Doug will be presenting at TaxConnections Internet Tax Summit and discussing the repatriation of funds without paying double taxation and various techniques you will want to know about. His presentation begins Tuesday, September 22nd at 10:00AM (PST).
Gather your tax department for this informative session with Doug Eckert.
(See Video Introduction Below) Read More
NASA recently announced that your name can be put on the planet Mars. This is incredibly great news for the people with good fortunes who are thrilled by the opportunity to gain their foothold in the universe and enhance their fame. However, in another space mission, scientists are attempting to find out if any life exists in other planets.
Think about it. If they indeed were able to find the life on Mars and if the inhabitants there happen to be much more advanced than the humans on earth, they are likely to have a tax law that can tax such inbound activities. Beware and think before you make that tempting decision.
Putting your name on a planet may have its other side. If “cross planet” law applies and Read More
International legal and independent professionals consulting in India often have issues receiving funds from their clients in India. India has stringent exchange control regulations contained in the Act called Foreign Exchange Management Act – FEMA. Accordingly all foreign remittances must go through certain procedures. Additionally, Income Tax Department asks for “Tax Residency Certificate” (TRC) from the US service provider so that the treaty benefits can be allowed. If TRC is not produced, the payer must withhold tax from the income remitted to US service provider. This is true regardless of where the services were provided.
Until recently, it was mandatory that TRC issued by foreign tax authority must contain all items required by the government of India in order to exempt any tax withholding Read More
In making use of Offshore Financial Centers taxpayers will invariably have a structure of entities that are related taxpayers by virtue of common ownership. Because these related taxpayers engage in transactions among themselves, they present opportunities to shift items of income, deductions, and credits through the process of allocations in accounting for deductible items and income. (See TaxConnections, Introduction to Section 482 and International Financial Centers, April 24, 2014) These types of transactions between related parties are to be regulated to prevent what may be perceived to be abuse and avoidance of tax; Section 482 of the Code is designed to implement that regulation. Read More
The PFIC regime was not introduced until 1986. Prior to 1986, U.S. taxation of foreign corporations was strictly tied to control of the corporation held by U.S. persons. This allowed not only the foreign mutual fund to avoid U.S. taxation, but also U.S. persons who invested in the fund. How so?
For starters, the fund itself avoided U.S. taxation because it was a foreign corporation that derived only foreign-source income. The fund was able to avoid the taint of being classified as a controlled foreign corporation, or “CFC” because it was owned by a large number of U.S. and foreign investors, each of whom owned a relatively small percentage.
U.S. investors avoided U.S. taxation in two primary ways. First, the fund paid no dividends. Read More
If you meet the conditions of the substantial presence test, you are considered to be a U.S. resident for U.S. International tax purposes. If you qualify as a U.S. resident under the substantial presence test, you may be able to have your nonresident spouse treated as a U.S. resident for tax purposes even if your spouse does not qualify under the substantial presence test.
If you elect to treat your nonresident spouse as a resident for U.S. taxation purposes, in the year that you make that election, both you and your nonresident spouse will be taxed on your worldwide income. IRS – Nonresident Spouse Treated as a Resident. In Read More
Form 5471:
Form 8621:
By Don D. Nelson, Attorney, C.P.A.
Kauffman Nelson LLP
If you are a US Citizen you must file a US tax return every year unless your taxable income is less than $15,700 – for a joint return or $ 9,750 – for a single return (these amounts are for 2012 and are lower amounts for earlier years) or have self employment-independent contractor net self employment income of more than $ 400 US per year. You are taxable on your worldwide income regardless of whether you filed a tax return in your country of residence. You must file a tax return each year if you income exceeds the amounts stated above even if you owe no tax.
As an US expatriate living and working abroad 4/15, your 2012 tax return is automatically extended until 6/15 but any taxes due must be paid by 4/15 to avoid penalties and interest. The return can be further extended until 10/15/10 if the proper extension form is filed.
For 2012 if you are a qualified expatriate you get a foreign earned income exclusion (earnings from wages or self employment) of $95,100, but this exclusion is only available if you file a tax return. You must qualify under one of two tests to take this exclusion: (1) bonafide resident test or (2) physical presence test. You can read more about how to qualify in IRS Publication 54.
