SECURE Act BIG Retirement Plan Changes: Major Take-Aways Read More Here!

Pangong Lake, Ladakh, India. Picture Courtesy: pixabay.com

I started blogging about taxes in 2013 because I wanted to share what I knew about taxes. In the process of getting word out about my writing, I have learnt a thing or two about social media and marketing my blog. The engagement with fellow Enrolled Agents and other professionals in the Tax field has been an amazing experience and in the process of educating others about taxes, I have learnt a lot myself both about Social Media marketing, about blogging and my online tax colleagues as well. 

As twenty-nineteen comes to a close, every tax professional agrees that the time since the Tax Cuts and Jobs Act {TCJA} was passed in December 2017 has been a very stressful. There has been a lot of new rules and regulations, both proposed and final to process and understand applications. Just as we thought we had it all ready for the 2020 Tax Season, the Government pushed through a bunch of last minute laws. The most important of those and the one to have many far-reaching consequences was the SECURE Act, an acronym for Setting Every Community Up for Retirement Enhancement Act of 2019. 

The SECURE Act is a major act of retirement legislation to be passed in a decade. There is a LOT in this legislation that will not only effect some taxpayers getting close to the earlier retirement age of 70.5 years immediately but there are also other important provisions in the new Act that will effect taxpayers who plan on leaving their retirement plans to their heirs or those taxpayers who will inherit retirement plans. 

Here is a synopsis of some of the most important provisions from the Act:

• Required Minimum Distribution {RMD} Now At 72: If you have not reached an "RMD Age" of 70.5 by December 31st, 2019 your new required minimum distributions are now due on April 1st of the year after you turn 72. The RMD for any year is the balance in your retirement plan as of December 31st of the previous year divided by the distribution period in the IRS' Uniform Lifetime Table. 

• No Age Limit On Traditional IRA Contributions: Since a lot of Americans continue to live longer and work into their seventies, this Act repeals an earlier provision prohibiting an individual from making contributions into a Traditional IRA after the age of 70.5 years. 

• 529 Education Savings Plan Can Be Used To Pay Off Student Loans: One can use up to $10,000 of their 529 Plan to pay off their student loans. This legislation also expanded the 529 Plans to cover costs associated with registered apprenticeship programs, homeschooling and private elementary, secondary or religious schools.  

• Taxable Non-Tuition Fellowship and Stipend Eligible as Compensation for IRA Contributions: Before the legislation, those who had stipends and non-tuition fellowship payments were not allowed to use those earnings as a basis for contributing to Individual Retirement Accounts. After this legislation, graduate and post-doctoral students can begin using these earnings to put money away in retirement plans.

• Long-time Part-time workers eligible for 401K Plans: Except in the case of collectively bargained plans, the bill will require employers maintaining a 401(k) plan to have a dual eligibility requirement under which an employee must complete either a one year of service requirement (with the 1,000-hour rule) or three consecutive years of service where the employee completes at least 500 hours of service.

• Penalty-Free Distribution Allowed for Birth/ Adoption: Any "qualified birth/ adoption" expenses can be paid for with retirement plan distributions penalty free.

• 401K Safe Harbor Rules Simplified: The legislation simplifies the employer non elective contribution safe harbor rules so that there is more "flexibility, improve employee protection and facilitate plan adoption."

• Increase in Penalty For Failure to File: Penalty for failure to file a return has been increased to the lesser of $400 or 100% of the tax due.

• Stretch IRA Is No LOnger Applicable for Most Taxpayers: The goal of a "Stretch IRA" is really a strategy used by those who have inherited IRA's and do not need the money and want to be able to take as little as possible by way of annual distributions. These "Stretch IRA's" can be used by a beneficiary to fund his/ her own retirement eventually. The premise of this type of strategy is that the Return on Investment on the remaining balance in the plan are greater than the annual distributions. 

        Under the SECURE Act, for beneficiaries who inherit after 2019, an inherited IRA has to be completely drawn out by the 10th year after year of death of the original account holder. {This is called a 10-year Distribution Cap} There are no required minimum distributions for beneficiaries in the 1st 9 years of inheritance. This rule is not applicable to the spouse of the deceased account holder, to a beneficiary who is disabled, is chronically ill, not more than 10 years younger than the account holder or is a minor child. 

The change in the "Stretch IRA" rules will definitely require a rehaul of Estate Plans that are using this strategy. And there is not much time left in order to put this in place! 

