U.S. Individual Income Tax Update & Strategies for 2011/2012 and Beyond

Transcription

1 U.S. Individual Income Tax Update & Strategies for 2011/2012 and Beyond Russell T. Fisher MBA, CPA, CCPS, AIF RT Fisher CPA PLLC RT Fisher U.S. Tax & College Planning Services Pte. Ltd. 1 Tannery Road, #02-04 One Tannery, Singapore Telephone: , , HP: Fax: rt@rtfishercpa.com

2 Select 2011 Tax Law Changes 2011 tax changes less drastic than 2010 One wide-ranging change replacement of Making Work Pay Credit 2

3 Expiring Provisions Increased Alternative Minimum Tax (AMT) Exemption Amounts State/Local Sales Tax Deduction Mortgage Insurance Premiums Deduction School Teacher Expenses Qualified Charitable Distributions from IRAs 3

4 The Basics How Is Tax Measured? Filing Status Tax Rates Standard Deduction Standard Deduction Additions Itemizing Deductions Personal Exemptions Charitable Deductions Alternative Minimum Tax (AMT) AMT Exemption Amounts 4

5 How is tax measured? Income Gross Income (-) Adjustment to Income Adjusted Gross Income (AGI) (-) Deductions / Exemptions Taxable Income Tax (-) Credits Tax Liability (-) Prepayment of Tax (+) Interest / Penalties Tax Due / Refund 5

6 Filing Status Single Married Filing Jointly Married Filing Separately Head of Household Qualifying Widow(er) 6

7 Filing Status Options with a Foreign Spouse Married filing joint - Two full foreign earned income exclusions - Married Filing Joint tax rates and deductions - World-wide income subject to US income tax Married filing separate - Can apply for ITIN (Form W-7) to tax exemption for dependent spouse. - Higher tax rates, passive losses from rentals disallowed Head-of-Household - Must have a qualified dependent, other than spouse. Child must have Social Security Number 7

8 Obtaining an ITIN Form W-7 and instructions found at IRS Publication 1915 Go to spouse s foreign embassy with foreign passport and copies to be notarized by spouse s foreign embassy. Attach Form W-7 and notarized copies of foreign passport to the special processing unit noted in the Form W-7 instructions 8

9 Married to non-us Citizen or US Resident Gift tax limitation to non-us spouse approximately US$136,000 Transfer at death, limitations. Testamentary transfers do not pass free of estate tax unless: - Testamentary transfer is made to a qualified domestic trust (QDOT) -Recipient spouse transfers the property to a QDOT within short period after death of spouse; or -Recipient spouse makes special arrangements for non-assignable property rights (i.e., pensions benefits and/or IRAs) Report of Foreign Gifts Form 3520 (US$100,000 per year) for gifts from any foreign person, including foreign spouse. IRS wants to account for income derived from gift received. A joint bank account with a foreign spouse is a Gift Tax trap Foreign Bank Account disclosure Form TD F must be filed 9

10 Individual Tax Rates Current Tax rates extended until December 31, 2012: - 10% - 15% - 25% - 28% - 33% - 35% 10

11 2011 Tax Rates % 15% 15% 25% 28% 28% 31% 33% 36% 35% 39.6% 11

12 Long Term Assignment - Assignment period of more than 12 months - Tax home is considered to have shifted - Eligible to claim the -Foreign Earned Income Exclusion, and -Housing Exclusion - Foreign Tax Credits 12

13 Qualified Individual - A U. S. citizen who meets either the bona fide residence or physical presence test, has a foreign tax home, and has foreign earned income. - A resident alien who meets the physical presence test, has a foreign tax home, and has foreign earned income. - Discrimination Income Tax Treaty Bona Fide Residence Test also applies to treaty country residents. 13

14 Tax Home - Principal place of employment - May or may not coincide with family s residence - Temporary travel to U.S. is permitted - Temporary vs. indefinite assignment 14

