Foreign Tax Issues By Merrill Fromer Pages 435-475
Foreign Tax Issues pg. 435 Issue 1: Reporting by US Citizens Living Abroad Issue 2: Foreign Earned Income Exclusion Issue 3: Nonresident Alien Reporting Issue 4: Withholding on Payments to Nonresident Aliens Issue 5: Nonresident Spouse Treated as US Resident Issue 6: 2017 Rules for Foreign Owned US LLCs
Issue 1 Reporting by US Citizens/Residents Living Abroad pg. 436 Generally subject to same filing and paying rules on US source income: Some differences Filing deadlines & deductions Treatment of Income from US possessions, US govt. employees and scholarship exclusion Foreign income exclusions, exclusion or deduction for foreign housing may be available
Terms US Source Income NIB Fixed, determinable, annual, or periodic income Income effectively connected with a trade or business
Reporting by US Citizens Living Abroad pg. 436 Taxpayer worldwide income is generally taxable regardless of where the taxpayer resides in US dollars All gross income is used to determine a filing requirement Automatic 2 month extension allowed (June 15 th ) Extension to October 15 th must be requested (Form 4868) Taxpayer may request in writing for an additional 2 months
Sample Letter October 1, 2017 Department of the Treasury Internal Revenue Service Center Austin, Texas, 73301-0045 Re: Izzy R. Late, SSN 111-22-3333 Dear Sir or Madam, We hereby request an extension of time until December 15, 2017, to file the 2017 US individual income tax return for the above-named taxpayer. The facts in support of this application are as follows: 1. The taxpayer is currently living outside of the United States. 2. The taxpayer filed Form 4868 on or before June 15, 2017, thus obtaining an extension of time until October 15, 2016, to file her tax return. 3. The taxpayer now requests an additional extension until December 15, 2017, because of the difficulty in gathering the information necessary to file a complete and accurate tax return.
Moving Expenses To or From The United States pg. 438 Same as moving to Ohio from New Jersey Move is directly related to a new full time job location Closely related to the start of work Meets distance test (50 miles further) Time test (39 weeks in first year) Directly related to foreign earned income If income is partially excluded (foreign income housing exclusion) moving expenses are allocated
Retirees Moving Back to The US pg. 438 Retirees no time tests Must be permanently retired (from former employment) Main job and residence must have been outside US What is considered permanently retired? Age and health Customary retirement age (similar work) Retirement payments started & Time between returning to fulltime work
Survivors Who Move to the US pg. 438 Spouse or dependent Death was outside the US While employed/working outside the US Must meet all 5 requirements: 1. Moves to a residence in the US 2. Within 6 months of death 3. The move is from the decedents former home 4. Decedents former home was outside the US 5. Former home was also spouse s or dependent s home
Allocation of Moving Expenses pg. 438 Moving expenses must be directly related to foreign earned income If any part of that foreign income is excludable under the foreign earned income exclusion or housing exclusion.. The portion related to the exclusion is not deductible
Reimbursements of Moving Expenses pg. 439 Nonaccountable plans included in gross income (deductible & non deductible amounts) Accountable plans include in gross income only nondeductible amounts: Meals Housing Trips Real estate expenses
Report of Foreign Bank and Financial Accounts pg. 439 FBAR Filing Requirements Financial interest Signature authority Any other authority or control Aggregate value exceeding $10,000 at any time during the year Deadline April 15 th / extendable to October 15 th For 2016 there was an automatic extension to October 15 th, 2017
Filing an FBAR FinCEN Report 114 NIB To file the FBAR as an individual, you must personally and/or jointly own a reportable foreign financial account that requires the filing of an FBAR (FinCEN Report 114) for the reportable year. There is no need to register to file the FBAR as an individual. If you are NOT filing the FBAR as an individual (as in the case of an attorney, CPA, or enrolled agent filing the FBAR on behalf of a client) you must obtain an account to file the FBAR by registering to Become a BSA E-Filer
If You Failed to File an FBAR pg. 440 For taxpayers living abroad SFCP Streamlined Filing Compliance Procedure Non-residents Dual citizens OVDI Offshore Voluntary Compliance Program Chose only one For potential willful and or civil or criminal Situations - OVDI
FACTA - Foreign Account Tax Compliance Act pg. 440 Other filing requirements Form 8938 Statement of Specific Foreign Financial Assets Form 5741 Information Return of US person with Respect to Certain Foreign Corporations Form 3520 & or Form 3520-A Foreign Trusts and Foreign Gifts Form 8865 Return of US Persons with Respect to Certain Foreign Partnerships Form 926 Return by a US Transferor of Property to a Foreign Partnership
