American Expat parents can potentially take advantage of not just one but three U.S. Child Tax Credits, depending on their circumstances: the Child Tax Credit, the Additional Child Tax Credit, and the Child and Dependent Care Credit. In this article we outline when and how all three can be used, and what conditions need to be fulfilled to claim them. Read more
While the past year did not produce any monumental changes to U.S. tax law, there are a number of noteworthy changes that expats should keep in mind as we enter 2017. We also share a few highlights from President-elect Trump’s current tax plan.
Millions of Americans forgo critical tax relief each year by failing to claim the Earned Income Tax Credit (EITC), a federal tax credit for individuals who work but do not earn high incomes. Taxpayers who qualify and claim the credit could pay less federal tax, pay no tax or even get a tax refund.
Last year, an estimated 21 million taxpayers received approximately $37.5 billion in EITC. However, the IRS estimates Read more
If you cannot claim the entire amount of your child tax credit because it exceeds your tax, don’t be discouraged, because you may be able to claim the unused portion as an additional child tax credit. The additional child tax credit is a refundable credit, and is available to you whenever you cannot claim the entire amount of the child tax credit.
The amount of the refund, however, may differ depending on your total earned income. It may also be affected by the amount of Social Security and Medicare taxes that were paid.
Figuring and Claiming the Credit:
The amount of the additional child tax credit that you can claim on your income tax is the lower of: Read more
The child tax credit is a credit given for each dependent child on your tax return, who is under the age of 17 at the end of the tax year. The child tax credit is a nonrefundable credit, and is intended to provide an extra measure of tax relief for taxpayers with qualifying children.
To qualify for this credit, you must have a qualifying child on your tax return. The rules for determining if your child is a qualifying child for the purpose of this credit are as follows:
• The child must be your son, daughter, adopted child, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them. (This includes your niece, nephew, grandchild, great-grandchild, etc.)
• The child must not provide for over half of his or her own support for the year. Read more
New trade laws were recently enacted after President Obama signed them into law recently.
One of the provisions is affecting child tax credit claimed by certain expatriates. Under the provisions of new law, expatriates claiming foreign earned income exclusion under IRC 911 will no longer be entitled to claim refundable child tax credit. The change is effective from the tax years beginning after December 31, 2014.
Pertinent to note here that IRC 911 exclusion limit for 2015 tax year is $100,800.
Each year the IRS reports about $1 billion in unclaimed refunds for individuals who did not file a tax return. The IRS estimates that approximately half of the unclaimed refunds are for amounts greater than $600. You may not have filed, thinking that because you don’t itemize and your employer is withholding tax that you don’t need to file. But there is a good chance you are leaving money on the table by not filing. Consider the following:
• Over-Withholding – Your employer may have withheld more than you owe, as withholding is not an exact science. But you have to file to get the excess back.
• Earned Income Tax Credit (EITC) – An EITC is a credit for lower-income taxpayers. If you worked and earned less than $52,427 last year, you could receive the EITC as a refund if Read more
A nonrefundable tax credit is a credit that can reduce the amount of an individual’s tax liability to zero, but cannot exceed the total amount of income taxes owed. In other words, you would not receive a tax refund if the credit exceeds the amount of your tax liability. For example, if you have a nonrefundable tax credit of $5,000 and a tax liability of $3,000, the credit will eliminate the tax liability, that is, reduce it to zero. The remaining $2,000 of the credit, however, will be lost, because the IRS will not send you a refund for this amount.
Nonrefundable credits for tax year 2014 include the following:
• Credit for child and dependent care expenses.
• Child tax credit. Read more
With my family snugly content amidst a long holiday season I felt compelled to pen some thoughts regarding the ubiquitous United States Tax Code and all its myriad of seemingly scary changes looming around the proverbial corner. This post lists ten tax matters to be aware of in the new year that have come up in conversations with clients. It also offers four recommendations to minimize tax obligations that I’ve found myself repeatedly trumpeting whenever asked. And finishes with some quick reference tax facts.
