Pre-Immigration Tax Planning and Why We Need It?

The Sogal's: On the banks of the Tunga river, South India. 

As part of our practice we work with those who are planning to immigrate to the United States or those who are already in the United States on a work-visa and are planning on applying for permanent residency. 

This could not have hit closer home when my parents finally decided that it was time to listen to their children, my brother and I, and make the decision to come live with us in the United States. My father is a gentle, humble soul who with my mother lived a quiet retired life in a small but bustling town in South India. He is a retired Civil Engineer and has played big roles in some of the biggest oil and gas projects in India-you wouldn't know if you met him. He likes to go by "Children's Author" these days and has published 3 books already, translating folk tales from all over the world to our mother tongue, Kannada. My mother rules the family with her love for routine, her classical Carnatic music and delicious cooking. My father is an avid reader of my blog and has been asking me why I have not been at it since my last post in April! So this one is dedicated to my parents, who landed just before the lock-down (thank god!) and have been doing great, adjusting to a different routine in the United States! 

Pre-immigration tax planning is imperative to minimize impact of US taxes on your world-wide income, your foreign assets, financial accounts and investments. Planning for such a tax impact should start as soon as a foreign national begins to consider moving to the United States or plans on otherwise becoming a US person. 

If you are a regular reader of my blog, you already know that the US taxation is a CBT system. If you are a US person for tax purposes, your "worldwide" income is considered subject to US taxation rules and regulations largely grouped under FATCA. Compliance with these rules and regulations require reporting your foreign accounts, assets, investments and foreign income on certain forms known as "International Information Forms". The penalties and fines for non-compliance in filing these forms is substantive, it could even wipe out your entire bank balance!  

This is why anyone with plans on becoming a US person or permanent resident AKA Green Card holder, should be aware of these consequences before their plans are finalized and their tax picture changes permanently. 

US Persons And The Substantial Presence Test {SPT}: 

In a previous blog post, we examined how to determine if you were a US person or not for US tax purposes here. Your visa has to specifically state that the days in the US will not be counted for the SPT. If it does not, your stay will eventually mean that your world-wide income is reportable in the United States on a regular Form 1040 (instead of the Form 1040-NR). Hence a visitor on a B1/B2 visa or someone on an EB-5 Investment Visa could find that their world-wide income is subject to US tax reporting. 

Quick snap-shot-- you maybe considered a US person if you pass the SPT as follows: 

You will be considered a U.S. resident for tax purposes if you meet the substantial presence test for the calendar year. {More about substantial presence on my post here}

To meet this test, you must be physically present in the U.S. on at least: 

1. 31 days during the calendar year and

2. 183 days during the 3 year period that includes the current year and the previous 2 years, counting-

      a. All the days in the current year and

      b. 1/3 of the days you were present in 2019, and

      c. 1/6 of the days you were present in 2018.

Consequences of Getting a Green Card/ Legal Permanent Residency:

As a Green Card holder, you will be taxed on your world-wide income as if you were a US Citizen. This is true even if you do not live in the United States, maintain all your assets outside and your income is sourced outside of the United States. If you held a Green Card for at least eight of the last fifteen years, you will be considered a "Covered Expatriate".  

What happens if you are considered a Covered Expatriate?

• Covered Expatriates pay tax when they renounce their Green Card or Citizenship. 
• Covered Expatriates cannot make tax-free gifts or bequests to U.S. persons. 
• They may not be allowed to re-enter the United States, thanks to the Reed Amendment. 
• A Covered Expatriate need not have resided in the US for any of the eight years to be considered one. 

Remember, your Green Card is not relinquished just because it has expired. If I had a dollar for every time I see this mistake on a client's return, I would be a very rich woman! 

Plan for all this before applying for a Green Card or becoming a US person and make your non-taxable gifts and transfer assets if need be, before taking this step. Have a strategy in place!

What Are International Information Forms?

Among the forms required for US persons with foreign financial assets, the two most commonly known are Form 8938 (under FATCA) and the FinCEN Form 114 AKA the FBAR. These forms require that you disclose the highest balances in your foreign financial accounts for the calendar year. 

