Expatriation: Divorcing the Government Has Tax Consequences

As someone who moved around a lot with my parents in my childhood, any kind of displacement conjures up vivid images of huge wooden crates, packers & sad goodbyes. But life is no longer as simple as crates, packers & going-away gifts, many US citizens who had relocated and moved abroad are deciding to renounce their US citizenship. 2013 was a record-breaking year that saw an alarming increase (221%-according to the Treasury Department of US) of Americans renouncing their citizenship . Why such a drastic move? A big reason is the global tax reporting requirement and FATCA. 

I read this somewhere, that "expatriation is like divorcing a government". As heart-wrenching and final as that may sound, it is made even more complex by the tax provisions under Internal Revenue Code (IRC) sections 877 and 877A. So if you decide on taking such a step, what would be the tax consequences? 

These rules apply to US citizens who have renounced their citizenship and long-term residents (defined in IRC 877(e)) who have ended their US resident status for federal tax purposes. The rules differ based on the date of expatriation. For the sake of today's blog post, we will discuss the latest date which is June 16,2008. 

Expatriation on or after June 16,2008: The new IRC 877A rules apply to you if ANY of the following statements apply, 

• Your average annual net income tax for the last 5 years ending before the date of expatriation or termination of residency is $157,000 or more for 2014.
• Your net worth is $2 million or more on the date of your expatriation or termination of residency.
• You fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the last 5 years.

If any of the above rules apply to you, you are a "covered expatriate". And you have to pay exit tax. 

The exit tax is like a capital gains tax because all the property of the covered expatriate is deemed sold for its fair market value on the day before the expatriation date. 

There is an exclusion amount for the exit tax, for 2014, it is $680,000. 

A US Citizen can relinquish his/ her citizenship on the earliest of FOUR possible dates: 

1. When he/ she appears before a diplomatic/ consular officer.
2. The date on which she/ he sends a statement of voluntary relinquishment to the US Department of State. 
3. The date the US Department of State issues a certificate of loss of nationality. 







4. The date a US court cancels a certificate of naturalization. 

Note. If you expatriated before June 17, 2008, the expatriation rules in effect at that time continue to apply. See chapter 4 in Publication 519, U.S. Tax Guide for Aliens, for more information.

The fee for renunciation of US citizenship is $2,350. 

The important take away points from this blog post are that, in order to avoid tax consequences of renouncing your US citizenship, you have to prove you have been regular in filing your tax returns for the past 5 years AND if you are worth more than $2 million or you have been paying income tax of $157,000 or more (for 2014), you have to pay an exit tax on renunciation. 

The decision to expatriate is not to be taken lightly. Always consult the right professional who can guide you with respect to your unique circumstances. 

Bibliography: Pub 519; irs.gov; Internal Revenue Codes 877 & 877A; Department of Treasury

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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.mntaxsolutionsllc.com

Back-To-School Blues & Tax Credits To Go With It!!

After the horrible 2013 winter doomed by one polar vortex after another, we couldn't wait for summer to get around. It did finally arrive but amazingly was gone in the blink of an eye! I am always amazed by how quickly every summer flies by and before we know it, school is back in session. This year, summer was a huge deal in our household, we had a kid to send off to college!  

Handy-dandy tax consultant that I am, with major life events, tax planning cannot be far behind. So, I thought I should remind my readers of the the college tax credits that are out there for 2014. Now would be a perfect time to see if they would qualify for college credits. 

American Opportunity Tax Credit {AOTC} & The Lifetime Learning Credit {LLC}:  These credits are available to those taxpayers who pay qualifying expenses for an eligible student. 

The AOTC  provides a credit for each eligible student while the LLC provides a maximum credit per tax return.  A taxpayer may qualify for both these credits in the same year but can claim one of them for a particular student in a particular year. 

The above credits are claimed on Form 8863 and it doesn't matter whether the taxpayer itemizes or takes the standard deduction. 

For those eligible to take the college tax credits, including under-graduate students, the AOTC generally yields higher tax savings. The LLC is favored by those who are part-time students or are attending graduate school. 

The AOTC can yield a maximum annual credit of $2500 per student. It equals 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.

40% of the AOTC credit is refundable, that means even those who do not owe any tax can get an annual payment of $1,000 for each eligible student. 

The LLC can yield a maximum annual credit of $2,000 per tax return. 

Who is an eligible student?: An eligible student

• Includes the taxpayer, the spouse and dependents. 
• Is enrolled in an eligible college/ university/ vocational school whether a non-profit or for-profit institution. 
• Cannot be a non-resident alien/ married but filing a separate return/ can be claimed as a dependent on another tax return. 

