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

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.


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 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


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


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


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 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


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












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


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


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


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


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


Questions?

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 Overview


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?

Date post:	03-May-2018
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