•  Increase in Penalty in Failure to File Retirement Plan Returns {Forms 5500}: Per Section 403 of the SECURE Act, 

1. Form 5500 penalty would be modified to $105 per day, not to exceed $50,000.  
2. Failure to file a registration statement would incur a penalty of $2 per participant per day, not to exceed $10,000.  
3. Failure to file a required notification of change would result in a penalty of $2 per day, not to exceed $5,000 for any failure.
4. Failure to provide a required withholding notice results in a penalty of $100 for each failure, not to exceed $50,000 for all failures during any calendar year.

If any of the above applies to you and you find all this very last minute and overwhelming, I would not blame you at all. This would be a great time for you to contact both your Enrolled Agent and your Financial Planner and if you do not work with one or the other, it would be the perfect time to get one or both these professionals into your lives. 

If you need an Enrolled Agent with extensive experience in retirement matters, please contact us at www.mntaxbiz.com. 

Bibligraphy: The SECURE Act; Jeff Levine @CPAPlanner In-Depth Article 

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I am an Enrolled Agent and owner of MN Tax and Business Services PLLC (www.mntaxbiz.com), based in the Metro Detroit area in Michigan. The firm provides Tax Preparation, Planning services to Individuals, Small Businesses, Trusts and Non-Profit Organizations. Get my latest posts by subscribing to my blog. 

You can also find me tweeting @ManasaSogNadig where I have been @Forbes Top 100 Tax Tweeters for 2018 and 2019. 

Read my disclaimer here

Are You Ready For 2020? Tax Filing Season Is Coming!

 

Picture Courtesy: pixabay.com Angkor Wat

How was 2019? Did it go well for you? I have been talking to my colleagues in the tax sphere, opinions are all over the place. The Tax Reform roll-out kept most of us either waiting on the proposed regulations or trying to wrap our heads around the final regulations that kept coming through in bits and starts from the Internal Revenue Service. Kudos to the people who work there I must say, in spite of all the staffing issues, they were doing their best to keep the regs rolling out. 

Well, the proverbial Father Time does not wait for anyone,and here we are, final regs and proposed regs tucked under our elbows, getting ready for 2020! So, here are some steps my dear readers I thought would help you get your stuff together and be as ready as possible for Tax Season 2020. 

A. Adjust Your Withholding: If you are a wage earner and have been working with the same employer for the past few years, I would highly recommend doing a "payroll check-up" so you can make sure you are having enough taken out in taxes. A lot of taxpayers were in for a sticker shock after payroll withholdings changed for 2018 considering a lot of deductions were either removed or changed and exemptions were completely phased-out. Ask your tax preparer to help you with this or you could do this on your own on the IRS Website Tax Withholding Estimator. 

B. Adjust Your Employer Retirement Plan Contribution: If you have an Employer Provided Retirement Plan like a 401K or a 403b, you can stash away up to $19,000 (for 2019) and $ 6,000 in catch-up contributions for those over 50 years of age. If you have cash to spare, make sure you are maximizing these contributions before the end of the year. 

C. Check Your Eligibility For Individual Retirement Account {IRA} Contributions: In addition to your employer provided retirement accounts, you may be eligible to contribute in to an IRA. These contributions can be made up to the tax filing deadline or April 15th. You can make a maximum contribution of $ 6,000 (for 2019) and $ 1,000 in catch-up contributions for those over 50 years of age. Talk to your tax preparer to check your eligibility. 

D. Estimating Annual Income For Small and Medium Business Owners: If you are a business owner, it is important to calculate and pay your taxes every quarter: April 15th, June 15th, September 15th and December 31st. The most ideal and safe way to set this up is to open an Electronic Federal Tax Payment System Account on eftps.gov. Payments can also be made through direct bank debit or with a credit card via irs.gov/payments. Depending on your entity structure, size and nature of your business, you may be able to schedule these payments ahead of time. Many States also have a similar system. Do not forget your state taxes.

E. Making Retirement Plan Contributions For Business Owners: You can contribute into a Solo 401K/ SEP/ SIMPLE IRA. You can make both "Employer" and "Employee" contributions. Funding options on each of these retirement plans are different, and so are set up requirements. I would highly recommend you work with an Enrolled Agent to determine eligibility and contribution limits. 

