Sunday, November 23, 2014

What If I Own Real Estate In a Foreign Country? Answers Here!

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There's this question that I always get from my clients: "Do I have to report my real estate holdings in a foreign country?" To which, my answer (in true accountant style) is always: "It depends". Let me explain further. 

You may be a first generation immigrant to the US and still have strong ties to your home country; by way of family elders who live there or a strong sense that you would like to some day retire back there, where you grew up. Or you are an adventurous investor who would like to invest in a little vacation home by the beach in the Caribbean. Or you were stationed abroad through your job and loved it so much that you invested in some property there. Then this blog is for you to read! 

The FATCA makes it mandatory for U.S. citizens, Green Card holders and foreign individuals with substantial presence in the US, to disclose all of their offshore holdings on their tax returns (via Form 8938), or on the FBAR, now known as Form FinCEN 114. Due to Inter-Governmental Agreements (aka IGA s), foreign financial institutions also disclose this information to the U.S. government. 



Bengaluru, Karnataka, India
Form 8938, Statement of Specified Foreign Assets, applies to foreign financial accounts, including stock in foreign companies and stakes in foreign business partnerships. So, what about your real estate holdings in foreign countries, do they have to go on these forms? 

If your foreign real estate holdings were held directly by you, then it is NOT a specified asset that needs to be reported on Form 8938, for example, your personal residence or a rental property.

Please do not stop here! Read On! 

A. If these real estate holdings were held by a foreign entity, such as a foreign corporation, partnership, estate or a trust, in which you have an interest, then ONLY the investment in this foreign entity must be reported on Form 8938, if the form thresholds are met. 

The value of this interest would be determined by the fair market value of the real estate holdings.

If point # A applied to you, there are other reporting requirements in addition to Form 8938. 

B. If the foreign property is in your name and is rented out, the rental income is to be reported on Schedule E of Form 1040.  The allowable expenses are the same as if the rental property was in the US, however, the depreciation is taken straight-line over a period of 40 years instead of 27.5 years. 

C. If the foreign property was inherited, if the inherited property was transferred to your personal name then it not a specified asset to be reported on Form 8938 unless the inheritance was an interest in a corporation, partnership or trust that held real estate. 



D.If the foreign property in your personal name were to be sold,   you will have to report short term or long term capital gains, as the case may be, via Schedule D to Form 1040 in the year the sale occurred. You may be eligible to get a foreign tax credit against your US taxes, if taxes were paid on the sale in the foreign country where the property was located. 

E.  If the foreign property was your personal residence, that is if you lived in the foreign property, 2 out of previous 5 years, immediately prior to the sale, you may be eligible for an exclusion on the sale- of $250,000 if filing as single or $500,000 if filing married & joint.

Agreed that owning property in a foreign country is not a walk in the park, but understanding the rules and regulations will keep you in compliance, and will make it manageable. Please make sure you completely understand your compliance requirements if any of the above apply to you. Better yet, consult an Enrolled Agent! 

Bibliography: Form 8938, Statement of Specified Foreign Financial Assets; Form 1040 & Schedules D & E; Internal Revenue Code § 121; Publication 946. 


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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxsolutionsllc.com


Sunday, November 16, 2014

"MyRa"...A New Retirement Buzz Word Or a Dud?

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President Obama signed a presidential memorandum in January of 2014 directing the Dept of Treasury to create "myRA". The memorandum states myRA to be a "a new simple, safe and affordable “starter” retirement savings account that will be initially offered through employers and will ultimately help low and moderate income Americans save for retirement". 

The proposal is that beginning in late 2014, with this retirement savings account  individuals will be able to open accounts and begin contributing to them every payday. myRAs will be initially offered through employers, balances will never go down, and there will be no fees. myRAs will hold a new retirement savings bond that will be backed by the U.S. Treasury.


The key features of myRA include: 

  • No cost to open an account.
  • Contribute to savings through regular payroll direct deposit.
  • Individual decides how much to contribute every payday ($50, $25, $7 – any amount!)
  • No fees.
  • myRAs will earn interest at the same variable rate as the Government Securities Investment Fund in the Thrift Savings Plan for federal employees.
  • myRAs will not be limited to one employer  – the account will be portable.
  • myRA contributions can be withdrawn tax free.
  • Earnings can be withdrawn tax free after five years and the saver is 59½.
  • Account holders can build savings for 30 years or until their myRA reaches $15,000 – whichever comes first. After that, myRA balances will transfer to private-sector Roth IRAs.





