FBAR: THE CONTINUING SAGA – IRS SUSPENDS FBAR FILING FOR NON-CITIZENS– FOR NOW.

Posted by Don W on March 17, 2010 under Expatriate Taxes, Foreign Bank Account Reporting (FBAR), Tax Matters in the News

The IRS has made yet another change to what’s known as FBAR– they have “temporarily suspended the requirement to file a Report of Foreign Bank and Financial Accounts for the 2009 and earlier calendar years, for people who are not U.S. citizens, residents or domestic entities”.

Announcement 2010-16 (PDF) temporarily suspends the requirement to file Form
TD F 90-22.1, also known as the FBAR, as the IRS tries to clear up the definition of “United States person.” In addition, the IRS issued Notice 2010-23 (PDF), which provides FBAR filing relief for some persons with signature authority and who own commingled funds.

. . . After receiving a significant number of public comments, the Treasury Department published proposed FBAR regulations to provide taxpayers with guidance on who is required to file FBARs due on June 30, 2010, and how to answer FBAR-related 2009 federal income tax return questions.

The IRS and the Treasury Department now believe it is appropriate to provide the following administrative relief: The requirement to file an FBAR due on June 30, 2010, is suspended for persons who are not U.S. citizens, U.S. residents, or domestic entities. Additionally, all persons may rely on the definition of “United States person” found in the July 2000 version of the FBAR instructions to determine if they have an FBAR filing obligation for the 2009 and earlier calendar years. The definition of “United States person” there is: (1) a citizen or resident of the United States, (2) a domestic partnership, (3) a domestic corporation, or (4) a domestic estate or trust.

This substitution of the definition of “United States person” applies only with respect to FBARs for the 2009 calendar year and to earlier calendar years.

All other requirements of the 2008 version of the FBAR form and instructions, as modified by Notice 2010-23, remain in effect until changed by subsequent guidance issued by the Treasury Department, including the IRS.

– excerpted from WebCPA – Feb 26, 2010

Q&A: It’s my first year abroad– how should I file back home, and how do I get an extension?

Posted by Don W on February 22, 2010 under Expatriate Taxes, First Time Filing as an Expat, Relocation and Taxes

Q: This is my first year abroad and I have been away since April 2009. I was a resident of Oregon in the beginning of 2008 then California as of May 2008. What do i need to do/know to file taxes? Do I automatically get the extension for filing or do i need to file by April 15th since its my first year?

A: From your email it looks like you will need to file Part Year Resident returns in both states.  It would depend on income generated in each state, if any, etc.

All US citizens are required to report their worldwide income to the IRS on their tax return. The two primary forms required for expat returns, in addition to the usual Form 1040, etc., are Form 2555 (PDF) – Foreign Earned Income Exclusion (instructions) and Form 1116 (PDF) – Foreign Tax Credit (instructions).

Yes, you get automatic a 2 month extension until June 15th. However, if you want to extend until October you will need to file for extension by April 15th. Make sure to check with each state to see if they accept the federal extension or whether you need to file an extension with the state as well. Filing an extension is never a bad idea for expats—gives you time to decide what you are going to do.

Q&A: I just found out that I should have been filing for years. Please help– where do I begin?

Posted by Don W on under Expatriate Taxes, First Time Filing as an Expat

Q: I am a US expat living abroad and I was wrongly informed that I did not need to file a return if I didn’t earn more than a certain amount per year and lived outside the US as there is an exclusion. This was some years ago, I cannot recall the last year I filed a return and I am now very worried as I have recently been informed that I may have been required to fill in a form each year. I don’t know where to begin now.

I don’t know how to find out when my last return was filed and do I need to file a return for all the years I haven’t filed? What forms do I need? Can I file forms retroactively? Should I contact the IRS for help or should I file all years before contacting them?

A: You can look at your situation on the bright side: at least you are getting back into compliance when you are under no pressure!  You never know if it might have come back to haunt you at a time when you could least afford it.

Your situation is not as bad as it appears. Regardless of when you last filed, what you need to do is file the most recent three years. This is what we always recommend to our clients. Technically, the IRS requires six years, but the unspoken rule is three. Then, if the IRS requests additional years the taxpayer can provide them.

Your tax return will use the same forms you would have used if you had been in the US with the addition of two forms that are specific to most expatriates: Form 2555 (PDF) – Foreign Earned Income Exclusion (instructions) and Form 1116 (PDF) – Foreign Tax Credit (instructions). The way the tax system works in the US is that a taxpayer must declare all income regardless location.

For information about basic expat tax filing requirements – as well as income exclusions, housing deductions and foreign tax credits available to US expats – please visit our Expat Tax Basics page.

Q&A: Is it better to be a contractor or an employee of a foreign corporation, for tax purposes?

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

Q: I’m an American citizen considering a 3 month contract with a Japanese company. I would be working in Japan and they would pay me as a contractor, not an employee. Right now I’m a sole proprietor.

Would it be better for tax purposes to incorporate (LLC or S Corp)? Would I pay any taxes in Japan? We’re also discussing a longer term contract where I would be in Japan for 270 days per year. Would I be better off as an employee or a contractor?