You need to also disclose if you have or are a part of a foreign trust/ receive gifts or inheritances from non-US citizens (Form 3520 and Form 3520-A), foreign partnership (Form 8865),foreign corporation (Form 5471) and own foreign mutual funds or other passive investments (Form 8621). 

If you have not planned for these disclosures, catching up with the filing is a nightmare in itself!  

If you are planning on immigrating to the United States, make sure you are consulting with tax professionals in the country where you live right now and coordinating it with US tax professionals who are experts in the field. Contact us if you need more advice (like my parents did!).

---

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. 

Covid-19 Tax Deadlines, Updates, Stimulus Checks: All You Need To Know.

Washington DC Cherry Blossom

The past one month has seemed like an eternity. The deluge of information from the Internal Revenue Service and the Government has been relentless and I hope that this blog post helps you, my dear reader, to navigate the flood. So brace yourselves, this is going to be a long read and there is no TL; DR version unfortunately!

The Internal Revenue Service on March 20th announced a "Coronavirus Tax Relief" and extended your tax deadline from April 15th to July 15th 2020. This news was updated to include all deadlines that fell between April 15th, 2020 and July 15th, 2020 to be now July 15th, 2020. This relief was extended to Estates, Gift Tax and Non-Profits as well.

 Let's take a quick look at all the deadlines: 

Estimates: Both your 1st and 2nd Quarter estimates are now due on July 15th. These can be combined and paid on the same day without fear of interest and penalties. Some states however do not follow the same timeline for estimates--make sure you know what that is in your state of residence. 

Taxpayer Living Abroad: If you were a taxpayer living abroad for 2019, your original US tax deadline would have been June 15th. Your return is also now due July 15th, 2020. 

Foreign Information Returns/ Forms: The Internal Revenue Service provided clarification that all foreign income information forms such as Forms 3520, 3520-A, 5471, 5472, 8938, 8858, 8825 etc are all now due with your tax return on July 15th, 2020. 

Foreign Bank Account Regulation Forms {aka FBAR}: The deadlines were NOT changed from April 15th, 2020. However there is an automatic extension to file these until October 15th. My firm's practice is to file an extension anyway for those who file FBAR's and are unable to file their return by April 15th. 

Extension Due Date: Extensions can be filed for those who cannot file their returns by July 15th, 2020. This extended due date still remains October 15th, 2020. 

S Corporations and Partnerships which were due on March 16th, 2020 did not get any reprieve from filing. Those who could not file by March 16th, 2020 should have filed an extension to extend their filing to September 15th, 2020 which is the same as every year. 

The Congress' Stimulus Check was put into in to action quite quickly by the Internal Revenue Service I must say and bank deposits started to go out April 15th. 

Here is what we know so far regarding the stimulus check payments {Or if we do not know we in the tax community have deduced from trends so far}: 

Non-Filers: If you did not need to file a tax return in 2018 or 2019 because your income was below the filing threshold, you can go to this link {Non-Filer Link} and fill out your bank information, so the IRS can deposit your Stimulus Check. Be sure to read the FAQ's on this website and see if you qualify to enter your information here. 

Those Who Have Filed their 2018/ 2019 Tax Return: This is where the major chunk of the taxpayers fall and where I have had the most questions. 

It is not known what "cut-off" date the IRS picked to select your 2018 tax return over your 2019 tax return (or vice-versa) if you have filed both years, in order to calculate your stimulus payment. 

If you have not received your stimulus payment as yet, you can check on the status of your payment, at this link. {Get My Payment}.

This link can also be used to update your bank information with the IRS in the instances as detailed next when the IRS may not have your bank information. 

Here is a nifty chart a dear friend and CPA colleague prepared and I am posting it here for you to determine what your payment will be approximately.  

AGI (Adjusted Gross Income)--> Refer To Line 8b, Page 1 on your 2019 Form 1040 / Line 7, Page 2  on your 2018 Form 1040. 

Chart created by my friend Amie K, CPA at Eide Bailley

• If you got a refund in 2018 and 2019 and you had the refund directly deposited into your bank account, the IRS has your bank information and if you are eligible, you should see a deposit in your account anytime soon.

•  If you owed money in 2018/ 2019 and you had the IRS directly debit the tax due via your over-the-counter software/ your tax professional's software OR you sent the IRS a check OR you paid the IRS online via a credit card or a debit to your bank account, the IRS does not have your bank account information. Your stimulus check, if you are eligible to receive one, will be mailed to you at the address on file.