What Do People Think about myRA? 

According to the writers over at CNNMoney, there are people on both sides of the fence on this topic, there are those who do not want to "give a broke and bankrupt government any more money". And there are those who keep their modest savings in accounts yielding less than 1% returns, to them a 2% guaranteed return while saving for retirement is worth considering. 

 We can see that one can start small with this retirement account and that this might be a great tool for low, middle-income or part time employees to get started on the path to retirement. 

So how does myRA transition to the next step?  The total contribution to the myRA caps at $15,000. Once this happens, the balance is transferred to a Roth IRA. The balance however continues to grow tax-deferred till it is withdrawn just like any other IRA account. 

Retirement experts say that people who run their retirement calculations regularly tend to save more intelligently. And those who have a payroll deduction towards retirement are more likely to keep up with it. 

John F. Wasik, the author of "Keynes' Way to Wealth: Timeless Investment Lessons from the Great Economist, says in his article on forbes.com, that retirement security is sagging and economic inequality is partially perpetuated by this country’s fractured retirement security policy. 

Although myRA offers a good opportunity to help people save for retirement without putting a lot of pressure on the current employer-based system and more mandates on small businesses, it remains to be seen how many sign up for this and can make a meaningful dent in the retirement-savings shortfall. 

Bibliography: www.myra.treasury.gov; Keynes' Way to Wealth: Timeless Investment Lessons from the Great Economist; Center for American Progress; www.irs.gov


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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxsolutionsllc.com.

Friday, November 7, 2014

You Have Foreign Bank Accounts? Questions Your Tax Preparer Should Be Asking!

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My expression was like that of the puppy in the picture when a client of ours revealed their foreign bank account balances a month after we had filed their tax returns. A long lecture about foreign account balances, and an Amended Tax Return followed with required attachments.  We quickly realized the need for the right questions in the December Tax Organizer. This was a few years ago and there have been many updates to those questions now.

Unfortunately there are many taxpayers out there who are still unaware of their filing/ reporting requirements. More details on the requirements in my post here. And many a time this is because they have not been educated of their requirements by their tax preparers. 

Due Diligence is a BIG buzz word in tax professional circles! Especially since many taxpayers unaware of their requirement to file FBARs, blame the tax preparer on whom they reasonably relied. The tax practitioner in turn relies in good faith on the information provided to them by their clients, and are not required to audit the records of the client. 

Circular 230, § 10.22 lays out the level of due diligence required to be exercised by Practitioners (Attorneys, CPA s, Enrolled Agents or Enrolled Actuaries): 
  • (a) In preparing or assisting in the preparation of, approving, and filing returns, documents, affidavits, and other papers relating to Internal Revenue Service matters; 
  • (b) In determining the correctness of oral or written representations made by him to the Department of the Treasury; and 
  • (c) In determining the correctness of oral or written representations made by him to clients with reference to any matter administered by the Internal Revenue Service. 
In addition to the above, a tax practitioner is also required by Circular 230, § 10.34 to not ignore the implications of any information provided. The tax professional should also advise the taxpayer of any potential penalties of non-compliance. 

If the tax practitioner determines that there is a foreign bank account to report on Schedule B, he is not obligated to prepare the FBAR form for the client. He can do so only if he feels competent and the client has agreed to this additional service. 

Notwithstanding the above lack of obligation to prepare the FBAR, the practitioner does have an obligation to advise the client of the need to file the FBAR form and the consequences of failing to do so. 



So What Questions Should Your Tax Preparer Be Asking You About Your Foreign Accounts?: 
  1. Do you own accounts in countries other than the United States? Do you have a signatory authority over them either in your name or as a joint/ secondary holder?
  2. What are the nature of the bank accounts and how much are the balances therein. 
  3. Have you reported these accounts every year? 
  4. Did you have income from these accounts? If yes, has the income been included on the tax return? 
  5. How have you answered the question on Schedule B of Form 1040, Part III, Line 7a? 
  6. If thresholds were met, was FinCEN Form 114, Report of Foreign Bank & Financial Accounts aka FBAR filed? (FinCEN Form 114 was known as TD F 90-22.1)
  7. If thresholds were met, was Form 8938, Statement of Specified Foreign Financial Assets, filed with the tax return? 
  8. Are you a beneficiary of a foreign trust? If so what is the nature of the relationship? Have you received a distribution? 
  9. Do you own stock in foreign companies or partnerships? If so what percentage of the total is it?
  10. Are you a participant in a foreign retirement plan? 
  11. Do you have mutual funds, insurance policies in foreign countries? 
With a heightened availability of information to the Internal Revenue Service about foreign bank accounts through many Inter-Government Agreements, tax payers who have accounts in foreign banks or other such instruments should make sure their tax practitioners are asking the above questions. 