15 Bona Fide Residence Test - The individual must be a U.S. citizen or a resident alien under tax treaty. - Must reside in a foreign country (or countries) for an uninterrupted period that includes an entire tax year. - Must have changed his or her tax home from the U.S. to the foreign country. - Must not claim to be a nonresident of the foreign country for tax purposes. - If the foreign country has an income tax, the individual s earned income must be subject to that tax. - Once the test is met, such qualification is applicable to the first day of establishing bona fide residence. 15

16 Physical Presence Test - The individual must be a U.S. citizen or a resident alien of the United States. - Must have changed his or her tax home from the U.S. to the foreign country. - Must be physically present in a foreign country (or countries) for 330 full days during any consecutive 12-month period (not a calendar year). - A full day is a 24-hour period beginning at midnight. - Travel over international waters counts as U.S. time. 16

17 Earned Income - In general, earned income is income received for the performance of personal services and can be in the following form : Cash item Non cash item Allowances or reimbursements - For the purpose of exclusions, it does not include : Pensions or annuities Amounts paid to an employee by an employer which is the U.S. government or any of its agencies. 17

18 Source of Earned Income - To be excludable, income must be received for services performed outside the U.S. Where the income is paid or received has no effect. Two Steps : - Allocate income to the tax year(s) in which the services are performed ; then - Source income to U.S and foreign : Allocation of all compensation, base pay and foreign allowances to U.S. and foreign worked days. 18

19 Foreign Earned Income Exclusion - Qualified individuals may elect to exclude some or all of the foreign earned income from taxable income. The amount which may be excluded will be limited to the lesser of : Foreign earned income received for the current year; or $92,900 annual ceiling for 2011 (or an amount prorated for a transfer year). $95,100 for Each working spouse has a separate FEI exclusion - Any unused exclusion can be carried forward for one year. 19

20 Foreign Earned Income Exclusion Reasonable expenses paid for housing in a foreign country in excess of a government-set base housing amount of $14,864 for

21 Stacking Tax - Apply an Exclusion with Progression methodology which adds back the exclusion to determine the rate of tax to ensure that international assignees are subject to the same U.S. tax rates on income not excluded under Section 911 as taxpayers living and working in the U.S. i.e., The first $92,900 of income excluded under section 911 is tax free but anything above the exclusion amount is now taxed at a higher rate. 21

22 Stacking Effect Tax Brackets/ Rates (MFJ) Excess > 35% A Stacking 379,150 Final Tax = Tax on A-Tax on B B 166,850 (212,300) 33% 72,950 (139,350) 28% 70,350 25% 52,000 15% 17,000 10% Exclusions Exclusions 22

23 IRS Publication 54 Location Limitation on Housing Expenses (Full Year) Less: Base Housing Amount Maximum Foreign Housing Exclusions Singapore 67,000 14,864 52,136 Kuala Lumpur 46,200 14,864 31,336 Malaysia (not 33,700 14,864 18,836 KL) Jakarta 37,776 14,864 22,912 Not Specified 27,870 14,864 13,006 23

24 Foreign Tax Credit - Intend to relieve US taxpayers of the double tax burden when their foreign source income is taxed by both the US and the foreign country. - Foreign income tax may be deducted as an itemized deduction (Schedule A) or claimed as a foreign tax credit (Form 1116) 24

25 Foreign Tax Credit on Form Credit reduces actual U.S. tax on a dollar-todollar basis; deduction reduces only income subject to tax. - FTC are available in addition to the standard deduction. - Carry-back 1 year and Carry-forward 10 years of any unused foreign tax credits (arising in 2004 and onwards). 25

26 Foreign Taxes - May elect to account for foreign tax either on paid or accrual basis. - May change from paid to accrual basis in any subsequent year and cannot change back from the accrual to paid basis. 26

27 Limitation (continue) To determine the amount of U.S. tax attributable to foreign source taxable income, the tax law provides the following formula : Total taxable income before personal exemptions X U.S. Tax = Maximum Allowable Foreign Income Tax Credits 27

