Monday, November 28, 2016

Foreign Asset Reporting For Entities: New for 2016!

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There is a lot of attention these days on big companies (Apple, Google, General Electric, Facebook and others) stashing their earnings overseas in what are considered tax havens to avoid paying US taxes on their corporate income. Some international tax reform proposals have been suggested as to how to get the corporation to either bring this stash back into the US by way of a "repatriation holiday" or "deemed repatriation" or ending the system of tax deferrals. 

These rules and proposed tax reforms are for the big players, in the mean time, what is happening with the little guys?

For those of us tax professionals who specialize in international tax and compliance with FATCA, Form 8938 has played a big role since 2011. I wrote in detail about this Form and its filing requirements in my widely read blog post here. The Form 8938 had applied to individuals alone and entities had not been considered as falling under the law to report their Specified Foreign Financial Assets {SFFA}. 

What changed in 2016? 
The Treasury Department and the Internal Revenue Service {IRS} adopted § 1.6038D-6 (REG-144339-14) early this year as final. As per the new regs, for tax years beginning after December 31, 2015, certain domestic corporations,partnerships, and trusts that are
considered formed or availed of for the purpose of holding, directly or indirectly, specified foreign financial assets must file Form 8938 if the total value of those assets exceeds $50,000 on the last day of the tax year or $75,000 at any time during the tax year. 

What is a Specified Domestic Entity {SDE}?
§ 6038D(f) defines an SDE as "any domestic entity which is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets, in the same manner as if such entity were an individual". 

An entity can be a corporation, partnership or a disregarded entity. 

In order to be classified as an SDE, the entity has to make a determination every year 
under Treasury Regulation § 1.6038D-6(b)(2) if: 
  • At least 50% of the corporation or partnership’s gross income or assets is passive; 
  • At least 80% of the corporation or partnership’s gross income or assets is closely held directly, indirectly or constructively by a specified individual on the last day of the corporation's or partnership's tax year. 

Is A Trust a Specified Domestic Entity?:
A trust could be broadly considered an SDE under the new rules if it has one or more specified individuals as current beneficiaries. A "current beneficiary" is generally any person who at any time during the tax year is entitled to, or at the discretion of any person may receive, a distribution from the principal or income of the trust (determined without regard to any power of appointment to the extent that such power remains un-exercised at the end of the tax year).

There are many exceptions to a trust being considered an SDE. One can determine this only after careful reading of the regulations. Some of the excepted trusts include REITs, IRA accounts, § 403(b) or § 457(g) plans. A Grantor Trust is also exempt from reporting SFFAs under the new regs.

The above rules are in effect for Tax Year 2016 that is the coming 2017 tax season. If the above rules effect you and you do not take any action, the penalty for non-disclosure is $10,000 for failure to file the Form 8938 up to a maximum of $50,000. 

The tricky and complicated part of tax compliance here is determining if the SDE passes the passive income test; the 80% closely held test; and the total income from all sources. 

Please contact your Enrolled Agent or other tax professional if you think you may be impacted by the above changes. 

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, November 17, 2016

2016 Year End And Tax Planning: What To Expect?

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When that first leaf changes color, there's a nip in the air, and the sunshine starts to fall into corners it did not before, you know the year is coming to an end. Typically that is when I start getting phone calls for year end tax planning. 

This year has been tumultuous, to say the least, as we recover from all the pre and post election trauma or elation depending on which candidate you favored, we need to put our tax plans in place based on what we know about likely tax changes for 2017 and 2018.

Most tax planning usually starts with identifying the need to either postpone income & accelerate deductions if you think you are going to be in a lower tax bracket in the coming years OR to accelerate income & postpone deductions if your income is going to increase. And then we look into your withholding and taxes, your employer retirement contributions etc. 

Filers who claim itemized deductions on their taxes are the ones who have the flexibility in shifting deductions. For example, one can send in the last estimated tax check before December 31st to claim the deduction in the current year. A mortgage payment for January can be made in December and your charitable contributions for 2017 can be moved back as well. 

