Monday, May 11, 2015

Rental Property In Foreign Countries- A Primer!

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I keep saying this, "The world is shrinking!", ad nauseum perhaps, but I just cannot seem to get over that. When I went into the tax profession 15 years ago, I never thought I'd be reading as many tax treaties as I do now! I found out that the US had a Tax Treaty with Ukraine this year! Go figure!

Speaking of a shrinking globe, Inter-Governmental Agreements and Tax Treaties, it was uncanny this tax season, I had more than my share of clients who had a property or two in foreign countries by way of an inheritance or purchase and after having held it for a while as investments, they were now contemplating turning them into rentals.

I had written about owning foreign real estate a few blog-posts ago. You can read more on it here.  Today we are going to focus on tax reporting of foreign rental properties. Foreign rental properties owned by US citizens are treated the same way as domestic rental properties. The following points however, need to be kept in mind: 

Determine Value Of Property:

If the property has been passed on to you via an inheritance, there could be a "step-up" in basis. Essentially this means, no matter when the property was purchased by the original owner, the cost/ basis of the property is determined as of the date of death of the original owner. 

If the property has been purchased by you, you have to determine the value of the property based on it's current market value.  

In either case, having an appraisal from a competent, licensed real estate professional is good record keeping. Many times, based on where the property is located, the appraisal may have to be translated into English. 

Currency Conversions: 

The Internal Revenue Service has no official exchange rate. Generally, it accepts any posted exchange rate that is used consistently. When valuing currency of a foreign country that uses multiple exchange rates, use the rate that applies to your specific facts and circumstances. 

For instance, if you have a single transaction such as the sale of an investment that occurred on a single day, use the exchange rate for that day. However, if you receive income evenly throughout the tax year, you may translate the foreign currency to U.S. dollars using the yearly average currency exchange rate for the tax year. 

The yearly average currency exchange rates are posted by the IRS here.


A property that you own and rent out, if it has a determinable useful life and is expected to last more than a year has to be depreciated. The value of land cannot be included in the depreciable value. 

You begin to depreciate your rental property when you place it in service for the production of income. You stop depreciating it either when you have fully recovered your cost or other basis, or when you retire it from service, whichever happens first.

Under IRC Section 168(g)(1)(A), a foreign rental property has to be depreciated using the ADS over 40 years. 

Rental Income:

All rental income and expenses are reported on Schedule E or Schedule C to your Form 1040. If you pay taxes on this income in the foreign country, they can be deducted as foreign taxes paid. See my post regarding foreign tax credit here

Rental Expenses:

Just as rental income above, rental expenses such as mortgage interest paid, property taxes, insurance, payments to property management companies, repairs, travel, and certain other expenses towards maintenance of the property can be deducted on Schedule E or Schedule C as well. 

FBAR Compliance:

If the rental income results in your foreign bank accounts balances to fall under the FBAR Compliance requirement, then you have to file  Form 8938 and/ or FinCEN Form 114, if the thresholds are met. 

Limits On Rental Losses:

If your expenses are more than your rental income, you will obviously have a rental loss. However, you may be limited from claiming all your rental losses in the year of occurrence. 

The 2 sets of rules that may limit you from claiming the loss are either "At-risk rules" or "Passive Activity Limits". There may be certain exceptions to this. 

If all of the above were to apply to you, that is you have rental property in a foreign country, please remember that this blog-post touches only on the main points. There are a many other nuances and complexities to owning rental property whether it is domestic or foreign. Please consult an Enrolled Agent if you are in such a situation. 

Bibliography: Schedule E; § 168 (g) (1) (A); Publication 527;

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,

Monday, April 20, 2015

Special Needs Require Special Deductions

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Over the years I have worked with many families with special needs kids. I am amazed at their strength and the resilience of their spirit. The term "Special Needs" now encompasses more than what it used to and rightly so. It is truly phenomenal that studies show that the number of children diagnosed with autism, Asperger's syndrome and many other neurological disorders continue to skyrocket. A recent report by the Centers for Disease Control estimated the rate to be as high as 1 in 50. 

We know how disruptive the lives of families with special needs dependents are, which is only compounded by the fact that the costs of providing care to the dependents are very high. To further complicate things, parents or care-givers are not aware of possible tax deductions that can help alleviate some of these costs and they unknowingly forgo tax deductions or credits. 