• If you neither owed tax nor had a refund on your 2018/ 2019 tax return, the IRS does not have your bank information and you will be mailed a check to the address provided via your tax return. 

• If you used an over-the-counter software or went to a big box chain tax preparation store and if you either applied for a refund loan or had the chain take your tax preparation fees out of your refund, the IRS does not have your bank information. Your stimulus check, if you are eligible to receive one, will be mailed to you at the address on file. 

• If you had your 2018 refund applied to your 2019 tax return, the IRS will not have your bank account information. Your stimulus check in this case will be mailed to your address on file. 

Taxpayers Living Abroad: 

If you are taxpayer living abroad, and if your AGI is within the threshold as in the chart above, you are eligible to receive the stimulus payment. Most taxpayers who live abroad may not have filed their 2019 taxes yet. 

1. If living abroad and you filed a return for tax year 2018 and had a refund for 2018 and had it deposited in your US bank account, the IRS has your bank information and will deposit your check. If not chances are this check will be mailed to your foreign address or the US care of address they have on file. 
2. If living abroad and you have not filed returns for 2018, you will not receive a stimulus check. The IRS will only make a deposit into your US bank account if they have a return on file for tax year 2018/ 2019. 

**For those claiming the Foreign Earned Income Exclusion**: As per IRS guidance to date, you are eligible for the stimulus check if your AGI is within the thresholds as stated in the chart above. 

If you have not filed your US tax returns, this would be a good time to catch up on your previous years' filings. There are several programs you can be eligible for to bring your delinquent returns into compliance. Do explore your options with a tax professional experienced with this. 

Taxpayers on Immigrant Visas, SSN's and ITIN's:  

The stimulus payment in theory is based on your residency status and your social security number. If you are on an immigrant visa like H1-B/ L1 etc., have a SSN and have fulfilled substantial presence requirements in the US for 2018/ 2019 and are therefore considered a "resident alien", you should be eligible for the stimulus check. If you have a spouse in the US with whom you file jointly and who has a social security number, you are both eligible for the stimulus check. Same goes for dependents who have SSN's and you claim on your return. 

Any dependents or your spouse with an ITIN { Individual Taxpayer Identification Number} are not eligible to be counted for the stimulus check. However, there has been anecdotal evidence that payments have gone out to those with ITIN's as well. At this time, we do not know if the amount is to be re-paid to the IRS. 

Dependents/ Children Over 17 Years Old or Parents Claimed As Dependents: 

If they did not have any income in 2018/ 2019 and you provided more than half their support, they are ineligible for the stimulus check at the time this post is being published.

Advance Credit: 

If for some reason, you do not receive the stimulus check, know that this is an advance credit for your 2020 taxes and will be eligible to be claimed while filing your 2020 tax return. I understand that your need for cash may be right now unfortunately.

Get My Payment Messages Regarding Ineligibility: 

Tax professionals who have been observing trends over the past few days conclude that most instances of the IRS website ineligibility messages is due to the fact that you have not yet filed your 2019 tax return. They encourage you to file your 2019 tax return ASAP. 

The Internal Revenue Service will start mailing out checks to those who qualify but whose bank account information is not known. We have been informed that this date is April 24th, 2020. If your check is already in the pipeline to be mailed, you may not be able to update your bank information on the IRS' website. 

The IRS has an updated FAQ page for these messages. 

If you have any questions regarding the above, please reach out to a tax professional or please contact our office. 

 --
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, USA. 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, 2019 and 2020.

Interesting Court Cases: Failure to File an FBAR and Interpretation of "Reasonable Cause".

Sussex, UK

It is a beautiful sunny, cold February 29th in Michigan. Us tax professionals are hurtling through tax season at break-neck speed. The days are getting longer and Spring is teasing us with a game of peek-a-boo. I am hooked on a certain streaming show about gardens in the UK and the presenter's encouraging words that could make any gardener's wildest dreams come true. I am already thinking of all the flowers and herbs I am going to plant post-tax season when the weather is warmer. 

