U.S. Expats Balk at Tax Law / American Citizen Renunciations Are Soaring

• MARIKO SANCHANTA
 And 
• JASON CHOW for the Wall  St. Journal write: 
The U.S.'s crackdown on global tax evaders is leading to a record number of people renouncing their citizenship, and its effects are being felt keenly in Asia—now the world's wealthiest region by household assets.

A growing number of wealthy Americans in Asia—and others with green cards—are exploring whether to renounce their U.S. citizenship or give up their green cards to avoid onerous tax obligations.

Globally, more U.S. citizens have renounced their citizenship in the first and second quarters than all of 2012 combined, and 2013 is already on track to becoming a record year for renunciations. A total of 1,130 names appeared on the latest list of renunciations from the Internal Revenue Service, according to Andrew Mitchel, a tax lawyer who tracks the data. That is far above the previous high of 679, set in the first quarter, and more than were reported in all of 2012.

While those numbers are still a fraction of the estimated six million Americans living abroad, lawyers say the main trigger for cutting ties with U.S. recently is the Foreign Account Tax Compliance Act, or Fatca, which requires foreign institutions to disclose the overseas assets of U.S. green-card holders and citizens to the U.S. government.

The U.S. Congress estimates that tax evasion by U.S. citizens results in losses of up to $100 billion a year. The main objective of Fatca is to identify people who may be evading taxes through offshore investment vehicles.

"When I became an immigration lawyer 30 years ago, people really were excited about going to America. Now, more than half of my clients are people thinking of other alternatives rather than people seeking to immigrate to America," said Eugene Chow, the principal of Chow King & Associates.

In Hong Kong, where the individual tax rate is capped at 15%, becoming a citizen is an attractive prospect. But some U.S. citizens say they are exasperated by a growing raft of paperwork that forces U.S. citizens living abroad to declare the minutiae their financial holdings and other assets. "My decision was less about the actual amount of taxes I had to pay, and more about the system," said one investment banker, who renounced his U.S. citizenship and is now a Hong Kong citizen. "I'm not an ultrawealthy dude. It was the hassle with all the paperwork"

Jay Krause, head of the wealth planning group in Asia for law firm Withers, says his lawyers in Hong Kong and Singapore are busy processing voluntary U.S. tax returns under the IRS's offshore voluntary disclosure program, which is also designed to weed out tax evaders and people who haven't filed their taxes in years. Many of his clients are citizens or green-card holders who haven't lived in the U.S. for years but kept the green card or passport for travel purposes. "They stuck it away in a drawer and didn't think about it," he said.

The U.S. Government Accounting Office said found that 10,439 offshore voluntary disclosures were filed and closed, with the median taxpayer reporting $568,735 in offshore accounts and owing $95,982 in taxes, interest and penalties.

Since the 2009 program, the IRS launched similar measures for voluntary filings in 2011 and 2012, which are still in place. Mr. Krause said the highest tax bill he has seen was "in excess of $35 million."

After filing their taxes, many Withers clients are giving up their green cards and U.S. citizenship, deeming the tax liability to be too onerous. Among them are American expatriates who see their Singaporean and Hong Kong peers paying a far lower income tax and aren't subject to capital gains taxes, Mr. Krause said.

Rather than pay a hefty exit tax in exchange for renouncing U.S. citizenship, many wealthy Asian families are simply paying up their missed taxes, paying penalties of 27.5% on the value of previously undeclared assets. Scott Michel, a tax and estate lawyer based in Washington DC with Caplin & Drysdale, said he has filed taxes up to $60 million on behalf of one family. "Some clients, many of the wealthier ones, decide to bite the bullet," he said. "That's a lot of money to pay for peace of mind, but people do it."

