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Expat Tax Blog

Apr 10

IRS reminds those with foreign assets about U.S. tax obligations

by julie

IRS reminded U.S. citizens and resident aliens, including those with dual citizenship, to check if they have a U.S. tax liability and a filing requirement. At the same time, the agency advised anyone with a foreign bank or financial account to remember the upcoming deadline that applies to reports for these accounts, often referred to as FBARs.

Key things to keep in mind:

Deadline for reporting foreign accounts

The deadline for filing the annual Report of Foreign Bank and Financial Accounts (FBAR) is the same as for a federal income tax return. This means that the 2017 FBAR, Form 114, must be filed electronically with the Financial Crimes Enforcement Network (FinCEN) by April 17, 2018. FinCEN grants filers missing the April 17 deadline an automatic extension until Oct. 15, 2018, to file the FBAR. Specific extension requests are not required.

Reminder: IRS to end Offshore Voluntary Disclosure Program

The Offshore Voluntary Disclosure Program will close on Sept. 28, 2018. Taxpayers with undisclosed foreign financial assets still have time to use OVDP before the deadline.

Most people abroad need to file

An income tax filing requirement generally applies even if a taxpayer qualifies for tax benefits, such as the Foreign Earned Income exclusion or the Foreign Tax credit, which substantially reduce or eliminate U.S. tax liability. These tax benefits are only available if an eligible taxpayer files a U.S. income tax return.

Special income tax return reporting for foreign accounts and assets

Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts.

In addition, certain taxpayers may also have to complete and attach to their return Form 8938, Statement of Foreign Financial Assets.

Specified domestic entity reporting

For tax year 2017, certain domestic corporations, partnerships and trusts that are considered formed for the purpose of holding (directly or indirectly) specified foreign financial assets must file Form 8938 if the total value of those assets exceeds $50,000 on the last day of the tax year or $75,000 at any time during the tax year.

Report in U.S. dollars

Any income received or deductible expenses paid in foreign currency must be reported on a U.S. tax return in U.S. dollars. Likewise, any tax payments must be made in U.S. dollars.

Expatriate reporting

Taxpayers who relinquished their U.S. citizenship or ceased to be lawful permanent residents of the United States during 2017 must file a dual-status alien return, attaching Form 8854, Initial and Annual Expatriation Statement. A copy of the Form 8854 must also be filed with Internal Revenue Service, Philadelphia, PA 19255-0049, by the due date of the tax return (including extensions). See the instructions for this form and Notice 2009-85, Guidance for Expatriates Under Section 877A, for further details.

Choose Free File or e-file

U.S. citizens and resident aliens living abroad can use IRS Free File to prepare and electronically file their returns for free. This means both U.S. citizens and resident aliens living abroad with adjusted gross incomes (AGI) of $66,000 or less can use brand-name software to prepare their returns and then e-file them for free. A limited number of companies provide software that can accommodate foreign addresses.

A second option, Free File Fillable Forms, the electronic version of IRS paper forms, has no income limit and is best suited to people who are comfortable preparing their own tax return. Both the e-file and Free File electronic filing options are available until Oct. 15, 2018, for anyone filing a 2017 return.

Original Story at IRS website.

Apr 9

How to report AIrBnB income on your U.S. tax return

by julie

Do I have to report the income?

If you are an AirBnB host wondering how to report the income on your tax return, the first question should be — are you required to report it at all?

– S. Citizens/GC holders – If you are a U.S. citizen, you must report worldwide airbnb income on your U.S. tax return.
– Non-U.S. Persons – If you are a non-U.S. citizen, and you do not meet the substantial presence test (ie – required to file form 1040 as a U.S. resident) – then you only have to report the U.S. AirBnB listing income.

Where do I report this income?

For most casual AirBnB renters, the income received would constitute Rental Income, and reported on Schedule E of your tax return.

If you not a casual renter, but instead are in the real estate business or treat your AirBnB as an actual hotel/motel business and provide maid services, serve coffee, etc – you would be considered to engage in “active participation” – this would be considered Self-Employment and reported on Schedule C of your tax return. Note – unlike Schedule E, Schedule C carries potential self-employment tax (SECA).

Whole Story at TFX.

Mar 31

Mail Bag #13: W-8, Expatriation, 8802, CA Rental, US Dividends, Estate tax, Legal Settlement

by julie

W-8

Perhaps you would be so kind to answer a question regarding Form W-8BEN? My Austrian boyfriend wants me as co-signature on his bank account in case of accident / sudden death, etc. His bank is not sure, but thinks this form applies to me and asked me to complete the form (even with proof of USA loss of nationality- citizenship). Does the bank realy need to submit such a form to the USA for ex-citizens?

