Tuesday, July 8, 2014

New Rules On ITINs: What This Means For You?

Picture Courtesy: Google Images

For a quick refresher on what ITINs are: Individual Taxpayer Identification Numbers aka ITINs are tax processing numbers issued by the Internal Revenue Service. It is a nine digit number that always begins with the number 9 and has a range of 70-88 in the fourth digit, example 9XX-7X-XXXX. The IRS issues ITINs to individuals who are required to have a U.S. taxpayer identification number but who do not have, and are not eligible to obtain a Social Security Number (SSN) from the Social Security Administration (SSA).

ITINs are issued regardless of immigration status because both resident and nonresident aliens may have a U.S. filing or reporting requirement under the Internal Revenue Code.

Individuals must have a filing requirement and file a valid federal income tax return to receive an ITIN, unless they meet an exception. You can also use the Form W-7, to apply for the ITIN. 

Under the old policy, announced in November 2012, ITINs issued after Jan. 1, 2013 would have automatically expired after five years, even if used properly and regularly by taxpayers. Though ITINs issued before 2013 were unaffected by that change, the IRS said at the time that it would explore options for deactivating or refreshing the information relating to these older ITINs.

As of June 30th, 2014, Individual Taxpayer Identification Numbers (ITINs) will expire if not used on a federal income tax return for five consecutive years. The IRS will not begin deactivating ITINs until 2016.

Under the new policy:
  • An ITIN will expire for any taxpayer who fails to file a federal income tax return for five consecutive tax years.
  • Any ITIN will remain in effect as long as a taxpayer continues to file U.S. tax returns. This includes ITINs issued after Jan. 1, 2013. These taxpayers will no longer face mandatory expiration of their ITINs and the need to reapply starting in 2018, as was the case under the old policy.
  • To ease the burden on taxpayers and give their representatives and other stakeholders time to adjust, the IRS will not begin deactivating unused ITINs until 2016. This grace period will allow anyone with a valid ITIN, regardless of when it was issued, to still file a valid return during the upcoming tax-filing season. 
  • A taxpayer whose ITIN has been deactivated and needs to file a U.S. return can reapply using Form W-7. As with any ITIN application, original documents, such as passports, or copies of documents certified by the issuing agency must be submitted with the form. 
Bibliography: irs.gov News Releases; Form W-7.
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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, June 22, 2014

Investments In Foreign Pensions & Annuities

Picture Courtesy: Jules Verne

I always liked the interestingly unique name, Phileas Fogg from "Around The World in Eighty Days". Having traveled the world through books, I always wondered how different life would have been if I had the chance to live & work in many different countries! 

Not so much any more as I encounter as clients, many US citizens who were based out of the country for a few years. Especially those who could have contributed into or had employers contribute into their then resident country's retirement accounts. These were either mandated by the resident's country's employer rules or were used as a tax saving strategy. 

What is a foreign pension or foreign annuity? 
A foreign pension or foreign annuity is a pension plan or retirement annuity received from a source outside the United States. This may be received from a: 
  • foreign employer
  • trust established by a foreign employer
  • foreign government or one of its agencies including a foreign social security
  • foreign insurance company
  • foreign trust or other foreign entity designated to pay the annuity
How is a distribution from a foreign pension or annuity treated?
The taxable amount of a distribution from such a foreign retirement account is generally the Gross Distribution minus the Cost/ the Investment in the contract. These distributions may be partially or fully taxable whether a Form 1099R is received or not. You can claim a treaty withholding exemption to the paying country, if that is not honored, you can claim an foreign tax credit on your US tax return for the taxes paid in the other country. 

Picture Courtesy: Google Images
Tax Treaties and How They Effect You? 
The United States has tax treaties with many countries to avoid double taxation. This also usually covers income from pensions/annuities. As a general rule, most treaties allow the resident country to tax pension/ annuity income. Each treaty must be carefully examined to determine,
  • The country of tax residency
  • The country to which taxes are due
  • Special taxation of government payments or social security payments
  • Special rules for lump sum payments
  • Check if the Tiebreaker rules apply if you are resident of both countries for that tax period (if the Tiebreaker rules cannot be determined by you, you can request the competent authority of each country to make the decision) 
Note: Please make sure that the Tax treaty being referred to is the most current one between the countries in question. 