What are qualified education expenses?:  Qualified education expenses are amounts paid for tuition, fees and other related expenses for an eligible student. Expenses such as for room and board are NOT qualified expenses. 

Limits on the AOTC: The following limits exist, 

• It is available only for 4 years per eligible student.
• It is available only if the student has NOT completed the first 4 years of post-secondary education before 2014. 
• The student must be enrolled at least half-time in college. 
• The taxpayers modified adjusted gross income (MAGI) for 2014 should be $80,000 or less if filing single, head of household and $160,000 or less if filing married filing joint to claim full credit. 
• The credit is completely phased out for taxpayers with MAGI of $90,000 for single and head of household and $190,000 for those married filing jointly. 

Limtis on the LLC: The following limits exist for the Lifetime Learning Credit,

• The limit on the LLC applies per tax return. 
• The full $2,000 credit is available only to those who pay $10,000 or more in qualifying tuition and fees and have sufficient tax liability. 
• The full credit can be claimed for 2014 for those with MAGI $54,000 or less and married filing jointly, $108,000. The credit is completely phased out for taxpayers with MAGI $128,000 filing married & jointly and $64,000 for singles, heads of household etc. 

Other education tax benefits include: 

• Scholarships and grants- Tax free if used to pay for tuition and fees, books, and other course materials. 
• Student Loan interest deduction- up to $2,500 per year subject to MAGI limits.
• Savings bonds used to pay for college- Interest is tax free on Bonds purchased after 1989 by a taxpayer, who at the time was at least 24 years old. 







• Qualified tuition programs also known as 529 plans. 

Note: The Tuition and Fees deduction as an adjustment to your total income is no longer available from the tax year 2014. 

Bibliography: Pub 970; Form 8863; irs.gov; 2014 draft Form 1040

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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.mntaxsolutionsllc.com

Quick & Easy Non-Profit Filing: the new Form 1023-EZ

Hello Readers! A two month hiatus from tax-blogging is a long time to be away. Especially at this time with so many changes- exciting or scary- happening in the tax-world! My first born heading to college was definitely more challenging than I expected and yes, that's my excuse and I am sure you would agree that it's a good one?

Well, as if sending off my son to college wasn't exciting enough, I filed for non-profit status for a client using the new Form 1023-EZ. This process used to be a long, arduous and complicated one. Most organizations contemplating going down that route had to wait months after filing for determination of non-profit status to hear back from the Internal Revenue Service, often not being able to raise as much capital as they expected. 

So What Is Non-Profit Filing Status?: A non-profit organization is a group organized under state law for purposes other than generating profit and in which no part of the organization's income is distributed to its members, directors, or officers. Each state in the US defines non-profits differently. 

Most federal tax-exempt organizations maybe nonprofit organizations, organizing as such at the state level does not automatically grant the organization exemption from federal income tax.  To qualify as exempt from federal income tax, an organization must meet requirements set forth in the Internal Revenue Code. 

The New Form 1023-EZ:  Available on IRS.gov as of July 1st, 2014, the new form is three pages long, compared with the standard 26-page Form 1023. Most small organizations, including as many as 70 percent of all applicants, qualify to use the new streamlined form. Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible.

This form MUST be filed online at www.pay.gov, the $400 user fee is payable at the time of submission. The instructions contain a checklist to determine if your organization is eligible to use this method of filing for non-profit status. 

My client's filing was approved in 3 weeks! 

The Internal Revenue Service's logic for introducing the new streamlined application according to Koskinen is, "We believe that many small organizations will be able to complete this form without creating major compliance risks. Rather than using large amounts of IRS resources up front reviewing complex applications during a lengthy process, we believe the streamlined form will allow us to devote more compliance activity on the back end to ensure groups are actually doing the charitable work they apply to do."

However not everyone is as excited about the new form. Diana Kern, the Vice President of Programs at NEW writes in her blog, " Let the small nonprofit rain storm begin.  Donors beware. Perhaps not all of these small nonprofits will be scammers, but there is no guarantee they have the requisite capability to run a business and use your donation responsibly and effectively. My recommendation… perform due diligence before you donate to any nonprofits in the future." 

However simplified or not, if you are in the process of setting up a non-profit or thinking of doing so, I would still suggest consulting an Enrolled agent or other tax professional.

Bibliography: irs.gov;  Legal Information Institute; www.new.org; Pub 557

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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.mntaxsolutionsllc.com