If your total medical expense for any reason is over 10% of your AGI, you can have any elective procedures before December 31st so you will be eligible for the tax write-off as well. This is especially very important if you are 65 years of age or older since the special 7.5% medical cost threshold is gone for the Tax Year 2017 and you get the same 10% medical cost threshold as the rest.

If you are going to have a spike in income and that is going to put you into the Alternative Minimum Tax category, the planning of deductions will change. 

Now would also be a good idea to visit Capital Loss Harvesting or Tax Loss Harvesting and see if that will be a right strategy for you. The basic premise of this fancy term is that you sell off your low-yield investments or those that have lost value to off-set the gain(s) from the sale of those that increased in value. There are downside risks to this strategy that you should have your tax professional or financial advisor weigh in for you. 

Speaking of tax planning for the coming years, we must take into reckoning some important points from President-Elect Trump's proposed tax plan. These proposals stand a very high chance of passing since both the House and the Senate are in Republican hands & they have been itching for tax reform. From many accounts and experts weighing in, these plans if implemented will reduce revenue by an estimated $7.2 trillion in the first decade and as a result deficit is expected to increase as well. 

Proposed Tax Plan from President-Elect Trump:

  • Tax brackets reduced to three: 12%, 25% and 33%.
  • Elimination of:
         a. Alternative Minimum Tax.
         b. Head of Household filing status.
         c. Net Investment Income Tax.
         d. Personal Exemptions.
         e. Estate Tax
  • Business tax rate lowered to 15%.
  • Cap on itemized deductions at $100,000 for single filers and $200,000 for married filing joint. 
  • Standard deduction $15,000 for single filers and $30,000 for married filing joint. 
  • Low-income families get a credit up to $1200 a year for child-care costs. 
  • Carried interest is taxed at ordinary tax rates instead of capital gains rates. 

Based on the above, 2016 would probably be a good year to accelerate your charitable contributions. This is especially true if you are in a higher income tax bracket, the percentage of savings is higher as well. Donating appreciated stock to a tax-exempt charity is also a good way to increase your itemized deductions. 

We do not know yet how the GOP will go with the proposals, please check with your Enrolled Agents and make sure advice is tailored to your unique situation. 

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, October 17, 2016

Running A Gig or Two? What You Need to Know!

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A Gig I thought always had a kind of 1950's/ 1960's hipster vibe. This was something you did on the side while waiting for real life to catch up! The Gig is gaining more legitimacy these days I believe. It means a free-lance or a side job you hold down out of interest or necessity. It is also called a "Gig Economy" or a "Shared Economy" and sometimes people hold down more than one or two gigs. 

Just this morning, the USA TODAY said that the number of multiple job holders hit an eight-year high this September. They say that the burgeoning gig economy is putting a premium on free-lance work and short-term projects. So what is a "Gig Economy"? It is defined as "An environment in which temporary positions are common and organizations contract with independent workers for short-term engagements."

Tax Obligations: If you participate in the Gig or the Shared Economy, there are certain tax obligations you have to fulfill. Income to you from participating in this activity may be reported to the IRS via Form 1099-MISC, Miscellaneous Income, Form 1099-K, Payment Card and Third Party Network Transactions, Form W-2, Wage and Tax Statement, or some other income statement. 

In order to correctly report the income received, one has to first determine if one is an employee or an independent contractor. More about that in my post here. There are related tax issues here: payments received may be in forms of money, goods, property or services. You may be able to deduct gig expenses if you are an independent contractor or a self-employed individual, subject to the normal tax limitations and rules.
Airbnb and temporary rentals: If you participate with Airbnb and rent your home out, in most cases the rental income must be reported, unless the rental is for less than 15 days in a year. The total expenses should be divided between rental use and personal use, there are other restrictions on the total amount of expenses allowed. 

