Tuesday, October 10, 2017

Cryptocurrency: The Story and Tax Consequences.

PC: pixabay.com Split, Croatia
Thinking about writing about Bitcoin, I remembered my maverick of an Economics teacher back in high school in Mumbai, India whose very thick south Indian accent meant we did not know what he was saying more than half the time. He started off the chapter on currency by having everyone in class remain standing till we came up with a definition for "Money". Thankfully someone said "medium of exchange" real quick! 

Although the underlying meaning of currency remains the same, the simple concept of a medium of exchange has undergone several upgrades particularly so with the cryptocurrency or digital payment systems known more commonly as Bitcoin. 

Bitcoin started out as recently as 2009, invented by programmer possibly named Satoshi Nakamoto. Transactions with bitcoins can be made without any middlemen, which means-no banks, no transaction fees and anonymity! In addition, bitcoin transactions between countries are easier and less expensive and not subject to regulation (yet). 

This virtual currency can be used to buy goods and services where it is accepted. Some buy bitcoins for investment and hold on to it hoping it will rise in value. 

Tax Treatment of Cryptocurrency By The Internal Revenue Service: 

A. All virtual currency held as investment is treated as property. Hence all the same rules as selling an asset and capital gains apply to any gains or losses from sale of Bitcoins as well. Hence, if you are holding Bitcoins as investment, calculating gains or losses should not be a problem since the basis, holding period and date of sale should be easily determined. 

B. For Bitcoin treated as currency, if one is paid in virtual currency for goods or services provided, its fair market value (as of the day the currency was received) needs to be included in calculating gross income for the year. 

C. For those who "mine" virtual currency, its fair market value on the date of receipt is included in gross income for the year. 

D. If payments of more than $600 were made using virtual currency to an independent contractor for services performed, the payment needs to be notified to the Internal revenue Service via Form 1099-MISC. 

E. Third party settlement organizations are required to aggregate payments made with virtual currency with real currency if (1) the number of transactions settled were more than 200, and (2) the gross amount of payments made exceeded $20,000. 

Penalties via code sections § 6721 & 6722 may be levied on those who fail to comply with the above filing requirements. Penalty abatement may be available for those who can demonstrate reasonable cause. 

Bitcoin has been in the news in 2017 when it's value shot up to $3,000 from $13 in the year 2009. Various virtual currencies like Bitcoin saw it's market cap go to $44 billion, Ethereum's market cap was $21 billion and Bitcoin cash go up to $12 billion in early August of this year. 

More recently, there has been news that a "fork" may take place in the blockchain that stores cryptocurrencies. This spin-off, so to speak, will result in another form of cryptocurrency called "Bitcoin Cash". There may be more tax consequences for those affected by the spin-off. More on that in this article from Forbes by Kelly Phillips Erb.

The Internal Revenue Service started to investigate one of the virtual currency exchanges, Coinbase, asking for an exhaustive list of details about their customers in December, 2016. It figured that a large part of Bitcoin users were not reporting their income/ capital gains on their tax return. Experts see tax exams from the Internal Revenue Service escalating. If you have traded in or purchased cryptocurrency, report and pay your capital gains taxes via amended tax returns. 

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com.

Bibliography: Notice-2014-21; Section 6721






Thursday, August 31, 2017

U.S. Expat Mistakes : Part III



PC: pixabay.com Fontana Di Trevi, Rome, Italy

The same vein runs through most expat conversations. U. S taxes are burdensome and compliance is difficult. Keeping up with the rules and regulations takes up a big chunk of the expats' time. 

Many financial institutions in countries which have Inter-Governmental Agreements {IGAs} with the U.S. find keeping up with U.S. Bank Secrecy Act reporting requirements so cumbersome that they  do not want U.S. citizens to be their patrons. 

Expats find these circumstances to be overwhelming and decide to surrender their U.S. citizenship. The most common mistake expats make when renouncing their citizenship is not understanding covered expatriate rules and what the consequences of being non-compliant with taxes before taking this huge step. 