F. Review Changes To Rental Income and Safe Harbor Requirements: The Internal Revenue Service issued clarifications in September 2019 regarding treating your rentals as a "trade or business" and a safe harbor to claim a deduction under §199A. Owners of rental properties need to comply with certain requirements to be able to claim their rentals as a "trade or business" and avail of a deduction under §199A. These requirements can be found here.

G. Renew Your Individual Tax Identification Number {ITIN}: If you or someone in your family has been issued an ITIN, be aware that the ITINs now expire. If your ITIN or someone in your family has an ITIN that is going to expire in 2019, you need to renew it unless you are now eligible to obtain a Social Security Number.Here are some FAQ's issued by the IRS. 

The key to a successful tax season, complete and proper filing of your taxes is to have all your records ready. We undertake end-of-year tax planning for our clients so we can avoid surprises at tax time! Please contact us or your trusted tax professional and get ready for 2020. 

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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.

"Accidental Americans" Get Relief! New Announcement from the IRS!!

Image from Pixabay

Stop the presses, hold the phones, drop everything you are doing! The Internal Revenue Service announced "Relief Procedures for Certain Former Citizens" on September 6th, 2019. If you are an "Accidental American" and planning on renouncing your U.S. Citizenship, you should be reading this. 

Let's dig back a bit and refresh our memories: The United States Constitution provides through the 14th Amendment that "all persons born or naturalized in the United States" are citizens of the USA. A person born abroad to a U.S. citizen parent or parents acquires U.S. citizenship at birth if the parent or parents meet conditions as specified in § 301 and following sections of the U.S. Immigration and Nationality Act. 

Those who have acquired U.S. citizenship in such a manner may not be aware of the obligations and consequences of this status. As you my dear readers already know from my blog, that by law, U.S. citizens regardless of where they live have to report and possibly pay tax on their world-wide income to the Internal Revenue Service. 

With the passage of the FATCA {Foreign Account Tax Compliance Act} in 2010, now foreign financial institutions are required to know if any of their customers are U.S citizens and if that is true, the customer's information is to be reported to the United States. The customer also needs to provide their Social Security Number to the foreign bank where they have their accounts. 

A U.S. Citizen may relinquish his or her citizenship by paying a fee and taking an oath of renunciation before a US diplomatic or consular officer. They also need to certify that they have fulfilled their federal tax obligations for the year of expatriation and five tax years prior to this event. The relinquishment is detailed under IRC 877A. Those who are deemed to be "Covered Expatriates" may continue to have US tax obligations even after they renounce their citizenship. 


What Are the Relief Procedures: The Internal Revenue Service is providing relief to citizens who meet certain criteria by providing an alternative means to satisfy tax compliance certification process. If the citizens qualify, then they will not be "Covered Expatriates" under IRC 877A and they will not be liable to unpaid taxes and penalties for these years and any previous years.

Who Are These Procedures Available To?: These relief procedures come with the following caveats, which the IRS plans on implementing strictly-

1. Citizens who expatriate after March 18th, 2010 can use these relief procedures. 
2. One should have no filing history as a US Citizen or resident. 
3. The citizens should have a net worth of less than $2 million at the time of expatriation and submitting. 
4. Their aggregate tax liability for the year of expatriation and five prior years should be $25,000 or less. 
5. You have to agree to complete and submit with your submission for renunciation all required federal tax returns for 6 years at issue including all schedules and information returns. The IRS recommends filing your FBAR's as well.
6. Their failure to file required tax returns/ gift tax returns/ and other information returns (including Form 8938) and FBAR's or FinCEN Form 114 and pay taxes and penalties for the years under question was due to non-wilful conduct. 
7. This action of renouncing a US citizenship is irrevocable. 

The IRS does not have a specific termination date at this time for these relief procedures. The IRS also plans on letting the applicant know that the submission was received and was complete. The IRS may take upto 2 months to turn this around. 

Renouncing your U.S. citizenship is a BIG step. If you are planning on renouncing your U.S. citizenship, we highly recommend that you meet with a knowledgeable Enrolled Agent or an attorney who specializes in this area. 

Bibliography: Expatriation Tax; IRS Announcement. 

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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.
 

 

 

A Reprieve From Revocation of Passport When You Owe Taxes!

 

Image from Pixabay: Munich, Germany

I have been fortunate the past couple of years to have been able to travel. I find that as I check off places on my bucket list, I keep adding on to it! I have been bitten by the travel bug! We recently went to Munich, Germany and climbed 14 stories to the top of The Kirche of St. Peter. The climb through the narrow stairway was somewhat crowded and tight at times but it was absolutely worth it! The views at the top were breath-taking. 