1. For 2013 the self-employment tax has reverted back to its normal 15.3% rate, and the limit for the Social Security portion of the tax has increased to $113,700. Read more
• The IRS issued proposed regulations permitting deductions for certain local lodging expenses.
• In Veriha, the Tax Court held that the Sec. 469 self-rental rule applied to a taxpayer who owned three companies, a trucking company and two truck-leasing companies, and thus the income from the S corporation truck-leasing company should be recharacterized as nonpassive, while the losses from his LLC truck-leasing company should remain passive.
• In Quality Stores, Inc., the Sixth Circuit held that severance payments paid to terminated employees as a direct result of a workforce reduction are not subject to FICA tax.
• In Rev. Rul. 2012-18, the IRS issued guidance about FICA taxes imposed on tips and the procedures for notice and demand for those taxes under Sec. 3121(q). Under Announcement 2012-50, the rules distinguishing between tips and service charges in the revenue ruling will not apply until 1/1/14.
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The First and Second Circuits found Section 3 of the Defense of Marriage Act (DOMA) unconstitutional (1). The effect of Section 3 is to deny federal income tax benefits, such as filing joint income tax returns, to same-sex couples. The First Circuit stayed its mandate that Section 3 not apply pending a likely Supreme Court review. The Supreme Court has granted certiorari in the Second Circuit case and will hear arguments on March 27.
Children of a U.S. citizen and her Israeli spouse, who were born and living in Israel, did not qualify as dependents under Sec. 152(b)(3), which states a dependent must be a citizen or resident of the United States (2). Therefore, the child care and child tax credits under Sec. 21 and Sec. 24 were denied. The taxpayer also claimed that the IRS’s alternative argument that the credits were being denied because she did not file a joint return, as required by Sec. 21(e), was prohibited by Sec. 7522 because the notice of deficiency did not mention Sec. 21(e). The Tax Court noted Sec. 7522 does not require the IRS to identify all of the Code sections applicable to each tax adjustment.
In Notice 2012-12 (3) the IRS provides that mandatory restitution payments that victims receive from defendants under 18 U.S.C. Section 1593 (4) are excluded from income.
In Blackwood, (5) the taxpayer was terminated from her job for accessing her son’s medical records at the hospital where she worked. In the taxpayer’s unlawful termination suit, she indicated she suffered from a relapse of depression symptoms. The taxpayer received $100,000 and a Form 1099-MISC, Miscellaneous Income, reporting the payment, but the taxpayer did not report it on her tax return because she believed it was excludable under Sec. 104.
The Tax Court held for the IRS that the damages were not excludable under Sec. 104(a)(2) even though the underlying action was based on a tort or tort-type right. The taxpayer was unable to show she received damages for physical injuries. A letter from her doctor did not note any physical symptoms. The flush language of Sec. 104(a) also did not help the taxpayer’s case because it states that “emotional distress shall not be treated as a physical injury or physical sickness.” She was also unable to benefit from Sec. 104(a) because she did not show that she used any of the damages for medical care for emotional distress.
The Supreme Court declined to hear the taxpayer’s appeal in Driscoll (6). This case involved how the word “a” in the Sec. 107 exclusion from gross income for the rental value of a parsonage should be interpreted when used in the phrase “a home.” Does that mean one home or could it mean two homes? The Tax Court held for the taxpayer, noting that “a home” could have a plural meaning. On appeal, the Eleventh Circuit held for the IRS, noting that “home” has a singular meaning and that income exclusions should be construed narrowly.
In a case decided by the U.S. Tax Court, the taxpayers did not qualify to exclude income from discharged credit card debt under the exclusion for insolvency in Sec. 108(a)(1)(B) due to a lack of credible evidence presented regarding the fair market value (FMV) of their assets immediately before the discharge (7). The evidence they submitted was insufficient to establish FMV for federal tax purposes because the documents (tax bills and loan documents) did not describe the property or explain the methodology used to determine the value, and their testimony regarding comparable sales was uncorroborated and was not based on contemporaneous sales.
