Friday, October 11, 2013

Advisers, Clients Frustrated as Tax Deadline Nears

Daisy Maxey for the Wall St Journal writes:  As the partial government shutdown stretches on, certified financial planner and tax professional Gene Bell is growing more concerned about the Oct. 15 deadline he faces for about 35 taxpayers.


With Internal Revenue Service telephone help lines shut and delays making it difficult to obtain needed information for returns, some of Mr. Bell's clients have grown frustrated and angry.
"It's an absolute mess," says Mr. Bell of Gene Bell & Associates, an independent adviser in Bellingham, Wash., which is affiliated with H.D. Vest Investment Services.
To obtain information on new clients seeking help with their returns, Mr. Bell must file a Form 2848, a power of attorney authorizing him to represent them before the IRS. The enrolled agent with the IRS always has been able to do that online or by calling the service's Practitioner Priority Service, a support line.
But since the shutdown began, the help line has been shut off.
Previously, if Mr. Bell faxed the form in, it might take 72 hours to obtain the required authorization, he says. Since April 15, however, that's slowed to more than two weeks. With the shutdown, he says, he has "no clue if anybody is even looking at them."
He can still file requests online, but isn't sure how much longer that will be possible. The "Disclosure Authorization and Electronic Account Resolution" system was due to be shut down "largely to low usage," but that's been delayed, according to a statement on the IRS' website.
Some of Mr. Bell's clients have received notices indicating there's a problem with their returns, which require a response within 30 days. He'll often try to request more time.
Now, he might get a letter, which basically states: "'Thanks for your communication. We'll get back to you in 60 days'," he says. "The next thing they get is a levy."
Michael David Schulman, an adviser with Blue Flamingo Wealth Management, who also runs Schulman CPA, has had issues with several clients' returns as a result of the shutdown. Before it began, for example, the IRS told him via letter and a telephone call that a client's account would not go into collection. Then, just before the shutdown, the client received a notice of a potential levy, he says.
"That's a nightmare because there's no one to call for help," says Mr. Schulman, who's based in Central Valley, N.Y.
Advisers and accountants continue to send information to the IRS, "but they're just sitting on piles," he says. "The longer they sit there, the more there's a chance they'll get lost."
A major concern is what happens when the IRS reopens, Mr. Schulman says. "How much mail do you think is sitting on those desks? There's no way they're going to get back to you in 60 days. Contacting them isn't going to be easy either."
Kyle Brownlee, chief executive and senior wealth adviser at Wymer Brownlee Tax and Financial Management, is also frustrated. The most common problem he's facing is the inability to get transcripts from the IRS. For clients who have lost forms, the firm, based in Enid, Okla., usually turns to the local IRS office to obtain information on payments they've made to the IRS, he says. But most of those offices are now closed or offering limited service.
"We're waiting," he says. "The problem is under professional-conduct rules, we're not supposed to file knowingly incomplete or inaccurate tax returns, yet they're asking us to meet the deadline."
Luckily, just before the shutdown, the firm's tax director spent hours requesting transcripts for any clients it anticipated might need them, Mr. Brownlee says.
Melissa Labant, director of tax advocacy at the American Institute of CPAs, said the organization's phone lines have been buzzing with calls from frustrated CPAs, some concerned that they won't be able to meet the Oct. 15 deadline.
Tax season is still going smoothly for most of the group's 394,000 members, but for those affected, "panic is starting to set in," Ms. Labant says. As the 15th nears, the concern grows that some returns and issues may not be addressed in a timely manner, she says.
IRS e-services programs are working, but with no one answering telephones, accountants who aren't registered to use the e-services program have no way of getting help if they face a unique situation. "Tax practitioners are desperate for answers, and doing the best they can, Ms. Labant.
It's difficult especially for taxpayers who have unpaid tax bills or notices to levy, she says, noting that "interest and penalties are accruing during this shutdown."
Others are awaiting refunds, which the IRS is not issuing during the shutdown.
For now, accountants continue to file tax returns online through the IRS's Modernized e-File system. "I have my fingers crossed that the MeF system continues to operate smoothly," says Ms. Labant. "If the MeF system goes down, that could be a disaster for practitioners."
Posted on 5:54 AM | Categories:

Year-End Tax Planning Ideas for U.S. Individual Taxpayers, Tax Planners, and Tax Preparers

Thomson Reuters for MarketWatch writes:  Thomson Reuters tax analyst offers tax saving moves for the end of 2013.  For most individuals, the ordinary federal income tax rates for 2013 will be the same as last year: 10%, 15%, 25%, 28%, 33%, and 35%," said Jim Van Grevenhof, a senior tax analyst for Thomson Reuters. "However, the Tax Relief Act passed early this year increased the maximum rate for higher-income individuals to 39.6%.
"This change only affects taxpayers with taxable income above $400,000 for singles, $450,000 for married joint-filing couples, $425,000 for heads of households, and $225,000 for married individuals who file separate returns," Van Grevenhof added. "Higher-income individuals can also get hit by the new 0.9% Medicare tax and the 3.8% Net Investment Income Tax (NIIT), which can result in a higher-than-advertised federal tax rate for 2013."
Despite these tax increases, the current federal income tax environment remains relatively favorable by historical standards. Below, Van Grevenhof offers six tax-saving moves for the end of 2013:
Up-to-date analyses of legislation and regulations, authored by VanGrevenhof and hundreds of other experts, are available to tax and accounting professionals on the industry-leading, award-winning Thomson Reuters Checkpoint research platform.
1. Make Charitable Gifts of Appreciated Stock. If you have appreciated stock or mutual fund shares that have been held more than a year and you plan to make significant charitable contributions before year-end, you should consider keeping the cash and donating the stock (or mutual fund shares) instead. You will avoid paying tax on the appreciation, but will still be able to deduct the donated property's full value. If you want to maintain a position in the donated securities, you can immediately buy back a like number of shares. (This idea works especially well with no load mutual funds because there are no transaction fees involved.)
However, if the stock is now worth less than when it was acquired, you may sell the stock, take the loss, and give the cash to a charity. If giving the stock to a charity, the charitable deduction will equal the stock's current depressed value and no capital loss will be available. However, if you sell the stock at a loss, you have to wait 31 days to buy it back. Otherwise, you will trigger the wash sale rules, which means your loss will not be deductible, but instead will be added to the basis in the new shares.
2. Do Not Lose a Charitable Deduction for Lack of Paperwork. Charitable contributions are only deductible if you have proper documentation. For cash contributions of less than $250, this means you must obtain either a bank record that supports the donation (such as a cancelled check or credit card receipt) or a written statement from the charity that meets tax-law requirements. For cash donations of $250 or more, a bank record is not enough. You must obtain, by the time the tax return is filed, a charity-provided statement that shows the amount of the deduction and lists any significant goods or services received in return for the donation (other than intangible religious benefits) or specifically states that the individual received no goods or services from the charity.
3. Leverage Standard Deduction by Bunching Deductible Expenditures. If 2013 itemized deductions are likely to be just under, or just over, the standard deduction amount, you might want to consider the strategy of bunching together expenditures for itemized deduction items every other year, while claiming the standard deduction in the intervening years. The 2013 standard deduction is $12,200 for married joint filers, $6,100 for single and married filing separate filers, and $8,950 for heads of households.