Of course when you travel, you need your passport. What happens when you owe taxes to the Government, can they revoke your passport? If you remember, back in 2015, there was a Law passed called the FAST Act. The Act was mostly about transportation but they got in a clause that if you owed more than $50,000 in taxes, the Government could revoke your existing passport or deny you a new passport. 

Under Section 32101 of the FAST Act, if the IRS certifies a taxpayer as having a 'seriously delinquent tax debt", which is: (1) Owing $52,000 or more in taxes and (2) Meeting certain other requirements under IRC §7345(b), the State Department must deny the taxpayer's original or renewal passport application and may revoke or limit an existing passport.

 Taxpayer Advocate Services {TAS} had been advocating on behalf of those who had been working with them before being thus certified by the IRS. TAS wanted the IRS to exclude from their lists those taxpayers who were working to determine their tax liability; or were seeking penalty abatements based on reasonable cause; or were seeking audit reconsideration. TAS felt that the taxpayers would be pressured into agreements with the IRS to avoid certification. 

The IRS recently agreed to temporarily exclude taxpayers with open TAS cases from certification and to reverse certifications for TAS who were certified before coming to the TAS. The acting National Taxpayer Advocate, Bridget T. Roberts recently said in her blog that she thinks "this is a change in the right direction that protects taxpayers who are working with TAS to resolve their liabilities from the severe consequences of passport denials and consequences". 

Obviously, the TAS wants taxpayers to work with them in good faith or they cannot recommend this exclusion.  

The Internal Revenue Service is going to be hard pressed to put the certification process into action. According to Ms. Roberts' blog post on the IRS' website, the IRS recently implemented a program to recommend revocation of passports in certain cases, however the standards in the Internal Revenue Manual for making these determinations are vague and the IRS may come across as making arbitrary decisions. Also, the technology at the disposal of the IRS is apparently preventing them from sending out certification and decertification notices. 

What does this mean for you if you have tax debts that are $52,000 or more? If you would like to arrange for a payment plan with the Internal Revenue Service or request penalty abatement for reasonable cause, work with the Taxpayer Advocate Service. How does one get in touch with the Taxpayer Advocate Service? Well, get in touch with a Tax Professional/ Enrolled Agent who knows how, find out if you qualify and take advantage of the reprieve offered by the IRS thanks to the Taxpayer Advocate Service!

Bibliography: Internal Revenue Code IRS §7345 (b); FAST Act; IRS News.

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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.
 

Expiring ITINs? Here Is What You Should Know!

Metheora, Greece (Image via Pixabay)

Hope summer is going well for you in the Northern Hemisphere. Out here in the United States Mid-West region, we are experiencing a heat-wave this week and have been asked to take proper precautions and stay indoors. Perfect time to work on a blog-post I think, would you agree? 

Many come to the United States on various work Visas and eventually bring their spouse and children to join them. Now these family members may not qualify for Social Security Numbers {SSN} and they have to apply for an Individual Taxpayer Identification Number {ITIN} so the member of the family here on the work visa and consequentially an SSN can claim dependency credits and also be able to file jointly on their U.S. tax return with their spouse if conditions have been met and they qualify.

The 2017 Tax Cuts and Jobs Act now requires all applicants for Employer Identification Numbers to have either a Social Security Number or an ITIN. Non-resident individuals doing business in the US as a partner in a US partnership also require an ITIN to file their US tax returns and to be able to claim back taxes paid on their behalf by the US partnership.

An ITIN is a very important nine-digit number starting with a 9, therefore an individual who has an ITIN needs to be aware of the rules and regulations governing it. The last big change that was made to the ITIN Rules was back in August of 2016 with the PATH Act. The PATH Act ITIN provisions were detailed in Notice 2016-48 here. 

So what's new on the ITIN front for 2019? 

All ITIN's not used on a federal income tax return at least once for tax years 2016, 2017 or 2018, will expire on December 2019. Additionally, all ITIN's with middle digits 83, 84, 85, 86 or 87 will expire at the end of 2019. 

The Internal Revenue Service will send out a CP48 notice that you need to renew your ITIN if you have previously filed a tax return with an ITIN with the above middle digits but not renewed it. 