Rev. Rul. 2012-14 (8) amplifies Rev. Rul. 92-53 (9) and explains how partners treat a partnership’s discharged excess non-recourse debt in measuring insolvency under Sec. 108(d)(3). To the extent discharged excess non-recourse debt generates cancellation of debt (COD) income that is allocated under Sec. 704(b) and its regulations, each partner treats its part of the discharged excess non-recourse debt related to the COD income as a liability in measuring insolvency under Sec. 108(d).
In Letter Ruling 201228023, (10) the IRS found that a parent corporation’s bankruptcy plan was considered a liquidation plan for tax purposes. None of the debtors will recognize COD income with respect to any of the allowed claims until all distributions are made or if the bankruptcy plan ceases to be a liquidation plan.
After the IRS denied a taxpayer’s deduction for moving expenses, the taxpayer agreed but then tried a uniquely different approach in Tax Court (11). He tried to claim meals, lodging, and lease cancellation fees as business expenses related to his employment as a restaurant chef. The IRS and the court both agreed that he had changed his tax home when he moved himself and his family and therefore no deduction was allowed.
The IRS issued proposed regulations (12) that would allow a deduction under Sec. 162 for certain local lodging expenses incurred by employers or their employees. The deduction would be allowed under a facts-and-circumstances test. One factor considered in the test is whether the expense is incurred to satisfy a bonafide requirement imposed by the employer. In addition, the regulations contain a safe harbor allowing the deduction in the following circumstances: (1) The lodging is necessary for the person to fully participate or be available for a bonafide business function; (2) it does not exceed five calendar days or occur more frequently than once a quarter; (3) the individual is an employee, and his or her employer requires him or her to remain at the function overnight; and (4) the lodging is not lavish or extravagant and provides no significant personal pleasure or benefit. A simplified version of these rules was already in effect under Notice 2007-47 (13) [which was made obsolete by these regulations].
DeLima (14) could be used as a teaching tool for all the ways taxpayers can fail to substantiate their Schedule C, Profit or Loss From Business, trade or business expenses. The court went through a top 10 list of problems with the claimed expenses including:
• Failure to provide credible evidence on the relative amount of business vs. personal use of her vehicles;
• Failure to establish a business purpose for various expenses, including insurance costs, furniture rental, or lawn maintenance;
• Failure to provide receipts or other proof of equipment purchases and rentals;
• Admitting that her rented home and apartment were entirely mixed personal/business use; and
• Failure to meet the strict substantiation requirements of Sec. 274(d) for travel and entertainment or listed property expenses.
In addition, the taxpayer tried to claim that the IRS examination was barred by statute, even though she had signed a Form 872, Consent to Extend the Time to Assess Tax. This argument and her claim that she had signed the Form 872 under false pretenses were not raised until after the actual trial, and the court rejected them both.
In Abarca, (15) the petitioner claimed mortgage interest expense deductions for various rental properties on Schedule E, Supplemental Income and Loss, some of which were purportedly owned in partnership with others. The petitioner was neither named as the borrower for any of the mortgages on these properties nor was he able to prove he was the properties’ legal or equitable owner. In addition, it was unclear whether the properties had been contributed to the various partnerships. It was also apparent that the partnership form was not respected as the petitioner reported the properties as if he owned them individually. In addition, the petitioner was unable to prove that he personally paid all of the interest that he claimed. The petitioner was denied the deductions for any of the mortgage interest claimed on Schedule E for the subject properties. The Tax Court held in Chrush (16) that the petitioner failed to substantiate payments of mortgage interest on Form 1098, Mortgage Interest Statement, and home mortgage interest not reported on Form 1098. The petitioner co-owned the house with a close friend, but the amount reported on the Form 1098 issued to them was far lower than the deduction the petitioner claimed on his tax return, and no bank statements, canceled checks, or other evidence was produced to substantiate that he paid the claimed interest that was not reported on the Form 1098. In addition, the petitioner was unable to prove that he, and not his co-borrower, paid the interest reported on the Form 1098.