For instance, you might want to consider moving charitable donations that would normally be made in early 2014 to the end of 2013. If temporarily short on cash, a taxpayer can charge the contribution to a credit card-it is deductible in the year charged, not when payment is made on the card. You can also accelerate payments of real estatetaxes or state income taxes otherwise due in early 2014. But, watch out for the Alternative Minimum Tax (AMT), as these taxes are not deductible for AMT purposes.
Note: If you expect to pay a higher tax rate next year, you may want to claim the standard deduction this year and bunch itemized deductions into 2014 when they can offset the higher taxed income. This will boost overall tax savings for the two years combined.
4. Make Charitable Donations from Your IRA. IRA owners and beneficiaries who have reached age 70 1/2 are permitted to make cash donations totalling up to $100,000 to IRS-approved public charities directly out of their IRAs. These so-called Qualified Charitable Distributions, (QCDs) are federal-income-tax-free to you, but you get no itemized charitable write-off on your Form 1040. That is okay, because the tax-free treatment of QCDs equates to an immediate 100% federal income tax deduction without having to worry about restrictions that can delay itemized charitable write-offs. QCDs have other tax advantages too. Be careful though-to qualify for this special tax break, the funds must be transferred directly from your IRA to the charity. Also, this favorable provision will expire at the end of this year unless Congress extends it.
5. Employ Your Child. If you are self-employed, you might want to consider employing your child to work in the business. Doing so has tax benefits in that it shifts income (which is not subject to the Kiddie tax) from you to your child, who normally is in a lower tax bracket or may avoid tax entirely due to the standard deduction. There can also be payroll tax savings since wages paid by sole proprietors to their children age 17 and younger are exempt from both social security and unemployment taxes. Employing your children has the added benefit of providing them with earned income, which enables them to contribute to an IRA. Children with IRAs, particularly Roth IRAs, could have a great start on retirement savings since the compounded growth of the funds can be significant.
Note: Remember a couple of things when employing your child. First, the wages paid must be reasonable given the child's age and work skills. Second, if the child is in college or entering soon, having too much earned income can have a detrimental impact on the student's need-based financial aid.
6. Adjust Federal Income Tax Withholding. If you expect to owe income taxes for 2013, you may want to consider bumping up the federal income taxes withheld from paychecks now through the end of the year. When filing the return, it will still be necessary to pay any taxes due less the amount paid in. However, as long as the total tax payments (estimated payments plus withholdings) equal at least 90% of the 2013 liability or, if smaller, 100% of the 2012 liability (110% if 2012 adjusted gross income exceeded $150,000, $75,000 for married individuals who filed separate returns), penalties will be minimized, if not eliminated.
Van Grevenhof advises caution with year-end tax planning moves, though-taxpayers should consult a personal tax advisor before applying these or other tax strategies.
Posted on 5:54 AM | Categories:

How to Get the Most from Tax Deductions for Student Loan Interest

Rachel S for Tuition IO writes:  Did you know you can deduct up to $2,500 per year in student loan interest from your taxes? If you are paying back student loans and not taking this deduction, you are giving money away! If you’re single you should definitely be taking advantage of the student loan tax deduction. If you have student loans you’ve taken for a dependent, you may be able to take advantage of this deduction. If you are married, though, there are a couple of considerations you should be aware of that we will review in today’s blog. Here’s what you need to know for each of these circumstances.

Student loan tax deductions

Image source: BigStockPhoto.com
Form 1098-E
Each year, your lender should provide you with a Form 1098-E that confirms how much in interest you paid for the prior tax year. If your lender doesn’t provide you with the form by January 31st each year, contact them to request a copy. If you pay less than $600 in interest in a given year, your lender may not issue you the form but you can still take the deduction. The maximum you can deduct each year is $2,500. Early on in your repayment cycle, more of what you pay is interest. Student loans of roughly $37,000 at 6.8% will trigger this amount of interest annually.

Form 1098-E

Image source: IRS.gov
If You’re Single and Deducting Interest on Your Own Loans
If you earn less than $60,000 you can take the maximum deduction. If you earn between $60,000-$75,000 you can take a prorated amount. What’s nice about this deduction is that you don’t have to itemize deductions to take it. It is actually an adjustment to income. On Form 1040 line 33 you list your eligible student loan interest. This then lowers your adjusted gross income which will lower the amount of your taxes assessed. Although not as good as a tax credit that lowers your taxes dollar per dollar, it’s better than nothing…
If You’re a Parent Dealing with Your Children’s Student Loans
This subject is a little trickier if you’re a parent. If you have taken out parent PLUS loans or other loans to pay for your dependent’s education you can take a deduction for the interest you pay subject to the earnings limits. If you’re single and earning $60,000 or less you can take the maximum. For marrieds, less than $125,000 in earnings gets you the full deduction. Earning above $75,000 in income for single parents and $155,000 in income for married parents means you can’t take the deduction. Between these two ranges will get you a prorated amount. If you are paying loans on your dependent’s behalf (that are issued in their name) then neither of you can take the interest deduction!
If You’re Married and Relying on an Income Driven Repayment Plan
If you’re enrolled in Income Based Repayment (IBR) or Pay As You Earn (PAYE), your adjusted gross income determines how much your payments will be. If you file with your status as married filing jointly, both incomes will count toward your IBR or PAYE threshold. This can result in higher payments or denial to enroll. If you file married filing separate, your income for IBR/PAYE will be lower and your calculated payments lower but you won’t be able to take the interest deduction. This is where it gets more complicated.
If you are cash strapped, the lower monthly payment is likely more important. If you have a marginal tax rate of 20%, then the $2,500 reduction in income translates to less than $500 in savings. But if you earn $35,000 and your spouse $40,000 and you have $35,000 in loans, filing taxes together disqualifies you for IBR. If you file married filing separate, you would qualify for payment reduction from $400 down to roughly $220. Obviously, it’s better to pay down your debts as soon as you can, but if you simply can’t afford the standard plan, applying for IBR or PAYE will save you more than the tax deduction.
Get the Information You Need
In addition to understanding what your options are for deducting student loan interest deductions, you should also have a clear picture of your total debt and what your options are. Tuition.io can help with that. Sign up for our free student loan tool to get a snapshot of your debt at any moment in time, track your progress, payments and explore a customized plan to optimize your debt. Check out our blog for great articles and our student loan help center for a roster of helpful information.
Posted on 5:54 AM | Categories:

Automatic tipping: IRS rules change could be taxing for hospitality industry

Annalisa Rodriguez  for JCOnline.com writes: When Thomas Howard sees an automatic gratuity on a restaurant bill, one thing is for certain: His server won’t be getting any more than that amount.
If restaurants tack on the charge to his bill, the Indianapolis resident said he doesn’t think servers should expect any more. But when it comes to leaving less, he thinks that’s not even allowed.
“I don’t think you can, can you?” Howard said. “You’ve got to go by whatever their policy is.”
He’s confused — and a little put off — by the whole “automatic gratuity” practice, and he’s not alone.
That practice is receiving more scrutiny lately because of an updated IRS ruling taking effect in January that will treat automatic gratuities as service charges, rather than tips. The switch means servers will no longer be responsible for reporting those automatic tips as income. And it also means automatic gratuities will be considered a part of a server’s wages, making them subject to payroll tax withholding and delaying the receipt of those automatic tips until an employee’s next paycheck.
Understandably, many servers aren’t happy about the tax policy, but neither are restaurant owners. The IRS change will create additional accounting and bookkeeping work for restaurants, because automatic gratuities will have to be factored into hourly pay rates that could vary depending on the number of large parties served by the employee.
“Some may be equipped to deal with that additional accounting,” said Patrick Tamm, president and CEO of the Indiana Restaurant and Lodging Association. “Some may not.”
It could also mean the loss of an income tax credit, which restaurants receive for paying Medicare and Social Security taxes on employees’ reported tips. Service charges are not eligible for the credit.
Industry officials say the change could have a great impact on Indiana, where restaurants are projected to register $9.2 billion in sales in 2013. Restaurants account for 296,100 jobs in the state — 10 percent of the work force.
“It’s a big deal because it impacts in one way or another 10 percent of the work force in the state of Indiana,” Tamm said. “Not all employees in restaurants are tipped employees, but they could still pay for it.”
Restaurant hiring also could take a hit as a result of the IRS ruling, Tamm said.
“It could affect hiring if restaurants continue to be faced with additional costs and burdens to comply with government mandates and regulations,” he said. “That cost has to be paid for in some fashion and it may be paid for by not hiring as many people as they would like.”