Foreign Employer Contributions:  
Some of the foreign employer contributions may not be part of the Cost of the pension. This is usually the case if the contributions were made either:
  • Before 1963 by your employer for that work,
  • After 1962 by your employer for that work if you performed services under a plan that was in existence on March 12,1962,
  • After 1996 by your employer if you were a foreign missionary. 

Foreign Contributions When Nonresident Alien:
Your contributions or the employer's contributions are not part of your Cost if the contribution was based on compensation for services performed outside the US while you were a nonresident alien & not subject to laws of the United States or any foreign country. 
Picture Courtesy: Google Images

Foreign Social Security Pensions:
Generally tax treaties have special rules for foreign social security pensions. These may include the country making the payment to also be taxing the distribution. Unless otherwise specified in the tax treaty, the foreign social security payments are treated the same as foreign pensions or foreign annuity payments. Certainly, they are NOT eligible for the same tax treatment as US social security payments. The US has bilateral social security agreements with 25 countries. More information can be found on www.ssa.gov.  

Foreign Bank Account Reporting Requirements and Compliance:
The balances in the foreign pensions and other annuities have to be included to calculate threshold limits for both the FinCEN 114 and Form 8938. An interest in a foreign social security/ social insurance or similar program of a foreign government is not included in these calculations. 

Bibliography: IRC Sections 72, 1441,3405 ; IRS Publications 575, 54,590,939 etc; IRS Tax Treaty; Social Security Bilateral Agreements; Form 8938 & IRC Section 6038D

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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, June 16, 2014

Sorry Kids! You May Have to Pay Taxes On Your Summer Jobs!

Picture Courtesy: Google Images

One of my teens starts her baby sitting gig tomorrow. This tax consultant's heart swelled up with pride when she asked if there would be taxes on her earnings! Well, wish I could say "no"! 

So if you are or you know a student on their first summer job, these are somethings you need to remember: 

1. Every new employee has to submit a Form W-4. This is an Employer's Withholding Certificate, telling them how much you want taken out in taxes from your pay. You can use the Withholding Calculator on irs.gov to help fill out this form.

2. If the employer does not withhold taxes from your pay, you may be liable to send in your own estimates every quarter. This is done using Form 1040-ES. The estimates are due April 15th, June 15th, September 15th and January 15th of the next year. 

Picture courtesy: Google Images
3. Some of the work that you do may be counted as "Self-Employment". This may include baby-sitting, lawn mowing etc. If this is so, then you can deduct expenses you had towards earning this money. These income & expenses are shown on Schedule C

4. If you work in a place where paying tips to the workers is a norm, remember tip income is taxable. Think waiters, golf-caddies etc. One must report $20 or more in cash tips in any one month to your employer. So it is important that you keep a log of the daily tips received. All tips received during the year should be reported on your Form 1040. 
Picture Courtesy: Google Images

5. If you work as a newspaper carrier or distributor, special rules apply. One is considered self-employed if certain conditions apply, if not and one is less than 18 years of age, one could be exempt from social security & medicare taxes. 

6. If you are in ROTC (Reserve Officer's Training Corps), your pay for summer camp is taxable, however the subsistence allowance you get while in advanced training is not taxable. 

The summer job may not even pay enough to owe income taxes, however the employer is liable to withhold income taxes, social security and medicare taxes from your pay. If it is so, one may have to file just so one can get a refund of the income taxes withheld. Please contact an Enrolled Agent to help file your taxes. 


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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, June 9, 2014

Foreign Corporations: That Have A Stake In US Corporations/ Do Business in the US.

Google Images


There were proposed and final regulations issued for Form 5472 on June 6th, 2014. Like the above cartoon shows, the long arm of the US Government is not only reaching out to U.S. corporations doing business in other countries, it is also expecting compliance by foreign corporations that do business in the U.S or have a stake in US Corporations. 

Form 5472 is an information return used by a 25% foreign-owned U.S. corporation or a foreign corporation engaged in a U.S. trade or business to provide information when reportable transactions occur during the tax year of a reporting corporation with a foreign or domestic related party under sections 6038A and 6038C. 

What Is a Reporting Corporation? A reporting corporation is either: 

  • a 25% foreign-owned U.S. corporation OR
  • a foreign corporation engaged in trade or business within the U.S. 
A corporation is 25% foreign-owned if it has at least one direct or indirect 25% foreign shareholder at any time during the year. Section 318 of the Internal Revenue Code dictates the rules for 25% foreign shareholder, constructive ownership and related party. 