In this blog post, let's take a look at the various potential tax benefits that can help parents/ care-givers of special needs individuals: 

The Dependency Exemption:

The dependency exemption under § 152(c)(3) includes the so-called "age test", where an individual must be under the age of 19 at year end, the individual must be a student under the age of 24, or the individual must be totally or permanently disabled at any time during the year. § 152(c)(3) was amended in 2009 to include a rule that the person claiming the dependent must be older than the qualifying child. Age is not relevant in determining the dependency exemption of an individual who is permanently and totally disabled. 

§ 22 (e)(3) states that an individual is permanently and totally disabled if he or she is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months. A physician must certify in writing that the individual is permanently & totally disabled. 

Special School Instruction Deductible as Medical Expenses:

According to Regs. Sec 1.213-1(e)(1)(v) the unreimbursed cost of attending a "special school" for a neurologically or physically handicapped individual is deductible as a medical expense if the principal reason for sending the individual to the school is to alleviate the handicap through the school’s resources. 

As long as these expenses exceed the 10%-of-the-adjusted-gross-income floor in 2013 & beyond,expenses paid to a special school are deductible on Schedule A as part of Itemized Deductions.  

Recent IRS Letter Rulings & Revenue Rulings have expanded the definitions of special schooling. 

Capital Expenditures: 

To secure a current medical expense deduction for a capital expenditure, the cost must be reasonable in amount and incurred out of medical necessity for primary use by the individual requiring medical care.

Qualifying capital expenditures for medical expense deductions fall into two categories:

  1. Expenditures improving the taxpayer’s residence while also providing medical care                                                              and 
  2. Expenditures removing structural barriers in the home of an individual with physical limitations.

Under either of the above category, costs incurred to operate or maintain the capital expenditure, such as increased utility and maintenance costs, are deductible currently as medical expenses as long as the medical reason for the expenditures continues to exist.

Conferences & Seminars: 

If as a parent or a guardian of special needs children, you have to attend medical conferences and seminars to learn more about their disability, the amounts paid towards registration fees and travel are deductible as medical expenses under Rev. Rul. 2000-24. There should be a physician recommendation, and the seminar should deal directly with the disability. 

State deductions: 

Many states provide deduction on the state tax returns which are in addition to the above, please check with your Enrolled Agent about the specific U.S. state you live in. 

Bibliography: Revenue Rulings; Letter Rulings; Pub 502; Journal of Accountancy Articles. 

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,

Sunday, April 5, 2015

Aliens: Non Resident or Resident- What Is Your Status?

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Star Trek came much later to Indian television, growing up, I was always a big fan of the science fiction stuff, every Sunday morning my brother & I would be glued to the telly waiting for the next episode of "Star Trek",not even the tantalizing smell of special Sunday breakfasts would get us to budge from our spots. Many, many re-runs of the Star Wars series and the cult movie, E.T later, when I landed in the United States, I was amused to find out that I was considered an "alien"! 

Of course, that was not meant as a "stranger-landing-from-a-space-ship" kind of an alien, but it was more as a sedate, ubiquitous immigrant alien. So let's get to the mundane type of complicated rules to determine - for income tax purposes- if you are an alien, that is, not an U.S. citizen, there are certain criteria you have to examine. 

Are You A Non-Resident Alien/ Resident Alien Or Both In The Same Year?

You are considered a non-resident alien, unless you meet one of the two tests. If you do then you are considered a resident alien. 

  • The Green Card Test:   
You are a resident for tax purposes if you are a lawful permanent resident of the United States at any time during calendar year. One would generally have this status if they possess a Green Card issued by the U.S. Citizenship and Immigration Services (USCIS). You would continue to be considered a lawful permanent resident unless the Green Card was taken away or it is administratively or judicially considered abandoned. 

  • The Substantial Presence Test: 
You will be considered a U.S. resident for tax purposes if you meet the substantial presence test for the calender year. {More about substantial presence on my post here}
To meet this test, you must be physically present in the U.S. on at least: 

1. 31 days during the calender year and

2. 183 days during the 3 year period that includes the current year and the previous 2 years, counting-

      a. All the days in the current year and

      b. 1/3 of the days you were present in 2013, and

      c. 1/6 of the days you were present in 2012.