Wealthy families with U.S. citizenship—many of whom haven't lived on U.S. soil in years—are finding ways to work around Fatca regulations. Many are opting to set up special "foreign grantor trusts" to escape paying taxes while maintaining citizenship. In that scenario, one family member who doesn't have U.S. citizenship is designated as the settlor—typically, the head of a family business—and places assets in a designated trust for the benefit of the children who do have U.S. citizenship. The income generated from those assets isn't subject to U.S. taxes. But there is a caveat: The trust must be fully revocable, which means the settlor has the right to withdraw the assets from the trust whenever he or she pleases.

The foreign grantor trust is becoming a favored method for passing on wealth, said Jay Krause, head of the wealth planning group in Asia for law firm Withers. Such trusts are "highly advantageous" to families living abroad, he said.

Still, many long-term U.S. expats are grappling with the new regulations and the longer-term implications it could have for the U.S. in general. "The U.S. system does not incentivize anyone to go overseas anymore," said the banker in Hong Kong who renounced his citizenship. "As a country, your sphere of influence is impacted."

Mr. Chow says the new regulations have altered the entire premise of his business. "My mentor, who is in his early 80s, said to me, 'You became an immigration lawyer to fulfill the American dream, and now you are helping people leave."

Tax deductions for college savings?

Karin Price Mueller/The Star-Ledger  writes: Question:  When can I apply a state income tax deduction? When I enter money into a 529 account for my grandchild, or when I actually send the money to a college for my grandchild’s tuition?

Answer. Great question. You certainly don’t want to run afoul of the Internal Revenue Service.  The tax deduction for a 529 contribution is taken in the year that the contribution is made into the plan, which can be many years before the expenses are incurred for college, said Howard Hook, a certified financial planner and certified public accountant with EKS Associates in Princeton.

New Jersey isn’t among the states that offer a tax deduction for 529 plan contributions.

Still, 529 plans can be a terrific way to save for college.

In a normal investment account, interest, dividends and capital gains are subject to income taxes in the year the earnings are realized, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

But in 529 plans, the money grows tax free and can be withdrawn tax free as long as it’s used for qualified education expenses.

Kiely said there are three players in a 529 plan: the owner of the account, the beneficiary and the successor owner.

The owner is the person who sets up the account and who is in control of the account, usually a parent or a grandparent.

The beneficiary is the person who will attend college, usually a child or grandchild — but it can be anybody, including you.

The successor owner obviously becomes the owner if the owner passes away or is otherwise incapacitated.

Because there is only one beneficiary for a 529 plan account, you must open a separate 529 accounts for each beneficiary, he said.

"With a 529 plan, the owner actually owns the account. The owner can change their mind and take the money back, subject to tax and a 10 percent penalty on the earnings," he said. "The owner can change the name of the beneficiary at any time."

So if the child gets a full scholarship to college, you can name another child as the beneficiary.

"A contribution made for the benefit of someone else is a gift subject to gift taxes and gift tax return requirements," Kiely said. "If you make a gift to someone of more than $14,000 in a year — $28,000 if it’s a joint gift from a husband and wife — you have to file a gift tax return and possibly pay a tax."

The $14,000 gift limit is called the annual gift tax exclusion, but Section 529 of the code makes an exception for this, too. You can contribute five years’ worth of annual gift tax exclusions in one year, said Kiely.

If the funds in a 529 plan are used to pay for qualified expenses, which include tuition, fees, books, supplies and more, the distributions are free of federal and New Jersey income tax.

Do I need a separate app to record receipts, if I'm already using cloud accounting?

Daniel James for Business IT writes:    If I'm using online accounting solutions such as Xero, do I need a separate app to record receipts?

It's a good question - for example Xero already has a function for employee expenses.

So what is the point of using the Expensify expense-reporting system that's reportedly being integrated with Xero?

The point of using a third party expenses tool like Expensify is that it's designed to help employees to record and submit their expenses. For example, Expensify's apps include features such as taking photographs of receipts and logging car journey distances via GPS or entry of odometer readings.

Expensify's bank feed mechanism lets employees pull transactions from their credit cards and other accounts straight into their expense reports. This works with the big four banks, American Express, and a few smaller institutions, though we are wary of such arrangements that require users to reveal their internet banking credentials to third-party services.