Specified Individuals NIB A U.S. citizen A resident alien of the United States for any part of the tax year (see Pub. 519 for more information) A nonresident alien who makes an election to be treated as resident alien for purposes of filing a joint income tax return A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico (See Pub. 570 for definition of a bona fide resident
Form 8938 Filing Requirements The aggregate value of your specified foreign financial assets is more than the reporting thresholds that applies to you: Unmarried taxpayers living in the US: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year Married taxpayers filing a joint income tax return and living in the US: The total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year Married taxpayers filing separate income tax returns and living in the US: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
A specified foreign financial asset NIB Any financial account maintained by a foreign financial institution, except as indicated on the instructions Other foreign financial assets held for investment that are not in an account maintained by a US or foreign financial institution, namely: Stock or securities issued by someone other than a U.S. person Any interest in a foreign entity, and Any financial instrument or contract that has as an issuer or counterparty that is other than a U.S. person.
Form 8938 - Taxpayer Living Abroad NIB You are filing a return other than a joint return and the total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year; or You are filing a joint return and the value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year
Income from US Territories or Possessions pg. 440 Guam Commonwealth of the Northern Mariana Islands American Samoa US Virgin Islands Puerto Rico
Determining Residency Status in US Territories pg. 440-441 Physically present in the territory for 183 days during the tax year Does not have a tax home outside the territory during the tax year, and Does not have a closer connection to the US or to another foreign country
Self-Employment US Territory pg. 441 Self-employed in a US Territory pay self-employment tax Regardless if the income is excludable Regardless if you otherwise have no US filing requirement File 1040-SS or Form 1040-PR (Puerto Rico)
Issue #2 Foreign Earned Income/Housing Exclusion Page 444-454
Income Exclusion pg. 444 Income Exclusion $102,100 Housing 16,336 Exclusion/Deduction Total exclusion/deduction $118,436
Foreign County pg. 445 A foreign country is any territory (including the air space and territorial waters) Under the sovereignty of a government other than that of the US. It includes the seabed and subsoil of those submarine areas adjacent to the territorial waters of a foreign country and over which the foreign country has exclusive rights under international law to explore and exploit the natural resources
Foreign Country pg.445 Foreign country does not include US possessions such as Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, the U.S. Virgin Islands, or American Samoa. For purposes of these foreign exclusions or deduction, the terms foreign, abroad, and overseas, refer to areas outside the US, American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, Puerto Rico, the U.S. Virgin Islands, and the Antarctic region. Foreign country does not include ships and aircraft traveling in or above international waters, and it does not include offshore installations that are located outside the territorial waters of any individual nation.
What is Foreign Earned Income? Pg. 445 Income you earn in a foreign country (performing services) Construction Playing ball Working in the mall Selling/serving coffee Self-employment
Foreign Earned Income Does Not Include pg. 445 1. Pay received as a military or civilian employee of the US government or any of its agencies 2. Pay for services conducted in international waters (not a foreign country) 3. Pay in combat zones, as designated by an executive order of the president 4. Payments received after the end of the tax year following the year in which the services that earned the income were performed 5. The value of meals and lodging furnished for the convenience of the employer 6. Pension or annuity payments, including social security benefits
Tax Home pg. 445 A tax home is the general area of a taxpayer s main place of business, employment, or post of duty, regardless of where he or she maintains a family home. Tax home is the place where the taxpayer is permanently or indefinitely engaged to work as an employee or self-employed individual. Having a tax home in a specific location does not necessarily mean that the location is the taxpayer s place of residence or domicile for tax purposes.