Know Your Responsibility:  If you are one of those reading this blog and have undisclosed foreign bank accounts, I cannot assert enough how important it is for you to come forward voluntarily with disclosure. The Internal Revenue Service's 2014 Offshore Voluntary Disclosure Program (OVDP) is still open. If the IRS contacts you about these accounts then you will be subject to heavy fines & penalties and you will no longer have the chance to file under the OVDP. 

Bibliography: Circular 230; FinCEN From 114; Form 8938; FBAR FAQs from www.irs.gov

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxsolutionsllc.com




Sunday, October 5, 2014

Oh My! You Have Substantial Presence in the US? Now You Have To File Taxes!

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I usually have clients who need substantial presence in the USA. Most times this is for a spouse and/ or a dependent in the country to apply for an ITIN  when they would not otherwise qualify for a Social Security Number. It is also possible that the taxpayer himself needs to establish substantial presence in the US so he is able to make a "First Year Choice" for the previous year. 

Some taxpayers whose parents make repeated trips from abroad and stay with the taxpayers for extended periods of time, may be able to apply for ITINs if they fulfill the substantial presence requirements. This usually results in the taxpayers claiming the parents as dependents for that year if other dependency tests are fulfilled. 

There are caveats on new ITINs issued, please read my post here for more information on this. 

There is a flip side to this issue however, before we explore that we need to know what "Substantial Presence" is and how the Substantial Presence Test (SPT) or the "Green Card Test (GCT) is calculated: 

You will be considered a U.S. resident for tax purposes if you meet the substantial presence test for the calendar year. 



To meet the SPT, you must be physically present in the United States on at least:
  1. 31 days during the current year, and
  2. 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
  • All the days you were present in the current year, and
  • 1/3 of the days you were present in the first year before the current year, and
  • 1/6 of the days you were present in the second year before the current year.
Rule 1: You are treated as present in the United States on any day you are physically present in the country, at any time during the day.

Rule 2: One does not have to count days for which one was an exempt individual

Rule 3: Closer Connection to a foreign country. 

There are exceptions to above 3 rules and are detailed in Pub 519, U.S. Tax Guide for Aliens. 

To meet the GCT, you are a resident, for U.S. federal tax purposes, if you are a Lawful Permanent Resident of the United States at any time during the calendar year. 

And you are a Lawful Permanent Resident of the United States, at any time, if you have been given the privilege, according to the immigration laws, of residing permanently in the United States as an immigrant. You generally have this status if the U.S. Citizenship and Immigration Services (USCIS) issued you a Form I-551, also known as a "green card."

If you meet the green card test at anytime during the calendar year, but DO NOT meet the substantial presence test for that year, your residency starting date is the first day on which you are present in the United States as a Lawful Permanent Resident (Green Card Holder).
 



The flip side of this issue as it recently happened to a client, once a non-US person is classified as a "resident" for income tax purposes, he is subject to income tax in the same manner as a US citizen. He is taxed on his world wide income, that includes income from within AND outside the US. 

The world wide income covers what is earned from the start of the residency period to the end. This income includes wages, interest, dividend, rents & royalties, capital gains no matter where they were sourced from. 

The person also becomes responsible for filing tax returns including FBAR forms. More on requirements to file FBAR on my post here. There are also other tax obligations if this person is a shareholder in a corporation outside the country or gets a distribution from a foreign trust. 


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Consult with a tax professional for your unique needs and make sure your questions are answered. Always remember to read my disclaimer here. If you have any more questions regarding this or other tax matters, contact me at manasa@mntaxsolutionsllc.com. 

 
 





Friday, September 26, 2014

Expatriation: Divorcing the Government Has Tax Consequences

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As someone who moved around a lot with my parents in my childhood, any kind of displacement conjures up vivid images of huge wooden crates, packers & sad goodbyes. But life is no longer as simple as crates, packers & going-away gifts, many US citizens who had relocated and moved abroad are deciding to renounce their US citizenship. 2013 was a record-breaking year that saw an alarming increase (221%-according to the Treasury Department of US) of Americans renouncing their citizenship . Why such a drastic move? A big reason is the global tax reporting requirement and FATCA. 