Here in part three of the series, let's take a look at covered expatriation rules. Part one of the series is here and part two here

I had written about tax consequences of expatriation in my post here. To rehash this for 2017, there are three ways one can become a covered expatriate: 

A. If one's tax liability for the previous five years is above $162,000 or one passes the tax liability test. 

B. Or if one passes the net worth test, i.e., one's net worth is $2,000,000 or more at the time of renunciation. 

C. You fail the certification test, that is your tax paperwork and payment obligations for the five years before expatriation is incomplete. 

What Happens If You Renounced Your Green Card or U.S. Citizenship AND Were A Covered Expatriate At The Time?:
  • Covered Expatriates pay tax when they renounce their Green Card or Citizenship. 
  • Covered Expatriates cannot make tax-free gifts or bequests to U.S. persons. 
  • They may not be allowed to re-enter the United States, thanks to the Reed Amendment. 

Do not become an accidental covered expatriate, if you are thinking of renouncing your citizenship or surrendering your Green Card, consult with a tax professional familiar with these rules BEFORE you start the process. 

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com.

Wednesday, July 26, 2017

U.S Expat Mistakes: Part II



Trompe L'oeil: www.pixabay.com
I have been on many online forums; message boards; and groups for U.S citizen expats over the past few years. Most posts you see are ones with frantic U.S. citizens overwhelmed with U.S. tax rules & regulations they have to keep up with. This, in addition to keeping up with their resident country's tax laws, must drive one crazy. These forums provide quick answers; no wonder they are so popular!

However, one has to exercise caution when relying solely on answers from these sites or on the internet. Each situation is unique and only an experienced tax professional in expat matters can correctly evaluate what steps need to be taken to stay in compliance with US Tax Law. 

We started out talking about tax mistakes U.S. expats commonly make in my post here. Today's post is the second in the series on mistakes U.S. Expats make and we are going to focus on contributions to retirement accounts. 


Individual retirement accounts or IRAs are great tools for saving for retirement with a winning combination of tax-deductible contributions and tax-deferred growth. IRA rules are written purely with U.S tax code in mind and they may cause conflict with the tax codes of the countries the expats work and live in. Double taxation avoidance agreements {DTAA} may mitigate some of the burden, but most countries I know of will not allow an expat to save on local taxes by contributing to a U. S. IRA. 

Some high-income earners may still be able to contribute to a US IRA, the rules get complicated. We see a lot of self-prepared returns that have made excess IRA contributions and penalties on these are steep. Here are a few common mistakes expats make in relation to contributions into Individual Retirement Accounts (IRAs): 

1. All Income is Excluded and an IRA Contribution Is Made:

In order to make IRA {Traditional or Roth} contributions, one has to have earned income. If a taxpayer after currency conversions is able to exclude a 100% of his/ her foreign income using the Foreign Earned Income Exclusion rules  u/s § 911, then they do not have any U.S earned income to make an eligible contribution to an IRA. These excess IRA contributions are taxed at 6% annually as long as the excess contributions remain in the IRA. 

2. Not Taking Into Account Income Phase-outs for IRA Contributions:  

The flip side of point #1 is when a taxpayer has a high income and is still liable to US tax after taking advantage of the Foreign Earned Income Exclusion rules. A Roth IRA contribution is possible in this case, however the taxpayer must consider the income phase-out to make sure he/ she is eligible to make this contribution. 

This income is called the Modified Adjusted Gross Income or MAGI for short. The MAGI phase-outs for 2017 for making Roth IRA contributions are: 

Single Filers                Phase out starts at $118,000 and ineligible at $133,000.
Joint Filers                 Phase out starts at $186,000 and ineligible at $ 196,000.

