Sunday, June 22, 2014

Investments In Foreign Pensions & Annuities

I always liked the interestingly unique name, Phileas Fogg from "Around The World in Eighty Days". Having traveled the world through books, I always wondered how different life would have been if I had the chance to live & work in many different countries! 

Not so much any more as I encounter as clients, many US citizens who were based out of the country for a few years. Especially those who could have contributed into or had employers contribute into their then resident country's retirement accounts. These were either mandated by the resident's country's employer rules or were used as a tax saving strategy. 

What is a foreign pension or foreign annuity? 
A foreign pension or foreign annuity is a pension plan or retirement annuity received from a source outside the United States. This may be received from a: 
  • foreign employer
  • trust established by a foreign employer
  • foreign government or one of its agencies including a foreign social security
  • foreign insurance company
  • foreign trust or other foreign entity designated to pay the annuity
How is a distribution from a foreign pension or annuity treated?
The taxable amount of a distribution from such a foreign retirement account is generally the Gross Distribution minus the Cost/ the Investment in the contract. These distributions may be partially or fully taxable whether a Form 1099R is received or not. You can claim a treaty withholding exemption to the paying country, if that is not honored, you can claim an foreign tax credit on your US tax return for the taxes paid in the other country. 

Tax Treaties and How They Effect You? 
The United States has tax treaties with many countries to avoid double taxation. This also usually covers income from pensions/annuities. As a general rule, most treaties allow the resident country to tax pension/ annuity income. Each treaty must be carefully examined to determine,
  • The country of tax residency
  • The country to which taxes are due
  • Special taxation of government payments or social security payments
  • Special rules for lump sum payments
  • Check if the Tiebreaker rules apply if you are resident of both countries for that tax period (if the Tiebreaker rules cannot be determined by you, you can request the competent authority of each country to make the decision) 
Note: Please make sure that the Tax treaty being referred to is the most current one between the countries in question. 

Foreign Employer Contributions:  
Some of the foreign employer contributions may not be part of the Cost of the pension. This is usually the case if the contributions were made either:
  • Before 1963 by your employer for that work,
  • After 1962 by your employer for that work if you performed services under a plan that was in existence on March 12,1962,
  • After 1996 by your employer if you were a foreign missionary. 

Foreign Contributions When Nonresident Alien:
Your contributions or the employer's contributions are not part of your Cost if the contribution was based on compensation for services performed outside the US while you were a nonresident alien & not subject to laws of the United States or any foreign country. 

Foreign Social Security Pensions:
Generally tax treaties have special rules for foreign social security pensions. These may include the country making the payment to also be taxing the distribution. Unless otherwise specified in the tax treaty, the foreign social security payments are treated the same as foreign pensions or foreign annuity payments. Certainly, they are NOT eligible for the same tax treatment as US social security payments. The US has bilateral social security agreements with 25 countries. More information can be found on  

Foreign Bank Account Reporting Requirements and Compliance:
The balances in the foreign pensions and other annuities have to be included to calculate threshold limits for both the FinCEN 114 and Form 8938. An interest in a foreign social security/ social insurance or similar program of a foreign government is not included in these calculations. 

Bibliography: IRC Sections 72, 1441,3405 ; IRS Publications 575, 54,590,939 etc; IRS Tax Treaty; Social Security Bilateral Agreements; Form 8938 & IRC Section 6038D

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,

Monday, June 16, 2014

Sorry Kids! You May Have to Pay Taxes On Your Summer Jobs!

One of my teens starts her baby sitting gig tomorrow. This tax consultant's heart swelled up with pride when she asked if there would be taxes on her earnings! Well, wish I could say "no"! 

So if you are or you know a student on their first summer job, these are somethings you need to remember: 

1. Every new employee has to submit a Form W-4. This is an Employer's Withholding Certificate, telling them how much you want taken out in taxes from your pay. You can use the Withholding Calculator on to help fill out this form.

2. If the employer does not withhold taxes from your pay, you may be liable to send in your own estimates every quarter. This is done using Form 1040-ES. The estimates are due April 15th, June 15th, September 15th and January 15th of the next year. 

3. Some of the work that you do may be counted as "Self-Employment". This may include baby-sitting, lawn mowing etc. If this is so, then you can deduct expenses you had towards earning this money. These income & expenses are shown on Schedule C

4. If you work in a place where paying tips to the workers is a norm, remember tip income is taxable. Think waiters, golf-caddies etc. One must report $20 or more in cash tips in any one month to your employer. So it is important that you keep a log of the daily tips received. All tips received during the year should be reported on your Form 1040. 

5. If you work as a newspaper carrier or distributor, special rules apply. One is considered self-employed if certain conditions apply, if not and one is less than 18 years of age, one could be exempt from social security & medicare taxes. 