The idea is that the easier it is to file an expense report, the less likely people are to keep putting off the task.

It's not only employees who can benefit. Expensify also handles relatively complex approval processes. For example, say you are a shop manager and you approve expense claims from employees at that location, but your own expenses must be approved by the owner. Because it integrates with accounting systems that reduces the data entry load on bookkeepers.

So it's not really a question of whether or not you need an expense-recording tool, it's whether using one will make your business more efficient and help to keep your records right up to date. 

IRS Releases Draft Form 8960 on Net Investment Income Tax; Final Regulations, Public Comments Yet to Be Released

The IRS has released draft Form 8960, Net Investment Income Tax–Individuals, Estates, and Trusts. The draft form fits on a single page. It contains only 21 lines (33 entries if lines 4a-b, 5a-c, 9a-c, 18a-b and 19a-b are each counted separately), divided into three parts: Part I – Investment Income; Part II – Investment Expenses Allocable to Investment Income and Modifications; and Part III – Tax Computation (within which separate computations are required for Individuals and Estates and Trusts).

Draft Form 8960 Instructions have not yet been released. The IRS stated that the draft Form 8960 should not be interpreted as reflecting any changes that may be made by anticipated final Code Sec. 1411 regulations.

Although the IRS had published a Notice and Request for Comments on Form 8960 in the July 29, 2013, Federal Register (TAXDAY, 2013/07/29, I.2), the IRS did not made the draft form itself available until August 8, 2013. At the time the notice was published, an IRS spokesperson told CCH that the draft form was undergoing some "final adjustments" and would be released shortly.

Background

The 3.8-percent tax on net investment income under new Code Sec. 1411 has been effective generally for tax years beginning after December 31, 2012. Taxpayers and practitioners have been concerned about the complexities involved in determining liability for the net investment income tax (NII tax), particularly since the tax is already effective. Proposed regulations that were published on December 5, 2012 (TAXDAY, 2012/12/03, I.3) have been considered inadequate by many commentators (TAXDAY, 2013/04/03, I.5). Final regulations have not yet been issued, although they have been promised to be issued in 2013 (TAXDAY, 2013/05/14, M.1).

Insights

In a "caution page" preceding the draft form, the IRS warned that "no inference should be drawn from any particular line item regarding the treatment of such item in the final regulations." It also noted that the draft form does not reflect consideration of comments submitted on the proposed regulations. Nevertheless, some practitioners have been examining draft Form 8960 for any possible hint of how the IRS will resolve certain issues that have remained unclear under the proposed regulations.

Consistent with previous plans. IRS personnel had previously expressed their intention to make the NII tax form a relatively simple, single-page form on which, to the extent possible, various components of net investment income will have already been computed at the back end on other forms and would be merely transferred onto the NII tax form. David Kirk, attorney-adviser, IRS Office of Associate Chief Counsel (Passthroughs and Special Industries), and a principal drafts-person on the Code Sec. 1411 regulations project, had earlier reported that the NII tax touches over 50 existing IRS forms and instructions that were being revised (TAXDAY, 2013/05/14, M.1).

As an example of "back-door" computations done before an amount reaches the NII tax form, Kirk speculated at the time that NII adjustments for rental income might be made on Form 1040 Schedule E and then carried over as a single number onto the NII tax form. That intention appears to be reflected in draft Form 8960, line 4a: "Rental real estate, royalties, partnerships, S corporations, trusts, etc. (Form 1040. Line 17; or Form 1041, line 5)" since Form 1040, line 17 carries the same title and instructs "Attach Schedule E" and Form 1041, line 5, instructs the same.