What to do if you or a family member has an ITIN with middle digits 83, 84, 85, 86 or 87? You can immediately take action to renew your ITIN if you or your family member has to file a tax return for 2019 in 2020. You do not have to wait to receive the CP48 from the IRS. If you happen to receive the notice after you have initiated the renewal, the IRS asks that you ignore the notice. 

Currently Expired ITINs: 

                     Tax Year                                                           Middle Digits

                     2016                                                                  78 and 79
                     2017                                                               70, 71, 72 and 80
                     2018                                                          73, 74, 75, 76, 77, 81 and 82

If you have an ITIN with the above middle digits, and expect to have a filing requirement in 2020, you can renew your ITIN at anytime. 

ITIN used only for informational purposes: ITINs used by third-parties to report information to the IRS but which are not used to file a tax return need not be renewed. But if the person with this ITIN needs to file a tax return, the ITIN needs to be renewed.  

Spouses and Dependents With Expired ITINs: Spouses or dependents who reside outside the US must renew their ITIN only when filing an individual tax return or when they are claimed on someone else's tax return as an allowable tax-benefit. Hence, the Form W-7 will have to be attached to the federal tax return at the time of filing.

Process To Renew ITIN: Use one of the following methods.

• Mail Form W-7 long with original identification documents or copies certified by the agency issuing them to the IRS address in the form instructions. The IRS will review and send all identification documents within 60 days. OR
• Use one of the many Certified Acceptance Agents (CAAs) who are authorized by the IRS to apply for an ITIN. CAAs can certify original documents including birth certificates for primary taxpayers, secondary taxpayers and dependents. This can save the applicant from the rather risky need to send original documents to the IRS. There are many CAAs located around the world. Information can be found on the IRS' website. OR
•  Call and make an appointment at a designated IRS Taxpayer Assistance Center located nearest you.

Note: The IRS will not accept passports without a date of entry into the US as a stand-alone identification document for a dependent from a country other than Canada or Mexico or dependents of military members overseas. Additional documents can be provided along with the passport to prove US residency such as US medical records or US school records. 

If you have more questions regarding applying for or renewing your ITIN, please contact our office. We do not recommend doing this on your own without a tax professioal's guidance. 

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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. 

 

 
 

A Death Knell On the Offshore Voluntary Disclosure Program: Part II

Image by Paulina White at pixabay.com

Twenty nineteen in the Nadig household was to be the year of the great expedition to Machu Pichu. Our plans had to be shelved unfortunately. Who knew coordinating schedules for two kids in college would be more complicated than lugging diaper bags and strollers around airports! So here we are, enjoying a quieter than expected spring with some mental calisthenics thrown in figuring out the new OVDP rules to keep myself busy!  

It has been exactly a year to the day Part I of this post went up. The Internal Revenue Service decided to put an end to the Offshore Voluntary Disclosure Program {aka OVDP} on September 28th, 2018. That was just a precursor of the tumultuous changes to come at the Internal Revenue Service. 

In November of 2018, the IRS released a Memorandum with updated procedures regarding voluntary disclosure both domestic and foreign submitted to them after September 28th, 2019. Notwithstanding the closure date, the IRS has the discretion to apply the new procedures to domestic voluntary disclosures received on or before September 28th, 2018. 

Procedures Under the New OVDP: 

1.   All taxpayers, whether offshore or domestic need to submit a preclearance request on Form 14457 for screening to Criminal Investigation {CI} to determine eligibility. This can be requested via Fax or Mail to the IRS Criminal Investigation unit in Philadelphia. 

2. As soon as the CI grants preclearance, the taxpayer must promptly submit all non-disclosed information for voluntary disclosure to CI along with a narrative regarding facts and circumstances for past non-compliance on Form 14457. Once CI has accepted a preliminary preclearance, the taxpayer will be notified via a letter and the CI will then forward the information to LB&I Austin. CI will not process tax returns or payments.  

3. LB&I Austin will establish the most recent tax year covered by the voluntary disclosure and route the case to the appropriate Business Division and Exam function for civil examination. The taxpayer can remit payment to the LB&I before the case is assigned. The IRS will not require taxpayers to provide additional documents to LB&I Austin. 

4. Examiners at this stage will determine proper tax liabilities and applicable penalties. Taxpayers are expected to be prompt and cooperative. The IRS expects that all taxes, interest and penalties will be paid by the taxpayer for the disclosure period. Examiners may request CI to revoke preclearance for non-cooperation. 

5. The Disclosure Period is now six years. The examiners has the discretion to expand the period to include all non-compliant years. 