6. If you are in ROTC (Reserve Officer's Training Corps), your pay for summer camp is taxable, however the subsistence allowance you get while in advanced training is not taxable. 

The summer job may not even pay enough to owe income taxes, however the employer is liable to withhold income taxes, social security and medicare taxes from your pay. If it is so, one may have to file just so one can get a refund of the income taxes withheld. Please contact an Enrolled Agent to help file your taxes. 

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,

Monday, June 9, 2014

Foreign Corporations: That Have A Stake In US Corporations/ Do Business in the US.

There were proposed and final regulations issued for Form 5472 on June 6th, 2014. Like the above cartoon shows, the long arm of the US Government is not only reaching out to U.S. corporations doing business in other countries, it is also expecting compliance by foreign corporations that do business in the U.S or have a stake in US Corporations. 

Form 5472 is an information return used by a 25% foreign-owned U.S. corporation or a foreign corporation engaged in a U.S. trade or business to provide information when reportable transactions occur during the tax year of a reporting corporation with a foreign or domestic related party under sections 6038A and 6038C. 

What Is a Reporting Corporation? A reporting corporation is either: 

  • a 25% foreign-owned U.S. corporation OR
  • a foreign corporation engaged in trade or business within the U.S. 
A corporation is 25% foreign-owned if it has at least one direct or indirect 25% foreign shareholder at any time during the year. Section 318 of the Internal Revenue Code dictates the rules for 25% foreign shareholder, constructive ownership and related party. 

What is a Reportable Transaction?  A reportable transaction is:
  • any type of transaction listed in Part IV of the Form 5472, for which money was the only consideration paid or received during the reporting corporation's tax year (the money could be U.S. or foreign currency) OR
  • any transaction or group of transactions listed in Part IV, if:
         A. Any part of the consideration paid or received was not money, OR
         B. Less than full consideration was paid or received. 

Transactions with a U.S. related party is not required to be specifically identified in Parts IV and V. 

When and Where To File?  Earlier Form 5472 could be filed with the corporation's income tax return and if filed when not due, it could be filed separately with the service center where the corporation's income tax return is to be filed if not filed when due. 

Final regulations issued by the IRS on June 6th, 2014 removed the provision allowing Form 5472 to be timely filed separately from the taxpayer’s income tax return if that return is filed late. After the rules are adopted, Form 5472 would be required to be filed in all cases only with the filer’s income tax return by the due date (including extensions) of that return. 

Penalties For Non-Filing: A corporation that fails to file Form 5472 by the due date may be assessed a penalty of $10,000 for each tax year for which a failure occurs. If the failure to file the form continues for more than 90 days after the IRS mails the corporation a notice of its failure to file, the IRS can impose an additional $10,000 penalty for each 30-day period (or part of a 30-day period) in which the company fails to provide the information (Sec. 6038A(d)). 

The penalties are also part of the new final regulations issued June 6th, 2014. 

Exceptions To Filing: Some reporting corporations are not required to file Form 5472 if certain conditions apply. 

Please contact an Enrolled Agent or other qualified tax professionals to determine your unique situation and find out if you need to file Form 5472. And if you do, what the record maintenance requirements that is required under Section 6001 should be.

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,

Sunday, June 1, 2014

Roth Contributions: Limits To Remember.

William Victor Roth Jr. 

Who was William Victor "Bill" Roth, Jr? He was the legislative sponsor of the Individual Retirement Account plan that now bears his name, he was also famous for his toupee, he supposedly had "the grace of a stick figure", and most importantly, he had a succession of Saint Bernard dogs throughout his 34 years of politics and it sort of became his trademark. 

Besides his obvious love of St. Bernards, he was a lawyer by profession and started his political career in the late 1960s in Delaware. He was elected to the United States House of Representatives and was known to be fiscally conservative. He was the co-author of the Kemp-Roth Tax Cut. The Roth IRA has been in existence since 1998. And the Roth 401(k) since 2006. 

What is a Roth IRA?  This is an individual retirement plan that you can contribute after-tax earnings into. The earnings grow tax-deferred. You can withdraw your contributions at any time and there are no penalties or taxes. There is no age limit to contribute into a Roth IRA. To take "qualified" distributions from the Roth IRA, you should have had the IRA for at least 5 years and have reached 59 and 1/2 years of age.  

*Please consult your tax or finance professional to calculate what these reduced amounts are. 

Traditional Vs Roth IRA: One can make contributions to both the Traditional and the Roth IRAs. If you choose to do so, the maximum amount that can be contributed to both of the IRAs together is the same as  the limit in contributions if made only to Roth IRAs. But the contributions for the year to the Roth should be reduced by all the contributions made to all other IRAs in the year. Employer contributions under a SEP or SIMPLE IRA plan do not affect this limit. 
More information about Traditional Vs Roth IRAs can be found on this blog post

Bibliography: Publication 590; Delaware Grapevine; Wikipedia;

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,