Tax Home and Abode pg. 446 Abode is defined as one's home, habitation, residence, domicile, or place of dwelling. It does not mean a principal place of business. Abode is not the same as tax home. The location of a person s abode often will depend on where he or she maintains economic, family, and personal ties
Example 12.2 pg. 446 Taxpayer works on an offshore oil rig in territorial waters of Spain Works 28-day on and than 28-days off Returns to U.S. residence during his 28-days off Adobe is in the US Tax home is not in a foreign country No exclusion for income
Example 12.3 Tax Home and Abode is in a Foreign Country pg. 446 Taxpayer has been living/working in Massachusetts for several years November 2016 transferred to London, England She expects to be there for at least 15 months Placed her car and belongings in storage Rented her home to another family Moved her husband and children to employer provided rental in London Rented a car, British driving license, library cards, opened bank accounts enrolled children in school.
Bona Fide Residence Test pg. 446-447 Taxpayer intention Purpose of the trip Nature and length of stay Form 2555 must be filed with the IRS IRS makes the determination if the taxpayer is a bona fide resident of a foreign country Temporary job (even longer than 1 year) does not qualify Foreign country has a treaty with the US
Example 12.5 Domicile vs. Residence pg. 447 GG went to Paris to for an extended period of time Set up permanent quarters for herself and family She always intended to return to her home in Ohio She could have her domicile in Ohio and bona fide residence in Paris
Uninterrupted Period (Entire Year) pg. 447 The Test Must reside in a foreign country Uninterrupted period of time that includes an entire year January 1 December 31 Taxpayer can have periods of absence (vacations, business, health) Must intend to return to foreign residence in a reasonable time
Example 12.6 pg. 447 Katsu Lin is the Tokyo representative of a US employer He arrived with his family in Tokyo on 11/1/2016 His assignment is indefinite, and he intends to live there with his family until his company sends him to a new post He immediately established residence in Tokyo On 4/2/2017 he traveled to the United States to meet with his employer, leaving his family in Tokyo He returned to Tokyo on 5/1 and continued living there On 1/1/2018, he will have completed an uninterrupted period of residence for a full tax year, and he may qualify as a bona fide resident of Japan.
Bona Fide Residence Allocation pg. 448 Once a taxpayer meets the bona fide residence test for 1 year, other years come into play If I arrive in Spain for employment on 3/1/2016 Remain in Spain the entire 2017 year Return to Ohio 6/30/2018 I now have a partial year for 2016 and 2018 If I have not yet filed my 2016 return I could claim a partial year income exclusion If I did file my 2016, I would need to file an amended 2016 return
Physical Presence Test pg. 448 Another option to qualifying for the income and housing exclusions Physically present for 330 full days Nature and purpose still count (tax home) Type of residence and intentions of returning are not considered Generally much easier to meet this test Still requires a US Treaty with the foreign country(s)
Counting The Months pg. 449 Can begin any day Ends the day before the same calendar day (12 months later) Must be 12 consecutive months Does not have to start when you enter or leave the foreign country The taxpayer can choose the 12 month period The 12 month periods can overlap
Example 12.10 pg. 449 Larry worked in New Zealand for a 20 month period (1/1/16 8/31/17) February 2016 spent 29 days & February 2017 28 days in the U.S. In New Zealand 330 full days each of the following 2, 12 month periods 1/1/2016 12/31/2016 & 9/1/2016 8/31/2017 By overlapping, he meets the physical presence test for the entire 20 months
Exception to Both Tests pg. 449 War Civil unrest Similar adverse conditions Must have established tax home Met the bona fide residence or physical presence test IRS publishes list of countries and minimum time requirements Taxpayer must still allocate income or housing exclusion based on actual days present in the foreign country
Claiming The Exclusion or Deduction pg. 449-450 Form 2552 or Form 2555EZ (If no SE income, total foreign did not exceed $101,300, and you had no business or moving expenses) Filed with your Form 1040 or 1040X The Form is actually an eligibility application Claiming the credit is an optional election The Form is used to claim the income exclusion or the allowance/deduction