6.  Penalty for underpayment of tax is now 75 percent (75%). This civil penalty for fraud under §'s 6663 and 6651(f) will be assessed to the tax year in the disclosure period with the highest tax liability. The Memorandum states "limited circumstances" under which these penalties can be expanded to other years in the disclosure period. 

7. There will be willful FBAR penalties imposed on taxpayers. This penalty in most cases will be 50 percent (50%) of the highest aggregate balance of all unreported balances during the disclosure period. This penalty is discretionary and an examiner may recommend a higher or lower penalty not exceeding 100 percent (100%) of the highest aggregate balance. The taxpayer may request that non-willful penalties be imposed if they can provide convincing evidence. We do not know at this time what the success rate has been on taxpayers' requests for non-willful penalties. 

8. Penalties to file other information returns will not be imposed automatically. This may be resolved by agreement with the taxpayer. The examiners have the discretion to impose these penalties if they deem necessary. 

9. The taxpayer has the right to go to Appeals if they are unable to reach an agreement with the IRS. At this time there is no guidance what the taxpayer's recourse is if they are unable to reach an agreement with the examiner. Experts weighing in on this expect that the taxpayers will retain protection from criminal liability as under the old OVDP. 

10. Once an examination is concluded, we assume there will be a closing agreement via a Form 906, and there is finality for the disclosing taxpayer on future prosecution on this income. 

When the old OVDP was terminated, many tax professionals such as myself were wondering what the new rules would entail. These procedures have somewhat eased my fears. Taxpayers who do not fit into the requirements for Streamlined Filing Compliance Procedures or Delinquent FBAR Submission Procedures or Delinquent International Information Returns still have another option to bring their undisclosed foreign bank balances and income into US Tax Compliance. 

My biggest concern with the new procedures is that unlike under the old OVDP, we have no way of predicting what the final cost of voluntarily disclosing non-compliant accounts. Under the old OVDP, the size and number of penalties were known. This helped the taxpayer to set aside the cost of going into the program. Under the new procedures, the IRS has large discretionary powers for assessing penalties. 

As always I advise you to consult experienced Tax professionals to calculate their exposure and determine if this is a viable or appropriate option for you. Although more onerous than the previous one, the new OVDP is still the best option for you to minimize criminal exposure.   

Bibliography: Memorandum  LB&I-09-1118-014; LB&I AUSTIN stands for Large Business & International Unit in Austin; IRM 9.5.11.9; IRS FAQ's On Closing 2014 OVDP . 

Plans To Retire Abroad? Here's What You Need To Know!

Picture Courtesy: www.pixabay.com Bilbao, Spain Train Station

Twenty Eighteen was a tumultuous year my friends and unfortunately my blog posting went on hiatus. I have a perfectly good excuse I must say, it was my big FIVE-OH birthday last year!! Yes, yes, I did hit that number in spite of my various attempts to stop Father Time! Besides starting a copious collection of AARP invitations promising me travel bags and blue-tooth speakers if I joined their ranks, I traveled a lot in 2018. One trip over early Fall was to Bilbao, Spain. We took the train from Madrid to Bilbao, the first thing to greet us at the Train Station was the stained glass facade (in the picture above), I was in Basque heaven after that, I was loathe to leave but work beckoned back home after a lovely week of the famous Bilbao hospitality. That got me thinking...how wonderful it would be to retire abroad! Wouldn't it? 

We have pre- and post-immigration planning services available for clients planning to move for work or retire outside the United States. Many move because they believe their retirement dollars stretch further, some move for the warmer climates and many move back to their birth countries to be closer to family. Immigration planning helps the taxpayer understand the tax implications of moving abroad and planning for it. 

1. Continue Filing Taxes in the US: First thing to remember about retiring overseas that the United States has a Citizenship-Based-Taxation regime or CBT, so your US tax filing obligations do not stop just because you moved abroad. The income to be declared on your US tax return should include your world-wide income. Your filing deadline maybe June 15th or April 15th depending on the category on income you have. All foreign bank accounts with highest balances over $10,000 should also be declared via Form 114. More about that in my blog post here. 

2. Retirement Income From the U.S: You might have various sources of income from the United States including but not restricted to Rental Income, Interest, Dividends, Pensions, IRA Distributions etc. You will have to make arrangements so you will have access to your income even though you are not a resident of the United States. These funds will have to be repatriated to your country of residence. If you have reached qualifying age, you can also apply for and receive Social Security Benefits. More information about receiving Social Security benefits while living abroad is on the SSA website, it is a tool that helps you figure out what your eligibility is. 