What is a Reportable Transaction?  A reportable transaction is:
  • any type of transaction listed in Part IV of the Form 5472, for which money was the only consideration paid or received during the reporting corporation's tax year (the money could be U.S. or foreign currency) OR
  • any transaction or group of transactions listed in Part IV, if:
         A. Any part of the consideration paid or received was not money, OR
         B. Less than full consideration was paid or received. 

Transactions with a U.S. related party is not required to be specifically identified in Parts IV and V. 

When and Where To File?  Earlier Form 5472 could be filed with the corporation's income tax return and if filed when not due, it could be filed separately with the service center where the corporation's income tax return is to be filed if not filed when due. 

Final regulations issued by the IRS on June 6th, 2014 removed the provision allowing Form 5472 to be timely filed separately from the taxpayer’s income tax return if that return is filed late. After the rules are adopted, Form 5472 would be required to be filed in all cases only with the filer’s income tax return by the due date (including extensions) of that return. 

Penalties For Non-Filing: A corporation that fails to file Form 5472 by the due date may be assessed a penalty of $10,000 for each tax year for which a failure occurs. If the failure to file the form continues for more than 90 days after the IRS mails the corporation a notice of its failure to file, the IRS can impose an additional $10,000 penalty for each 30-day period (or part of a 30-day period) in which the company fails to provide the information (Sec. 6038A(d)). 

The penalties are also part of the new final regulations issued June 6th, 2014. 

Exceptions To Filing: Some reporting corporations are not required to file Form 5472 if certain conditions apply. 

Please contact an Enrolled Agent or other qualified tax professionals to determine your unique situation and find out if you need to file Form 5472. And if you do, what the record maintenance requirements that is required under Section 6001 should be.


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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, June 1, 2014

Roth Contributions: Limits To Remember.

William Victor Roth Jr. 

Who was William Victor "Bill" Roth, Jr? He was the legislative sponsor of the Individual Retirement Account plan that now bears his name, he was also famous for his toupee, he supposedly had "the grace of a stick figure", and most importantly, he had a succession of Saint Bernard dogs throughout his 34 years of politics and it sort of became his trademark. 

Besides his obvious love of St. Bernards, he was a lawyer by profession and started his political career in the late 1960s in Delaware. He was elected to the United States House of Representatives and was known to be fiscally conservative. He was the co-author of the Kemp-Roth Tax Cut. The Roth IRA has been in existence since 1998. And the Roth 401(k) since 2006. 

What is a Roth IRA?  This is an individual retirement plan that you can contribute after-tax earnings into. The earnings grow tax-deferred. You can withdraw your contributions at any time and there are no penalties or taxes. There is no age limit to contribute into a Roth IRA. To take "qualified" distributions from the Roth IRA, you should have had the IRA for at least 5 years and have reached 59 and 1/2 years of age.  




*Please consult your tax or finance professional to calculate what these reduced amounts are. 

Traditional Vs Roth IRA: One can make contributions to both the Traditional and the Roth IRAs. If you choose to do so, the maximum amount that can be contributed to both of the IRAs together is the same as  the limit in contributions if made only to Roth IRAs. But the contributions for the year to the Roth should be reduced by all the contributions made to all other IRAs in the year. Employer contributions under a SEP or SIMPLE IRA plan do not affect this limit. 
More information about Traditional Vs Roth IRAs can be found on this blog post



Bibliography: Publication 590; Delaware Grapevine; Wikipedia; 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, May 25, 2014

Navigating The Myth of IRA Deductions

Robin Eggs-Google Images

According to the Merriam-Webster dictionary, a nest egg is a natural or artificial egg left in a nest especially to induce a hen to continue to lay there. Apparently this nest egg could be expanded to include teenagers still in bed at noon...but I digress! Well, we all know that a nest egg is a fund of money accumulated as a reserve and for most of us, that means a retirement account. 

One general trend I saw this tax season was, as more and more median incomes rose shifting people into the next higher tax bracket, more often than not, retirement savings schemes such as the 401(k), the Individual Retirement Account (aka IRA) seemed to be the salaried man's (or woman's) major or only avenue to tax savings. This is what I tell my clients, if the government gives you an opportunity to avoid income taxes, you should grab a hold of it & not let go. 

