Monday, July 27, 2015

Receiving Social Security Benefits While Living Abroad

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Social Security - that onerous tax we pay to work in the United States, supposedly for our own retirement but it seems to be more to fund those who are already drawing on it! I have quite a few clients who are on temporary work visas here in the US. They rightfully question whether they will be able repatriate Social Security when they are eligible to draw on it. Or there are those US Citizens who travel after they retire and may even choose to settle abroad or go back to their home country if they had migrated to the USA. 

Are You A US Citizen or Not?: 
Retirees who are U.S. citizens are entitled to continue receiving benefits for as long as they live outside the United States. However, citizens of other countries who receive Social Security may have some restrictions on how long they can receive benefits while outside the United States. 

There are some countries where the Social Security Administration (SSA) will not send social security checks. Do look for the complete list of such countries on the SSA website, if it's your plan to retire abroad. 



How Can I Actually Receive My Social Security Income and For How Long?
Like I said earlier, citizens of other countries who receive Social Security may have some restrictions on how long they can receive benefits while outside the United States. These rules are quite complicated. To get a quick overview, the SSA publication, "Your Payments While You Are Outside the United States", explains in detail what restrictions citizens of individual countries are subject to. 

Recipients of Social Security Income can have their checks directly deposited into a bank account in the United States, and this service is also available in some other countries. As you can imagine, using direct deposit avoids check-cashing and currency-conversion fees.

In many countries where there are a large number of U.S. retirees, American embassies and consulates have officers who are trained to provide Social Security services, including taking applications. Phone numbers for Office of International Operations are listed on the SSA Webpage here


Taxation of Social Security Benefits/ Income: 
If you are a US Citizen living abroad, you know you have to file a US tax return showing "world-wide" income and taxation of your social security benefits are subject to the same rules as if you were living in the US. Your total income together with your social security income determines whether and how much of your benefits are taxable. More than 85% of your Social Security Benefits cannot be taxed. This involves complicated calculations and is best left to your tax professional to determine. 

In addition to U.S. taxes, the country of your residence may tax benefits as well. If you would like to find out whether a country imposes taxes on Social Security benefits, you could contact the country's embassy in the United States.

Also, remember you will have FATCA obligations


Renunciation of US Citizenship & Consequences: 
If you have renounced your US citizenship, you are considered a non-resident alien (NRA). Now the US Social Security rules for NRAs will apply to you. It is your responsibility to notify authorities of your changed status. 

As an NRA, depending on your country of residence, you can generally continue to collect US Social Security in the long run. Bilateral agreements (or lack thereof) with the US & your country of residence, determine if your social security payments maybe be completely discontinued after more than six months outside the US or there may be only a minor tax adjustment to your social security payment.

Social Security Income and benefits in itself is an exhaustive topic and cannot be covered in one blog post. Please do contact a trained tax professional, such as an Enrolled Agent, to give you specific advice as per your requirements. 

Bibliography: ssa.gov; American Citizens Abroad; Social Security Lectures & Webinars. 

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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, July 18, 2015

New Countries on FATCA: India & UAE...What This Means For You!


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If you are a regular reader on my blog ~ you know the tax geek that I am, I write a lot about tax compliance for foreign bank account holders and the effect of the FATCA. FATCA stands for Foreign Account Tax Compliance Act. Calling a spade a "large digging instrument", we know this law is one-sided and forces other countries to enforce US tax laws. And if they fail to comply, they are effectively locked out of US markets and the US dollar ~ the "world currency" for now. 

For your reference, I wrote earlier on FATCA compliance here, here and here

Countries that sign the FATCA Agreement or Inter Governmental Agreement (IGA) are considered tax compliant. This means the banks/ foreign financial institutions (FFI) in these countries send information as demanded by the IRS to their own tax authorities which is then shared with the IRS. This is "Model 1". 

Other countries, like Switzerland, for example, leave it up to the banks/ financial institutions to come to an agreement with the IRS, this is a "Model 2" agreement. 

United Arab Emirates (UAE) jumped on board in February of this year (2015). 



If you are a US Citizen and are living in the UAE or are a US citizen living in the US and have accounts in the UAE, you should have filed FinCEN Form 114 also known as the FBAR if you have had AED (Emirati Dirham) 36732 or more which is approximately $10,000; filed Form 8938 if you have had AED 183657 or more (Single- approximately $50,000) and AED 367315 or more (filing Married & Joint- approximately $100,000) at end of the year. 

Since UAE has signed the FATCA agreement with the US, the UAE banks/ financial institutions will start to share information with the IRS regarding accounts held by US Citizens, reportedly from the 2nd quarter of 2015.

Map of India


India signed the IGA with the US early this month on the 9th of July, 2015. Nearly a 1,000 or more Indian FFIs have already signed agreements with the IRS long before, to share US Citizen information, however the official IGA came into place now. 

