Wednesday, July 20, 2016

The IRS & ID Theft: "New" News!

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There is something about old doors and entry ways that fascinate me! Maybe it is the mystery of what lies beyond, the unknown, the thrill of opening closed doors to discover new places, new feelings, new people. But it is not as simple as that anymore, is it? These are different and more difficult times we live in now, I guess!

We could go down a very deep, philosophical route  examining what Identity is, but we have to limit our discussion here to what Identity is in a digital age, and we all know how that ties into our finances! We also know of all the hacks trying to get in on that precious information.  

So, What is ID Theft?:
If you are new to this, here's a dictionary definition, "The fraudulent acquisition and use of a person's private identifying information, usually for financial gain". So if someone stole your credit card information, social security number and used it to their advantage pretending to be you racking up hundreds & thousands of dollars in credit card payments, stealing your tax refund, getting medical care etc., you could consider your Identity to be stolen. 

I had written about some basic measures you can take to protect your ID from being stolen on this post back in January 2014

For past 2 years, there have been phone scam artists who have made off with millions successfully convincing people that they are calling from the IRS. 

The authorities arrested the scammers but more have surfaced since then, some targeting only millennials, who are being asked to pay up their so called IRS or other debts in i-Tunes gift cards!  More on that story by the Federal Trade Commission here

The Internal Revenue Service has had it's share of woes. Earlier this year, their website where one can download a personal transcript of taxes filed, the "Get My Transcript" page has been hacked multiple number of times. The crooks have gone a step further and have been able to put together enough information about people from the Internet and their social media profiles to be able to log into the website and get these transcripts. USA Today reported that story in February 2016

If you get a notice from the IRS of an "attempt" to get a transcript, or you actually get a transcript from the IRS for a previously filed tax return, you should immediately contact your tax provider. If they are not available or do not know what to do, submit Form 14039 immediately to the IRS. Link to form here.

We had quite a few converts over from Do-It-Yourself tax software programs during the 2016 Tax Season. This was due to the fact that many DIY software users had received letters from the IRS of potential or real identity theft. 

So if you were one of those converts and you switched over to or are thinking of switching to a tax professional/ Enrolled Agent to prepare your taxes, know that tax professionals themselves are potential targets for ID thieves. These are some questions you should ask of them:

  • What are their data security policies?
  • How do they back up their data?
  • How is the data stored and is it at a safe location?
  • Do they encrypt their emails or do they use secure portals for exchange of sensitive information? If you have such a portal, make sure your password is very strong. Check how secure your password is here

I for one really appreciate these questions because I can show off all that I do to protect my clients' information.

Be alert, be savvy and take all necessary steps to keep your information under your control. If by some unfortunate circumstance, your ID does get compromised or stolen, here is a list of steps you can take. The list has been put together by the Federal Trade Commission for

As always, read my disclaimer here. Please consult an Enrolled Agent for your unique tax needs. More of my contact information is on my website,

Tuesday, July 5, 2016

Summer Camp! What's Tax Deductible?

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My kids did their share of summer camps growing up and like many other parents, my husband & I dealt with guilt and whiny kids. Many are luckier than us, they have a FSA {Flex Spending Account} through their employer to defray some of the hefty costs of day-care. Let's take a look at what summer camp costs are tax-deductible. 

What Are Child Care Costs?

Instructions for Form 2441, defines Qualified Expenses as, "These include amounts paid for household services and care of the qualifying person while you worked or looked for work." So most amounts you pay to a day care or a baby sitter qualifies. Child support payments and expenses that are reimbursed do not qualify. 

Who Can Take Child Care Credit?

 All of the following should apply for you to be able to take the credit:

  1.  Your filing status can be single, head of household, qualifying widower with qualifying child or married filing jointly. If filing as married filing separate, you may be able to take the credit depending on certain conditions. 
  2. The care should be so you (and your spouse if filing jointly) could work or look for work. Or if you were full time students. 
  3. The care should have been provided to qualifying persons. 
  4. The person providing the care should not be your spouse, your dependent, or the parent of your qualifying person. 
  5. You report the information of the care provider on line 1 of the Form 2441. 
The qualified expenses are limited to $6,000 per year. If you have more than one qualifying child, this amount does NOT have to be distributed equally. 

