Year-end tax planning could be especially productive this year because timely action could nail down a host of tax breaks that won’t be around next year unless Congress acts to extend them, which, at the present time, looks doubtful. These include, for individuals: the option to deduct state and local sales and use taxes instead of state and local income taxes; the above-the-line deduction for qualified higher education expenses; and tax-free distributions by those age 70-1/2 or older from IRAs for charitable purposes.
Some areas to draw your attention are listed below:
NEW HIGH INCOME SURCHARGES
High-income-earners have other factors to keep in mind when mapping out year-end plans. For the first time, they have to take into account the 3.8% tax surtax on unearned (i.e.investment) income and the additional 0.9% Medicare (hospital insurance, or HI) tax that applies to individuals receiving wages from a US employer with respect to employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately).
The surtax on investment income is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over an unindexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, a taxpayer’s approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than unearned income, and others should consider ways to minimize both NII and other types of MAGI. NOTE: The foreign earned income exclusion is added back for purposes of determining whether you meet the threshold above and this surcharge cannot be offset with foreign tax credits. More info can be found here: http://www.irs.gov/uac/Newsroom/Net-Investment-Income-Tax-FAQs
The additional Medicare tax may require year-end actions. US Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward year end to cover the tax. For example, consider an individual who earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year. He would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don’t exceed $200,000. Also, in determining whether they may need to make adjustments to avoid a penalty for underpayment of estimated tax, individuals also should be mindful that the additional Medicare tax may be over withheld. This could occur, for example, where only one of two married spouses works and reaches the threshold for the employer to withhold, but the couple’s income won’t be high enough to actually cause the tax to be owed.
2013 tax rates have increased for certain taxpayers (as compared to 2012 rates). There is now a 39.6% tax bracket, whereas the 2012 maximum tax bracket was 35%.
The mandatory minimum health coverage does not apply to those having a tax home overseas for the entire year. Others who live in the US and do not have minimum coverage can be subject to a penalty starting in 2014.
NEW ON LINE E-filing system for FBAR
You may be familiar with the Form TD F 90.22-1, Report of Foreign Bank Accounts. This was required if the combined balance of your foreign accounts exceeded US$10,000 during the year. This requirement is still there, but the Form is now called Form 114 and has to be filed and submitted on-line at http://bsaefiling.fincen.treas.gov/Enroll_Individual.html
Keep in mind the deadline for this form is June 30, 2014 with no extension available. We expect that in future years the IRS may routinely penalize late filings of this form.
ACCOUNTS REPORTABLE ON FBAR AND FORM 8938
There are many questions on which types of accounts are reportable on the FBAR as well as the Report of Specified Foreign Financial Assets. A summary of the types of accounts that need to be reported can be found at this link: http://www.irs.gov/Businesses/Comparison-of-Form-8938-and-FBAR-Requirements
A type of account commonly forgotten for the FBAR form is any type of foreign pension accounts, where there is an account in your name.
It is important to include all accounts as well as all reportable income from these accounts.
ELIGIBILITY TO CONTRIBUTE TO AN IRA ACCOUNT FOR EXPATS
It is important to remember you must have earned income after the foreign earned income exclusion to be able to contribute to either a Roth or Traditional IRA. Example: You make $80K and all of it is excluded under the foreign earned income exclusion. You therefore are considered to have no earned income in the view of the IRS, and therefore cannot make a contribution to any kind of IRA account. However, if you made $110K and $90K was excluded under the foreign earned income exclusion, then you would have earned income for purposes of being able to make an IRA contribution.
You have until April 15, 2014 to make a 2013 contribution
Roth IRA contributions have income limits and if you are married filing separately or have higher levels of income, you may not be eligible even if you meet the earned income test above.
DELAYS IN IRS ACCEPTING 2013 RETURNS
Due to the IRS shutdown in October 2013, the IRS has announced they will delay the start of the filing season by approximately two weeks. Therefore, they will again be not accepting returns until approximately February 1.
ITEMS APPLICABLE TO BUSINESSES AND SELF EMPLOYED
Businesses also should consider making expenditures that qualify for 50% bonus first year depreciation if bought and placed in service this year. This bonus writeoff generally won’t be available next year unless Congress acts to extend it.
Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2013, the expensing limit is $500,000 and the investment ceiling limit is $2,000,000.
PROPERTY IN MEXICO
The IRS has ruled that the typical fideicomiso is not a foreign trust and therefore Forms 3520 and 3520-A may not be required for your fideicomiso.
If you filed 3520 or 3520-A for 2012, you may want to file one last time to indicate “FINAL FILING” so that you can close these filings with the IRS. We believe this will avoid a notice for those who had previously been filing as the IRS may ask where the form is if you had previously been filing and now stop filing without an explanation.
NON-US MUTUAL FUNDS
The US has a complex tax regime for those who own foreign mutual funds that are not part of their US brokerage account (i.e. not listed on a US exchange).
Those who owned foreign mutual funds often were deferring tax on the dividends and capital gains earned by the fund (something you cannot do on a US regulated fund).
Distributions can be taxed at a 39.6% rate plus an interest charge. If you have these types of investments we can assist you with planning and reporting these under the Passive Foreign Investment Company (PFIC) regime by filing the proper special reporting form.
This is just a summary of some of the 2013 & 2014 changes and tax savings opportunities.