"See Instructions." In addition to the back-door work in determining what is net investment income done on other tax forms before reaching the NII tax Form 8960, draft Form 8960 also contains 15 lines on which it instructs "(see instructions)" Some of the figures to be entered on these lines may only require simple reference to a chart-like table in future instructions (for example, line 14 – "Threshold based on filing status (see instructions)"). The calculations for others, such as Line 4b – "Adjustment for net income or loss derived in the ordinary course of a non-section 1411 trade or business (see instructions)"; Line 5b – "Net gain or loss from disposition of property that is not subject to net investment income tax(see instructions)"; and Line 9c – "Miscellaneous investment expenses (see instructions)" look particularly challenging given the issues that have surfaced surrounding them since proposed regulations had been issued. At least some of these lines may include work-sheet computations that would be performed pursuant to the instructions.

Other insights. One theory about the content of draft Form 8960 is that it should be discounted as merely a place-holder, since scheduling of IRS forms and publications may call for finalizing new 2013 forms in early Fall 2013, which in turn may require the submission of a draft at this time. Nevertheless, assuming that the IRS Chief Counsel’s Office and IRS Forms and Publications have been working together, the following interpretation of the proposed regulations and the NII tax in general might be inferred from the following lines within draft Form 8960:

• Line 3—"Annuities from nonqualilfied plans (see instructions)." The fact that instructions are required may indicate a recognition that partner retirement payments that contain noncompete conditions may qualify;
• Line 4a—"Rental real estate, …etc." By omission, the inclusion of rental real estate only might indicate that income from personal property leases are not NII (although it might still be covered by Line 4b—"Activities for net income or loss…(see instructions)";
• Line 5a—"Net gain or loss from disposition of property." The inclusion of net losses may allow a net loss to offset other categories of investment income (but contrary to the Preamble to the proposed regulations).

Home Based Business Start Up Costs Tax Deduction Up To $5,000

Tyler Ford writes: Claiming Tax Deductions for HOME BASED BUSINESS START-UP COSTS:

“Costs incurred during the START-UP PHASE of a business are generally deductible over a 15 year period” (i.e., each $1,500 in start-up costs would be deducted at a rate of $100 per year for 15 years). [IRC Sec 195(c)(1)(A) ]

WHAT IS THE “SPECIAL DEDUCTION” FOR 2011?

Any taxpayer, who begins operation of a new business in 2011, may deduct ALL start-up costs (up to $5,000 maximum) on their 2011 tax returns — no need to spread the deduction over a 15 year period. [IRC Sec 195(b)]

EX: $5,000 in Start-Up Cost deductions, for a person in a 28% tax bracket, would generate a $1,400 tax Refund.

If Start-Up Cost deductions exceed the amount of money earned this year in the home-based business itself, most or all of the additional deductions may be applied against any other source of income such as a W-2 job, which could possibly even drop the taxpayer into a lower tax bracket. This one-time write-off provision in the tax law is valid only during 2011, and therefore will set to expire permanently at midnight, December 31, 2011. Even IF Congress reinstates this provision in 2012, a business begun after Jan. 1, 2012 will not be able to claim those deductions until April 2013 – when 2012 Tax Returns are filed. Not activating a new home-based business by December 31, 2011, will delay tax-deductions for Start-Up Costs by at least 15 months.

WHAT ARE “START-UP COSTS?”

The term includes business related costs you incur prior to actually beginning to offer goods or services for sale# i.e., the costs of getting ready to open your business. They are generally the same types of expenses that will be called “business operating costs” once you are actually operating a business. [ IRC Sec 195(c)(1)(B) ]

Q: When does the start-up period begin?

A: When you begin thinking about starting a business.

Q: What are some examples of tax-deductible “start-up costs?” [IRC Sec 195(c)(1)(A) ]

A: Seminars, Workshops, Courses and Books on how to run the business, investigating or researching one or more business opportunities, travel for meetings, conventions or interviews or to obtain education from experts, telephone and cellular phone costs related to new business start-up, office supplies and some business tools(briefcase, iPad, business cards, etc.)