If you have a FSA from your employer, you can still claim the dependent care credit to the extent your expenses are more than the amount that you pay through your Flexible Spending Account. 

The maximum amount of dependent care costs you can fund through an FSA is $5,000.
But the credit applies to as much as $6,000 of expenses for filers with two or more kids
under the age of 13. In that case, you’d run the first $5,000 of dependent care costs
through the FSA, and the next $1,000 would be eligible for the credit on Form 2441.
For most filers in this situation, taking the credit will save an extra $200 in taxes. 

Summer Day Camp costs qualify for the dependent care credit.
If you send your child to any special day camps this summer, such as those for sports,
computers, math or theater, you can take a tax deduction on those expenses. If your kid is attending camps that focus on improving reading or study skills those costs are eligible under this form as well.

Caveat: The costs of summer school and tutoring programs aren’t eligible for the credit.
Neither are overnight camps. The other rules for the tax credit (as stated above) also must be satisfied. The child must be under 13, and expenses must be incurred so the parents can work.

The above list is not exhaustive and there are many more conditions that could preclude you from taking the credit or nuances that would qualify you for the same. Please consult with an Enrolled Agent if any of the above apply to you. 

Bibliography: Form 2441; Pub 503; The Kiplinger Tax Letters. 


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,  

Thursday, June 16, 2016

Foreign Mutual Funds: The Horror Story

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Investopedia defines Mutual Funds as "An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets." 

The logic behind Mutual Funds being instead of a conservative investor putting his money directly in the Stock Market and losing money due to incorrect speculation, he invest in a Mutual Fund which is handled by efficient fund managers. Risks are lowered due to the diversification of the portfolio according to an individual's risk tolerance. 

That's what mutual funds are for those who didn't know, let's cut to the chase however and discuss the "Horror Story" for the day! This story actually hit quite close to home for us this year. We have clients who are US Citizens and have moved abroad and have started investing locally in the country of residence. Many of them invested in local mutual funds which in many parts of the world are doing extremely well. And that's when the horror starts like when Pastor Merrin finds the amulet in "The Exorcist"! 

Generally, mutual funds are treated similar to a partnership with respect to income & gains in the fund. The income is passed on to the shareholders in proportion to their holdings and reported to the IRS by the mutual fund. The IRS pairs up the information on the investor's return with that filed by the fund. Unlike domestic mutual funds, the IRS is not able to keep an eye on foreign investment companies or mutual funds and the foreign mutual funds do not want to have anything to do with the IRS either. Hence the burden of reporting the income & balances in these offshore investment companies falls on the investor. 

Any type of a corporate mutual fund based outside the United States of America is referred to as a Passive Foreign Investment Company or a PFIC.   

The PFIC Taint: 
The rules regarding taxation of income and gains from PFICs are onerous to say the least! The logic clearly is to deter US persons from using PFICs as an investment fund. If a mutual fund is a PFIC, US citizens or persons who are shareholders are subject to the most severe tax treatment of all on any distributions from the PFIC:

  • Unless the PFIC elects to be subject to SEC and IRS reporting requirements
  • Or the US shareholder makes one of several elections to pay tax on the undistributed income of the PFIC
  • Or the PFIC is listed on a national securities exchange and the shareholder elects to pay tax on any increase in the market value of shares from one year to the next. 

The most effective of the elections all agree is QEF election (QEF~ Qualified Electing Fund). Making this election preserves the capital gains treatment, the qualified dividend treatment and the loss deductions for the foreign mutual funds. The other more favorable election is the Mark-to-Market Election. These elections are made on form 8621. 

Unless one of these elections are made, the investor ends up paying the default Section 1291 tax on the accumulated income distributions even if there weren't any and pay capital gains taxes every year he has gains on income which he may have never physically received. 

