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 2016-48; News Release IR-2016-100; Form W-7; Journal of Accountancy

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 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, www.mntaxbiz.com. 

 

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. 

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