Hence the FBAR thresholds as described in the above would apply to you as well. The 2014 official INR or the Indian Rupee to USD conversion was Rs.63.469 to $1. 

Per the Indian press release, FATCA Compliance will cover all new accounts opened by Indian FFIs from July 1st, 2014 on wards. 

Do I Have To Be Worried If I had Financial Accounts In these Countries Before the IGA came into place? 

Undoubtedly- YES!! If you have had undeclared accounts in FFIs in India or the UAE from before these IGA dates and they exceed the FBAR limits, there are various procedures in place for you to come into tax compliance. These procedures, known as the Offshore Voluntary Disclosure Program or the Streamlined Compliance Procedures, can be used to work with the IRS. There are different penalties involved with the different programs, please talk to your tax professional to determine what is right for you. 

Picture Courtesy: www.usfunds.com

Fall Out From the FATCA IGA With Various Countries:

What we are seeing increasingly is that the USD is no longer as welcome in countries as it used to be. This is not because the FFIs do not like US Citizens any more, it is more to do with the fact that the bank/ FFI authorities do not want to have to deal with the additional paper-work involved with having US citizens as their clients. 

Not to speak of the confusion in the rules and regulations as instructions are understood and percolated down to every employee who deal with US citizens-customers. Till then, we have had to deal with misinformation and misinterpretation on the part of the authorities in these countries. 

Record number of US citizens are deciding to renounce their citizenship due to the increased pressure to report all world-wide income. The expatriation in itself is a herculean task to undertake not to mention the expatriation taxes that are due and hardship caused for any future visits/ immigration to the US by the expatriates themselves or their children. More on Expatriation Tax in my post here

The unforeseen consequences from this increased vigilance by the US tax authorities and other countries hoping for reciprocal cooperation to bring their tax evaders into tax compliance will be felt increasingly in the years to come I am sure. 

I cannot stress enough on the importance of contacting a tax professional knowledgeable in this field if you have questions regarding foreign bank account tax compliance. This is not something I would recommend venturing out as a Do-It-Yourself project. 
   
Bibliography: Form 8938; Form 114; FATCA News Releases

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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, July 13, 2015

Tax Related Identity Theft



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This past year, Identity Theft has become such a buzz word, that it needs to be revisited on my blog. Between scamming crooks on the phone from off-shore based call centers, hackers believed to be from Russia raiding the IRS website and some more hackers from China getting into the national data-base & managing to steal classified information of hundreds & thousands of federal employees, protecting one's identity has become a top priority for all. 

I wrote about Protecting Your Identity here earlier.  

According to today's news, the scammer who took millions with fake IRS calls from gullible taxpayers was sentenced to 14 years in prison. To many getting a phone call from someone claiming to be IRS can set off a panic attack! It is imperative to know that the IRS does NOT initiate contact with taxpayers by email to request personal or financial information EVER. And this includes any type of electronic communication, be it, text messages or messages over social media. 



What Is Tax Related Identity Theft?: 

If a tax return is filed without your knowledge using your social Security Number to claim a refund, that is "Tax Related Identity Theft". You are not likely to find out that a fraudulent return has been filed till you (try to) file your own tax return and learn that you can't do so. 

Alarm bells should go off if: 
 1. You get a notice form the IRS that 2 returns have been filed with the same SSN. 

 2. You haven't filed a tax return but you get a notice from the IRS that you owe taxes, are getting a refund offset or there is a collection notice being taken against you. 

 3.  You get a notice from the IRS that an employer you don't know paid you wages. 

If you suspect that your Social Security Number has been compromised and you know or suspect that you are a victim of Identity theft, contact a tax professional such as an Enrolled Agent immediately. An Enrolled Agent will be able to: 

1. Help our respond to any IRS notice effectively. 

2. Help complete Form 14039, which is an Identity theft Affidavit. 

3. file your tax return and stay in touch with the IRS. 

If you have previously contacted the IRS and did not have a resolution, contact the Specialized Unit at 1-800-908-4490. 

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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, June 12, 2015

Credit Cards: A Necessary Evil!


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This email popped up from the Credit Card Insider team just as I was having a conversation about summer jobs with my 19 year old. They asked me if I would be interested in writing a post about advising college students/ fresh graduates about credit cards & good practice.

Now, both my teens will tell you that I absolutely love advising, only, they don’t seem to agree on the term used, I think they would rather call it “lecturing” and immediately turn their ears off. (How is that humanly possible, anyway?) Naturally, I immediately shot back an answer to the email, “Serendipitous!” I said, “I would love to.”

If you are a recent college graduate and are trying to stare down a humongous college loan balance or if you are still in college, and you receive a lovely (and tempting) welcome letter from a credit card company every other day, or you are one of those lucky ducks whose parents paid for college but are out on your own now, here are my thoughts.