The above should now bring us to the conclusion that in almost all cases, having offshore mutual funds is not the best investment tool for a US person. If you are planning a move outside the US for a long period of time, keep in mind that pre-migration planning is an important step that you need to take. 

There may be a chance an exception applies to the above filing but do talk to your tax professional or an Enrolled Agent who specializes in cross-border taxation if the above applies to you and to learn more about the exception to file the Form 8621. 

Bibliography: Form 8621; Private Letter Ruling 200752029; Internal Revenue Bulletin 2014-3


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,  

Friday, May 27, 2016

When Junior Has A Foreign Bank Account: What's To Be Expected!

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I looked up my last blog post and realized I have not posted here since January! What a tax season it was, and how did time get away from me? Oh wait...I know how! 

The past few years have seen a steady growth of a client base that have foreign accounts, no complaints there! Most clients have very routine FBAR filing requirements but then some times things are a little out of the ordinary and that gets me all excited...yes I does! That either tells you about my lack of a life during tax season or we should just notch it up to tax nerd-iness!  

So you see this year, one family that came to see us had a letter from a foreign bank under FATCA regulations. The name on the account was their minor son's. The account for all these years had been forgotten because the parents never thought it figured into any calculations. 

A parent might open an account for their child in their home country for many reasons: to cover higher education, gifts from grandma, grandpa and other relatives, holiday funds and so on. And at some point, if the parents and the children move to the US & become "US persons" for tax purposes. This can happen if they have substantive presence in the US/ get a Green Card/ become US citizens. Now the parent has triggered a information-reporting requirement if the financial account balance crosses reporting thresholds.

There are U.S. Income Tax rules if a parent/ a caregiver elects to include the investment income of a child/ dependent on their own tax return. This is done by filing Form 8814 with the parent's tax return. One may think that this may reduce the burden of having to file separate FBARs and Form 8938 for the child. Form 8814 can be filed with a parent's return only if ALL of the following are true: 

  • The child was under 19 years of age or under 24 AND a full time student. 
  • The child only had investment/ passive income and no earned income. 
  • The child's gross income was < $10,500.
  • The child would have been required to file a Form 1040 if the parent had not elected to include his income on their tax return. 
  • The child does not file jointly. 
  • The child did not make estimated payments for the year. 
  • No tax over-payment has been applied from a previous year to the child. 
  • No federal income tax has been withheld under the child's name. 
Alternatively, if the parent is ineligible to or unwilling to make the above election, the child will have to file a Form 1040 and enclose a Form 8615.  

Hence if the foreign financial account balances cross reporting thresholds, the parent filing a Form 8814 of such a child needs to or in the second case where the child is reporting filing the Form 1040 with a Form 8615 enclosed: 

  1. Report the income from such accounts on Form 1040.
  2. Check the box "Yes" on Schedule B to form 1040 to the presence of foreign financial accounts and disclose the existence & location of the foreign account.
  3. Enclose Form 8938 if need be. 
Now, all of the above would apply to form 1040 and the accompanying schedules & forms such as the Schedule B and Form 8938. 

But what about the FBAR?

The online instructions for the FBAR rules for children were updated in June 2014. Irrespective of how the the child's investment income is reported on the Form 1040 either by the child or the parent, the FBAR needs to be filed in the child's name.  

Quoting from the online instructions from the FinCEN, 

" Responsibility for Child's FBAR
Generally, a child is responsible for filing his or her own FBAR report. If a child cannot file his or her own FBAR for any reason, such as age, the child's parent, guardian, or other legally responsible person must file it for the child.

Signing the child's FBAR. If the child cannot sign his or her FBAR, a parent or guardian must electronically sign the child's FBAR. In item 45 Filer Title enter “Parent/Guardian filing for child."

Please see an Enrolled Agent or a tax professional specializing in foreign bank accounts if you have questions regarding the above or if any of that applies to you. 

Bibliography: Form 8615; Form 8814; BSA Filing Instructions; Form 8938; Journal of Taxation


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,  


Thursday, January 14, 2016

Tax Filing Season's Here: Get Your Record Ducks In A Row!