28 Standard Deduction Filing Status Standard Deduction Single $5,800 Married Filing Separately $5,800 Married Filing Jointly $11,600 Qualifying Widow(er) $11,600 Head of Household $8,500 28

29 Standard Deduction Additions Additional standard deduction for taxpayers age 65 and older or blind: - $1,450 (single or head of household) - $1,150 (married filing jointly, married filing separately or qualifying widow/er) 29

30 Itemizing Deductions Alternative to standard deduction Use when total itemized deductions exceed standard deduction Wide range of itemized deductions No phase-out rules Bunching tax breaks AMT consideration Benefits of advance planning 30

31 Charitable Deductions Qualified donations only Deductible up to 50% of AGI (for itemizers) Documentation requirements Donations of more than $75 and $250 or more (additional substantiation rules) Donations of appreciated property Clothing, household items and automobiles (requirements and substantiation rules) 31

32 Alternative Minimum Tax (AMT) Additional tax for certain taxpayers AMT triggers: - Higher-than-average dependency exemptions - Large deductions for state and local income taxes - High real estate taxes - Miscellaneous itemized deductions and medical expenses 32

33 AMT Exemption Amounts Exemption amounts: - Single $48,450 - Married/Filing jointly $74,450 Phase-out when AMT income exceeds: - $112,500 (single) - $150,000 (married filing jointly) 33

34 Tax Strategies & Incentives Family Education Job Home Investments Retirement 34

35 Family Tax Incentives Kiddie Tax Child Tax Credit Adoption Credit Health Savings Accounts Health Flexible Spending Arrangements Dependent Care Tax Credit Long-term Care Premium Shifting Income 35

36 Kiddie Tax Income shifting to children less beneficial $1,900 investment income threshold Exception if parents deceased Applies to: - All children younger than age 18 - Most children who are age 18 - Most full-time students between ages Child who is married filing separately 36

37 Child Tax Credit $1,000 credit per qualifying child Child: - Under age 17 - Qualified dependent - U.S. citizen, resident or national 37

38 Adoption Credit Up to $13,360 per eligible child Employer reimbursement of up to $13,360 Different rules for U.S. and foreign adoptions Special-needs child full credit regardless of actual expenses 38

39 Health Savings Accounts Individuals covered Tax advantages contributions, earnings and withdrawals Consequences of non-qualified withdrawals 39

40 Health Flexible Spending Arrangements Tax-free contributions from wages Fully accessible for qualified medical expenses Wide range of reimbursable medical expenses (non-prescription drugs, except insulin, not reimbursable in 2011) Terms and limits determined by company plan Use or lose feature 40

41 Dependent Care Tax Credit Child must be under age 13 and a dependent 20% to 35% of qualifying expenses (up to $2,100) AGI factor Earned income requirement and joint return if married Up to $3,000 of expenses ($6,000 if two or more dependents) Reduced by certain employer-provided day care ($5,000/$2,500 limits) Applicable to other dependents 41

42 Long-term Care Premium Tax deduction for portion of insurance costs Age-based deduction amounts: - Age 40 or under -$340 - Age 41 to 50 - $640 - Age 51 to 60 -$1,270 - Age 61 to 70 -$3,390 - Age 71 or over - $4,240 42

43 Shifting Income Kiddie tax Gift tax: - Up to $13,000 not subject to gift tax ($26,000 if election by spouse/use other spouse s exclusion) - Cash gifts and present interests in property requirement Family business (hiring your minor children): - Legitimate work, adherence to rules/laws and reasonable wages - Social Security and Medicare tax advantages if under age18 - Kiddie Tax not applicable 43

44 Education Strategies Tax Credits American Opportunity Tax Credit Lifetime Learning Credit Student Loan Deduction Higher Education Tuition and Fees Deduction Qualified Tuition Programs (529 Plans) Prepaid Tuition Plans U.S. Savings Bonds 44

