Income Tax Planning for International Clients

Transcription

1 Income Tax Planning for International Clients Presented by: Debra Silverthorn, CPA marcumllp.com

2 Table of Contents Income Tax US Citizens Overseas (Expats).. 3 Income Tax Foreign Nationals (FN) in the U.S Treaty Positions Social Tax Planning Foreign Informational Reporting. 10 2

3 INCOME TAX US Citizens Overseas 1. Eligible for 2017 Foreign Earned Income Exclusion of $102,100 BFR (Bona Fide Residence), ie Intent is tax home shift > 1year PPT (Physical Presence Test), must be in a Foreign Country 330 out of any 365 days May be beneficial to get larger exclusion by using a sliding scale Note, this is an Election that must carry forward into all future years, unless revoked. If revoked, cannot elect this again for 5 years. Special Extension on Form 2350 is used to extend 2017 tax return to Jan 2019 NOTE US Workdays create US sourced income, not eligible for FEI 3

4 INCOME TAX US Citizens Overseas (Continued) 2. Eligible for 2017 Housing Exclusion Costs over 2016 floor of $16,208 excluded Myth Buster* Expat does not have to receive a housing allowance from their employer to qualify 3. Foreign Tax Credit To the extent FEI and HE is elected, a percentage of Foreign Taxes are scaled down, ie not available for credit, as a percentage of income was excluded One can elect Paid or Accrued Method, but if Accrual is elected, cannot switch back to Paid One should do Optimization to determine if FEI is advantageous Significant opportunity for planning if going to a Fiscal Year country 4

5 INCOME TAX US Citizens Overseas (Continued) 4. Host Country Income Tax Planning Know your Foreign Country Japan has an Inhabitants Tax if Resident on January 1st Switzerland imposes a Wealth Tax if resident in Swiss for > 5 Years Hong Kong will not tax a Housing allowance, if Employer pays directly to Landlord Each Foreign Country has it s own specific planning opportunities 5

6 INCOME TAX Foreign Nationals in the U.S. 1. FN are taxed on their US ECI income (Effectively Connected Income) which is connected with a US trade or business, or income that is derived from sources within the US, such as US rental property or gain from US real estate. For example, US workdays creates US ECI, irrespective of where FN is paid 2. If a FN meets SPT (Substantial Presence Test), the FN will then become a US long term resident, and become taxable on their worldwide income, just as a US citizen is. 3. Myth Buster* SPT looks at physical presence days over a 3 year period, not just one year. You must add all weighted days. 1/6 days in /3 days in all of 2017 days = 183 or >? Then SPT is met. 6

7 INCOME TAX Foreign Nationals in the U.S. (Continued) 4. There are Exempt Individuals for the day count test, G visa (Government employees), J or Q visa (Teach or trainee), F visa (student). 5. Even if FN meets SPT, if in 2017 only, the FN had < 183 days, and the FN maintains a home in a foreign country, and has a Closer Connection to his home country, this is an IRS Statutory exception, and he will be a Non Resident. (Form 8840 must be filed with his 1040NR tax return). 6. Various Elections are available in a Dual Status year, where a FN can elect to be treated as a US Resident for the full year, rather than day or arrival. Significant planning opportunities. 7

8 INCOME TAX Foreign Nationals in the U.S. (Continued) Real Live Example - Great Tax Planning to Elect to be a US resident! UK Foreign National to US in May 2015 Satisfied PPT, so became a US resident in May 2015 We elected to treat him as a US resident beginning 1/1/2015 Therefore, was able to file Married Filing Jointly and claim 3 Dependents Brought in $167,000 of income earned January May, but also brought in Foreign taxes available for credit on Accrued basis, so entire UK taxes 4/6/2014 4/5/2015, and all US tax on the $167,000 was wiped out. BONUS WE CREATED A $117,000 FTC CARRYFORWARD TO 2016 Foreign National had 18% foreign workdays in 2016, and we claimed a $30,000 Foreign Tax Credit, which would not have been available had we not elected full year residency in

9 US Expat and FN Treaty Positions 1. IF there is a Treaty between the US and the specific Foreign country, there may be planning opportunities. a. Must first see if we have a Treaty with that particular country, listing can be found on IRS.Gov website. b. Look under appropriate Article; Form 8833 must be attached to 1040NR if a Treaty position is taken c. Myth Buster* Not all treaties are alike! i. May be 183 days in a calendar or rolling 12 month period ii. May have provision for DPS (employees) but not Director Fees iii.there is also a no cross-charge provision d. Myth Buster* Treaties can exclude all U.S. income Not true! Applies to Federal only, and most States do not follow Treaty! 9

10 US Expat and FN Treaty Positions Real Life Example Foreign National Inbound from Italy TOTAL USD ALLOCATED ALLOCATED WORLDWIDE FEDERAL California Gross Salary paid by Italian Firm (Euro 12,937) in USD 13,695 3,259 3,259 Gross Salary paid by Hong Kong Firm (HKD 1,856,804) in USD 239,022 56,887 56,887 Gross Salary paid by China Firm (CNY 300,000 CYR) in USD 43,470 10,346 10,346 Taxable Fringe Benefits (School, Moving, Housing) in USD 43,817 10,428 10,428 Director's Fee (US Firm) per US Form 1099 in USD 77,458 77,458 77,458 Total Worldwide Compensation in USD 417, , ,379 Nontaxable Comp if no cross-charge to US, as per Article 15 Italy/US Treaty (80,921) 0 - Note, per Article 16 of the Italy/US Treaty, Director Fees fully taxable Taxable Compensation 77, ,379 Itemized Deduction California State tax paid in 2016 for Federal (7,744) (4,159) Exemption (4,050) (111) Taxable income 65, ,109 10

11 US Expat and FN Social Tax Planning 1. General Rule is one pays into the Social Tax Scheme where you work 2. If there is a Totalization Agreement between the US and the specific Foreign country, then you may elect to stay in your Home country Social scheme, but typically up to only 5 years 3. List of US Totalization Agreements can be found on IRS.Gov website. 4. Note one must have a Certificate of Coverage in place with the Payroll Dept of the Host Country. 5. Myth Buster* Social taxes are never creditable for FTC? Not true! If there is no totalization agreement, so an employee is paying into both Home and Host country social scheme, social taxes will be creditable on the US Form 1040 for an Expat, ie Bermuda. 11

12 Foreign Informational Reporting Both US Expats and FN 1. SIGNIFICANT PENALTIES for Non compliance 2. FinCEN Form 114 Separate tax filing, Now due 4/15, If account exceeds $10,000 held in a FBA Penalty for failure to file can be the greater of $100,000 or 50% of the highest account balance 3. Note OVDP is currently available, but we are not sure how much longer before it s closed 4. Form 8938 Is filed with the 1040 Specified Foreign Financial Assets $10,000 per month penalty if not filed, up to a $60,000 max penalty per asset, such as a Foreign Pension 5. A handful of others forms such as 8271, 5471, Discuss International Tax Flash Foreign National filings 12

13 Questions? MARCUM can Help!