A: The short answer is an LLC or S Corp would pass through just like a sole proprietorship. Unless you would be making large sums it would not really be worth it, from a basic tax perspective. There may be legal or industry specific issues which make them attractive options.

The employee or contractor question is a tricky one. The big difference is whether you pay into US Social Security or into the Japanese system. Employees of foreign corporations are generally not required to pay into US system because they are paying into the foreign system. Those self-employed would be required to pay into the US system. Both statuses are eligible for the Foreign Earned Income Exclusion, for which you must meet the Physical Presence Test to qualify. However, self-employed taxpayers must pay Self-Employment Tax. This is comprised of the employee and employer portions of Social Security and Medicare. These taxes are not eligible to be excluded. It is possible to have all of your foreign income excluded and still have to pay Self-Employment Tax. We invite you to visit the Expat Tax Basics page on our main site for more information.

Tax returns for those filing as self-employed can be more complex– something to take into consideration.

Q&A: Is there such a thing as a “tax-free” status? My employer is in the US– does that make any difference tax-wise?

Posted by Don W on February 12, 2010 under Expatriate Taxes

Q: My family and I are now living in Denmark. We moved to Denmark from New Jersey back in January 2009. I have been looking on the Internet for answers to some tax questions and the IRS web site was not much help. I have a few basic questions to start.

#1 – I was told by others, friends of mine (I have not seen this in writing) that after I am living and working out of the country for 9 consecutive months, I fall into a tax-free status. What do they mean by this, and is this a true statement?

#2 – Even though I am living and working here in Denmark, my employer is is in the states and my salary is being paid (deposited) into my local checking account in New Jersey. Does this effect my tax-free status? My salary is not being paid by a foreign employer, does that make any difference tax wise?

#3 – If any of the above is true and correct, do I continue to pay (have my federal income tax) deducted from my salary and then file for a refund? Or, do I file a new W-4 claiming that I am tax exempt? This one really scares me because I was in India for four years working for the US government and I did this while I was there and I had a very hard time convincing the IRS that I paid income taxes in India for the last 4 years and that I did not have to pay both. They (the IRS) wanted back taxes for the 4 years that I did not pay (2000 to 2004). This took me well over a year to get that all sorted out.

My employer is deducting my Social Security and Medicare taxes every other week. I’m listed as a New Jersey resident so I do not deduct or have to pay any state income tax. I pay no taxes here in Denmark at all.

A: I will answer your questions in the order you sent them.

1. The information you received from your friends is completely untrue. All US citizens are required to report their worldwide income each year. That does not mean you will owe tax, depending on your circumstances, but there is no “tax free” status just because you are out of the US. Please visit our Expat Tax Basics page on our main site for more information.

2. The fact that you have a US employer would not matter because you are required to report your worldwide income. The next question is –do you have a state filing obligation? The answer to this can be more complex than the federal rules.

3. Without further information I would say that leaving it as it is would be the most simple and most conservative. Depending on all details of your return I can see a situation where you might want to file IRS Form 673(PDF).  This allows your employer to stop withhold federal income tax (does not apply to SS or Medicare).

Q&A: I’m about to be an Expat. What are some of the basics I need to know?

Posted by Don W on under Expatriate Taxes, First Time Filing as an Expat

Q: I’m moving to Portugal for up to four years beginning in May of this year. I’m looking for some assistance with my tax return and an estimate of what I’ll need to set aside for my U.S. taxes each year.

A: There are a couple of issues up front that you should consider.

First, if you want to claim the Foreign Earned Income Exclusion, you will need to meet the Physical Presence Test. This means being outside the US 330 out of 365 day period. Most expats tend to file extensions in their first year so that they can be eligible for the exclusion. Please visit our Expat Tax Basics page on our main site for more information.

Second, you are basically required to pay into a social security system. The US has Totalization Agreements with countries to ensure that you are not having to pay into two systems, but you must pay into one.

Third, we recommend that you contact an Portuguese tax expert as well. We use the information from Portuguese tax returns to calculate for tax paid. You can also find more information on taxation by country in the Foreign Tax: Country-Specific Sites section of our Self-Help Links page on our main site.

Q&A: I am an American living abroad. I am considered a dependent, and all taxes have been paid by my family so far. Do I need to file?

Posted by Don W on under Expatriate Taxes, First Time Filing as an Expat

Q: I am an American living abroad. My family has supported me for years, and have paid all of the taxes on the money they have given me. It is my understanding that due to this, I am their dependent, and do not owe additional taxes on that money. In 2009 I earned the equivalent of $3,200 US. Do I need to file a return on this amount? Or is it too small? How does it work with the money I have received from my family? Do I actually owe taxes on that as well, or is the fact that they have paid all taxes on it to date sufficient?

A: When your income is below the minimum filing amount you are not required to file a tax return. And, you are correct – you don’t have to declare gifts from your family.  The minimum filing amount for 2009 is $5,700. However, if you have unearned income, interests, or dividends totalling more than $950 you would need to file.

The IRS has a page with further information.


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

Posted by Don W on January 29, 2010 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.