Haiti Relief Donations Qualify for Immediate Tax Relief

Posted by Don W on January 29, 2010 under Tax Matters in the News

People who give to charities providing earthquake relief in Haiti can claim these donations on the tax return they are completing this season, according to the Internal Revenue Service.

Taxpayers who itemize deductions on their 2009 return qualify for this special tax relief provision, enacted Jan. 22. Only cash contributions made to these charities after Jan. 11, 2010, and before March 1, 2010, are eligible. This includes contributions made by text message, check, credit card or debit card.

Source: Washington State CPA Society newsletter – January, 2010

Q&A: My income is suddenly above the exclusion threshold. What now?

Posted by Don W on under Expatriate Taxes

Q:  I hold dual citizenship in the USA and Canada. I immigrated to Canada from the US and have been residing in Canada permanently since that time. My income is derived solely from my employment salary. At present, my wife (Canadian citizen) and I jointly own a house which we live in. We are still paying a mortgage on this property. Aside from our pension funds through our employers, we do not hold any other investments.

Up until the end of financial year 2008, my Canadian earnings have been below the exclusion threshold (when converted to US dollars). However, in 2009, my earnings exceeded that exclusion threshold for the first time. My understanding is that, provided my home country income tax is higher than it would have been in the US, I should be allowed to claim credits which eliminate my taxable income for US reporting purposes. Could you please help me understand the details and requirements better?

A: Unfortunately, regardless of whether your income was below the Foreign Earned Income Exclusion amount, as a US citizen you have an annual obligation to file a US tax return.

Second, individual taxpayers must be on a calendar year tax year. Other types of entities can have fiscal years that do not end on December 31st, but all individuals do. What we do for clients who are in countries that are not calendar year is to compile an annual income and taxes paid by month. This way we can have the correct calendar year amounts. We also convert the currency based on an annual monthly average for the particular year.

Third, unless your wife has an ITIN (similar to a Social Security Number– for more information please see this IRS page) and intends to report her worldwide income you will be required to file Married Filing Separate rather than Married Filing Joint.

Finally, we are not experts in any tax systems except the US.  We always encourage our clients to retain our counter-parts in the host country. Please see the Tax Links section off our Self-Help Links page on our main site for useful information on specific countries.

Q&A: I live outside the country and I don’t work. Do I need to pay US tax?

Posted by Don W on under Expatriate Taxes

Q: I’m an American expat living in Australia with my wife who is a citizen of New Zealand. I do not work, I’m residing in Australia as her spouse. I’m not sure if I must pay US taxes. I have not filed or paid taxes in 10 years. Would you be able to assess my case and advise as to what it would take to get me back on track? Thank you.

A: First off, it depends on how long you have lived in Australia. If you have been there for the last decade and not worked at all then you likely don’t have any filing obligations unless one of the following exceptions applies to you.

  • Exception One - you have sufficient passive income such as rents, interest, dividends, stock sales,
    partnership interests, etc.  In this case you do have a filing obligation.
  • Exception Two - your wife is a US Green Card holder and has her own filing obligation.

Assuming your wife has no exposure to the US system then you will be required to file as Married Filing Separate if you have a filing obligation.

If you were to need to file, we recommend that our clients file the most recent three years of returns and then, if requested, an additional three– for the IRS, the rule is that the most recent six years be filed in order to be in compliance. Again, this is only if you meet minimum filing requirements.

 

Q&A: My mortgage interest is almost the same as my income. Can I claim the interest and reduce the tax deduction?

Posted by Don W on under Expatriate Taxes

Q: I am a retired teacher living in England. I own a primary home and a holiday home in England. I am aware that my mortgage interest is deductible on my IRS form I submit from England. The question is: My mortgage interest is just about equal to my U.S. pension. That is the only income that I have from the U.S. My wife and I work over here and live off of that income. Our foreign income is below the 87,500 cut off so it is not taxable in the U.S. Can I claim all of the mortgage interest off of my pension income or must some of it be allocated to my foreign income therefore lowering the deduction from my pension?


A:
The Foreign Earned Income Exclusion reduces your total income first. Then, if you still have income you then subtract any adjustments. Then, you subtract out the Itemized Deductions. So, you can claim all of your mortgage interest on your Itemized Deductions, but you will only get the benefit if your Adjusted Gross Income (AGI) is positive.

There is a substantive issue for you and that is that pensions do not qualify for the Foreign Earned Income Exclusion. Only Earned Income is eligible. Please check out this link to an IRS page that explains further: http://www.irs.gov/businesses/small/international/article/0,,id=96811,00.html

My interpretation of the facts presented is that you are not eligible for the Foreign Earned Income Exclusion. You must report your pension on your US tax return and you should report your mortgage interest on your tax return. Based on what you have said, you should not have any tax liability because your mortgage interest is almost equal to your pension. Add in your two Personal Exemptions and you should have a Taxable Income of zero or less.