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by Karl L. Fava, CPA; Jonathan Horn, CPA; Daniel T. Moore, CPA; Susanne Morrow, CPA; Annette Nellen, J.D., CPA; Teri E. Newman, CPA; S. Miguel Reyna, CPA; Kenneth L. Rubin, CPA; Amy M. Vega, CPA; Donald J. Zidik Jr., CPA.
Edited and posted by Harold Goedde, CPA, CMA, Ph.D. (taxation and accounting)
Footnotes
1 Massachusetts v. United States Dep’t of Health and Human Servs., 698 F. Supp. 2d 234 (1st Cir. 2012); Windsor, No. 12-2335-cv(L) (2d Cir. 10/18/12), cert. granted, Sup. Ct. Dkt. 12-307 (U.S. 12/7/12).
2 Carlebach, 139 T.C. No. 1 (2012).
3 Notice 2012-12, 2012-6 I.R.B. 365.
4 Added by Section 112(a) of Victims of Trafficking and Violence Protection Act of 2000, P.L. 106-386.
5 Blackwood, T.C. Memo. 2012-190.
6 Driscoll, 669 F.3d 1309 (11th Cir.), cert. denied, Sup. Ct. Dkt. 12-153 (U.S. 10/1/12).
7 Shepherd. Memo. 2012-212.
8 Rev. Rul. 2012-14, 2012-24 I.R.B. 1012.
9 Rev. Rul. 92-53, 1992-2 C.B. 48.
10 IRS Letter Ruling 201228023 (7/13/12).
11 Newell, T.C. Summ. 2012-57.
12 REG-137589-07.
13 Notice 2007-47, 2007-1 C.B. 1393.
14 DeLima, T.C. Memo. 2012-291.
15 Abarca, T.C. Memo. 2012-245.
16 Chrush, T.C. Memo. 2012-299.
The IRS announced that it would no longer hold tax returns that both claimed the Earned Income Tax Credit [EITC] and had incomplete Forms 8867 attached.
Late last week, published reports indicated that the IRS was devoting special scrutiny — and so delaying refunds — to filers who claimed the EITC, typically those taxpayers who needed their refund checks the most. IRS spokesman Terry Lemons, however, said on Monday that the service was paying no special scrutiny to such returns and that any delay in refunds was a “processing” problem caused by incomplete or inappropriate use of Form 8867.
“We were seeing two issues with the 8867 during the early part of filing season,” Lemon said. “In one instance we were seeing the form being filled out incompletely. The other issue was with taxpayers who prepared their own returns and had an 8867 with the return and didn’t need it because the return wasn’t filled out by a preparer. Those two situations created a processing issue for us.”
“We’ve increased scrutiny on fraud in general, but we’re not giving special scrutiny to returns claiming EITC,” he said, adding that the service has “worked through those [early EITC] returns” and that filers in that group should be getting their refunds soon. He also confirmed that fewer than five percent of returns submitted claiming the EITC have had refunds delayed and that refunds should generally take one to two weeks if returns were e-filed and direct deposit was selected as a payment option.
“We’re in good shape on this front,” Lemon added, also stressing that the “Where’s My Refund?” site is updated overnight. The IRS did acknowledge in a recent question and answer flyer that it was holding returns “submitted with incomplete Forms 8867 and was sending Letter 12C to taxpayers requesting they provide the required missing information. [But] as of February 19, these returns are no longer being held and 12C letters to taxpayers are no longer being issued” and the returns were being processed. Those who have received a Letter 12C should respond to it, the service said, adding that it would contact preparers about any compliance issues after return process is complete. It also noted that those whose returns were held prior to February 19 should expect their refunds in the next one to two weeks.
Some preparers’ experiences are consistent with IRS warnings regarding Child Tax Credit and the EITC before tax season began. “Some of our clients have had their refunds anywhere from two to 14 days. There doesn’t seem to be a consistent method of processing. It seems like the EITC and college credit returns are taking a little longer to process, however,” said Michael Perkins, enrolled agent and president of Larrison’s Tax Service in Terre Haute, Ind.