3. Contributing to a Spousal IRA when filing as Head of Household:

Many times high-income earners who have a non-citizen spouse may be able to file with a Head of Household status if they have children. There might be enough taxed income left over for them to contribute to an IRA, but the most common mistake we see that a contribution is made to a spousal IRA. One can contribute to a spousal IRA only if filing as married and joint. 

4. Not factoring double taxation on deductible IRA contributions
The most common mistake expats make is making a deductible contribution into a U.S. IRA with money already taxed by the resident country. When the taxpayer takes a distribution from this IRA, he will be taxed on it again in the US. 


This is generally true if the resident country's tax rate is higher than that of the US. If the resident country's tax rate is lower, double taxation may not be substantial, but accurate projections need to be made. 

5. Opening foreign investment and retirement accounts without understanding expat tax obligations:

I have written extensively on this here.  

6. Missing Required Minimum Distributions on inherited IRAs:

Penalties for not taking required minimum distributions are very high, it can sometimes be as much as 50% of the amount that should have been withdrawn. If you have an inherited IRA from an aged parent/ relative, you need to continue to take required minimum distributions based on a certain schedule. 

A common mistake expats make is depending on the broker holding the account to make this calculation for them or being completely unaware of this requirement. 

These are complicated provisions that is difficult for a lay person to understand and keep up with. If you are an expat and find that some or all of the above apply to you, drop us an email or call us and we can take care of you. 

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com.

Tuesday, June 20, 2017

U.S. Expat Mistakes: Part I

Picture Courtesy: www.pixabay.com/ Cambridge
United States is one of the few countries in the world in it's Citizen-Based-Taxation format. This means that no matter where you live, you need to be current on your US tax filing if you are a US Citizen or Green Card Holder. You are known as an Expatriate or Expat (for short) if you are a US citizen or green card holder living outside the United States.  

Many such expats may have a simple tax return and accomplish their tax filing requirement with an over-the-counter software. Of late however, I have seen many expats who come to see us because they have made a mistake and overpaid taxes to the US government or have been ignorant of certain Tax Treaty provisions that would have been beneficial to them financially. 

The complexity of these rules and regulations increases if your stay abroad is longer and you have investments in your resident country such as being in business for yourself/ being in a partnership or a stock-holder/ director in a foreign company. 

I have put together some of the most common mistakes expats make and hope this list helps you avoid these pitfalls. 

Here is the first set in what will be an extensive multi-part series--SO WATCH THIS SPACE!

1. Not Filing Your Taxes: Believe it or not, many expats do not know that they have to continue file their US taxes even if they moved out of the country. The US tax rules and regulations grant the Foreign Earned Income Exclusion (FEIE) to those who earn a salary or you can claim a Foreign Tax Credit for taxes paid on income earned in the resident country. In order to be able to claim these exclusions or credits, one has to file a tax return

2. Not paying estimated taxes: After the foreign earned income exclusion and application of foreign tax credits, you may still owe taxes on the US tax return. If you do not get a W-2 and no taxes are withheld at source on your income, one must pay estimated taxes every quarter. These are usually due April 15th, June 15th, September 15th and December 31st of every year. There are penalties for non-payment of these quarterlies. One must pay 100% of your prior year taxes or 90% of your current year tax. 

3. Ignoring FATCA and FBAR Filing requirements: The Foreign Account Tax Compliance Act was enacted to prevent US citizens and green-card holders from avoiding tax income earned from foreign investments. I cannot stress enough about the importance of being aware of the income thresholds that would apply to you based on your filing status and residency. The Foreign Bank Account Report now known as FinCEN Form 114 is required if one has more than $10,000 in foreign bank and other foreign specified investments.  The FATCA is one of the most complicated set of regulations in the US tax regime and there are steep penalties for non-compliance. 

   
4. Travel dates to and from the US: If the Foreign Earned Income Exclusion is the only tax saving option for you, the most important number to remember is "330". These are the number of "full days" or 24-hour periods that one has to be present in a foreign country out of 365 days to qualify for the Physical Presence Test to claim the FEIE. An error in calculation can lead to a loss in savings, so track this with extra care. 