In regards to ViSalus examples of deductable items would include (sure there are many more):

1. Executive Success System (ESS)
2. Business Cards
3. Banners
4. Clothing
5. Taster Packs
6. ViSalus Events – book and pay for your Vi events for 2012 before 2011 ends
7. Marketing Materials
8. Vi-Net

DOES NOT INCLUDE vehicles, furniture, computers and other depreciable assets [IRC Sec 167(a)] Caveat:

The IRS “default setting” for start-up expenses is to deem that the taxpayer made a decision to amortize the amounts over a 15 year period. [Reg Sec 1.195-1T (b) ] To keep that from happening, and claim your deductions immediately, you should take 2 actions: [Reg Sec1.195-1T (b)]

1. Claim your Start-Up Expenses on IRS Form 4562 (“Depreciation and Amortization”)

2. Attach an “election statement” to your tax return, stating specifically that you wish to claim all (or the first $5,000) of your Start-Up Expenses in 2011, “the year in which your business became active.” By the way, since Start-Up Expenses are deductible in the year in which the business begins active operation, if the business you are investigating never gets off the ground, you will not get any deductions. [IRC Sec. 165]

PS: Your AUTO DELIVER and Vi-Net are A TAX DEDUCTION! CLICK HERE TO FIND OUT HOW.

PSS: OH Ya - almost forgot most of us get our monthly product for FREE!

THE ABOVE INFORMATION IS FOR ILLUSTRATION PURPOSES ONLY, AND SHOULD NOT BE TAKEN AS TAX ADVICE. ALWAYS CONSULT A TAX ADVISOR WITH EXPERTISE IN HOME BUSINESS TAX LAW PRIOR TO USING THIS, OR ANY, TAX DEDUCTION INFORMATION. 

Married Same-Sex Couples With Kids See IRS Tabs Rising

Lydia Beyoud and Heidi Przybyla for Businessweek write: Married same-sex couples with children may face higher bills from the IRS as recent Supreme Court rulings start playing out in the tax code.

The increase probably would result from phasing out income tax credits for families, depending on the distribution of income between two working spouses, now that same-sex couples will be required to file joint returns with the Internal Revenue Service, according to a Congressional Research Service report.

“Under the new tax laws, you get the worst of both worlds,” said Jonathan Forster, chairman of the wealth management practice group at Greenberg Traurig LLP. “As you get pushed up into higher income tax brackets you also end up where there are certain exemption phase outs and deduction limits. You hit the ceiling on all these, you get whipsawed, particularly if both couples are working.”

The Supreme Court ruled June 26 in a 5-4 decision that excluding state-sanctioned, same-sex marriages from the federal definition of marriage is unconstitutional -- opening up a flood of tax- and benefits-related changes that in many cases will raise costs for gay married couples.

In most same-sex marriages, both individuals work, Forster said. While some couples have a big disparity in income between partners, that’s the exception rather than the rule, he said.

If each person earns $150,000 in wages and they have $30,000 in itemized deductions, $20,000 in state and local income tax and $10,000 mortgage interest, they will pay $9,400 more as married joint filers than as single separate filers based on current federal laws, Forster said.

Marriage Penalties

“Generally speaking, if there is a wide disparity in the income between the two spouses, they’re more likely to pay less total taxes as a married couple than they would as single people,” said Courtney Joslin, professor at the University of California Davis School of law who specializes in family and sexual-orientation law. “By contrast, if the two incomes are closer together, they’d probably have to pay more as a married couple than they would as single people.”

With children, the picture looks worse, Bloomberg BNA reported. The loss of the earned income tax credit is one area where same-sex spouses with children stand to see a tax bill, according to the Congressional Research Service.

“Marriage penalties” can occur when the couple’s joint income pushes them into the range where the credit phases out or results in ineligibility, the report said.

Adoption Issues

Joint filers could also face a phase-out for the child tax credit as their joint income rises above a certain threshold, as the phase-out threshold for married couples is less than twice that for unmarried individuals, CRS said.

“As a result, two unmarried individuals might each qualify for the credit but receive a smaller credit or become ineligible for it if married,” the group said.