  • Dual Status Aliens:
You can be both a resident alien and a nonresident alien in the same year. This usually happens either in the year you arrive in or depart from the US. If this applies to you than you are a 'dual-status" alien. Dual status does not refer to your citizenship, it only refers to your resident status in the U.S. To determine what your income-tax liability will be for a dual-status year, different rules apply for the part of a year you are a resident & the part you are a non-resident.

It is important to remember that there are restrictions for dual-status tax-payers. You cannot use the standard deduction, the head of household tax table, you cannot file jointly, you cannot claim the education credits, the earned income credit, or the credit for the elderly or the disabled.

Please contact an Enrolled Agent if any of the above apply to you.

BIbliography: Publication 519

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,

Thursday, March 26, 2015

Paying Too Much Or Too Little In Taxes? First Look At Your Withholdings

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Are you an early filer or do you like to wait? I guess some of that depends on whether you are getting money back or you owe! When my clients owe money to the government and we have gone down every route there could possibly be to reduce their taxes, I remind them about their missed October tax planning appointment and we usually look at their withholdings.

An employer requires you to give them information on how much tax needs to be withheld from your paycheck. Based on the information that is provided to them, the employer then proceeds to withhold & submit income taxes on your behalf to the Internal Revenue Service. This information from you is obtained by means of the Form W-4. 

The Personal Allowances Worksheet and the Dependents & Adjustments Worksheet help you calculate how much needs to be taken out in taxes. The way this worksheet is worded, you have to know your filing status, the number of dependents that are claimed on your return and if you plan to itemize on your tax return. 

If this is your first job or if you are always confused about what to do with this form, be sure to talk to a tax professional. Also know that this is a legal document that you are signing and frivolous tax withholdings are penalized. 

I always associate cash-flow with the Form W-4. Remember when filling this form out, what your paycheck is going to be every pay period, how often you are going to get paid, the FICA deductions, and determine what your cash flow every pay period needs to be. Hence, make a list of your rent payments, car payments, utilities, and other monthly overheads. 

Once you have determined how much you need on your check to take care of your basic necessities, make sure you have factored in debt you are paying off or amounts you are contributing towards retirement. Depending on your age and other financial aspects of your life, these may need to take priority over getting that big refund check at tax time. 

The W-4 mantra should be: The higher the number of deductions on your Form W-4, lesser is the amount of tax taken out.  

Having too little tax taken out is also not a great idea. This will definitely give your bank balance every pay period a big smile but it will also lead to a huge tax bill at filing time and possibly interest & penalties on the shortfall in tax deducted at source. 

Tax time is a really good time to take your latest pay-stub to your Enrolled Agent and have this discussion about what your withholdings are and whether you are covered. I am of the school of thought that as long as I have paid in enough to not hit interest & penalties when filing, I'd rather have the money & make smart investments than let the IRS keep it interest free.

But that is not true for everyone, some are averse to taking that risk, do not like to cut too close to the line or some may even think that this is a "forced way of saving money"! Whichever side of the fence you are on, be sure to talk to an Enrolled Agent. 

Bibiliography: Form W-4 

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,


Tuesday, March 17, 2015

Latest Form 8938 Update: Statement Of Specified Foreign Financial Assets

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I am happy to announce dear readers, my blog crossed 50,000 views this week. Can't tell you all what an awesome feeling that is. Thank you, thank you to my dear loyal readers! This time of the Tax Season is always interesting, most of my clients who have easy returns and get refunds have already filed their taxes, so now is the time when I become the deliverer of bad news. 

So staying in the spirit of the tax season, I deliver the latest changes to the Form 8938 with a huge spoonful of sugar! If you need to know if the Form 8938 thresholds apply to you, read my blog-post here

The latest release from the Internal Revenue Service on the 10th of March, 2015 incorporated into the Form 8938 instructions for reporting requirements made under the Final Regulations for § 6038D of the Internal Revenue Code. It also contains additional information not included in the published 2014 Instructions for Form 8938.