Etsy & Others: If you sell items on sites like Etsy, or other online platforms that cater to artists selling their own creations, your income is taxable. Etsy and such other sites will report your income through them to the IRS via Form 1099-K of which you will be given a copy. You will be able to deduct certain expenses from your income. You may also have a sales tax obligation if selling on Etsy. If your Etsy store is a hobby then you are restricted from claiming more expenses than income. 

Ebay, Amazon & Other E Stores: The same rules as Etsy sellers apply to sellers on Ebay, Amazon and other e-stores. The Internal Revenue Service has given "Tax Tips for Online Auction Sellers" on its website. Amazon has some stringent seller requirements which is different than that of Ebay. 

Working for Uber, Lyft, TaskRabbit, Doordash and many such service providers fall into the above categories.

Form 1099-K: The Form 1099-K was introduced in the year 2011, and regulations require that US payment processors file a Form 1099-K for sellers who exceed $20,000 in gross sales and the total number of transactions exceed 200. The same regulations also require that the payment processors have the sellers' tax identification numbers on file regardless of sales volume. 

It could be that you have not yet hit the $20,000 sales mark or have had more than 200 transactions. We would still recommend that you keep good accounting records and report income & expenses to the IRS whether you conduct this as a business full time or even if this is just a hobby for you. Sometimes being able to claim a business loss against higher income can turn into a "gain" as it reduces your other income from taxes. 

If you run a gig or two or three, do talk to your Enrolled Agent or tax professional. 

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,



Wednesday, September 21, 2016

Corporations: Changes For 2016

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One of the most positive aspects of my job is to talk to people who come in with their start-up ideas. Whether those are tried & tested ideas or totally out of the box schemes, the excitement at starting something new is always palpable. It's like planning a baby's room or buying a new house. 

I always start off our consultation with the story behind an idea. Isn't it exciting to see these stories being played out, sometimes smoothly, sometimes with a few bumps on the road? So far almost every business we helped set up has continued their journey with us. 

Almost always a business set up begins with entity selection. There are Limited Liability Companies {LLCs}; Corporations {C-Corps}; and Sub Chapter S Corporations {S-Corps} that one can choose to form. 

How the entity is set up determines the taxation of the net profits of the business. The income of LLCs and S-Corps flows through to their owners and is taxed at individual rates. Subject to certain restrictions, owners of pass-through entities can also deduct their share of losses on their personal returns. The income of C Corps is taxed at corporate rates. 

My blog post here talks about LLCs versus S Corporations

In 2015, there were significant changes made to some aspects of S Corp taxation:
  • Literally the big changes in tax law was the Built-In Gains tax, aka the BIG tax. When a C corporation converts to an S corporation or an S corporation acquires assets from a C corporation in a tax-free transaction, it may be subject to a corporate-level “built-in gains” tax in addition to the tax imposed on its shareholders. This tax was 35% paid on profits from sales of assets owned before the switch. Under the new law, only assets sold within five years of conversion are subject to BIG tax. 

  • An S Corp can make donations as if it was an individual.  Generally, allowable deductions cover contributions to religious organizations, governments, non-profit schools and hospitals, war veterans’ groups, and any organization able to accept tax-deductible contributions. These donations have to be made through the S Corp's bank account or can be the S Corp's assets. The 2015 tax law changes permanently extended the provision that shareholders can reduce their stock basis by the cost of the asset donated, not the fair market value. 

The Internal Revenue Service also released the latest 2016 draft Form 1120, which is what we use to file tax returns for Corporations:

  • The Failure to File Penalty has been increased to smaller of the tax due or $205 if the return is over 60 days late. 

  • Beginning in 2016, if the US corporation was formed for purposes of holding directly or indirectly, specified foreign financial assets, the Corporation must attach a disclosure statement to their income tax return for any year in which the aggregate value of these assets were more than $50,000 on the last day of the year or $75,000 at any time of the year. More on specified foreign assets & form 8938 in my blog post here. 

  • There is a new question on the Schedule K asking if the corporation made payments during the year that would require it to file Forms 1042 & 1042-S. In general a withholding agent must file a Form 1042-S to report amounts paid to a foreign persons. 