 

However, wild dreams should not come into the picture when we are talking about foreign bank account reporting, penalties and reasonable causes. Let us go over what happened to Mr. Agrawal, a naturalized U.S. Citizen and immigrant from India in (DC WI 12/9/2019) 124 AFTR 2d ¶2019-5522. 

 

Facts About the Case: Mr. Agrawal self-prepared his 2006 and 2007 tax returns. He hired an accountant to prepare his 2008 and 2009 tax returns. In all years, he indicated, in the Foreign Accounts and Trusts part of Schedule B to Form 1040, that he did not have a foreign bank account. In all years he failed to file FBARs. But Mr. Agrawal did have a foreign bank account during those years with more than $10,000 in it.

 

The defendant testified that he told his accountant that he did not have a foreign bank account. He said he did this because a tax professional at the foreign bank told him that the income in the account was not subject to US income tax.

Mr. Agrawal was in immigrant from India, completed graduate school education in the US, and taught geophysics and math at a US technical college.

The IRS sought to impose a penalty for non-willful failure to file FBARs. While he conceded that he should have filed FBARs, Agrawal argued the reasonable cause exception should apply and that his conduct was excused because he relied on the advice of tax professionals, and because he was elderly, unsophisticated about tax law, and spoke English as a second language.

 

Quick background about reporting your foreign bank accounts: Under 31 USC § 5314(a), every person who has a financial interest in, or signature or other authority over, a financial account, or accounts, in a foreign country must report the accounts to IRS annually on a FinCEN Report 114, Report of Foreign Bank and Financial Accounts (also known as the FBAR) if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. 

 

31 USC § 5321(a)(5) provides the methodology how the Secretary of the Treasury may impose penalties on failure to file and also states how much the penalties depending on whether the violation of these rules were non willful {maximum $10,000} or willful {greater of $100,000 or 50% of the balance in the account at time of violation}. Under USC § 5321(a)(5)(B)(ii), the IRS may not impose a penalty if the violation was due to reasonable cause. 

 

Reasonable Cause & What It Is?: Interestingly, 31 USC § 5321 nor it's corresponding regs define the term "reasonable cause" and there has been very little development in case law either. Code Sec 6651(a) and code Sec 6664(c)(1) give some context in terms of tax compliance. The courts have found these useful in constructing a standard applicable to reasonable cause in the FBAR context. { Jarnagin, (Ct Fed Cl 2017) 120 AFTR 2d 2017-6683 } 

 

Regs under Code Sec 6651 equate the reasonable cause standard to "ordinary business care and prudence". The regs under Code Sec 6664 state the determination for reasonable cause needs to be made on a case by case basis, taking into account all pertinent facts and circumstances. It also alludes to the fact that the taxpayer is responsible to assess the taxpayer's proper liability. 

 

Decision By The Court: The district court found that the reasonable cause exception did NOT apply to Agrawal and that he was liable for the penalty.

The court held that no reasonable juror could find that Agrawal acted with ordinary business care and prudence, or that he made a reasonable effort to understand his FBAR reporting responsibilities, when he failed to file his FBARs for the years 2006-2009. By his own admission, the defendant self-prepared his 2006 and 2007 tax returns; he did not disclose the existence of a foreign financial account on Schedule B despite a direct question on the issue. 

 

According to his deposition testimony, in 2008 and 2009, Agrawal did not tell the CPA preparing his tax return of the existence of the foreign account or question the CPA's decision to leave blank the Schedule B question about foreign bank accounts.

The court said that a taxpayer acting with ordinary business care, or one making a reasonable effort to understand his responsibilities, would have sought informed advice about the reporting requirements alluded to in Schedule B; seeking such advice would necessarily involve the taxpayer notifying the advisor of the existence of the foreign account.

The court said that Agrawal's arguments that he was elderly, spoke English as a second language, and had an inexpert understanding of tax reporting requirements did not alter its reasonable cause analysis. By his own admission, Agrawal had sufficient mental acuity and technical facility with the English language to work as a math teacher and as a geophysicist, and, for that matter, to represent himself in this litigation.