Ineligibility for education tax credits probably would double for married filing jointly parents.

Couples in which one same-sex spouse wishes to adopt the other spouse’s child may also lose out on the adoption tax credit, because the credit isn’t available when adopting a spouse’s child, the report said. Families also stand to lose the child and dependent care credit if one spouse has no income, disqualifying them for the credit, CRS said.

Same-sex married couples who both contribute to dependent care flexible spending accounts also may find themselves in a situation where they over-contributed in the first year in which they file as a married couple, CRS said. This is because under current law, taxpayers with children may contribute only up to $5,000 tax-free to an account, whether married or not.

Filing Easier

So some couples may find anything contributed above that amount have become taxable, even though individual incomes makes them eligible for the child and dependent care credit, CRS said.

Even so, there are also advantages for same-sex couples when it comes to tax season.

“One thing that will be true for everyone, regardless of their tax liability, is that filing their taxes will become much easier,” Joslin said. “Filing taxes has been extremely complicated for married same-sex couples because they had to calculate their taxes twice.”

The Earnings Tax Is A Key Factor In Detroit's Taxpayer Exodus, Bankruptcy

Rex Sinquefield, for Forbes writes: High crime rates, out-of-control public employee pensions, dreadful failing schools, dwindling population, long-term infrastructure deterioration — the story of Detroit’s bankruptcy filing last month has few heroes and many villains.

The ill-conceived economic policies and real leadership vacuum, locally and at the state level, set the stage for Detroit’s failure, ultimately bringing this iconic American city to its knees.  If it can happen in Detroit, we now ask, what other U.S. cities may be facing the same fiscal disaster? Chicago? Philadelphia? New York?

Recently Dave Helling of the Kansas City Star looked at the variables at play in Motor City’s economic collapse as a point of comparison for Kansas City, Mo. His conclusion? Detroit’s earnings tax structure may have been a key factor in its loss of high wage earners. According to Helling, the tax incentive for workers to move to the suburbs has led to a “vicious cycle of collapse.” From 2000-2010, the metro areas with the largest declines in population (excluding New Orleans, post Hurricane Katrina) were Detroit (-25%), Cleveland (-17%), Cincinnati (-10%), Pittsburgh (-8%), and St. Louis (-8%). Each of these aforementioned cities have an earnings tax.

One state, Missouri, has taken significant steps towards dealing with the negative effect of earnings taxes.

In late 2010, they voted to require St. Louis and Kansas City to reapprove the earnings tax every five years. If the tax fails to survive an election, it will be removed over 10 years. The process led St. Louis City officials to consider alternative, less harmful methods of raising revenues.

Detroit’s city income tax rate of 2.5 percent for residents and 1.5% for non-residents was the highest. In its Proposal for Creditors, Detroit clearly articulates that the City’s income tax base should be “increased through economic growth” and that lowering its earnings tax rate to “levels that are at least competitive with surrounding jurisdictions is critical to reversing the City’s crippling population and job loss.”

Last Tuesday, economist Stephen Moore cited 20 American cities that are dancing dangerously close to a fiscal cliff of their own making. As mayors and city managers take a closer look at their own deficits and consider the best fiscal policies to counteract years of revenue loss and population decline, they would do well to consider some of the studies that show the detrimental effects of taxing wages at the local, municipal level.

Recent analysis by Howard J. Wall for the Missouri-based think tank the Show-Me Institute looked at a total of 176 cities, 21 of which levy an earnings tax, over the time period between 1990 and 2000. His findings show that “an earnings-tax rate that is higher by one percentage point is associated with a population growth rate that is lower by 3.04 percentage points, and an employment growth rate that is lower by 2.32 percentage points” and “that those municipalities within the same metro area that did not levy an earnings tax, enjoyed faster population growth.”

This new evidence supports Detroit’s plan to cut earnings taxes and to rely on economic growth through other more productive development. It also should be used as a guide for city leaders across the country as they face their own economic crises.