Dual resident taxpayers
  • If you are a specified individual filing as a nonresident alien at the end of your taxable year: A specified individual who computes his or her U.S. income tax liability as a nonresident alien on the last day of the taxable year is not required to report specified foreign financial assets on Form 8938 for the portion of the individual’s taxable year covered by Form 1040NR/ Form 1040NR-EZ:

  1. If the individual  complies with the filing requirements for nonresident aliens per § 301.7701. 
  2. Including the requirement to timely file Form 1040NR/ Form 1040NR-EZ and 
  3. Attach Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b).

  • If you are a specified individual filing as a resident alien at the end of your taxable year:   A specified individual who computes his or her U.S. income tax liability as a resident alien on the last day of the taxable year is not required to report specified foreign financial assets on Form 8938 for the portion of the individual’s taxable year reflected on the schedule to Form 1040/ Form 1040EZ:            

  1. If the individual  complies with all of the filing requirements of §1.6012-1(b)(2)(ii)(a).
  2. Including the requirements to timely file Form 1040/Form 1040EZ and 
  3. Attach a properly completed Form 8833.  

 Accounts excluded from the definition of a financial account under an applicable Model 1 or Model 2 IGA 

  • For taxable years beginning on or before December 12, 2014: If you have an account that can be considered specified foreign asset/s in a country that has an model 1 IGA or Model 2 IGA in effect, on or before the last day of the taxpayer's taxable year, and if the retirement and pension accounts, non-retirement savings accounts and other accounts satisfying requirements under the law are excluded from the definition of financial account in such IGA, are not required to be reported on Form 8938. 
  • For taxable years beginning on or after December 12, 2014: All retirement, pension accounts, non-retirement savings accounts and other accounts satisfying required conditions under the law must be reported on the Form 8938 irrespective whether account is maintained in a country with an IGA in effect. 

Joint Form 5471 or Form 8865 filing

A person who has included as part of a joint Form 5471 filing or joint Form 8865 filing & notifies the government of this effect does not have to file a Form 5471/ Form 8865 for the same accounts. And if an asset is reported on these forms that are timely filed, then they do not have to be included on the Form 8938 as well for the same tax year. 

Bibliography: Form 8938;; Form 5471; form 8865; § 301.7701; Form 8833

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,

Sunday, February 15, 2015

Reporting Changes For 2014 Individual Tax Returns - IRS Fact Sheet

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So Valentine's Day was here and left- that could only mean one thing - we are into the 3rd serious week of tax season! The Internal Revenue Service got out it's fact sheet about the changes in reporting requirements for individuals. I thought for all those self-preparers, this would be a good tool to look at and see if this is the year you want to make the leap & have your taxes examined by a tax professional, especially an Enrolled Agent! 

The ACA Act says that a taxpayer and each member of his family when filing his federal income tax return, must either 
  • Have qualifying health coverage for each month of the year; 
  • Qualify for an exemption;
  • Make an individual shared responsibility payment 
Some moderate-income taxpayers may also qualify for financial assistance to help cover the cost of health insurance purchased through the Health Insurance Marketplace. 

You would be categorized as one of the following:

A. Check the box- Simply check the box on the tax return that each member of your family had qualifying health coverage throughout the year. You can use a chart on to find out if your coverage counts as "qualifying coverage".

B. Exemption -  You may be eligible to claim an exemption from the requirement to have coverage. Eligible taxpayers need to complete the new IRS Form 8965, Health Coverage Exemptions, and attach it to their tax return. 

C. Individual shared responsibility payment: If you do not have qualifying coverage or an exemption for each month of the year, you will need to make an individual shared responsibility payment with your return for choosing not to purchase coverage.

D. Premium tax credit (PTC): If you bought coverage through the Health Insurance Marketplace, you should have received Form 1095-A, Health Insurance Marketplace Statement, from the Marketplace by early February. If you haven't received this yet- contact the Marketplace and not the IRS for that information. 

You will also need to reconcile your advance payments to the amount of your PTC on Form 8962 with the amount of your actual income.

  •  RENEWAL OF TAX BENEFITS: Benefits that had expired for 2013 and were renewed for 2014 are: 
                  # Deduction for state and local sales taxes claimed by taxpayers who itemize their deductions on schedule A. 