If you are an expat and find that some or all of the above apply to you, drop us an email or call us and we can take care of you. 

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com.


Sunday, May 7, 2017

Spring Cleaning? Can You Toss Those Tax Records?

Pic Courtesy: pixabay.com
Ever stare at boxes and boxes of files in your garage or your basement and get an itch to clean up? Or are you the sort who pushes these boxes out of sight and is quite happy to let them be? Whichever personality best describes you, you will want to read this before you decide to throw those papers or cover them up with something fancy, call it art and make it a fixture in your basement!   

A question I get all the time is, "How long should I hold on to my tax records?" The answer to that questions is the ubiquitous, "It depends!" Yes, I know there are many situations that effect the length of the time you have to preserve your papers. Here's your check list, starting with the longest:  

A. Keep copies of all your tax returns indefinitely. Supporting papers to the returns filed timely can be discarded 3 years from due date of filing the returns. 

B. Keep supporting papers indefinitely if: 
  • You did not file a tax return at all. 
  • You filed a fraudulent tax return. 
  • You were a US Citizen or a US Green Card holder who surrendered your citizenship or your green card. *
C. Keep records for 7 years if you file a claim for a loss from worthless securities or a bad debt deduction. 

D. Keep records for 6 years if you did not report income that should have been reported, and such income is more than 25% of the gross income shown on your tax return. 

E. Keep employment records for at least 4 years after the due date or is paid, whichever is later. 

F. In all other cases, keep records for at least 3 years from the date you filed your original return or the date your taxes were paid whichever is later. 

Records Connected To Property: If there is purchase, records should be kept to calculate cost of property, depreciation, depletion, repairs etc, till the property is sold. If a property was sold, generally one should keep records till the statute of limitations run out on reporting the sale, which is 3 years. 

Note: One should also check with other agencies like your insurance company, health insurance company or creditors to see how long records pertaining to the information should be kept. Their requirements may be different from that of the Internal Revenue Service. 

* UPDATE added May 8th, 2017

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com





Sunday, April 30, 2017

Perspective: What Frustrates Me Most About Start-Ups!




One of the services my firm offers is assistance in Entity Selection for start-ups. This is usually when we talk about various options available for the Incorporator and what type of entity would be the best fit for the start-up in terms of liability exposure, record-keeping and tax filing. This meeting usually results in setting up an entity, giving the incorporators guide-lines for record-keeping and help with choosing accounting software and set up, and so on, you get the drift? 

So off they go with an Entity tucked away neatly under their arm, and the title music plays-- you think? But no wait, here's where the music stops with an ugly, teeth-tingling screech: The Incorporator comes back at tax time and you look at all the bank statements, and you see the big thou-shalt-not: "Commingling The Books". 

What is this commingling you ask? 

Commingling happens when a business owner uses their business checking account to pay for both personal and business expenses. Personal expenses become subject to payroll taxes as compensation to the business owner. 

You see, the Internal Revenue Service says that "To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business."  As per Reg. § 1.6001-1, the business owner needs to keep "contemporaneous" records to prove income and expenses.

It is therefore imperative that there is separation between personal & business expenses. I cannot stress enough about the need to keep diligent records, this not only makes your tax filing less stress-full but also gives you information you need to keep your business up and running profitably. 

How should one clean up the commingling?

First thing to do is to find all the personal expenses. If you had many transactions in the year, this will take a long time but thoroughness is important. The Internal Revenue Service flags expenses like that spent on travel, hotel,meals, groceries, clothes, cosmetics, entertainment and such. Anything classified as "Miscellaneous" draws IRS attention too. 