45 Tax Credits American Opportunity Tax Credit and Lifetime Learning Credit Credit vs. deduction Mutually exclusive credits in certain circumstances 45

46 American Opportunity Tax Credit Applies to first four years of college/postsecondary school Recognized educational credential requirement $2,500 per student per year maximum Qualified tuition and related expenses Allowed against AMT Phase-out ranges apply $80,000 to $90,000 (single & Head-of-Household) $160,000 to $180,000 (Married filing joint) Married Filing Separate does not apply *MAGI 46

47 Lifetime Learning Credit Worth up to $2,000 per year Not limited to any number of years Applies to undergraduate, graduate and professional-degree expenses Available to each taxpayer not each student No educational-credential requirement Phase-out ranges apply $51,000 to $61,000 (single & Head-of-Household) $102,000 to $122,000 (Married filing joint) Married Filing Separate does not apply *Pertains to MAGI 47

48 Student Loan Deduction Deduct loan interest up to $2,500 No limit on repayment period No need to itemize Qualification requirements Phase-out ranges apply $60,000 to $66,000 (single & Head-of-Household) $120,000 to $150,000 (Married filing joint) Married Filing Separate does not apply 48

49 Higher Education Tuition and Fees Deduction Up to $2,000 or $4,000 deduction Available every qualifying year Covered expenses similar to American Opportunity Tax Credit and Lifetime Learning Credit Broad availability Barred in certain circumstances Phase-out ranges apply *MAGI $ 0 to $65,000 to $80,000 (single & Head-of-Household) $ 0 to $130,000 to $160,000 (Married filing joint) Married Filing Separate does not apply 49

50 Qualified Tuition Programs (529 Plans) Tax-advantaged way to save for college expenses Money in plan grows tax free Tax-free qualified withdrawals State income tax breaks in certain circumstances Wide range of qualified expenses (no dollar limit) Gifts from family members 50

51 Prepaid Tuition Plans State-instituted plans Plan inception date and child s age key factors to amount contributed Tuition costs covered not room, board or books In-state vs. out-of-state school Tax treatment similar to 529 Plan 51

52 U.S. Savings Bonds Tax benefits for qualified higher-education expenses No dollar limit on exclusion Series EE bonds (issued after 1989) and Series I bonds 52

53 Job Strategies Unreimbursed employment-related costs Deduction greater than 2% of AGI Job search expenses Line-of-work requirement Possible disallowance if long-term unemployment period Not applicable to first job 53

54 Homeowner Strategies Deductions Selling Your Home First-time Homebuyer Credit Home Energy Incentives 54

55 Deductions Mortgage interest: - Deduct up to $1 million of home-acquisition loans - Deduct up to $100,000 of home-equity loans - No restrictions on use of proceeds - Special rules on deducting points Real estate taxes: - No limits on number of homes or dollar amount - Prepay/delay decision 55

56 Selling Your Home Exclude up to $250,000 in capital gains ($500,000 if married filing jointly or surviving spouse in certain cases) Home owned/used as principal residence at least two (aggregate) of five years preceding sale Temporary absences from residence Special rules for specific homeowners Repay/recapture First-time Homebuyer Credit 56

57 First-time Homebuyer Credit Limited credit for 2011 home purchases Credit repayment for some home purchasers 57

58 Home Energy Incentives Nonbusiness Energy Property Credit - 10% and 100% credits for certain improvements and expenditures - Dollar limits for specific types of property - $500 maximum lifetime credit - Wide range of improvements Residential Energy Efficient Property Credit - Wide range of costs - Two types of 30% credits - Dollar limit, principal residence and kilowatt-capacity considerations 58

59 Investment Strategies Dividends Capital Gains Tax Offset Capital Gains with Losses 59

60 Dividends Top tax rate of 15% for qualified dividends 0% for taxpayers in 10% or 15% tax bracket 60

61 2013 Dividends Top tax rate of 39.6% for qualifying dividends Foreign dividends top tax rate 39.6% 61