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Just before tax season I sometimes feel like that man in the old movies about cars- you know the one where he ran ahead with a flag announcing there was a car on the way! Well, tax season is officially just a few days away & the Internal Revenue Service has announced January 17th, 2016- so go figure!

I usually send out a nifty Tax Organizer for my clients every year around this time, so they have all their records together when they are ready for me. But this is a great list to have whether you do your taxes by yourself or you hand them over to your Enrolled Agent or other tax professional

Income Information & Taxes Paid:

  • Social Security Numbers for yourself, spouse and dependents. 
  • All your general taxable income information including W-2's, 1099s etc. 
  • Do you get tips on your job? Hope you keep records of that, you will need it. 
  • Unemployment income if you filed for it, you'll receive a Form W-2G from your state. 
  • Alimony paid & received are deductible & taxable. 
  • Gambling winnings are taxable & losses are deductible to the extent of the winnings- so Forms W-2G's and records of losses. 
  • Retirement distributions, Social Security statements and Forms 5498 showing basis in your accounts.
  • Estimates Paid to the feds and the state.

  • Deduction Information:

  • Homeowners may have mortgage interest statements, property tax and other related expenses. Interest paid on home equity loans or line of credit. 
  • Medical and dental expenses out of pocket. 
  • Other deductible taxes: prior year state taxes paid, local income taxes, personal property taxes, sales tax write-offs if you had major purchases
  • Charitable contributions, both cash & non-cash. 
  • Casualty or theft losses if you had any, not reimbursed by your insurance company is deductible on your taxes. 
  • Hope you have been keeping track of your unreimbursed work-related expenses, including expenses of looking for a new job. 
  • Some investment expenses are deductible, so you had hefty advisor fees? Let your tax pro know of them. They may also be listed on the brokerage statements. 

  • Other Life Status Changes That Effect Your Taxes: 

  • Marriage or Divorce.
  • Yourself, your spouse or dependents going to college.
  • Major Improvements to your home. 
  • Renting out real estate. 
  • Birth or adoption of a child. 
  • Moving in connection with your job.
  • Cancellation of non-residential debt.
  • Served in the military, received combat pay? That has special treatment
  • Had grandchildren? Gifted money to their Education Savings Plan?

  • Some Other Information You May Need:

    > Bank account information if you want your refund direct deposited. (Safest recommended way)
    > If you had a problem with Identity theft and the IRS issued you a PIN, then you will need that to e-file. 
    This is no way an exhaustive list, you may need more documents depending on your unique tax situation. Do make your appointment with an Enrolled Agent today to get your taxes prepared. If this Enrolled Agent is a member of the National Association of Enrolled Agents (the NAEA), you will then be assured of meeting a tax professional with 30 annual Continuing Professional Education hours to be back you up. 

    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,


    Thursday, December 31, 2015

    Hee-Haw! It's All Serious Business At The 2015 FATCA Roundup!!

    A lot has been written about the Foreign Account Tax Compliance Act {FATCA} in the past year. As this year comes to a close and I write up my 89th post, I wanted to give you all, my dear readers a synopsis at your finger-tips, a round-up, if you will of some major FATCA events for 2015: 

    1. FBAR Deadlines Changed:

    On July 31, 2015 President Obama signed the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 into law, which modified the due date of several key forms for Americans with foreign income and Americans living abroad. That includes the Report of Foreign Bank and Financial Accounts, or Form 114, colloquially known as the FBAR

    Any U.S. person with a financial interest in, or signatory authority over, foreign financial accounts must file the FBAR, if at any time, the aggregate value of their relevant foreign account or accounts exceeds $10,000. An account over which a person has signature authority but no ownership interest is included in this computation.

    The new due date for the FBAR will be April 15th with a maximum 6-month extension till October 15th. For US citizens living abroad the deadline will be June 15th. The new deadlines are effective starting for the 2016 tax returns due in 2017. 

    More details on the new FBAR deadline in my blog post here.