Some dropping practice

Several restaurants are wondering whether the right course of action might be to eliminate automatic gratuities altogether.
Darden — which operates Red Lobster, Olive Garden, Longhorn Steakhouse, Bahama Breeze, Seasons 52, The Capital Grille, Eddie V’s and Yard House — is testing a new concept that eliminates 18 percent automatic gratuities for parties of eight or more and instead leaves tip percentage calculations at the end of a bill.
The restaurant group is experimenting with the tip suggestions in 100 restaurants in four markets across the country — none in Indiana — and will decide whether to keep the automatic grauity or do away with it at all locations by the end of the year.
“What we have seen so far is that guests appreciate the convenience factor,” said Darden spokesman Rich Jeffers, “and our employees appreciate the fact that we’re seeking to preserve those tips for them.”
The Melting Pot on the Northeastside no longer puts an 18 percent automatic gratuity for parties of six or more on checks, owner Bennet Ackerman said.
“It’s going to hurt us as employers, because now I’d be paying taxes on that as a wage which in the past I haven’t,” Ackerman said. “Between that and the health-care reform, it’s adding one more burden to employers.”
Still, it’s a change he is not completely opposed to.
“I think some servers tend to get a little lazy when they know they already have that automatic gratuity,” Ackerman said.
Cunningham Restaurant Group, which operates Bru Burger Bar, Mesh, Stone Creek Dining Company and other Indiana and Ohio restaurants, hasn’t yet decided how it will handle transactions come Jan. 1.
The most challenging aspect, says chief operating officer Mike O’Donnell, is figuring out a way to pay employees different wages if automatic gratuities are kept.
“That’s the tricky part,” he said. “Logistically, it becomes a challenge for us.”
O’Donnell said he will talk with other restaurant owners and see how they plan to handle the ruling.
“There’s no real clear-cut direction on which way to go,” he said. “Either way, there’s some rewards and some risks.”
Industry experts say the ruling was updated because of a concern that automatic gratuities have become charges that feel compulsory to customers, when they are supposed to be voluntary.
Indianapolis resident Summer Jones likely would agree. She believes servers sometimes don’t deserve the automatic gratuity that she sees as compulsory.
“I know I’ve encountered servers before that haven’t been pleasant or attentive,” she said. “But off of my party, they might get $40. It’s a little disheartening.”

Worries about coercion

“The IRS has signaled its intent to scrutinize auto gratuity patterns to determine whether they are tips or if there has been more coercion so it becomes more of a service charge,” said Marianna Dyson, a Washington, D.C.-based lawyer who represents restaurant chains.
Industry experts say the ruling may also be a way for the IRS to combat the fact that many servers do not fully report their tips.
“I don’t think we can always assume it’s a perfect system and every dollar that is being tipped is being reported,” said Judith Hack, an associate professor of hospitality and tourism management at Purdue University-Calumet. “Maybe this is the first in a series of tightening up.”
Servers, who make $2.13 an hour in Indiana, are likely to be the most affected by the change, experts say. Rather than receiving automatic gratuities at the end of the night, under the new IRS rule those payments would be tacked onto paychecks as wages. That could adversely impact servers who have come to depend on that extra cash at the end of each shift.
But, on the flip side, it could also mean fewer headaches and less anxiety when it comes time to file taxes. Some servers also prefer receiving tips on their paychecks because it makes budgeting — and saving — easier.
For some servers, automatic gratuities provided a layer of protection against customers who might not have been so generous with their wallets without the practice.
After The Melting Pot stopped automatic gratuities, server Michael Turney noticed a decrease in the amount of tips he received.
“I feel like larger parties don’t tip as well as they should for the amount that they spend at the restaurant,” said Turney, who has been a server at The Melting Pot for two and a half years. “When they spend $200 and leave $20 you’re losing out on about $16 or $17 when we already pay a tip out to a host, bartender and bussers. It really makes the income of a server go down.”
The change also has made many servers reluctant to take on large parties of customers, Turney said.
“They don’t feel like the time that they dedicate to a large party, which does take up a lot of time, is actually rewarded,” he said. “They could make more money off smaller parties.”
As workers in the restaurant service industry try to make sense of the effects of the ruling, Dyson, the attorney for restaurant chains, said the IRS needs to create clearer guidelines to erase the confusion that exists now.
“How far can a restaurant go to suggest an appropriate tip amount, before it is converted to a service charge?” she said. “What does a check need to say? How do you have the discussion with the guests? That’s where I think the next frontier is with the IRS, having those discussions.”
Posted on 5:54 AM | Categories:

2013 Small Business Tax Saving Ideas -- Including a $475,000 Deduction That May Go Away Next Year

Thomson Reuters for MarketWatch writes: Thomson Reuters Tax Analyst offers businesses a list of 2013 tax-saving strategies to consider -"Self-employed business owners on the higher end of the income scale face two new taxes and higher maximum tax rates in 2013," says Jim Keller, a senior tax analyst at Thomson Reuters.
The planning strategies summarized below can reduce or avoid exposure to the new, higher taxes. "Additionally, thanks to the enactment of the 2012 American Taxpayer Relief Act in early 2013 (referred to as the Relief Act), small businesses have several tax breaks available for 2013 they otherwise would not have had."
Up-to-date analyses of legislation and regulations, authored by Keller and hundreds of other experts, are available to tax and accounting professionals on the industry-leading, award-winning Thomson Reuters Checkpoint research platform.
Avoiding Higher Tax Rates and New Taxes
Higher Maximum Tax Rates. Starting in 2013, the Relief Act imposes a new 39.6% tax rate for individuals (including self-employed business owners) with ordinary income above $400,000 for single filers, $450,000 for married couples filing jointly and $225,000 for married couples filing separately. Plus, those in the 39.6% tax bracket face a higher 20% tax rate on long-term capital gains and qualified dividends. To keep income below these thresholds, cash method businesses can delay sending year-end invoices and pay December bills by the end of the year. Cash and accrual businesses can claim bonus deprecation and/or a Section 179 deduction, prepay expenses to the extent allowed by the Code, or arrange an installment sale of qualifying property.
New 0.9% Tax on Earned Income. A 0.9% tax applies to wages and self-employment (SE) income earned in 2013 by individuals with income above $200,000 for single filers, $250,000 for married couples filing jointly, and $125,000 for married couples filing separately. The strategies noted in the preceding paragraph for lowering SE income also apply here. This new tax also provides another reason for S corporation shareholder/employees to reduce their salary in favor of distributions because distributions are not subject to the 0.9% tax. While salary must be reasonable for the services provided, in many cases the amount can be set at the low end of a range that is reasonable and supportable.
New 3.8% Net Investment Income Tax. Beginning in 2013, a 3.8% net investment income tax (NIIT) applies to individuals with modified adjusted gross income (MAGI) above the thresholds listed in the preceding paragraph. The NIIT Is imposed on interest, dividends, annuities, royalties, rent, and income from business in which you do not actively participate (referred to as passive activities). Since passive activity income is subject to the NIIT, you may want to reexamine your involvement in the business if you are subject to the passive activity rules. Increased involvement may create a better tax result.
Better Depreciation Breaks Available in 2013
If your business will be buying equipment or computer software, or making capital improvements in the near future, Keller recommends you consider doing so by the end of this year. Here is why . . .