Get A Job:

Really, get a job- any job! If it’s a job at your college library, stacking books or if it is at a local fast food joint, or if someone is looking for a tutor in a subject you are rock at- take it! Getting a job & holding it down is a self-esteem booster like none other. And having money trickle into your bank account? That’s an awesome feeling, as long as you remember that this first job is not going to be your career for the rest of your life! We have a trio of brothers in our neighborhood who mow our lawn for $30 a pop or $250 for the whole season, and I believe they have 45 homes on their route.

Get A Credit Card:
     
     It’s truly scary how important your “credit” is these days. Even your landlord or your cell phone company will check your credit score to determine your eligibility. The best time to start building credit is while you are still in school. How is your credit score determined? Many things go into that but your credit history is most important. The best way to acquire credit history is to get a credit card.




    How To Get A Credit Card:
     
     Can you ask your parents to be authorized user on your credit card? If yes, you should. If they cannot or will not, and there is no one else with a proven credit history who can be an authorized user on your credit card, apply on your own. You can apply for a credit card on your own only if you have proof of income. If you do have a job, it is better to apply for a student credit card, as these may have lower credit requirements and low limits. When you get the card, use it very, very sparingly.  Don’t ever carry a balance, this way you will never pay a penny in interest but will build a credit history. The Credit Card Insider has some great tips for students applying for credit cards here
   

     Be Responsible About Your Credit: 
     Like I said earlier, do get a card but use it sparingly and always pay off the balance from month to month. If you do this for at least a year, you are on your way to building a good credit score. This means you will have to be responsible and know what your balance on your card is, do not exceed the spending limit and I can’t say this enough, pay off the balance every month. If you exceed your limit or take cash out on a credit card, be aware of the fees involved and that you will have to pay the fees in addition to the balance. Don’t forget, pay all your other bills on time as well.




Be Aware of Annual Fees:

The only time paying annual fees on a credit card makes sense is when you cannot get a   credit card otherwise. If there is an annual fee and a high interest rate on the card, it would be better not to get the card. Get a credit card that have rewards for spending but don’t charge you a dime.


Protect Your Identity:
     
     Do not give your Social Security Number and other private information on an un-secure website or in the open to an unknown person. Make sure the person you are talking to is indeed the authorized representative of the card company.

Do not apply for many credit cards at the same time. This will actually lower your credit   score or worse even raise a red flag. Do not agree to be a co-signer on a card for a friend/ room-mate. If the friend/ room-mate is not responsible about their credit, you will be at risk.

 It seems like it was just yesterday that my husband & I were proud owners of our first credit card which we had to get in order to establish our credit history. But we have come a long way now and I am proud to share these tips with you to get you started on your path to good credit history. 

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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, June 6, 2015

What Has Jeeves Got To Do With Taxes?

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If you know Jeeves, he is the fictional character in the series of humorous (read rib-tickling funny) short stories by P.G. Wodehouse. Jeeves is a very, very capable valet who gets his employer, Wooster out of many a sticky situation. 

My father introduced me to P.G.Wodehouse's books and there was no turning me back after that. The brilliant comic genius' writing has kept me enthralled through long train rides, boring summer afternoons, quick breaks in the midst of grueling exams, you get the drift! 

Now we may not all be able to afford a Jeeves in our lives, but a very common trend these days is to hire a nanny or an "au pair" if one has small kids. Considering the sky-rocketing day-care costs for young children, this does not seem such a luxury anymore. 

Did you know that a nanny/ au pair is considered a Household Employee? A nanny is not an independent contractor because you are telling them what they will do and how they will do things. 

Read more about independent contractors in my post here

You Have A Household Employee If:

You hired someone to do household work and that worker is your employee. This work can be part-time or full-time; you could have hired the person directly or through an agency; and you could pay him/ her hourly/ daily/ weekly or by job. 

You have to make sure the person who is your employee is legally allowed to work in the U.S. 

What Is Household Work:

Some examples of household work cover babysitting, care-taking, house-cleaning, drivers, health-aides, house-keeping, maids, nannies, private nurses or yard workers. 

Employment Taxes For The Household Employee:

You may have to withhold social security, medicare taxes, federal unemployment tax and state taxes. But you do not have to withhold federal income tax on such employee. 




Household Employer's Checklist:

1. ID Numbers: You will need federal & state ID numbers to report the taxes withheld. 

2. Payroll Information: The employee's gross pay determines the taxes to be withheld, the pay period determines when the taxes are paid in to the government. 

3. Forms: You have to provide the household employee with a Form W-2 by the end of January of the next year. And the taxes paid can be reported on Schedule H attached to your Form 1040. 

4. Employee's Information: You will have to collect their Social Security Number or ITIN on a Form W-4. And if need be their Form I-9 with proper identification. 

The Internal Revenue Service expects that a family with a household employer can expect to spend 50-55 hours per year correctly managing this. This would be the best example to hire a professional to take care of the filings etc accurately & on a timely basis. 

Bibliography: Publication 926; Schedule H. 


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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, 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.

Depreciation:

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; 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.















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. 


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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.