Do have conversations with your Enrolled Agent or a tax professional if any of the above apply to you. 

Bibliography: Draft Form 2016; Form 1042; Form 1042-S; IRS News Release



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,

Wednesday, August 10, 2016

The New ITIN Rules, PATH Act and My 100th Post!!

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Starting off on my 100th blog post is extremely exciting to say the least! From my first post nearly 3 and half years ago, I think I have come a long way indeed! My stat-counter this morning read 78,670 views and that to me friends is a definite thumbs-up to continue to do what I am doing! What do you think?

Learning the ropes of blogging on the fly, trying ins & outs of social media promotion as I moved along, there have been many pitfalls but it has definitely been an incredible journey! I am so thankful for all the loyal readers and "sharers" and commentators. I also have to thank Tax Connections for all they have done in promoting me and my blog on their fantastic website and to all their readers. 

So my 100th Blog Post will be about Individual Taxpayer Identification Numbers {ITIN}. I picked this topic because this year was a tumultuous year for ITIN Applications not only in our office but for everyone we heard from the buzz in the Tax World. Now that the ITINs are getting approved (or not), the birds are coming home to roost! 

What Are ITINs?: 
ITINs are generally used as an identifying number for those individuals who need to file a US Tax Return or may need to be included on one as a dependent but may not be eligible for a Social Security Number {SSN}. These are in the same nine digit format as an SSN, begin with the number 9 and have fourth & fifth digits in a particular range of numbers. You apply for an ITIN using the Form W-7, Application for IRS Individual Taxpayer Identification Number. 

Prior to the PATH Act, an individual applied for and received an ITIN only once, this remained in effect until the taxpayer became eligible for and obtained an SSN. 

The "Protecting Americans From Tax Hikes" or PATH Act, 2015:
U. S. Code § 6109 governs ITINs. There were some major changes that happened to § 6109 in the PATH Act enacted in 2015. Under these provisions, ITINs issued after 2012 expire on December 31st on the 3rd consecutive year of non-use, and those issued before 2013 will expire on a rolling schedule based on the year of issue. 

On August 4th, 2016, the Internal Revenue Service {IRS} issued instructions and explanations to the changes to § 6109 via Notice 2016-48 and News Release IR-2016-100; under the PATH Act. From now now on, any ITIN that is not used on a federal tax return for three consecutive years, either as the ITIN for the person filing the tax return or as the ITIN of a dependent included on the return, it will expire on December 31st of the 3rd year of consecutive non-use. 

For example: An ITIN is obtained and used on a taxpayer's 2014 tax return in the year 2015. If this individual does not file or is not claimed as a dependent on a tax return for 2016, 2017, and 2018-- the ITIN will expire on 12/31/2018. 

This rule applies to all ITINs regardless of when the ITIN was issued.

What Happens to the ITINs That Have Expired?
No, they do not go to the little ITIN yonder beyond the blue! If an ITIN has expired due to non-use in the last 3 consecutive years (2013, 2014, 2015), they may be renewed anytime starting October 1st, 2016. 

  • Filers have to use the most recent Form W-7 and check the box for "renewal".  
  • Filers do not have to attach this Form W-7 used for renewal to a Tax Return.
  • Filers can submit the Form W-7 along with their Tax Return if they chose to do so. 
  • This renewed ITIN will expire again if not used on Tax Returns for 3 consecutive years. 

What Happens to the ITINs issued before 2013 & Are Still In Use?:
These ITINs get special treatment since they are set to expire based on a multi-year schedule. The IRS will administer the PATH Act by a different method from what is specified in § 6109(i)(3)(C) in order to simplify the renewal process:

  • ITINs with the middle digits 78 or 79 will no longer be in effect starting January 1st, 2017.
  • Starting this summer (of 2016), the IRS will send out a Letter 5821 to ITIN holders with middle digits 78 or 79. 
  • The Letter 5821 will be sent to the most recent address on file with the IRS. 
  • If you get this letter, you will have to submit a Form W-7 with original or certified documents. This can be done only starting October 1st, 2016 with a current Form W-7. This need not be attached to a tax return but you can file it with your next tax return if you so wish. 
  • If there are multiple members in the family who have such ITINs, the IRS will accept a single family submission.
  • For ITINs other than those with middle digits 78 or 79, wait for future guidance from the IRS. 