 

Conclusion: Suffice it to say that it is getting to be really difficult for a taxpayer to claim that they were not aware of their responsibility to declare their foreign bank accounts since the IRS has been so vocal about this requirement since their push with FATCA in 2010. As in Mr. Agrawal's case, if you have been filing your own taxes, any over-the-counter tax software worth it's salt would ask you a question regarding the presence of foreign bank accounts and if you feign ignorance, it is not going to be a plausible excuse. 

In our practice, we have helped countless non-reporters. If you or someone you know has been delinquent with their foreign bank reporting and needs help being compliant, we can go over various options available and determine the best possible solution for you. 

 

Bibliography: (DC WI 12/9/2019) 124 AFTR 2d ¶2019-5522; FTC 2d/FIN ¶V-1813.4; United States Tax Reporter ¶60,114.06; Reg. § 310.6651-1(c)(1); Jarnagin, (Ct Fed Cl 2017) 120 AFTR 2d 2017-6683; 31 USC § 5314(a) and 5321(a)(5)

 

--
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, USA. 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, 2019 and 2020.

 

 

 

 

Expat: Individual Retirement Accounts {IRA} and Foreign Income

Picture Courtesy pixabay.com Nepal Himalayas

Happy New Year dear reader and welcome to a new decade! Looking forward to a lot of reading and sharing this year.

If you are a U.S citizen living abroad, you could continue to contribute to a retirement account. An expatriate's tax life is complicated as we know-different tax issues, elections and levels of income have to be considered before one can determine if an expat can make an IRA contribution based on their foreign income. 

There are complex technical rules that we have to sift through in order to seek eligibility for a taxpayer with foreign income to be able to contribute into an IRA. I found a lot of information out there on the World Wide Web about this matter, this article is my attempt to bring it all together. 

Income Limits for IRA Contributions:

In order to contribute to a traditional or a Roth IRA:

• You must have taxable compensation for the year. 
• You must have foreign income in excess of your foreign housing and foreign earned income exclusion ($105,900/ taxpayer for 2019 indexed for inflation).  
• Your Modified Adjusted Gross Income (In the charts attached below) will add back the foreign earned income exclusion. 

2019 Roth IRA Income Limits for a $6,000 ($7,000 for those 50 years or older) Contribution are as follows: 

2019 traditional IRA Income Limits for a $6,000 ($7,000 for those 50 years or older) Contribution for those covered by a retirement plan at work are as follows:

2019 traditional IRA Income Limits for a $6,000 ($7,000 for those 50 years or older) Contribution for those not covered by a retirement plan at work are as follows:

Taking the above aspects into consideration, how can one contribute into an Individual Retirement Account if one has foreign income?  
Since the Roth IRA has overall income limits in order to make a contribution, and the Traditional IRA further limits amounts based on whether one is already contributing to an employer provided retirement account, the range of income that is available for a contribution is narrow at best. This could only be wages or net self-employed income that is in excess of the foreign earned income exclusion. 

Can taking the Foreign Tax Credit be more advantageous so one can make an IRA Contribution?
In some situations, claiming a foreign tax credit on taxable wages or net self-employed income can yield a more opportune scenario to fund an IRA in the United States. This would not only provide a reduction in US taxes but will also provide the tax-payer a higher "taxable" income to work with. 

How do IRA Roll-overs work for those who have moved out of the U.S?
There is a possibility that you have worked in the US before moving abroad and have accumulated retirement savings, possibly accounts in 401K's, 403B's or other employer retirement plans or traditional IRA's.You may have long term plans of staying abroad or do not have plans of drawing your retirement accounts at the age of 72. 

You could take advantage of the lower tax brackets in case you are making use of the Foreign Earned Income Exclusion and roll over these retirement accounts into a Roth IRA. If the numbers line up favorably, this Roth IRA conversion may even be tax-free. You could then leave the Roth IRA to grow tax-free and not have to take Required Minimum Distributions from it. 

Consultation WIth An Enrolled Agent or Experienced Tax Professional: 
It is very important, you seek the help of an experienced tax professional in order to execute any of the above. If the IRA's are rolled over incorrectly, there will be penalties on early withdrawals or excise taxes to be paid on incorrect set-up. Please contact our office for consultations, we have experience in guiding you with the correct set up and rollover. 

Bibliography: Section 911; Individual Retirement Accounts § 408
-- 
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, 2019 and 2020. 

Read my disclaimer here