You do need to file however. And, if you have been claiming the Foreign Earned Income Exclusion in the past you may have to amend your returns and file correctly.

Q: I am a retired teacher living in England. I own a primary home and a holiday home in England. I am aware that my mortgage interest is deductible on my IRS form I submit from England. The question is: My mortgage interest is just about equal to my U.S. pension. That is the only income that I have from the U.S. My wife and I work over here and live off of that income. Our foreign income is below the 87,500 cut off so it is not taxable in the U.S. Can I claim all of the mortgage interest off of my pension income or must some of it be allocated to my foreign income therefore lowering the deduction from my pension?

A: The Foreign Earned Income Exclusion reduces your total income first. Then, if you still have income you then subtract any adjustments. Then, you subtract out the Itemized Deductions. So, you can claim all of your mortgage interest on your Itemized Deductions, but you will only get the benefit if your Adjusted Gross Income (AGI) is positive.

Q&A: Just found out that I should have filed. I want to avoid the bureaucracy but I don’t want to get in trouble. What should I do?

Posted by Don W on under Expatriate Taxes, First Time Filing as an Expat, Foreign Bank Account Reporting (FBAR)

Q: I worked in China for three years. While there I deposited my salary in a bank account and when I left the country I left money sitting in the account. While in China I filed and paid Chinese taxes.

After returning to the US, I learned that I was supposed to file taxes in both China and the US. I hate dealing with tax documents, so I did the easiest thing I could and just filed the missing years in the US as zero income.

Later, I learned that I was supposed to report the money I earned in China in the tax returns. I’d now like to access some of the money sitting in my account in China. I don’t want the hassle of re-filing tax returns and I don’t want to be double-taxed on the money.

The reason I’m asking this questions is because I recently got in touch with the Chinese bank to update my contact information and let them know I was living in the US. They sent me a form asking if I wanted to declare the account to the US government on a W-9 form.

I want to go through as little paperwork, expense and bureaucracy as possible. Therefore I’m not inclined to file a W-9 and declare the account to the government. Is the IRS going to come after me for money laundering?


A: It is clear from your question that you know you are not in compliance.  You know that you need to correct your prior years returns. And, you may need to file form TDF90-22.1(PDF)  which is used to report foreign bank accounts under your control IF your combined foreign balances ever equal $10,000 or more on any given day–sometimes referred to as FBAR (see IRS FAQ).  The penalties for not filing TDF 90-22.1 are very large.

You want to resolve this so you can access your funds without any concern for future actions against you. Amend your prior year returns to report any interest/dividends you received each year in your Chinese accounts. Determine if you have to file Form TDF 90-22.1.

It is important to note that you are not penalized unless you owe money.  So, it is possible that you would be fully covered by the Foreign Earned Income Exclusion and Foreign Tax Credits.  For more information on these, visit our Expat Tax Basics page on our main site.

You won’t know until you redo your tax returns.  Would you rather spend a few hours on your own, or pay a professional to do it, and know for certain that the issue has been put to bed or always wondering if you are going to get caught?

Compliance is always the easiest road because you get peace of mind.

Q&A: Do I need to file taxes for my company that doesn’t have revenue to date?

Posted by Don W on under Business Tax Issues, Expatriate Taxes

Q: I live in Pennsylvania.  My personal taxes will be comprised of a 1099 as I was hired by an American company as a consultant for a couple months and then as a standard employee thereafter.

In September 2007, I started an LLC in Alaska that is to be taxed as a partnership.  The company has no employees and no income to date, and neither my business partner nor myself are getting paid from that company.  My business partner is a citizen of Germany but is currently a resident of Japan.  When we first set up the partnership they had mentioned that he should apply for an EIN which he has not yet done. Do you know if this is necessary? I am not sure what the requirements are for him as a foreign member.

A: Your LLC has to file an annual return by April 15th, even if it has no income.  Your partner will certainly need to get a TIN (Taxpayer ID Number). It should go on the LLC tax return and on his personal tax return.  Since he is a foreign partner there are some additional reporting requirements for the  partnership as well – Forms 8804 (PDF) and 8805 (PDF) – instructions for both are here.  This is for the LLC to report to the IRS, and withhold taxes, any income received by the foreign shareholder.  There are penalties associated with not filing these forms.

Your personal tax return is much less complicated.  Any time you have spent outside the US in 2007/2008 will determine whether or not you qualify for the Foreign Earned Income Exclusion.  If you have paid any income tax to a foreign country then you may be eligible for the Foreign Tax Credit.  If neither of these were to apply you would simply file your return like you lived in Pennsylvania.  For more information on the Exclusion and Credit please visit our Expat Tax Basics page on our main site.