I am uncertain if this form really applies to me, especially since the bank is uncertain if it is necessary! Do you have any information?

If you are currently not a US citizen then you indeed should file form W-8BEN in order to be approved as an account co-owner.

This is the compliance requirement for all banks. If you were US citizen you would have provided form W-9.

Expatriation

I have now gained UK citizenship and hold a UK passport. In considering expatriation and the determination of ‘covered’ taxpayer, are property assets valued on the basis of my interest in them (50%) or on a full valuation basis. My husband is British and does not pay US tax and holds the other 50%.

Your interest in UK assets determines your net worth for expatriation purposes – i.e. 50%.

8802

It is essential for me to obtain an IRS fiscal residency certificate for my Spanish tax filings for the years 2015 and 2016, which I just found out about from our Spanish accountant. (We’ll also need that going forward each year, 2017, etc.). Our Spanish accountants have told me that I am supposed to get this from the U.S. so I do not have a tax obligation in Spain for the work I do in the U.S. (I make all of my money with U.S. companies).

I think that’s the second point is the most serious question we have of your firm. Can you help me obtain the certificates annually (starting with 2015 for me – my husband worked in Spain and did not have U.S. income) so I don’t owe Spanish taxes?

Many U.S. treaty partners require the IRS to certify that the person claiming treaty benefits is a resident of the United States for federal tax purposes. The IRS provides this residency certification on Form 6166, a letter of U.S. residency certification. We can help you apply for the certificate if you have filed US resident tax return form 1040 for the year that you request the certificate.

If an individual is a resident of both the United States and the country for which certification is requested, the certification may be denied, unless the individual can establish that the individual is solely a resident of the United States under the tiebreaker provision of the applicable treaty.

CA Rental

I’m a US government employee who had a Permanent Change of Station (PCS) move from CA to Dubai. Currently, I live and work in Dubai. I’ve cut as many ties as possible to the state. I do not have a bank account there. I sent a change of address to the department of motor vehicles. I changed my address with the post office. I have never voted in California and don’t intend to. My car has been shipped away from the state.

That said, I have a rental property in CA. I will file a tax return for that property since it’s CA income. How do I stop the income tax from that state? I’ve submitted a “Stop Tax” form to my government agency. CA income tax is still being pulled.

First and foremost, during tax preparation we will analyze your state tax residency position to verify whether you qualify as a non-resident of the state where you lived before expatriation.

The Safe Harbor rule states that a person whose residence is in California, but who is not in California because of a contract related to their employment for 546 days (consecutively) or more, will be seen as a nonresident. It has nothing to do with “cessation of ties with the state. If you qualify for Safe Harbor, you do not need to take any of those steps. However, your employer may be required to withhold state tax because you need to have a home of record. In this case, you can only rely upon claiming refund on CA non-resident tax return.

Whole Story at TFX.

Mar 30

The IRS Is Auditing a Lot Fewer Americans

by julie

The IRS audited 1 in about 160 individual tax returns in 2017, the lowest since 2002 and the sixth consecutive year that audits have declined, as budget cuts have reduced the number of staff at the federal agency.

The audit rate declined the most for high-income households, although they were still audited at a higher rate than filers of other income levels.

In 2017, the IRS audited 4.37% of returns with income of $1 million and higher, less than half the 9.55% audit rate for such returns in 2015.

The audit rate for other income groups also declined, but not as much. For taxpayers earning less than $200,000, the percentage of returns audited dropped to 0.59% in 2017 from 0.76% in 2015.

In 2017, IRS funding was $11.2 billion, down nearly 8% from its high in 2010, although the number of individual returns grew nearly 5% over the same period. For fiscal 2018, the IRS’s funding rises slightly, to $11.4 billion.

From a revenue standpoint, filers earning over $1 million in tax year 2015 accounted for 28% of total income taxes, up from 25% in 2013, according to the latest available IRS data. For 2015, filers earning between $200,000 and $500,000 paid nearly 21% of the total. Filers earning between $100,000 and $200,000 paid 22%.

Original Story at WSJ.

Mar 26

Do children need to file their own returns for unearned income (dividends)?

by julie

How to treat children’s unearned income – to report on parent return (form 8814) or file separate return (with form 8615)?

If only interest & dividends – can use form 8814

– If child has only interest and dividends – use Form 8814 on Parent’s return
Explore tax optimization – tax may be lower by filing individually child return

– if interest and dividends are high – explore if tax will be lower by filing individual return for the child. Although this can be reported on parent return. determine which option gives a better outcome

If Capital gains – child needs separate return (with form 8615) – no other choice

– If you are a TFX client and your child needs a separate return due to this situation, you will be entitled to a discount on the second return.
– This is only available if the return is simple (only investment income). If the child has other income – this does not apply.

Whole Story at TFX.