If you are a regular reader of my blog ~ you know the tax geek that I am, I write a lot about tax compliance for foreign bank account holders and the effect of the FATCA. FATCA stands for Foreign Account Tax Compliance Act. Calling a spade a “large digging instrument”, we know this law is one-sided and forces other countries to enforce US tax laws. And if they fail to comply, they are effectively locked out of US markets and the US dollar ~ the “world currency” for now.
Countries that sign the FATCA Agreement or Inter Governmental Agreement (IGA) are considered tax compliant. This means the banks/ foreign financial institutions (FFI) in these countries send information as demanded by the IRS to their own tax authorities which is then shared with the IRS. This is “Model 1”. Read More
As if divorce were not a stressful enough time, the complexities of the US tax rules when a non-US spouse is involved just make it all the more unbearable.
Here are the US Tax basics to keep in mind with respect to property transfers. (Payments of alimony will be the subject of another tax blog posting).
You May Have Both Income Tax and Gift Tax Issues
Under the general US tax rules, asset transfers between spouses incident to a divorce are tax-free under Code Section 1041. There is no realization of a gain or loss by the transferor-spouse upon such a transfer of property. Instead, the transfer is treated as a “gift”. If the spouses are both US citizens, the case is straightforward and simple – no US Income tax or Gift tax consequences will result. Not so simple if one spouse is a non-US citizen and even more complex if the non-citizen spouse is also a “nonresident” alien (NRA).
A transfer is treated as incident to a divorce if it takes place within a year of the divorce or is “related to the cessation of the marriage”. Generally, a transfer is related to the cessation of the marriage if it is pursuant to a divorce or separation agreement and occurs not more than 6 years after the date on which the marriage ceases.
Very significantly, in order for the income tax-free treatment of Code Section 1041 to apply, the recipient of the property cannot be a “nonresident alien” (NRA). For example, if you transfer appreciated stock to your NRA spouse as part of the divorce settlement, you will have to pay tax on the inherent gain in the stock, generally just as if you sold it. In addition you may have Gift Tax consequences. Read More
A foreign housing exclusion is available for certain overseas housing expenses that exceed a “base housing amount”. Generally, the allowable housing expenses are the reasonable expenses (such as rent, utilities other than telephone charges, and real and personal property insurance) paid or incurred during the year by the taxpayer, or on his behalf, for foreign housing. The housing costs include those of the spouse and dependents if they lived with the taxpayer. Allowable housing expenses do not include the cost of home purchase or other capital items, wages of domestic servants, or deductible interest and taxes. Some taxpayers mistakenly believe if they use only a portion of the employer-provided housing amount, they can still deduct the full amount permitted under the foreign housing exclusion rules. This is not so. To be eligible for exclusion, the taxpayer must actually incur these amounts in rental payments (for example, paid to the landlord on his behalf by the employer or paid by the taxpayer to the landlord from his employer-provided housing amount).
To be eligible for exclusion from tax, the allowable housing expenses must exceed a so-called “base housing amount”. The base housing amount is 16 % of the maximum Foreign Earned Income Exclusion amount (FEIE). For 2013, this “base housing amount” is US$15,616 (computed as follows: 16% x US$97,600 – the 2013 FEIE amount). Reasonable foreign housing expenses in excess of the ”base housing amount” are eligible for the exclusion, but such Read More
Certain findings and recommendations by the Government Accountability Office (GAO) about offshore tax evasion and the IRS efforts to combat it have many taxpayers worried. The GAO is an independent, nonpartisan agency that works for Congress and is often referred to as the “congressional watchdog.” It investigates how the federal government spends taxpayer dollars and makes recommendations as to how a governmental agency can be more efficient and effective.
Recently issued GAO report, Offshore Tax Evasion: IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion, provides key information about the IRS’ offshore voluntary disclosure initiatives. More importantly, however, GAO indicates its review of IRS data shows that the IRS is missing what appear to be rampant “quiet disclosure” and “new account” filings.
“Quiet Disclosures” / “New Account” Filings
With a “quiet disclosure”, taxpayers quietly amend past tax returns and FBARs reporting previously unreported income and accounts. With “new account” filings, taxpayers report the existence of any offshore accounts as well as income from the accounts on the current year tax return, without amending any prior years’ returns. They often also disclose the existence of the accounts by filing FBARs for the current calendar year making it appear as if the account was just newly opened.
GAO takes the IRS to task for not finding enough “quiet disclosures” and “new account” filings which lose billions of Read More