Effect on Other Deductions pg. 453 No Foreign Tax Credit (against excluded income) No additional child tax credit or EITC (income exclusion or housing exclusion) IRA contribution add back either/both exclusion(s) to determine compensation for IRA contribution limits
Foreign Housing Exclusion or Deduction pg. 453 Same test for income exclusion Housing exemption - Employer provided funds directly or indirectly Housing deduction Paid from self-employed income
Foreign Housing Exclusion pg. 450 Qualified expenses is limited to 30% of foreign earned income exclusion 2017 limit is $102,100 X 30% = $30,630 This is further reduced and limited to a 16% of maximum income exclusion (later slide) The limit varies by country (city) like per diem there is a list
Part Year Exclusion pg. 451 A qualifying taxpayer must adjust the maximum exclusion based on the number of qualifying days Multiply $102,100 X qualifying days / 365 Assume you meet all of the qualifying test and you were present for 330 full days in 2017.. $102,100 X 330 days = 33,693,000 / 365 = $92,310 exclusion (90%)
What s in Housing Expenses pg. 453 Reasonable expenses paid or incurred For qualifying period of time Do in include costs that increase the value or life of the property http://properties.lefigaro.com/announces/chateau-yvelines-ile+de+francefrance/13999899/#owl-player-popup
Calculation The Exclusion/Deduction pg. 454 16% X $102,100 = $16,336 / 365 day = $44.76 per day (max) Less this base housing amount from his/her total housing expense to arrive at the housing amount for the year Up to the 30% of the maximum foreign earned income exclusion Dependent on location Claimed on Form 2555 Limited to net foreign earned income Excess can be carried over 1 year
Issue 3 Nonresident Alien Reporting pg. 454 Generally subject to US tax on US source income Table 2-1 IRS Pub 519 Income is divided into two categories 1. Fixed, Determinable, Annual or Periodic income or 2. Effectively connected income
Issue 3: Nonresident Alien Reporting p. 454
Two Categories of US Sourced Income FDAP pg. 455 Category 1 Fixed paid in amounts known ahead of time Determinable specific basis for computing the amount Annual until a specific event occurs (death) Periodic paid from time to time (can increase or decrease in $ or length)
US Source Income Does Not Include pg. 455 Gains derived from the sale of real or personal property (including market discount Option Premiums (not including original issue discount) Items of income excluded from gross income, without regard to the US or foreign status of Tax-exempt municipal bond interest Certain scholarship income (depends on residence of payer)
US Source Income Does Include pg. 456 1. Compensation for personal services (such as commissions and gross proceeds from performances) 2. Dividends 3. Interest (but see the later discussion of nontaxable interest) 4. Original issue discount 5. Pensions and annuities 6. Alimony 7. Real property income, such as rents, other than gains from the sale of real property 8. Royalties 9. Scholarships and fellowship grants (depends on residence of payer)
US Source FDAP pg. 456 Social Security Benefits 85% in includable (unless treaty rate) Net Capital Gains- 30% rate (183 day rule )(unless treaty rate) 183 day rule - If individual/nonresident alien is present in US for 183 or more days during the tax year Less than 183 days no tax on listed capital gain transaction Many tax treaties eliminate most capital gains (encourage investment in US) Generally does not apply to residential Real Estate
Tax Treaties pg. 458 Compensation for personal services (independent contractor) treaty may exempt you from withholding (provide withholding agent Form 8233) Alien students, trainees, teachers & researchers (employees) exempt, use Form 8233 (most treaties) Other treaties exempting US sourced income require Form 8233 Form 8233 need to be filed each tax year Form W-4 should be provided to employer (see Pub 15)
Tax Treaties Disclosure pg. 458 File Form 8233 with tax return any time claiming a treaty benefit Taxpayer must file a US return and Form 8233 for any listed benefit 1. A reduction or modification in the taxation of gain or loss from the disposition of a US real property interest based on a treaty 2. A change to the source of an item of income or a deduction based on a treaty 3. A credit for a specific foreign tax for which a foreign tax credit would not usually be allowed under the Internal Revenue Code