If your spouse works and lives abroad, and is qualified, she or he can also get at $95,100 foreign earned income exclusion.
If your foreign earnings from wages or self employment exceed the foreign earned income exclusion you can claim a housing expense for the rent, utilities and maintenance you pay if those amounts that exceed a minimum amount of $15,216 up to a maximum amount which varies by your country of residence.
You get credits against your US income tax obligation for income taxes paid to a foreign country but you must file a US tax return to claim these credits.
If you own 10% or more of a Foreign corporation or Foreign partnership (LLC) you must file special IRS forms each year or incur substantial penalties which can be greater including criminal prosecution if the IRS discovers you have failed to file these forms.
If you create a foreign trust or are a beneficiary of a foreign trust you may be obligated to file forms 3520 and /or 3520A each year to report those activities or be subject to severe penalties. Foreign foundations and non-profits which indirectly benefit you may be foreign trusts in the eyes of the IRS.
Your net self employment income in a foreign country (earned as an independent contractor or in your own sole proprietorship) is subject to US self employment tax of 15.3% (social security) which cannot be reduced or eliminated by the foreign earned income exclusion. The one exception is if you live in one of the very few countries that have a social security agreement with the US and you pay that countries equivalent of social security.
Forming the correct type of foreign corporation and making the proper US tax election with the IRS for that corporation may save you significant income taxes and avoid later adverse tax consequences. You need to take investigate this procedure before you actually form that foreign because it can be difficult to make that election later.
If at any time during the tax year your combined highest balances in your foreign bank and financial accounts (when added together) ever equal or exceed $10,000US you must file a FBAR form with the IRS by June 30th for the prior calendar year or incur a penalty of $10,000 or more including criminal prosecution. This form does not go in with your personal income tax return and is filed separately to a different address.
In the past several years the IRS has hired thousands of new employees to audit, investigate and discover Americans living abroad who have failed to file all necessary tax forms. These audits have begun and will increase significantly in the future. The IRS gets lists of Americans applying or renewing for US passports or entering the country. They will compare these lists with those who are filing US income tax returns and take action against those who do not.
Often due to foreign tax credits and the the foreign earned income tax expats living abroad who file all past year unfiled tax returns end up owing no or very little US taxes. The IRS has several special programs which will help you catch up if you are in arrears which will reduce or possibly eliminate all potential penalties for failing to file the required foreign asset reporting forms. We can direct you to the best program for your situation, prepare the returns and forms and represent you before the IRS.
Beginning in 2011 a new law went into effect which requires all US Citizens report all of their world wide financial assets with their personal tax return if in total the value of those assets exceed certain minimum amounts starting at $50,000 . Failure to file that form on time can result in a penalty of $10,000.
Certain types of income of foreign corporations are immediately taxable on the US shareholder’s personal income tax return. This is called subpart F income. The rules are complex and if you own a foreign corporation you need to determine if these rules apply to you when you file the required form 5471 for that corporation.
If you own investments in a foreign corporation or own foreign mutual fund shares you may be required to file the IRS forms for owning part of a Passive Foreign Investment Company (PFIC) or incur additional, taxes and penalties for your failure to do so. A PFIC is any foreign corporation that has more than 75% of its gross income from passive income or 50 percent or more of its assets produce or will produce passive income.
Visit my Tax Professional Profile Page to download your 2012 US tax return questionnaire prepared expressly for Americans living abroad. Please “Connect” with me on TaxConnections and we will review your completed questionnaire for a fixed fee quote for the preparation of your return.
Don D. Nelson, US Attorney, CPA
Kauffman Nelson LLP
Dana Point, California 92629 USA
We have been preparing tax returns and assisting US clients located in over 50 countries around the the world for over 30 years. We also assist US Nonresidents meet their US tax obligations and return filing requirements. We offer mini consultations (with attorney client privilege) to answer your tax questions and resolve your tax issues.
If you are neither a citizen nor a permanent resident of the United States, you must determine your U.S. residency status for tax purposes. If you are a nonresident for tax purposes, you file a special tax form (Form 1040NR), pay tax only on U.S. source income, are subject to special rates on investment income, and might benefit from exemptions from income conferred by the tax treaty between the United States and your home country.
