The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500
Presentation to:
The 1818 Society on
U.S. Income Tax Presented by:
Dale Mason, CPA
Grant Miller
The Wolf Group
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...."
© 2013 The Wolf Group
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.
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Solving Tax Complexity
General Tax Residency Rules
Foreign Information Reporting
American Taxpayer Relief Act
Foreign Account Tax Compliance Act (FATCA)
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U.S. Tax Residency
U.S. Citizens
U.S. Lawful Permanent Residents
(Green Card Holders)
Substantial Presence Test
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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!
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Becoming a U.S. Tax Resident
All pre-residency financial assets and real property built-in 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
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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
© 2013 The Wolf Group
The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500
Foreign Financial Asset
Reporting: Form TD F 90-22.1
and Form 8938
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
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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
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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
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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
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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
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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
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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!
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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.
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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 U.S.
$200,000 $300,000
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
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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
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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
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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
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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
© 2013 The Wolf Group
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
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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
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Example: Facts
Single individual living in the U.S.
Retired from the World Bank
Receives an annual gross distribution of $75,000
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Example: Sample 8938
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Example: Sample 8938
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Example: Sample 8938
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Example: Sample 8938
© 2013 The Wolf Group
Example: Sample 8938
© 2013 The Wolf Group
Example: Sample 8938
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Questions?
American Taxpayer
Relief Act
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
New Medicare Taxes
1/1/2013
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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)
o$200,000 (Single & Other taxpayers)
Medicare Contributions Tax
1/1/2013
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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
Medicare Contributions Tax
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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
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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!
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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
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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.
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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
© 2013 The Wolf Group
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%
Comparison of Individual Tax Rates
from 2012 to 2013
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Questions?
Foreign Account Tax Compliance Act
FATCA enacted on March 18, 2010
FATCA Overview
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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
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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
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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 Overview
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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.
© 2013 The Wolf Group
Questions?
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