3. Getting Back To Work While Abroad: Let's say you are one of those lucky people who gets a second shot at working after you move abroad, and you are paid a salary. You may be eligible for the Foreign Earned Income Exclusion {FEIE}. There is a primer on this topic here on my blog. You may be able to exclude some or all of your foreign earned income from being taxed by the U.S. The 2019 FEIE amount is $105,900 which means you will be able to exclude the first $105,900 from being taxed in the U.S. 

4. Tax Treaty Provisions Or Double Tax Avoidance Agreements: The United States has entered into Tax Treaties with many countries around the world. This means that if you live in a country which has a tax treaty with the U.S. you may be able to take advantage of it's provisions and avoid double taxation by both countries on the same income. Under these treaty provisions, you may be able to take credit for taxes paid in either country. Some countries have Totalization Agreements with the United States and that helps you to also avoid taxation of your Social Security benefits earned in either country. 

5. Filing State Taxes: Sometimes, the U.S. State where you had residence before you moved abroad may still require you to file tax returns. This is especially true if you have rental properties in certain states in the U.S. Many U.S. states do not recognize Tax Treaties or offer foreign tax credit. You may have to establish residence in a non-taxing U.S. state tax before moving abroad. 

6. Some Challenges Moving Abroad: From the many, many online forums for Expat Americans and many expat clients, we have learnt that the Foreign Accounts Tax Compliance Act {FATCA, more in my blog post here} has caused them a lot of headaches in conducting their business with financial institutions in their countries of residence. Many financial institutions, brokerage firms, and retirement fund administrators in the United States do not allow online access from outside the country. This double whammy for a lot of people who move abroad is definitely a huge challenge. Navigating these hurdles requires knowledgeable support in the United States while you live abroad.  

7. Relinquishing Your U.S. Citizenship or Surrendering Your Green Card: The challenges in dealing with one's financial life in 2 countries causes many expats to take drastic steps to relinquish their citizenship or surrender their Green Cards. More details in my blog post here. This is indeed a huge step and one must not to try to do this on their own. 

Moving abroad is a huge endeavor and one must make sure they have worked out a plan with their tax adviser before they undertake this. Till then happy travelling folks, may you satisfy your wanderlust and find a dream retirement home if you are looking!  


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Consult with a Circular 230 Tax Professional for your unique tax needs. Please read my disclaimer here. If you have any questions regarding this issue or other tax matters, all of my contact information is on my website, www.mntaxbiz.com. 

Interesting Court Cases: When Your Friend Tells You Not To File an FBAR!

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Clients tell me many times about how they heard about disclosing their foreign bank accounts because their friends were doing it. It is funny when I am asked why should they disclose their foreign bank accounts when their friends are not doing that. I am reminded of those times when as kids we would ask our parents for permission to something mundane, and be subjected to an inquisition! The fun is because I get to say something most Indian kids grow up listening to their mom say it many times when , "Would you go jump in a well if your friend did it?" The angst is lost in translation but you get me, don't you? 

Something along similar lines must have happened with the Horowitzes. Peter and Susan Horowitz were US Citizens living in Saudi Arabia between years 1984 to 2001 and they opened a bank account in Switzerland with UBS. The Horowitz's never closed the account on their return to the US. By 2008, the account had grown to $2 million. Towards the end of 2008, Peter closed the account and tried to open a joint account with his wife at a bank named Finter. But the bank did not add her on because she was not present, hence the account remained in Peter's name only till 2009 when Susan traveled to Switzerland and her name was added to it. 

The Horowitzes' tax returns were filed using tax summaries sent to their US tax preparers. Peter never asked his tax preparers if he needed to disclose this bank account. Their tax returns were filed every year with the questions on Schedule B asking if they have foreign bank accounts being answered with a "No".

A long story short, the IRS held that willfulness penalty applied with respect to both taxpayers for 2007 and with respect to Peter for 2008. 

The Horowitzes testified that they had conversations with other expatriates living in the United States and they believed that income earned in Saudi Arabia was only subject to taxes in Saudi Arabia. Peter said he did not believe he had FBAR filing requirements for 2007 and 2008, Susan said she did not know what an FBAR was. The tax accountants never asked them if they had accounts overseas nor did they explain the Schedule B questions regarding the foreign account questions. The Horowitzes argued that their friends told them they did not need to pay taxes on interest in their foreign accounts. 