Other Excluded Income (non-treaty) pg. 459 Interest income not connected to a US trade or business Generally include CD s Deposit/withdrawable accounts savings, checking Amounts held by an insurance company under an agreement to pay interest
Income #2 Effectively Connected Income (ECI) pg. 459 Associated with a US trade or business under the principles of US tax law Generally associated with Visa designation F, J, M, Q Deductions can be claimed against EIC to arrive at net EIC Net EIC is taxed at same rates as US citizens & residents (unless treaty rate) Reported on 1040-NR List of other trade or business income considered ECI in book and (Pub 519)
ECI pg. 459 Wages & any other compensation performed in the US Location of where the service is determines if income is ECI Exceptions personal services provided by an independent resident alien contractor may be specially exempted by a treaty Specific treaty provisions IRS Publication 915 Income should be allocated between US/outside the US by days of service
Example 12.14 pg. 461 Jean Garneau, a citizen and resident of Canada, is employed as a professional hockey player by a US hockey club. Under Jean's contract, he received $150,000 for 242 days of play during the year This includes days spent at pre-season training camp, days during the regular season, and playoff game days. Of the 242 days, 194 days were spent performing services in the US and 48 days were spent performing services in Canada. The amount of US source income is $120,248 (194 242) $150,000
Allocation of Fringe Benefits pg. 461 Allocated based on geographic basis Housing benefits Education benefits Local transportation benefits Tax benefits/reimbursements allocated to taxing jurisdictions Hazard pay allocated to pay zone Moving expenses allocated to new employment location
Sources of Income pg. 462 Vessel of Aircrafts Airline or cruse ship employees Does use begin and end in the US? Yes considered derived entirely from sources in the US and subject to withholding if not effectively connected to a US trade or business Crew members of a foreign vessel(nonresident aliens) temporary presence not income from a US source
Sources of Income pg. 462 Scholarships, Fellowships and Grants US sourced = income from US Pension Payments Source of pension determines if income work is performed in the US = US source income Pension Earnings Pension trust is a US trust = US source income Treaties always override general rules/law there are several for pensions and Social Security (Mexico and Canada)
Issue #4: Withholding on Payments pg. 463 Withholding help ensure the filing of a tax return that might otherwise never been filed The term NRP Withholdings refers to withholding on payments under: IRC 1441, 1442 & 1443 - FDAP is subject to a flat 30% (or a reduced rate) Tax is generally withheld from the payment
NRA refers to IRC 1441, 1442 & 1443 withholding requirements pg. 463 Generally, a foreign person is subject to U.S. tax on its U.S. source income. Most types of U.S. source income received by a foreign person are subject to U.S. tax of 30%. A reduced rate, including exemption, may apply if an Internal Revenue Code Section provides for a lower rate, or there is a tax treaty between the foreign person's country of residence and the United States. The tax is generally withheld (NRA withholding) from the payment made to the foreign person.
NRA Withholdings NIB The term NRA withholding is used in this area descriptively to refer to withholding required under sections 1441, 1442, and 1443 of the Internal Revenue Code. Generally, NRA withholding describes the withholding regime that requires 30% withholding on a payment of U.S. source income and the filing of Form 1042 and related Form 1042-S. Payments to all foreign persons, including nonresident alien individuals, foreign entities and governments, may be subject to NRA withholding
Use Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, Use Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding,. Use Form 1042-T, Annual Summary and Transmittal of Forms 1042-S. Foreign Account Tax Compliance Act (FATCA). The Form 1042, Form 1042-S and Form 1042-T were modified in 2014 primarily for withholding agents to report payments and amounts withheld under the provisions commonly known as FATCA (or Chapter 4 of the Internal Revenue Code), in addition to those payments and amounts required to be reported under Chapter 3 of the Internal Revenue Code.