If you are a resident taxpayer, you must report your worldwide income for U.S. tax purposes. You are also eligible to claim deductions and credits available to U.S. citizens. You can file Form 1040, 1040A, or 1040-EZ, whichever is applicable to your situation, and if you are married you can file a joint return with your spouse. Additionally, you still might be eligible for treaty benefits in certain situations.
Your residency status for tax purposes is completely separate from your immigration status. Even though you arrived in the United States as a non-immigrant visa holder, you might be a U.S. resident for tax purposes.
So, if you are not a citizen or permanent resident of the United States, how do you determine your residency status for tax purposes? You look to the “substantial presence test” set forth in Section 7701(b)(3) of the Internal Revenue Code. To meet the substantial presence test for the current year, you must be physically present in the United States during a period you are not an “exempt individual” on at least:
1) 31 days during the current year, and
2) 183 days during the three-year period that includes the current year and the previous two years, counting:
* all of the days you were present in the current year,
* 1/3 of the days you were present in the first preceding year, and
* 1/6 of the days you were present in the second preceding year.
For example, let’s say you were present in the United States for 120 days in 2010, 222 days in 2011, and 80 days in 2012. In applying the substantial presence test to 2012, you count 20 days from 2010 (120 x 1/6) +74 days from 2011 (222 x 1/3) +80 days from 2012 = 174 days. That means that you did not pass the substantial presence test (< 183) and are not a resident of the U.S. for tax purposes for 2012.
An exempt individual is someone whose days in the United States are not counted toward the substantial presence test. It is not someone who is exempt from taxation. If you are an exempt individual, you are a nonresident for tax purposes until you are no longer an exempt individual, or until you receive permanent residency status. You are generally in this category if you are:
* Temporarily present in the United States as a foreign government related individual (A or G visa holder).
* A teacher or training temporarily present in the United States under a J or Q visa, who substantially complies with the requirements of the visa.
* A student temporarily present in the United States under an F, J, M or Q visa, who substantially complies with the requirements of the visa.
* A professional athlete temporarily present in the United States to compete in nature will sporting event.
Teacher or trainee. If you are a teacher or trainee temporarily in the United States on a J or Q visa, and you have been present in the United States during no more than two calendar years out of the last six calendar years, you are an exempt individual. For example, let’s say you entered the U.S. on December 28, 2009 as a trainee on a J visa, and stayed in the U.S. continuously through 2011. Your days in the United States are exempt from the substantial presence test for 2009 and 2010, but they all count in 2011 and later years if you remain in the United States.
There is an exception to this rule. If all of your compensation during the prior six years is from a foreign employer, the two year exemption period is extended to four years.
Student. If you are a student temporarily in the United States on an F, J, M, or Q visa, and you have been present in the United States during no more than five calendar years, you are an exempt individual. For example, let’s say you entered the U.S. on June 4, 2007 as an F-1 student visa holder, and have remained here until 2012. You are a nonresident alien for 2007, 2008, 2009, 2010, and 2011. If you are in the U.S. for at least 183 days in 2012, you will be a resident for tax purposes in 2012.
Members of the family. If you are an exempt individual, members of your immediate family who are with you in the United States on visas derived from your visa (J-2, F-2, etc.) are also exempt individuals.
If you are classified as a resident for tax purposes during part of a year, and a nonresident for the rest of the year, you are a dual status alien for tax purposes and are required to file a dual status return. This sometimes occurs during the year you enter the United States, during a year in which you change your visa status from an exempt individual to a non-exempt individual, or vice versa, or when you become a permanent resident.
There are several provisions, both statutory and through tax treaties, that allow you to elect to be treated as a full-year resident, a full-year nonresident, or a dual status alien in particular situations, if the choice is beneficial.
Well, this is a confusing topic, but one that is very important. Don’t worry – there is an interactive questionnaire at www.form1040NR.com that you can use to guide you to the correct result. In the header menu go to “Your Tax Residency” and answer the questions (after reading them very carefully). If you are still confused, I would be happy to answer your questions.
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