not apply to eligible individuals who fail to report transactions with, or ownership of, these trusts under section 6048. 

An eligible individual is a person who is or was a U.S. citizen or resident and who is compliant (or comes into compliance) with all requirements for filing U.S. federal income tax returns and has reported any contributions to, earnings of, or distributions from, an applicable tax-favored foreign trust. 

The revenue procedure will apply to all open tax years, subject to the limitations of section 6511. 

How to interpret relief requirements

SECTION 3 outlines six qualifying conditions for a foreign tax-favored retirement plan to qualify for the relief from filing Forms 3520a/3520 (see Sep 2019 article: New Compliance Campaign – IRS Going after Non-US Trusts).

Whole Story at TFX.

Jun 25

IRS Update: Combat-zone contract workers qualify for Foreign Earned Income Exclusion (FEIE)

by julie

Less ambiguity and reliance upon IRS discretion 

US military contractors and employees finally received official approval for claiming the Foreign Earned Income Exclusion (FEIE). Up until the enactment of Bipartisan Budget Act of 2018, claiming the Foreign Earned Income Exclusion (FEIE) for civilian contractors working in support of the US Army in designated combat zones was a challenge due to having an abode in the US. Prior to the Act, approval or disapproval of the exclusion was at the discretion of the IRS agent reviewing the return.

The Foreign earned income exclusion (FEIE) allows US taxpayers to exclude their foreign earnings from US income tax (up to certain limits and adjusted each year). The ability to exclude up to $105,900 (2019) from taxable federal income and some states from the state taxable income, too, provides huge tax savings. 

The housing exclusion is not applicable for this category of taxpayers because they usually do not incur housing expenses while serving in those areas. 

Income tax withholding and Form 673 – burden shifts to taxpayers

US employers are required to withhold income taxes on the earnings unless there is Form 673 on file signed by the employee. The form is also known as the Statement for Claiming Exemption From Withholding on Foreign Earned Income Eligible for the Exclusion(s) Provided by Section 911)

Once the Form 673 is completed, signed and presented to the employer, further responsibility for tax underpayment is entirely on the employee. If he or she spent one day over the limit and failed to meet the Physical Presence Test  the employer will not be responsible for non-withholding. The taxpayer will pay tax on the entire income with penalties for tax underpayment.

Whole Story at TFX.

May 28

Totalization Agreement and Additional Child Tax Credits

by julie

Totalization agreements

US citizens and green card holders residing abroad are responsible for making contributions to the U.S. Social Security system on net business income. 

Self-employed taxpayers residing in a country that has a Social Security Totalization Agreement with the U.S. are exempt from mandatory contributions in the U.S.. To qualify for the exemption, they should be making contributions to the Social Security system in the resident country.

The consequences of taking the exemption

The purpose of Totalization Agreements is avoiding duplicate taxation, not the duplication of benefits. Credits and benefits contingent upon contributions do not occur in two countries.

Even if you elected not to exclude your foreign earned income in anticipation of a hefty Additional Child Tax Credit of $1,400 per qualifying child, you will not get the refund if you took the exemption from paying Self-Employment tax. This income is not counted as net earnings for calculation of ANY U.S. benefits.

Per Code of Federal Regulations § 404.1096, self-employment income is the amount of your net earnings from self-employment that is subject to social security tax and counted for social security benefit purposes

Years where you made Social contributions in a resident country are not counted for Social Security benefits purposes. You are not accumulating work credits in the U.S. Your Social Security account does not reflect your earnings. From the standpoint of U.S. Social Security, you did not have earned income for the year.

Whole Story at TFX.

May 1

Couples with NRA spouses have to choose – file jointly and lose stimulus eligibility or file separately and possibly pay higher tax

by julie

Stimulus Payment Critical Update for Non-Resident Alien Spouses

The IRS updated the Stimulus check FAQ page with more information on COVID-19 Federal Stimulus Payment eligibility.

Couples filing jointly where one of the spouses is a non-resident alien with ITIN or Social Security number stamped “Not valid for employment” ARE NOT ELIGIBLE. The entire family is ineligible, not just the spouse without valid SS#  (FAQ 13)

The exception is given to the families where either spouse was a member of the US Army at any time during the taxable year.

Whole Story at TFX.

Apr 29

Non-US Citizen Amazon Resellers & U.S. Tax Obligations

by julie

Non-Resident alien merchants selling goods on Amazon

Non-US merchants from all over the world sell goods in the US via Amazon.com. Questions about the US tax consequences of this business activity are very common. The answer depends on the seller status (individual or business) and on the availability of the Tax Treaty between the US and the seller’s resident country.

The US tax consequences differ significantly depending on whether the Non-Resident Alien merchant sells goods as:

– As an individual seller (NRA)
– Through a US LLC registered under his/her name
– Through a non-US company

Another distinction lies between foreign sellers who

– Reside in countries that have a Tax Treaty with the US 
– Reside in countries that do not have a tax treaty with the US

Let’s review the US tax consequences for each situation.

If the seller does not file the US tax return, the IRS would consider the income taxable and send a tax bill to the seller address as provided by Amazon.

Whole Story at TFX.