Amounts not subject to withholding pg. 464 Portfolio interest paid on obligations that meet certain requirements Bank deposit interest that is not effectively connected with the conduct of a US trade or business Original issue discount (OID) on certain short-term obligations Nonbusiness gambling income of a nonresident alien playing blackjack, baccarat, craps, roulette, or big-6 wheel in the US Amounts paid as part of the purchase price of an obligation sold between interest payment dates OID paid on the sale of an obligation other than a redemption Insurance premiums paid on a contract issued by a foreign insurer
When, Who & How Much to Withhold pg. 465 Withholding agent Statutory rates generally 30 % - there are also reduced rates Many treaties have either reduced or eliminate withholdings Often rates are based on Visa designation Withholdings are withheld at time of payment
Who is the Withholding Agent pg. 466 Could be a US or Foreign person, partnership, trust, association or corporation just about anyone or any entity foreign or domestic Could be more than one withholding agent for the same payment Has control, receipt, control, disposal or payment to a foreign person
Domestic & Foreign Trust Funds Rules/Same Withholding agent is personally liable for any tax liability required to be withheld Independent of the foreign persons tax liability If the agent fails to withheld & foreign payee fails to pay both are liable for the tax Tax only will be collected once
Issue #5 - Nonresident Spouse Treated as US Resident pg. 471 One Taxpayer must be a US citizen or resident alien or One spouse is not a resident until the end of the year If spouses elect to treat the nonresident alien spouse as a US resident, the following three rules apply: 1. Both spouses are treated, for income tax purposes, as residents for all tax years for which the election is in effect. 2. They must file a joint income tax return for the year in which they make the election. 3. Neither spouse can claim under any tax treaty that they are not a US resident for a tax year for which the election is in effect
Example 12.20 pg. 472 Pat Smith, a US citizen, is married to Norman, a nonresident alien. Pat and Norman make the election to treat Norman as a resident alien by attaching a statement to their joint return. Pat and Norman must report their worldwide income for the year for which they make the election and for all later years unless the election is suspended or terminated. Although Pat and Norman must file a joint return for the year for which they make the election, they can file either joint or separate returns for later years.
Making the Election pg. 472 No specific Form exists Spouse must have a valid Social Security number or ITIN Statement attached to current return signed by both spouses Declaration that one spouse that one spouse is either a US citizen or resident alien and the other neither Include both names, address(s) and signatures (SSN and or ITIN) Attach to the joint return or amended joint return Sample election is in the book
Suspending the Election pg. 473 Automatic suspension if neither spouse is a US citizen or resident alien (election applies to partial year) Election is unsuspended if status reverts to prior year (citizen, resident status re-instated) Revocation election for any year by the original due date of the return (statement attach to return with community property information)
Termination Of Election pg. 473 Termination upon death of either spouse (following year) Divorce or Legal Separation January 1 in the year the divorce or separation occurs Inadequate records IRC can terminate (tax or status records)
Resident Alien NIB A resident alien is a foreign person who is a permanent resident of the country in which he or she resides, but does not have citizenship. To fall under this classification in the United States, a person needs to either have a current green card or have had one in the previous calendar year. People can also fall under the U.S. classification of resident alien if they have been in the United States for more than 31 days during the current year, along with having been in the United States for at least 183 days over a three-year period, including the current year.
Issue #6 Foreign Owned U.S. LLC s pg. 474 For tax years beginning on or after January 1, 2017 New Regs. treat foreign owned (directedly or indirectly) subject to reporting requirements under IRC 6038 For a 25% or more foreign owned LLC, Corporation or foreign corporation engaged in a U.S. trade or business Form 5472
The End Questions
What s in Housing Expenses pg. 453 Reasonable expenses paid or incurred For qualifying period of time Do in include costs that increase the value or life of the property http://properties.lefigaro.com/announces/chateau-yvelines-ile+de+francefrance/13999899/#owl-player-popup