62 Capital Gains Tax 15% maximum tax rate on net capital gains 0% for taxpayers in 10% or 15% income tax bracket Asset must be held more than one year before sale 62

63 2013 Capital Gains Tax Maximum tax rate on long-term gains is 20% Asset must be held more than one year 28% maximum tax rate for collectibles Assets purchased after January 1, 2001 held for five years and one day, extra-long-term gains is 18% 63

64 Offset Capital Gains with Losses Capital losses netted against capital gains $3,000 in capital losses can be deducted against ordinary income Ability to carry losses forward Keep track of losses unused, and short and long term Beware of wash sale rule 64

65 Retirement Strategies Employer Sponsored Plans Individual Retirement Accounts (IRAs) Conversion to Roth IRA 65

66 Employer Sponsored Plans Pre-tax contributions help reduce tax bill Employer matches and earned income tax deferred $16,500 maximum contribution (younger than age 50) $5,500 additional catch-up contribution (age 50 or older) 66

67 Individual Retirement Accounts (IRAs) Two types: Traditional and Roth $5,000 maximum annual contribution for either $1,000 additional catch-up contribution (age 50 or older) Contribution restrictions Traditional IRA: deductible contributions modified AGI and employer-sponsored plan considerations & distribution requirements Roth IRA: nondeductible contributions and tax-free withdrawals Tax-free earnings until distribution Open/contribution deadline: April 17,

68 Conversion to Roth IRA No dollar limit on conversion amount Conversion results in taxable income No early-distribution penalty under certain conditions No modified AGI requirement Opportunity to reverse conversion 68

69 Filing Dates - Normal due date is 04/17/2011 (Tuesday). - Auto extension of time to 06/15/ Auto extension of time to 10/15/2012 with Form Extension request to (Monday) 12/17/2012 overseas filers - First year overseas filers to 01/30/2013 with Form

70 Where is tax reported? Internal Revenue Services Center 3651 So. Interregional Highway 35 Austin Texas U.S.A. Telephone +1 (512)

71 Foreign Bank Account Penalties for failure to report foreign financial accounts (Form TDF ). File by 06/30/ Crack down on failure to comply - Increased civil penalties Currently $25,000 to $100,000 for willful violation Increase of an additional $10,000 without regard to whether conduct was willful - Penalty can be waived as long as income was properly declared and there was reason for failure to report. 71

72 New Form 8938 Statement of Foreign Financial Assets Unmarried & Married Filing Separate Taxpayers Living in the USA More than $50,000 on the last day of the year, or more than $100,000 at any time during the year. Married Filing Joint Taxpayers Living in the USA More than $100,000 on the last day of the year, or more than $200,000 at any time during the year. Unmarried & Married Filing Separate Taxpayers Living Abroad More than $200,000 on the last day of the year, or more than $400,000 at any time during the year. Married Filing Joint Taxpayers Living Abroad More than $400,000 on the last day of the year, or more than $600,000 at any time during the year. Stocks, financial instruments, interest in foreign entity, real estate investments 72

73 Other IRS Refund Direct Deposit IRS Payment Electronic Federal Tax Payment System (EFTPS) Educational IRA (Coverdell) 529 Savings Plans (avoid tuition plans) Savings live under your means IRS e-file Federal & State Returns 73

74 Key Takeaways Partner with your CPA Ask questions when considering advice Plan for tax savings year-round e-file 74

75 NOTICE This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer. This document is provided by RT Fisher CPA PLLC and RT Fisher U.S. Tax & College Planning Services Pte. Ltd., for general guidance only, and does not constitute the provision of legal advise, accounting services, investment advise, or professional consultation of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decisions or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. The information is provided as is, with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose. Thank you All rights of use and reproduction reserved. American Chamber of Commerce Singapore January 31, 2012 Copyright 2011 American Institute of CPAs Copyright 2011 American Institute of CPAs