Preparers on LinkedIn tax prep discussion boards have been reporting a number of delays in refunds for reasons such as failing to indicate that a filer’s family included a disabled child. Some preparers have chosen to refer EITC clients directly to local IRS preparers, and others dislike having to ask clients for such personal information, as well as questioning the appropriateness of the sources the IRS asks for regarding verification.
“Line 26k of the 8867 will accept an ‘Employer Statement’ as proof of residency,” wrote one preparer. “How ridiculous is it to think an employer is better qualified to prove residency than the man who tucks the kids in bed at night?”. “Why would I need to see more than a birth certificate for a client’s own child?” wondered one preparer. “ ‘Oh, I’m sorry, I know you gave birth to him and you’ve been my client for 10 years and he’s been on your return every year, but can you please run down to his school and ask for a statement that he is indeed your kid living in your home going to school from your house?’ That is completely ridiculous.”
“For the past several tax seasons, preparers have expressed concern over the amount of information that they are required to obtain from their clients before EITC eligibility can even be determined,” said EA Cindy Hockenberry, manager of the tax knowledge center for Appleton, Wis.-based National Association of Tax Professionals. “Many preparers are finding out the hard way that merely filling out Form 8867 and answering the questions is not sufficient. They need to dig deeper, ask more questions and request to actually see more documentation to determine eligibility. This takes time and creates delays and increased fees. Taxpayers have a difficult time understanding this, especially if they have been coming to the same preparer for years. The days of merely having a dependent and low income to qualify are gone. In many cases, obtaining the necessary information is a burden on the taxpayer.”
Some preparers’ organizations have also reported hearing from members that EITC due diligence can be a maze with the only clear end a $500-per-return penalty should they get it wrong. One culprit: Section 10.34(d) of Circular 230 that says a preparer may “rely in good faith without verification upon information furnished by the client.”
The least the IRS could do is post the returns on its site as being processed, instead of looking like the return has not been e-filed at all,” said preparer Tony Hernandez of Hernandez Enterprises in Ridgecrest, Calif. “Some of my clients have been checking, see nothing, and of course then call me to find out why their return hasn’t been filed.”
WOW, I never realized just how many paranoid people there were in the world. I have been doing taxes for nearly 20 years and I have never had a single client try to claim “fake” kids or have more than one person get away with claiming the same child. There is no way two people can claim the same child unless they have two social security numbers for that child. I have had clients that play the “I have to file earlier than the other parent so I can get the exemption before they do” game. I hate that some of the “big box tax prep stores” solicit their clients as early as Thanksgiving by offering to secure their refund as a pre-Christmas loan using their pay stubs to estimate the year-end amounts. I believe this is a ridiculous gimmick that ends up costing the client nearly $500 just to prepare their taxes and pay for the loan fees. It also encourages those who are in need to over extend themselves. Any tax/financial adviser should try to teach their clients to save for the holidays by lowering their withholding or taking the advanced EITC. That would increase their income throughout the year and then they might be able to budget a little of the extra to a Christmas club account or savings instead of allowing the government to hold their money interest free.
I don’t think the IRS should require me to ask long time clients for all that documentation when I know the children belong to them. Am I supposed to ask myself for the documentation as well since my family also qualifies for EITC and I prepare our return? Should I trust myself?
I can see asking the clients for a birth certificate as well as social security card since the card just verifies they have a number and not their parentage. But get real, who thinks to bring a letter from the school to a tax prep appointment? And how much burden does that add to the schools if they have to prepare letters of verification for all their students?
Finally to the Notary, I certainly hope you refused to notarize documents that you felt might be falsified. As a notary, as well, I know that would be against the law.
Posted by: Rennaemcintosh,| February 27, 2013
Tax preparers have too much on the line to commit fraud. I say they need to look who prepares the most returns with the EITC credit. Not private preparers. H & R BLOCK, Liberty Tax Services, Jackson. Hewlett. These are the firms that most people who have the EITC go to. They advertise to get clients big refunds based on the EITC.