Other ITIN Stuff:
There is more information in the August 2016 IRS Releases for those ITIN holders who have become eligible for an SSN, or for those who did not renew their ITIN. We will go over those rules in a future blog post. In the meantime, if any of the above applies to you or your dependents, please do contact us or your Enrolled Agent for more information. 

Note: The News Release IR 2014-76 dated June 30,2014 and that I elaborated on in this blog post is now superseded by the above changes. 

Bibliography: § 6109; Notice 2016-48News Release IR-2016-100; Form W-7; Journal of Accountancy

 Do not forget to read my disclaimer here. Please consult an Enrolled Agent for your unique tax needs. More of my contact information is on my website,


Monday, August 1, 2016

US Citizen Living Abroad & The Foreign Housing Exclusion.

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Having moved around a lot growing up, I think I have had the most unique of experiences and have learnt to assimilate wherever I am and make connections with people. But of course, I never saw it as an advantage while I was still little. Having to say good-bye to friends more often than not and starting over in a new place was painful. Even with all the world-wide turmoil these days, travel continues to fascinate me. My husband & I would like to travel a lot when we are retired, which definitely differs from moving house from place to place, and that brings us to today's topic. 

If you are a regular on my blog, you know that US Citizens and Green Card holders no matter where they live, have to pay taxes on their world-wide income. But if they live outside the United States, they may however qualify to exclude some or all amounts from taxes by way of the Foreign Earned Income Exclusion {FEIE} and the Foreign Housing Exclusion. 

To be eligible to claim the foreign housing exclusion, first & foremost the taxpayer must be eligible to claim the FEIE. What that means is that he/ she should have a valid election in place for the year in question. For more information on the FEIE, please see my blog post here 

The foreign housing exclusion applies only to amounts that are considered paid for with employer-provided amounts for services provided in a foreign country. These are mostly wages and salaries, FMV of compensation provided in kind, amounts paid by employer as reimbursement for housing expense etc. 

Foreign Housing Exclusion Calculation: The maximum Foreign Earned Income Exclusion { FEIE } for 2015 was $100,800. The housing amount excludable would be calculated as the total housing expenses paid reduced by the base housing amount, which is 16% of max FEIE. Not only are the total housing costs incurred reduced by the base amount, they cannot exceed 30% of of the max FEIE.  

Notes of Caution: 
  • Not all overseas locations are "foreign countries", for example, U.S. possessions and territories, Antarctica, international air-space or waters. 
  • If a taxpayer is eligible under a tax treaty in the country of bonafide residence for a credit for the amounts excluded under the FEIE or the Foreign Housing Exclusion, he will have to choose one of the two methods to save on taxes--not both! 
  • Foreign earned income from self-employment is NOT eligible for the housing exclusion.

One has to be careful what one includes as housing expenses for the above calculation. Expenses considered "lavish or extravagant under the circumstance" are payments on a mortgage to buy foreign property, deductible interest and taxes paid on such property, cost of domestic labor, television subscriptions, expenses for more than one foreign property, etc. Taking excessive housing expense deduction is a definite audit red flag.

Like I always say, if any of the above apply to you, speak to an Enrolled Agent who specializes in cross-border taxation and/ or expatriation taxation. Most D-I-Y software do not handle these calculations correctly and you may leave a lot of money that you could have rightfully claimed as deductions on the table. 

Bibliography: IRC § 911; Form 2555; IRS Pub 54. 

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

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!

Picture Courtesy: Free Images From
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!

Picture Courtesy: Google Images

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,