Tuesday, November 14, 2017

When Can A Non-Resident Spouse Be Treated As A Resident


PIC Courtesy: pixabay.com Arc De Triomphe, Paris, France


As the tax reform debate rages on currently, I do not see much in the proposals changing for US citizens living abroad. As this story unfolds, I think it is a good thing that US citizens/ resident aliens living abroad are not affected. We shall wait and watch. For all the latest news-stay tuned! 

As it happens many times for those US citizens who have moved abroad and married someone who is a citizen of their resident country, when times comes to file a tax return, they have to use the "Married Filing Separately" or the "Head of Household" filing status. Both of these may not be as advantageous as the "Married Filing Jointly" filing status tax-wise. 

This can also apply for those who have just become US citizens/ residents at the end of the year but the spouse has not yet/ chosen not to become a US resident/ citizen at the same time. 

One can get around this by making an election to treat the non-resident/ non-US citizen spouse as a resident/ US citizen, file jointly and perhaps reduce one's tax burden.

If this election is made, the following rules will apply: 


  • For all years the election remains in effect, the couple is treated as residents for federal tax purposes. The election is effective for the entire tax year, both for purposes of the federal tax return & taxes to be withheld from wages. 
  • The couple must file a joint tax return for the year/s the election remains in effect. 
  • The couple must report their "world-wide income" on their US tax return. 
  • Generally, tax treaty benefits cannot be claimed. Details of the savings clause of treaties must be examined in detail. 

How is the Election to be made:


The election is made by attaching a statement to the joint tax return, signed by both the spouses in the first tax year in which this applies. The statement should have the following information: 

1. A declaration that one spouse is a resident alien/ US citizen and the other spouse is a non-resident alien on the last day of the tax year. And that they chose to be both treated as resident aliens/ US citizens for the entire tax year. 

2. The name, address and identification number for each spouse. 

Other Notable Points: 


  • The election can be made on an amended tax return or on an originally filed tax return. If amending a tax return to make such an election, it should be filed with the Internal Revenue Service within 3 years of originally filing or 2 years from the date the tax was paid, whichever is later. 
  • The non-resident spouse needs to have a Social Security number or a Tax Identification number in order to be able to make the election. 
  • The election will be suspended for any later tax year if one of the couple is not a US citizen or resident alien at any time during a later tax year. 
  • The election is ended if it is revoked by either spouse; death of either spouse; the couple get legally separated; or have inadequate records to prove they are married. 
  • If one of the spouses is a resident of American Samoa or Puerto Rico, they can be treated as a resident without having to make an election. 
If the above situation applies to you and you would like to make such an election to claim a non-resident spouse as a resident & file a joint return, please contact us. 


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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.

Monday, October 30, 2017

Foreign Freelance Income & What Does Maradona Have To Do With That?


Diego Maradona. PC: totalposters.com
Just when I was planning on publishing my post on foreign free lance income & tax consequences- the big news headline of 2017 dropped! Today special prosecutor, Robert Mueller brought charges against Manafort & Gates for money laundering & foreign bank accounts among any other things. While those fire-works continue and you think that you may not be in the same league as them, let me assure you that many U.S. citizens who live abroad and have free lance income do not understand its tax implications. 

You may already be aware that US Citizens and Green Card holders are taxed in the United States on their worldwide income, regardless of where they live. Freelance income is reported on Schedule C, Profit or Loss from Business (Sole Proprietorship). "Ordinary & necessary" expenses related to this work can be deducted on the same Schedule C. The net income, that is gross minus the allowable expenses is then subject to tax. 


You may be able to avoid some or all of the U.S. Income Tax on this income, either through foreign tax credits (taxes paid to your resident country on this same income) or the foreign-earned income exclusion (by satisfying one of two residency tests). Operating as a “business” one's net income from this source may be subject to U.S. Self Employment tax. The Self Employment tax is rate is currently set at 15.3%.  The rate consists of two parts, 12.4% for Social Security and 2.9% for Medicare.

What is Self Employment Tax?: 
When one operates as a freelancer, or is self-employed, one is effectively both employer and employee.  So, the responsibility for the Self Employment tax {Calculated on net income on Schedule C} falls on one-self.  Foreign tax credit and/ or the foreign-earned income exclusion cannot be used to offset U.S. Self Employment tax due.  

The only way to exclude the self-employed income of a U.S. citizen or Green Card holder from U.S. Self Employment tax is through the application of a totalization agreement, if available.

What is a Totalization Agreement?:
The United States has entered into totalization agreements with several countries. If such an agreement exists between the U.S. and your country of residence, your business net income may not be subject to US Social Security taxes. 

To avail of this exemption from U.S. Self Employment tax, you may need to be registered as self-employed in your resident country.  You also will likely need to obtain a certificate of coverage from the tax authority in your resident country. This may take some time and effort in the country of residence in, hence you should give yourself time to file by either filing an extension or sending in some preemptive taxes/ estimated taxes. If there is no totalization agreement in place between the US and your resident country, then you will owe U.S. Self Employment tax on your Schedule C net income.

Here is a link to the list of countries that the US has Totalization Agreements with. 


It is funny that the idea for this post came about when an old college friend and I connected through social media after a couple of decades. She needed help with her foreign free lance income & was trying to understand how it would effect her US taxes. Soon we started to talk of other (less mundane things) and how we met for the first time in college in the Principal's office since we both needed a pass for being late after a heart stopping 1986 FIFA World Cup which in India (where we were at that time) was broadcast live in the middle of the night! Diego Maradona's performance in that FIFA World Cup is unforgettable to say the least, the principal joined us in gushing over him & we believe we got off lightly! 

Today also happens to be Diego Maradona's 57th birthday. So Happy Birthday Diego! Thanks to you I made a friend in college whose love of soccer kept me forever entertained in sleepy Commercial Geography lectures! And oh yeah... if you, dear reader want to talk about that some more or have foreign free lance income, do contact us. 

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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, 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