Once all the personal transactions are found, one has to be sure everything is classified as accurately as possible. The cleanest way to do this is to book these expenses as compensation and pay payroll taxes on them. Payroll taxes come at a price, and the process takes time and is complicated, especially if one has to go back & amend payroll reports. Many small business owners tend to classify these as a personal loan which is to be re-paid within a short period of time. Some tend to reduce the Capital account without regard to capital gain issues or the basis the owner has in the business. Partnerships may classify these as guaranteed payments and pay tax on it. 

Loans even if to owners/ shareholders should have proper loan agreements with interest accrued/ paid; reduction of capital beyond the owner's contribution or a negative capital account on the books is a huge red-flag; and partnerships should have proper approvals in their operating agreement regarding guaranteed payments.

 As a small business owner myself (my tax practice), I face the challenge in drawing firm lines between work and life everyday. But this is a habit one should cultivate as we go about our daily lives because fixing matters in retrospect is always more difficult. It all starts with being meticulous about one's record-keeping and strict with not using business funds for personal use. 

Quoting one of my most favorite Jungle Book characters, Colonel Hathi, "Discipline! Discipline was the thing! Builds character, and all that sort of thing, you know". Discipline, my friend is the key to a smooth, and stream-lined business process. 

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com. 














Sunday, April 16, 2017

Sticker Shock From The Tax You Owe: Read This!


Everywhere these days commercials are vying to get you to spend your big tax refunds on their products and services..oh yeah even that liposuction place! But you just finished preparing your taxes and you find out you OWE Uncle Sam big bucks. That is quite the sticker shock if you are short on cash or are unprepared.

There is one school of thought that it is okay owing at the end of the year as long as one does not pay penalties-- at least you did not have the government keep your money interest free! 

But if you don't like that line of thinking and owing money, here are some steps you can take to make life easier at tax time: 

1.  Check Your Withholding:   

Check the Forms W-4 you have filed with your employer to make sure you are having enough taxes taken out of your salary. The more taxes you need to be taken, the lower should your withholding number should be. It also matters if you put down if you are single or married. Many people get confused with the Form W-4--it lets you manage your cash flow from your paycheck. 

2. Paying In Quarterly If You Are A Freelancer: 

This is how I think most freelancers can reduce the pain of owing a lot at tax time or the uncertainty of not knowing how much they will pay. The freelancer has more options as far their write-offs go. They can take certain expenses such as mileage, home office, supplies etc and reduce their income. 

3.  Check if You Qualify For Contributions to IRA:

If you have the cash, and if your income limits permit, you have time until the deadline to contribute into a Traditional IRA for the previous tax year. You can contribute a maximum of $5,500 (with a catch-up of $1000 if you are over 50 years old) and defer some income from taxes. Plus if your income is within the qualifying limits, you will also earn a Retirement Credit. 

4. If You Are Married, play out the "Married Filing Separately" scenario

Almost all married couples benefit from filing jointly but it doesn't hurt to run a mock "Married Filing Separately" scenario to check if you could potentially reduce taxes. This is especially true of high-earners. Filing separately may put each of you in a lower income bracket and qualify you for some contributions and/ or deductions. Note: Do check if the state you live in is a community property state, rules here will be different for "married filing separate". 

5. Apply For An Extension: 

Okay so you are still in sticker shock, take a deep breath, apply for an extension. Get some time to figure out your finances and arrange for money. Send in as much as you can with the extension and check out the Internal Revenue Service's various resources for:


  • Installment / Payment Agreements: This can be done online or by filing Form 9465 with your tax return. You will qualify for this if you owe less than $50,000 as an individual or $25,000 as a business.
  • An Offer-In-Compromise: You can find out if there is a way to settle your debt for less than what you owe.  
  • Delay The Collection Process: The Internal Revenue Service may determine that you cannot pay your tax debt and delay action in collecting it. But penalties and interest keep accruing till the debt is paid off. 

These three suggestions above are all complicated methods of paying off your taxes and you will need professional assistance from an Enrolled Agent.

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com.