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!!

Pictures Courtesy; Google Images





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



Tuesday, July 8, 2014

New Rules On ITINs: What This Means For You?

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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!

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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