Presentation to: The 1818 Society on U.S. Income Tax

Presentation to: The 1818 Society on U.S. Income Tax Presented by: Dale Mason, CPA Grant Miller The Wolf Group The Wolf Group, PC 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 Tel: (703) 502-9500

Tax Complexity U.S. Representative Rob Portman (R-OH) "The income tax code and its associated regulations contain almost 5.6 million words -- seven times as many words as the Bible. Taxpayers now spend about 5.4 billion hours a year trying to comply with 2,500 pages of tax laws..."

Pursuant to Circular 230, promulgated by the Internal Revenue Service, any U.S. tax advice contained in the body of this presentation was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

Solving Tax Complexity General Tax Residency Rules Foreign Information Reporting American Taxpayer Relief Act Foreign Account Tax Compliance Act (FATCA)

U.S. Tax Residency U.S. Citizens U.S. Lawful Permanent Residents (Green Card Holders) Substantial Presence Test

Filing a Joint Return with a Nonresident (Sec. 6013(g)) Election to treat nonresident spouse as U.S. tax resident Requires one spouse to be a U.S. citizen or resident Election filed with tax return Must make election to file joint tax return! Otherwise joint filing is not valid!

Becoming a U.S. Tax Resident All pre-residency financial assets and real property builtin gains are subject to U.S. taxation Onerous foreign financial asset reporting requirements (FBAR and Form 8938) All worldwide income subject to U.S. taxation; including: All foreign and U.S. interest, dividends, capital gains All foreign and U.S. rental property income SRP subject to U.S. taxation FATCA issues

Pre-Residency Planning Consider: Selling built-in gain assets especially where foreign tax is lower than U.S. tax Moving foreign financial assets to the United States Selling foreign mutual funds (which are called Passive Foreign Investment Companies ) Special issues surrounding foreign exchange gains/losses

Foreign Financial Asset Reporting: Form TD F 90-22.1 and Form 8938 The Wolf Group, PC 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 Tel: (703) 502-9500

Foreign Bank Account Reporting: Form TD F 90-22.1 Who should file: U.S. citizens and residents Persons with financial interest in or signature authority over foreign financial account(s) Aggregate value exceeding $10,000 at any time during the year Must be received by June 30 of the following year No extensions Not filed with tax return Schedule B question

Foreign Financial Account Bank, savings and checking accounts Securities accounts such as mutual funds and brokerage accounts Even foreign annuity or insurance policy with a cash surrender value Not individual bonds, notes or stock certificates

Maximum Value Must file if the sum of all foreign financial accounts maximum values during the year exceeds $10,000 Look first at the maximum value of each account Then add all maximum values and compare to $10,000 Odd result: $5,000 transferred between accounts is reportable Convert foreign currencies at the 12/31 exchange rate Must use Treasury s FMS rate if available

Joint Accounts Each U.S. person who owns part of a joint account(s) that exceeds $10,000 must report the account on an FBAR Each joint owner reports the full value of the account No joint FBARs except for MFJ husband and wife Not allowed if each spouse has separate accounts

Form TD F 90-22.1 Penalties Non-willful failure penalty $10,000 May be waived due to reasonable cause Willful failure penalty Greater of $100,000 or 50% of account balance Criminal penalties 6 year statute of limitations

IRS Offshore Voluntary Disclosure Program Partial amnesty program FBAR and certain international tax reporting Pay all taxes and interest for past 8 years Accuracy or delinquency penalty Waiver of penalties for informational forms Penalty: 27.5% of the highest account balance Penalty: 12.5% if unreported foreign account < $75K Currently no deadline; subject to change

New Specified Foreign Financial Assets Report Form 8938 Effective for individuals beginning in 2011 Interest in Specified Foreign Financial Assets with an aggregate value exceeding $50,000 (or more) Information statement attached to the individual's U.S. income tax return This reporting requirement is in addition to FBAR!

New Specified Foreign Financial Assets Report Form 8938 Specified foreign financial asset Any financial account maintained by a foreign financial institution Any stock or security issued by a foreign person Any financial instrument/contract foreign issuer Any interest in a foreign entity Information statement - Maximum value of assets, account numbers, names and addresses of foreign financial institutions, etc.

Form 8938 Filing Thresholds Year-End Aggregate Value of All Specified Foreign Financial Assets Exceeds: Highest Annual Balance Exceeds: Single, living in the U.S. $50,000 $75,000 Single, living outside the $200,000 $300,000 U.S. MFS, living in the U.S. $50,000 $75,000 MFS, living outside the U.S. $200,000 $300,000 MFJ, living in the U.S. $100,000 $150,000 MFJ, living outside the U.S. $400,000 $600,000

Jointly Owned Assets Joint Ownership each specified person must report Spouse, MFJ file a joint 8938; include asset value once Specified Individual Spouse, MFS include ½ asset value to determine threshold, but report full amount on 8938 Non-Specified Individual Spouse, or Non-Spouse each joint owner includes entire value of asset Examples on page 3 of Form 8938 Instructions

Form 8938 Valuation Accounts: may generally rely on periodic statements Other assets: may rely on year-end value, don t need appraisal Unless individual has reason to know the above does not provide reasonable maximum value Foreign pension plan year-end value If not known, value of distributions received during the year If no distributions received, value is zero Convert to USD at December 31 spot rate Must use Treasury s FMS rate if available