    2. More countries entered into IGAs with the USA:

    More than 50 countries have entered into Inter-Government Agreements (IGAs) with the US since FATCA came into existence. 

    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". 

    Other countries, like Switzerland, for example, leave it up to the banks/ financial institutions to come to an agreement with the IRS, this is a "Model 2" agreement. 

    The consequence of these IGAs have been varied and wide-spread, the harshest being many banks in these countries do not want to do business with US citizens any more. 

    More on this in my blog post here.

    3. New Rules on Gifts & Inheritances from Expats to any US person Proposed by the IRS:

    Under the proposed regulations, if an expatriate meets the covered expatriate definition in Sec. 877A, he or she is considered a covered expatriate for Sec. 2801 purposes at all times after the expatriation date, except during any period beginning after that date during which he or she is subject to U.S. estate or gift tax as a U.S. citizen or resident. 

    This new component { Prop. Reg. 28.2801-1} says that US taxpayers who receive gifts & inheritances from people who had previously expatriated are subject to  gift and/or estate taxes on the receipt of such gift or bequest. This tax is imposed on US Citizens who receive, directly or indirectly, "covered" gifts or "covered" bequests from a "covered" expatriate. 

    More on this on my blog post here.

    4. Offshore Compliance Programs-OVDP/ Streamlined Procedures/Swiss Bank Programs:

    These disclosure programs are not new to 2015 but the Internal Revenue Service has been increasingly coming up with new rules and penalties through these programs. More banks signing agreements with the USA have resulted in increased penalties for those with accounts in such banks going into the OVDP. 

    I wrote in detail about these programs earlier this year in this post here.

    5. Final Regulations on Form 8938:

    A release from the Internal Revenue Service on the 10th of March, 2015 incorporated into the Form 8938 instructions for reporting requirements made under the Final Regulations for § 6038D of the Internal Revenue Code. It also contains additional information not included in the published 2014 Instructions for Form 8938.

    More about the final regulations in my blog post here

    6. You Owe Taxes? Your Passport Could Be Confiscated!:

    December 4th, 2015, President Obama signed into law the "FAST Act". FAST stands for Fixing America's Surface Transport, tucked away in this Act, is a provision that the Dept. of State  can deny a passport/ deny renewal/ revoke passport previously issued ti a seriously delinquent tax payer. 

    The "seriously delinquent taxpayer" is defined as one who has a tax debt greater than $50,000, including interest and penalties, this debt should have been assessed and a notice of lien or notice of levy should have been filed. 

    Although this does not strictly fall under the FATCA rules, a large number of US citizens who live abroad are concerned about this. One of the primary reasons being that the IRS still does not have the means to process foreign addresses which are in a different format than US addresses and due to this many times IRS notices/ letters to such citizens living abroad are returned undelivered. 

    7. Case Filed Against Imposition of FATCA by Rand Paul Et Al:

    A case was filed against the enforcement of FATCA by Senator Rand Paul and other opponents of this Act. It suffered an initial set-back when Judge Thomas Rose of the United States District Court refused to grant preliminary injunctive relief in October 2015. 

    The latest news on this case is that a plaintiff's memorandum was filed by James Bopp, Jr from The Bopp Law Firm of Indiana. Mr. Bopp has argued that the plaintiffs should be granted relief requested based on their claims for four reasons: the IGAs are unconstitutional sole executive agreements, reporting requirements violate equal protection for Americans living abroad, the challenged penalties violate the Excessive Fines Clause, and reporting requirements violate the Fourth Amendment.

    We will have to wait and watch what Judge Rose's ruling will be on this matter. 

    Entire document here. 

    Dear Readers: Thank you all so much for your following on Google Plus, Tax connections and LinkedIn. Wish you all a fantastic and "compliant" 2016! 

    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,  

    Tuesday, December 1, 2015

    Foreign Trust Protection for Foreign Assets: A Myth Busted!