I read this somewhere, that "expatriation is like divorcing a government". As heart-wrenching and final as that may sound, it is made even more complex by the tax provisions under Internal Revenue Code (IRC) sections 877 and 877A. So if you decide on taking such a step, what would be the tax consequences? 

These rules apply to US citizens who have renounced their citizenship and long-term residents (defined in IRC 877(e)) who have ended their US resident status for federal tax purposes. The rules differ based on the date of expatriation. For the sake of today's blog post, we will discuss the latest date which is June 16,2008. 



Expatriation on or after June 16,2008: The new IRC 877A rules apply to you if ANY of the following statements apply, 
  • Your average annual net income tax for the last 5 years ending before the date of expatriation or termination of residency is $157,000 or more for 2014.
  • Your net worth is $2 million or more on the date of your expatriation or termination of residency.
  • You fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the last 5 years.
If any of the above rules apply to you, you are a "covered expatriate". And you have to pay exit tax. 


The exit tax is like a capital gains tax because all the property of the covered expatriate is deemed sold for its fair market value on the day before the expatriation date. 

There is an exclusion amount for the exit tax, for 2014, it is $680,000. 




A US Citizen can relinquish his/ her citizenship on the earliest of FOUR possible dates: 
  1. When he/ she appears before a diplomatic/ consular officer.
  2. The date on which she/ he sends a statement of voluntary relinquishment to the US Department of State. 
  3. The date the US Department of State issues a certificate of loss of nationality. 
  4. The date a US court cancels a certificate of naturalization. 
Note. If you expatriated before June 17, 2008, the expatriation rules in effect at that time continue to apply. See chapter 4 in Publication 519, U.S. Tax Guide for Aliens, for more information.

The fee for renunciation of US citizenship is $2,350. 

The important take away points from this blog post are that, in order to avoid tax consequences of renouncing your US citizenship, you have to prove you have been regular in filing your tax returns for the past 5 years AND if you are worth more than $2 million or you have been paying income tax of $157,000 or more (for 2014), you have to pay an exit tax on renunciation. 

The decision to expatriate is not to be taken lightly. Always consult the right professional who can guide you with respect to your unique circumstances. 

Bibliography: Pub 519; irs.gov; Internal Revenue Codes 877 & 877A; Department of Treasury

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. 
More of my contact information is on my website, www.mntaxsolutionsllc.com

Monday, September 22, 2014

Back-To-School Blues & Tax Credits To Go With It!!

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After the horrible 2013 winter doomed by one polar vortex after another, we couldn't wait for summer to get around. It did finally arrive but amazingly was gone in the blink of an eye! I am always amazed by how quickly every summer flies by and before we know it, school is back in session. This year, summer was a huge deal in our household, we had a kid to send off to college!  

Handy-dandy tax consultant that I am, with major life events, tax planning cannot be far behind. So, I thought I should remind my readers of the the college tax credits that are out there for 2014. Now would be a perfect time to see if they would qualify for college credits. 

American Opportunity Tax Credit {AOTC} & The Lifetime Learning Credit {LLC}:  These credits are available to those taxpayers who pay qualifying expenses for an eligible student. 

The AOTC  provides a credit for each eligible student while the LLC provides a maximum credit per tax return.  A taxpayer may qualify for both these credits in the same year but can claim one of them for a particular student in a particular year. 

The above credits are claimed on Form 8863 and it doesn't matter whether the taxpayer itemizes or takes the standard deduction. 

For those eligible to take the college tax credits, including under-graduate students, the AOTC generally yields higher tax savings. The LLC is favored by those who are part-time students or are attending graduate school. 

The AOTC can yield a maximum annual credit of $2500 per student. It equals 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.

40% of the AOTC credit is refundable, that means even those who do not owe any tax can get an annual payment of $1,000 for each eligible student. 

The LLC can yield a maximum annual credit of $2,000 per tax return. 

Who is an eligible student?: An eligible student
  • Includes the taxpayer, the spouse and dependents. 
  • Is enrolled in an eligible college/ university/ vocational school whether a non-profit or for-profit institution. 
  • Cannot be a non-resident alien/ married but filing a separate return/ can be claimed as a dependent on another tax return. 
What are qualified education expenses?:  Qualified education expenses are amounts paid for tuition, fees and other related expenses for an eligible student. Expenses such as for room and board are NOT qualified expenses. 