                 # Educator Expense Deduction claimed as an adjustment to your income on Form 1040 Line 23 by eligible teachers. 

                 #  Qualified Charitable Distributions by IRA owners age 70 1/2 or older.  

                 # Non-business Energy Credits claimed on Form 5695 

                 # Tuition & Fees Deduction claimed on Form 8917

Under the new rule, an IRA owner can make only one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs he or she owns. 

The limit will apply by aggregating all of an individual's IRAs, including SEP and SIMPLE IRAs as well as traditional and Roth IRAs, effectively treating them as one IRA for purposes of the limit.

While this rule only begins to apply in 2015, it could affect taxpayers' actions with respect to their IRAs and their 2014 returns. There is a 2015 transition rule that ignores some 2014 distributions.

If you have either one of the 2 popular Canadian Retirement plan, the Registered Retirement Savings Plans (RRSPs) or Registered Retirement Income Funds (RRIFs), you know that you had a special annual reporting requirement on the Form 8891. This requirement has now been eliminated. 

Please note that this does not change your reporting requirements under FATCA or on the Form 8938, if those thresholds applied to these Canadian retirement accounts.   

IRS Direct Pay, which debuted during last year's tax-filing season, allows individuals to pay their tax bills or make quarterly estimated tax payments, directly from checking or savings accounts without any fees or pre-registration. 

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,

Sunday, February 8, 2015

So Whats The New Buzz On Foreign Bank Accounts?

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When looking for a picture for this post, I came across the one above & remembered my college English Professor. She really loved the term, "Freudian Slip" for some reason! All I knew then was that Sigmund Freud was the father of psychoanalysis but I never quite understood how that related to a Business English class, unless that was the Professor's way of telling us we were driving her nuts! Now I know that the term, "Freudian Slip" is a "mistake in speech that shows what the speaker is truly thinking" or "to do what one is truly thinking about". 

No, this post is not about defining psychoanalytic terms, dare I say more interesting than tax stuff? Not quite, but this post is about the latest buzz from the Internal Revenue Service, about some situations US taxpayers having foreign accounts might be in & their compliance options. So here it goes!

I. You are a US taxpayer who has properly reported and paid tax on ALL worldwide taxable income. Oops! You did not know that with your account thresholds, you should have been filing FBARs in all those years as well. These accounts were not only your own foreign bank accounts but were also some that you had signatory authority over through an employer. {About thresholds in my post here}

Your Compliance Options: Voila! 
  • You can now file those delinquent FBAR reports per instructions. 
  • Attach a statement explaining why the statements are late. 
  • Mail the delinquent FBARs to- Department of Treasury, P O Box 32621, Detroit, MI 48232.

II. You only have certain delinquent returns but no tax due. So you are the "lucky" one, you did not have any tax due but you failed to file certain tax information returns such as, Form 5471 or Form 3520. Or you had reported all taxable income arising from taxable income with respect to transactions relating to these forms. 

Your Compliance Options: 
  • You should go ahead and file these delinquent forms with the proper authorities (as per form instructions) 
  • With a statement attached (of course) explaining why they are late. 
  • The IRS will not impose a penalty for the failure to file Forms 5471 or 3520 if there are no under-reported tax liabilities. 
  • You should also not have been already contacted by the IRS regarding these delinquent forms.  

III. You are a non-resident US Taxpayer, you have delinquent returns- however your tax owed is less than $1,500 per year. So you have been abroad and have not filed your tax returns and your FBARs. You only owe less than $1,500 per year.

Your Compliance Options: 
  • File your delinquent tax returns for the last 3 years. 
  • Include any delinquent tax information returns with the bullet point above. 
  • File any delinquent FBARs for the past 6 years. 
  • Give all the required additional information compliance risk. 
  • Pay any outstanding federal tax and interest due with the outstanding returns. 
IV. You are a taxpayer with undisclosed foreign accounts and unreported income or you are a taxpayer seeking protection from criminal prosecution. 

Your Compliance Option: The Offshore Voluntary Disclosure Program aka OVDP. 

Please note that to decide if any of the above four situations apply to you and for further guidance regarding your compliance options, I cannot stress enough how important it is to consult with an informed and experienced Enrolled Agent, CPA or Tax Attorney. 

Bibliography: FS-2011-13; Report of Foreign Bank and Financial Accounts (FBAR); Form 5471 ; Form 3520. 

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,