Posted by: Optimouse , February 26, 2013
This whole thing is going to be a process and it is going to be painful at times to both preparers and to taxpayers. We just got done with 15 years of no enforcement by the IRS. People could do just about anything they wanted without much risk at all of being audited. As usual it’s the extremes that cause major issues and in this case going from near zero enforcement to complete enforcement of the tax code is going to take time. So many Americans no longer see the need to listen to a professional because there neighbor, brother or friend has been doing things one way for 15 years and never had anything happen so in their mind they can do the same and they do not consider any need of professional help. It will take many news stories and horror stories from there friends and family before the majority of the public starts to understand. If the IRS is going to get a handle on this as quick as possible they have to include the preparers to get the message out and to help put the fear in the American Public. Also because of close to no enforcement there are more a large numbers of preparers who have made allot of money taking advantage of the no enforcement and by including the preparer to fix this issue they also get to weed out the offices that have been promoting and taking advantage of EITC fraud and other fraud.
Over all this year I know we are doing all we can to ensure no fraud gets by us by doing things that make sense while not running good clients away. Most all of our good clients understand why we are asking for additional info and understand now that times are changing. I think additional changes are coming for the low income taxpayers in this country and would not be surprised when the IRS implements a system where children are assigned to someone and a system where the IRS will mail out a single form calculating there refund and all the clients need to do is sign and return taking the preparer out of the picture. I still believe the tax business is a gold mine and that additional opportunities because of the future enforcement efforts that are coming down the road and believe these opportunities will provide a great opportunity for additional revenue that will replace and surpass that of the income lost if they change low income tax returns.
Posted by: louisvilleliberty , February 26, 2013
I agree with all comments. I had a previous client to come in my office and request her W-2 from 2011. She said she needed it to prepare her 2012 return online. I laughed, but gave her nothing, because I gave her a copy of her 2011 return last year. Also a new client came in, and wanted an estimate, I told her I don’t do estimates – I am a paid tax preparer. She read my sign and agreed to allow me to prepare her return. She did not want to file it because her refund was $ 4,440. The taxpayer said she wanted to go to Mary T., because Mary T. could get her a $10,000 refund. I told her Mary T. is not a tax preparer, she is a fraudster, preparing 20 to 40 return on Turbo Tax, H & R e-file and other on-line software programs. The tax payer became very angry. I filed the return and she realized it was the right thing to do. But for sure she will not return next year. Every one here in my Texas town loves Mary T. the fraudster tax preparer online. I have reported her to the IRS, but they have done nothing. I reported her just this past January 4, 2013. Mary T. has been doing this for over 4 years.
Posted by: hitsero3, February 26, 2013
The tax returns with EITC included should not be held up unless there is something that raises a red flag. I have worked for H & R Block for 14 years before leaving to start my own at-home business. I’ve seen every type of situation when it comes to claiming children as well as adults at tax time. The number of returns I have amended lets me know that these branch offices of the big companies are doing whatever it takes to get the largest refund they can for their customer, no matter what. Circular 230 was created to control some of the fraudulent practices by some of the unscrupulous tax preparers (you know who you are!). The laws and regulations were put in place to help us and protect the consumer. If more of us would obey them, and fill out these forms with the information needed, the tax process would go a lot smoother.
Posted by: Jaybee3, February 26, 2013
People are hurting for money more than ever and tax cheating seems to be where they have all found where they can get more dollars since they say the IRS only audits millionaires. I tell them about the 80% fraudulent penalty they could get but it only scares a low percent of the tax cheats. IRS needs to review at least 35% of all EITC are cheating and that is a lot of money.
Posted by: Karin K, February 26, 2013
By Jeff Stimpson, “Tax Pro Today”, February 25, 2013
Edited and posted by Harold Goedde CPA, CMA, Ph.D. (taxation and accounting)
CIRCULAR 230 DISCLOSURE: Pursuant to regulations governing practice before the IRS, any tax advice contained herein is not intended or written to be used and cannot be used by the taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer.
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