Limits on the AOTC: The following limits exist, 
  • It is available only for 4 years per eligible student.
  • It is available only if the student has NOT completed the first 4 years of post-secondary education before 2014. 
  • The student must be enrolled at least half-time in college. 
  • The taxpayers modified adjusted gross income (MAGI) for 2014 should be $80,000 or less if filing single, head of household and $160,000 or less if filing married filing joint to claim full credit. 
  • The credit is completely phased out for taxpayers with MAGI of $90,000 for single and head of household and $190,000 for those married filing jointly. 
Limtis on the LLC: The following limits exist for the Lifetime Learning Credit,
  • The limit on the LLC applies per tax return. 
  • The full $2,000 credit is available only to those who pay $10,000 or more in qualifying tuition and fees and have sufficient tax liability. 
  • The full credit can be claimed for 2014 for those with MAGI $54,000 or less and married filing jointly, $108,000. The credit is completely phased out for taxpayers with MAGI $128,000 filing married & jointly and $64,000 for singles, heads of household etc. 

Other education tax benefits include: 
  • Scholarships and grants- Tax free if used to pay for tuition and fees, books, and other course materials. 
  • Student Loan interest deduction- up to $2,500 per year subject to MAGI limits.
  • Savings bonds used to pay for college- Interest is tax free on Bonds purchased after 1989 by a taxpayer, who at the time was at least 24 years old. 
  • Qualified tuition programs also known as 529 plans. 
Note: The Tuition and Fees deduction as an adjustment to your total income is no longer available from the tax year 2014. 


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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. 
More of my contact information is on my website, www.mntaxsolutionsllc.com


Saturday, September 6, 2014

Quick & Easy Non-Profit Filing: the new Form 1023-EZ


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Hello Readers! A two month hiatus from tax-blogging is a long time to be away. Especially at this time with so many changes- exciting or scary- happening in the tax-world! My first born heading to college was definitely more challenging than I expected and yes, that's my excuse and I am sure you would agree that it's a good one?

Well, as if sending off my son to college wasn't exciting enough, I filed for non-profit status for a client using the new Form 1023-EZ. This process used to be a long, arduous and complicated one. Most organizations contemplating going down that route had to wait months after filing for determination of non-profit status to hear back from the Internal Revenue Service, often not being able to raise as much capital as they expected. 

So What Is Non-Profit Filing Status?: A non-profit organization is a group organized under state law for purposes other than generating profit and in which no part of the organization's income is distributed to its members, directors, or officers. Each state in the US defines non-profits differently. 

Most federal tax-exempt organizations maybe nonprofit organizations, organizing as such at the state level does not automatically grant the organization exemption from federal income tax.  To qualify as exempt from federal income tax, an organization must meet requirements set forth in the Internal Revenue Code




The New Form 1023-EZ:  Available on IRS.gov as of July 1st, 2014, the new form is three pages long, compared with the standard 26-page Form 1023. Most small organizations, including as many as 70 percent of all applicants, qualify to use the new streamlined form. Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible.

This form MUST be filed online at www.pay.gov, the $400 user fee is payable at the time of submission. The instructions contain a checklist to determine if your organization is eligible to use this method of filing for non-profit status. 

My client's filing was approved in 3 weeks! 




The Internal Revenue Service's logic for introducing the new streamlined application according to Koskinen is, "We believe that many small organizations will be able to complete this form without creating major compliance risks. Rather than using large amounts of IRS resources up front reviewing complex applications during a lengthy process, we believe the streamlined form will allow us to devote more compliance activity on the back end to ensure groups are actually doing the charitable work they apply to do."

However not everyone is as excited about the new form. Diana Kern, the Vice President of Programs at NEW writes in her blog, " Let the small nonprofit rain storm begin.  Donors beware. Perhaps not all of these small nonprofits will be scammers, but there is no guarantee they have the requisite capability to run a business and use your donation responsibly and effectively. My recommendation… perform due diligence before you donate to any nonprofits in the future." 

However simplified or not, if you are in the process of setting up a non-profit or thinking of doing so, I would still suggest consulting an Enrolled agent or other tax professional.


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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. 
More of my contact information is on my website, www.mntaxsolutionsllc.com