Form 8938 Penalties $10,000 penalty for failing to file Form 8938 Additional penalties following notification from IRS 40% underpayment penalty Criminal penalties Reasonable cause exception Extended statute of limitations

Statute of Limitations If a taxpayer fails to file Form 8938 or fails to report a specified foreign financial asset, the statute of limitations for the tax return does not start to run Statute remains open until 3 years after complete 8938 is filed If a taxpayer omits more than $5,000 of income from a specified foreign financial asset, statute of limitations extended to 6 years from date 8938 is filed

FBAR vs. 8938 FBAR (TD F 90-22.1) Form 8938 Who Must File U.S. Persons Specified Persons What is Reported? Foreign financial accounts SFFAs Signature Authority? Reported Not reported Filing Threshold $10,000 $50,000 - $600,000 Minimum Penalties No minimum $10,000 Due Date 6/30, no extensions 4/15, plus extensions Statute of Limitations 6 years from filing date 3 years from filing date

Form 8938: World Bank Pension Subject to special valuation rules Value of participant s share of defined benefit plans generally not ascertainable Value equal to distributions received during the year Gross distribution reported on Form 1099-R

Example: Facts Single individual living in the U.S. Retired from the World Bank Receives an annual gross distribution of $75,000

Example: Sample 8938

Example: Sample 8938

Example: Sample 8938

Example: Sample 8938

Example: Sample 8938

Example: Sample 8938

Questions?

American Taxpayer Relief Act

New Medicare Taxes 1/1/2013 New 0.9% Medicare Tax Only on employee share Only on compensation exceeding: o $250,000 (MFJ) o $200,000 (Single) o $125,000 (MFS) Applies to both employment and Self-Employment income

Medicare Contributions Tax Tax is 3.8% of the lesser of: Net Investment Income OR The excess of Modified Adjusted Gross Income over: o$250,000 (MFJ) o$125,000 (MFS) 1/1/2013 o$200,000 (Single & Other taxpayers)

Medicare Contributions Tax Unearned Investment Income: Capital Gains Dividends Income Interest Income Net Rental Income Foreign non-qualified pensions Unearned Income does not include: Qualified retirement plan income SE income Sale of principal residence exclusion

2013 Payroll Tax Increase Employee s share of Social Security taxes increase from 5.65% to 7.65% beginning January 2013. Social Security ceiling for 2013 is $113,700. (A tax increase of $2,274 for max earners). U.S. citizens working for I/O will not be reimbursed because this portion of payroll tax is the employee s responsibility

Top Tax Rates Rates stay the same except for a top 39.6% rate above the following thresholds: $450,000 joint filers & surviving spouses $425,000 HOH $400,000 Single $225,000 MFS Note: Sec. 6013(g) election may make even more sense!

Capital Gains/ Dividends LT Capital gains/qualified Dividends tax raised from 15% to 20% for taxpayers over the following ordinary income thresholds: $450,000 joint filers & surviving spouses $425,000 HOH $400,000 Single $225,000 MFS

Phase-Out of Personal Exemption Phase-out of personal exemptions ($3,900 est.) Phase-out begins at the following AGI thresholds: $300,000 MFJ $275,000 HOH $250,000 Single $150,000 MFS Reduced by 2% by each $2,500 (or portion thereof) over the threshold amount.

Phase-Out of Itemized Deductions Itemized deductions are reduced by 3% of the amount AGI is over threshold amounts (not to exceed 80% of deductions). Phase-out begins at the following AGI thresholds: $300,000 MFJ $275,000 HOH $250,000 Single $150,000 MFS

Comparison of Individual Tax Rates from 2012 to 2013 2012 2013 Top rate for ordinary income 35% 39.6% LT Cap Gains 15% 20.0% Qualified dividends 15% 20.0% Surtax on investment income No provision 3.8% Medicare HI tax No provision 0.9% Phase-out of Personal Exemption 2% Phase-out of Itemized Deductions 3% Estate Tax Exemption $5.1M $5.25M Estate Tax Rate over exemption 35% 40%

Questions?

FATCA Overview Foreign Account Tax Compliance Act FATCA enacted on March 18, 2010

FATCA Overview Designed to force U.S. citizens and residents to report all foreign income FATCA provisions adds an entirely new Chapter 4 to the Internal Revenue Code 500 pages of final regulations

FATCA Overview IRS Agreement: Required of all worldwide foreign financial institutions ( FFI ) and certain non-financial institutions who receive any U.S. source payments. OTHERWISE: 30% withholding tax applied to any Withholdable Payment

FATCA Overview To avoid U.S. withholding, Foreign Financial Institutions ( FFIs ) that hold U.S. investments must: Identify U.S. persons; Report information to IRS (or foreign government) on U.S. persons; Withhold 30 percent on certain payments to recalcitrant account holders and other FFIs that do not meet FATCA requirements.

FATCA - Practical Implications Many foreign financial institutions have and will decide to terminate U.S. clients accounts Self-reporting will be cross checked with institutional (foreign government) reporting. Discrepancies will be easy to identify. Strict enforcement of PFIC rules and cost of information reporting will also cause U.S. persons to move financial assets to the U.S.

Questions?