There are various employer offered retirement plans, like the Section 401(k), 403 (b) etc. These have more or less the same rules for 2014. The maximum annual contribution for these plans remains unchanged at $17,500 and $23,000 if aged 50 and above. The Individual Retirement Accounts contribution limits also remain unchanged for 2014- $5,500 and $6,500 for age 50 and above. 

The maximum contribution limits are easy to remember. The tricky part is understanding the phase-out limits for tax deductions when contributing to an Individual Retirement Account. 

Most of the confusion arises when taxpayers are already contributing into an employer retirement plan and want to bolster that with an IRA contribution. The table below should help: 

Filing Status
Modified AGI
Deduction Available
Single or
Head of Household
$60,000 or less




More than $60,000 but less than $70,000
$70,000 or More

Full Deduction up to amount of your contribution limit: $5,500 or $6,500 if above 50 years of age.

A Partial Deduction

No Deduction
Married Filing Jointly or
Qualifying Widow(er)
$96,000 or less






More than $96,000 but less than $116,000
$116,000 or More

Full Deduction up to the amount of your contribution limit: $5,500 ($11,000 if both doing $5,500 each) or $6,500 if above 50 years of age ($13,000 if both doing $6,500 each).
A Partial Deduction

No Deduction
Married Filing Separately*
Less than $10,000


$10,000 or More
Partial Deduction


No Deduction


*If filing with the MFS status and the taxpayer did not live with the spouse at any time during the year, the IRA deduction is determined as if under the "Single" filing status. 

If you go through the above table you will get that being in the "Full Deduction" and "No Deduction" group is easy to figure out, however if you fall into the "Partial Deduction", make sure you talk to a tax professional BEFORE you make your IRA contribution for the year. 

I would say DO NOT try any of these calculations on your own if you do not know what your Modified AGI or MAGI is going to be for the year. 

Bibliography: Publication 590

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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, May 16, 2014

Alimony? What Is That? And Do I have to report It on my taxes?


Google Images




The word Alimony comes from the Latin Word alimonia which means nourishment or sustenance. It also comes from Scots Law which is the legal system of Scotland and their concept of aliment. This was a rule of sustenance to assure the wife's lodging, food, clothing and other necessities of divorce. 

In the 1970s, the United States Supreme court ruled against gender bias in alimony awards. You may remember some high profile divorces, where women such as Britney Spears, Jessica Simpson etc have paid multimillion dollar settlements in lieu of alimony to their ex-husbands like Mother Goose in this cartoon! 

 Alimony is not child support. Child support is paid by one parent to the custodial parent mainly to support the needs of their children. Usually child support is not considered taxable income to the parent receiving it and is not deductible by the parent making the payments. However in most countries and certainly in the US, alimony is deductible to the person paying it and taxable income to the person receiving it. 

The Treasury Inspector General for Tax Administration (aka the TIGTA) recently released a report that "Significant Discrepancies Exist Between Alimony Deductions Claimed by Payers and Income Reported by Recipients". This report highlights the errors made by taxpayers & preparers alike in reporting alimony. 

How Should Alimony Paid/ Received Be Reported By the Taxpayer?

  • The Alimony paid to an ex-spouse should be part of the divorce decree. Such decree should be examined thoroughly. Child support or other payments to be made by decree have to be clearly separated from alimony. 
  • The ex-spouse's Social Security Number should be noted correctly and reported on the tax return by the spouse making the alimony payments. 
  • The alimony paid is an above-the-line deduction, taken on line 31a of the Form 1040. 
  •  Alimony received is taxable income and is reported on line 11 of the Form 1040. 





TIGTA recommended that the IRS evaluate its current examination filters. This is to make sure that potentially high-risk tax returns are not excluded from examination and the IRS develops a strategy to address the compliance gap. 

TIGTA also recommended that the IRS revise processes and procedures to verify that all tax returns include a valid recipient TIN/ SSN when claiming an alimony deduction and correct errors in IRS processing instructions to ensure that a penalty is accurately assessed on all tax returns on which a valid recipient TIN/SSN is not provided.

If you use a software to prepare your tax returns, it should give you an error message if you are claiming an alimony deduction without a recipient's SSN/ TIN. 

We have to wait and watch how the Internal Revenue Service implements the TIGTA's suggestions, till then make sure you are reporting Alimony in a correct manner. 


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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