    It is not uncommon anymore that a US Citizen has parents and elders living in foreign countries who may have set up trusts in those countries under (obviously) its laws. There are also US Citizens who have expatriated to/ now live in foreign countries and set up trusts for their children there. 

    Today's post was prompted by questions from several clients about an urban legend that seems to be perpetuating itself out there: "You do not have any US tax reporting requirements if you are a US citizen/ permanent resident and your foreign assets and/ investments are in a foreign trust." 

    If you have believed this to be true and set up a trust in a foreign country or are thinking of taking this step or are just plain curious about foreign trusts, then you need to read this blog post.  U.S.owners and beneficiaries of foreign trusts have complex U.S. reporting requirements, which are different from the reporting requirements imposed on U.S.
    domestic trusts. 

    Please Note: All references to “U.S. owners” and “U.S. beneficiaries” refer to persons who are considered U.S. residents for income tax purposes; i.e., either a U.S. citizen, a green card holder, or someone who meets the “substantial presence test” in any tax year. 

    The U.S. taxation of the income and distributions from a foreign trust depends on the type of foreign trust and the status of the trust’s beneficiaries at the time of distribution. 

    How is the Tax Residence of the trust determined?
    If your trust fails the "Court Test" and the "Control Test", then it is considered a foreign trust as per § 301.7701-7 (a) (2).  

    For purposes of brevity for this post:

    • A "Court Test" is fulfilled when "any federal, state, or local court within the United States is able to exercise primary authority over substantially all of the administration of the trust (the authority under local law to render orders or judgments)". There are also bright-lines rules and safe harbor rules for fulfilling the "Court Test". 
    • "Control Test" is fulfilled when "one or more U.S. persons have the authority, by vote or otherwise, to make all “substantial decisions” of the trust with no other person having veto power (except for the grantor or beneficiary acting in a fiduciary capacity)".
    • The trust will automatically fail these two tests if the trust instrument provides words to the effect that will cause it fail the 2 tests. 

    There are TWO types of foreign trusts, Foreign Grantor Trust and Foreign Nongrantor Trust:
    The "grantor" is the person who creates the trust, and the beneficiaries are the persons identified in the trust to receive the assets. The "trustee" is a person who manages the trust for the benefit of someone else, namely, a "beneficiary". 

    The US income taxation of a foreign trust depends on whether the trust is a grantor or nongrantor trust. Income from a foreign grantor trust is generally taxed to the trust’s grantor, rather than to the trust itself or to the trust’s beneficiaries. 

    On the contrary, income from a foreign nongrantor trust is generally taxed when distributed to US beneficiaries, except to the extent US source or effectively connected income is earned and retained by the trust, in which case the nongrantor trust would pay US income tax for the year such income is earned. 

    The following flow charts explain the tax compliance obligations of the trustees & US beneficiaries of the foreign grantor & nongrantor trusts. They only provide a broad overview of the obligations of the trustees, US owners and beneficiaries. 

    Flow Chart for Foreign Grantor Trust Tax Compliance Obligations:

    Flow Chart for Foreign Nongrantor Trust Tax Compliance Obligations:

    There will also be reporting & tax obligations if a beneficiary uses property owned by a foreign trust, since the use itself is considered a "distribution". 

    The disclosure requirements under § 6038D also apply to foreign trusts and so also the requirements to file the FinCEN Form 114. 

    The Internal Revenue Service states that, "Citizens and residents of the United States are taxed on their worldwide income. To help prevent the use of foreign trusts and other offshore entities for tax avoidance or deferral, Congress has enacted several specific provisions in the Internal Revenue Code. Some provisions trigger recognition of gains that would otherwise be deferred. Others deny deferral of tax on income moved offshore."

    So going back to the urban legend we started with, please consult an Enrolled Agent, CPA or Tax Attorney well-versed in foreign trusts if you are a beneficiary/ trustee of a foreign trust or are thinking of setting up a trust in a foreign country. 

    Bibliography:; §301.7701-7; Form 3520; Form 3520-A; § 6308D; Abusive Offshore Tax Avoidance Schemes from the IRS. 

    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,