The Court argued that it did not have any information from which the court could assess whether it was reasonable for them to accept what their friends said as legally correct. Their friends' views did not override the clear instructions on Schedule B. It was also deemed that the very fact that the Horowitzes were having conversations with their friends about the taxability of interest on their foreign accounts meant that they were aware about their compliance needs. They should have had the same conversation with their accountants!  The Court inferred based on these facts willful blindness could be inferred. 

Moral of the story: If you have foreign bank accounts, please have conversations with your tax professionals on HOW TO disclose the accounts not conversations with your friends on HOW NOT TO. If your tax professionals are not aware of your compliance needs, find an Enrolled Agent on the NAEA Find a Tax Expert Directory who is an expert at expatriate taxation. And definitely do not try to do this yourself. 

Bibliography: Horowitz, (DC MD 1/18/2019) 123 AFTR 2d ¶2019-362

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Consult with a Circular 230 Tax Professional for your unique tax needs. Please read my disclaimer here. If you have any questions regarding this issue or other tax matters, all of my contact information is on my website, www.mntaxbiz.com. 

    

What's New on the 2018 Form 1040NR: Small Changes, Big Impact!

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Do train stations make you wistful? My husband and I lived on the East Coast when we first moved to the US and sometimes took the train from Baltimore to DC. Passing the town of Riverdale, MD got us all excited because like every other Indian teenager of our generation, we had grown up on a rather unhealthy dose of Archie comics! 

Well, it was around this time that I discovered Tax Law and found it quite fascinating. I started to prepare our own taxes which involved Form 1040NR's, India-US Treaty knowledge and the rest is rather choppy history which is reserved for another post because today we need to talk to about this 2018 Form 1040NR. 

For the longest time ever this foreign cousin of the good ol' Form 1040 had a rather mundane existence, nothing usually changed on it. Tax geeks got all excited when the Form 1040NR finally entered the digital age in 2017, we had hardly settled down from that when the BIG 2017 Tax Reform happened and everything pretty much is different now. 

Just so we are clear, the Form itself has not changed much but if you have to file the NR, your bottom-line will change due to the following: 

1. No Personal Exemption: First off, the personal exemption has been removed, so that nice $4,050 that reduced your taxable income? Not available to you anymore.If you file a Form 1040NR, your taxable income will be higher. 

2. Standard Deduction is Higher: Now this is the twist in the Treaty tale I was talking about earlier, the higher standard deduction will only help students and researchers from India. Why? Because they are the only non-resident aliens who are allowed to claim the standard deduction on their Form 1040NR per the India-US Tax Treaty. Students/ student-trainees/ researchers from India on an F1/ J1 visa will be able to lower their taxable income. All others see #3. 

3. Itemized Deductions Have Changed: The great Mahatma Gandhi marched to protest the Salt Tax imposed by the British Empire, this was a turning point in the Indian struggle for independence from the British. There was no such momentum with the SALT cap protest by the people in the US and many states. SALT here my dear readers stands for "State And Local Taxes". Those non-resident aliens who cannot take the standard deduction ( See #2), had the opportunity to write off state and local taxes they paid as part of the Itemized Deductions on Schedule A, that is now capped at $10,000. 

I have not seen many foreign students or researchers earn a lot of money (been there, done that), so the above may be non-consequential to most. However, adding salt to injury (too much?), Miscellaneous Deductions have been removed from Schedule A as well.  

Any personal casualty loss or loss from theft is also no longer allowed unless they occurred in federally declared disaster areas. 

Some solace: These disallowances are temporary through 2025. 

4. Moving Expense Cannot Be Deducted Any Longer: So you are a non-resident alien who moved to the United States in connection with your employment or are self-employed? You can no longer deduct your moving expenses to the US. You can now deduct your moving expenses only if you are a member of the Armed Forces. 

The 2017 Tax Reform has many changes and many forms and instructions are still work-in-progress. The Instructions to the 2018 Form 1040NR at the time of posting still has a draft watermark. Do not attempt to do this by yourself, hire a tax professional to help you navigate the Law. 

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Consult with a Circular 230 Tax Professional for your unique needs and make sure your questions are answered. Please read my disclaimer here. If you have any questions regarding this issue or other tax matters, all of my contact information is on my website, www.mntaxbiz.com.