Bigger Section 179 Deduction: Following changes by the Relief Act, businesses can immediately deduct up to $500,000 of qualified property purchases made in 2013. (This is referred to as the Section 179 deduction.) This limit is reduced dollar for dollar by the qualified property placed in service during the year over $2 million. Unless Congress makes further changes, the maximum Section 179 deduction next year will decrease to $25,000 and the phase-out threshold will be $200,000. By acting before the end of this year, businesses can get an extra $475,000 deduction for buying qualified property.
Real Property Section 179 Deduction: Historically, the Section 179 write-off could be claimed for the cost of purchasing tangible personal property but not real property. But once again, thanks to the Relief Act, businesses can claim the Section 179 deduction for up to $250,000 of qualified leasehold improvements, restaurant property, and retail improvements placed in service in 2013. In addition, a 15-year write-off is available for the remaining cost of this property. Keller adds that unless Congress acts, these three categories of property will be depreciated next year over a 39-year period.
Bonus Depreciation. The Relief Act extended 50% first-year bonus depreciation to eligible new (not used) assets placed in service in calendar-year 2013. To be eligible, the asset must be (1) qualified property (which includes most tangible personal property and purchased software costs plus certain leasehold improvement costs), (2) acquired by the end of 2013, and (3) placed in service by the end of 2013 (although the deadline is extended one year for certain assets with longer production periods).
Bonus depreciation also increases the maximum first-year depreciation deduction for 2013 by $8,000 for new passenger autos and light trucks that are subject to the luxury auto depreciation limits (which basically, includes autos and trucks with a gross vehicle weight rating of 6,000 pounds or less). The first year depreciation limits for passenger autos placed in service in 2013 are $3,160 or $11,160 with bonus depreciation, and $3,360 or $11,360 with bonus depreciation for light trucks and vans.
Unless Congress takes action, the bonus depreciation break will not be available after 2013.
Depreciation Rules for Heavy SUVs Still Good. Under the tax law, a "heavy SUV" is an SUV, truck, or van that has a gross vehicle weight rating above 6,000 pounds. Buying one of these vehicles can be a good tax move because a heavy SUV used over 50% for business can qualify for 1) the $25,000 heavy SUV Section 179 deduction; 2) 50% first-year bonus depreciation for vehicles acquired and placed in service in 2013; and 3) accelerated five-year depreciation for the rest of the vehicle's depreciable basis. In contrast, the 2013 first-year depreciation limits for light trucks with a gross vehicle weight rating of 6,000 pounds or less are $3,360 or $11,360 with bonus deprecation.
Benefits of Working from Home
Claiming a Home Office Deduction. There is a new safe harbor in 2013 you can use to determine your deductible home office expenses. The safe harbor is an alternative to deducting actual expenses and equals $5 x square feet of qualified home office used up to 300 square feet (or a maximum of $1,500). You still have to meet the basic requirements for claiming a home office deduction, such as using the space exclusively and regularly as the principal place of business or as a place to meet with clients or customers. However, you will get a deduction for the business use of your home without making the complex calculations, or meeting the substantiation rules, that are otherwise required. Taxpayers should consult with a personal tax advisor before applying these or other tax strategies.
Posted on 5:53 AM | Categories:

Changes in U.S. Healthcare Rules Can Affect Your 2013 Tax Bill

Thomson Reuters for MarketWatch writes:  Thomson Reuters tax analyst explains what individuals need to know now.  The big changes made by the 2010 health care law kick in in 2014, but there's still time left in 2013 to prepare for them," says Harris Abrams, Esq., a senior tax analyst at Thomson Reuters.
"The 2010 Affordable Care Act and other recent tax law changes significantly affect the tax consequences of your healthcare decisions," Abrams notes. "Odd as it may seem, you'd be well-advised to discuss your healthcare choices with your personal tax adviser as well as with your doctor."
Up-to-date analyses of legislation and regulations, authored by Abrams and hundreds of other experts, are available to tax and accounting professionals on the industry-leading, award-winning Thomson Reuters Checkpoint research platform.
Abrams advises taxpayers to consider the following recent tax law changes when making healthcare decisions:
- There is a higher threshold for deducting medical expenses. Before 2013, you could deduct unreimbursed medical expenses that exceeded 7.5% of your adjusted gross income (AGI). Now, if you are under age 65 (as of Dec. 31, 2013), you can deduct only those medical expenses that exceed 10% of your AGI. But for taxpayers or their spouses who are 65 or older, this 10% threshold will not apply until 2017.
However, you can still get a tax benefit from your medical expenses if you can bunch them together in one year. As an example, you have AGI of $50,000 and, at some point, you will need to have a $4,000 cataract procedure and a $5,000 hip replacement. If you have the cataract procedure this year and the hip replacement next year, you will not be able to deduct any of your expenses, because neither procedure costs more than 10% of your AGI (which is $5,000). If you can put off the cataract procedure until next year, or move the hip replacement up to this year, you will have a total of $9,000 in unreimbursed medical expenses in one year. The excess of that over $5,000 (which is 10% of your $50,000 AGI) can then be deducted.
- You can count an adult dependent's medical expenses as your own for purposes of the itemized deduction. If you pay the medical expenses of an adult dependent (a parent, grandparent, or adult child who gets more than half of their financial support from you), you can add those expenses to your own to determine if you exceed the 10%-of-AGI threshold. So, in the example above, if you have a $4,000 cataract procedure and your parent whose financial support you provide has a pacemaker put in at a cost of $5,000, you can add both of those expenses together and deduct the excess over 10% of your AGI.
- You may have to buy health insurance. Beginning in 2014, if you do not maintain minimum essential health coverage, you will be hit with a penalty. You can avoid the penalty by buying an individual insurance policy or by being covered by an employer plan, a government plan (such as Medicare, Medicaid, or the Children's Health Insurance Program), or certain grandfathered group health plans. Some lower-income individuals may be exempt from this requirement, and you may qualify for a refundable tax credit (a credit you can get even if it exceeds your tax liability) if you get coverage through a health insurance Exchange established by your state.
- Your Flexible Spending Account (FSA) contributions cannot exceed $2,500. Before 2013, the government did not limit the amount of money you could contribute to an FSA (although some plans did). Beginning in 2013, FSA contributions are limited to $2,500 a year-and this is a per-employee limit. That means your FSA contribution is limited to $2,500 whether you are single or married, and no matter how many children you have. Remember that FSA contributions are a use-it-or-lose-it proposition. So, if you are getting near the end of the year and still have money left in your FSA, consider moving any anticipated medical expenses from next year to this year. Otherwise, that money is lost.
The rules governing who must get health care insurance, how much insurance you have to get, and what exemptions and tax credits are available to ease the burdens of these rules, are complicated. Taxpayers should consult with a personal tax adviser before applying these or other tax strategies.
Posted on 5:53 AM | Categories:

Tax Realities for Self-Employed Who Get Obamacare Subsidies

Karen E. Klein for Bloomberg Businessweek writes:  Since I wrote a recent explainer about government subsidies for self-employed individuals who purchase health coverage through the Obamacare insurance marketplaces, many readers have followed up with tax-related questions. (In a nutshell, the Affordable Care Act subsidies I described are available to individuals making up to about $45,000 annually and four-person households bringing in about $94,000.) Here are a few answers on how self-employed individuals’ taxes will be affected.


Question: If a self-employed individual gets a subsidy for an insurance purchase on the exchange, is that subsidy treated as income for tax purposes? Will I get a 1099 for that amount?
Answer: Obamacare subsidies will not be treated as income and will not be taxable. The subsidies are designed to reduce out-of-pocket costs for individuals who don’t have employer-based insurance. They can be taken either up front, as premium assistance credits to reduce your monthly insurance premiums, or after the fact, as tax credits on your 1040 return.
“Statements will be issued reporting the amount of any advance credit payments received during the year,” says Twila D. Midwood, a tax preparer at Advanced Tax Centre in Rockledge, Fla. Since a subsidy won’t be considered income, it probably will not be reported on a 1099 form, she adds.
The statements will be used at tax time to reconcile whether the credit you took based on your estimated income was in the correct amount, given the actual income you report for the year. If the subsidy was too high, you may have to pay some part of it back. “Likewise, if the taxpayer received less than the allowed amount, they may be entitled to a refund,” Midwood says.
Ben Tallman, owner of Tallman’s Tax Service in Atlanta, points out one insurance-related scenario under which you might get a 1099. That wouldn’t be for an Obamacare subsidy, but for a rebate check from your insurer. “If the insurance provider does not spend 80 percent of premiums on health-care expenses, that provider will be required to rebate the excess premiums back to the individuals,” Tallman wrote in an e-mail. “These rebate checks will generally be taxable and come with a 1099.”
Question: Who do I contact as I’m applying to buy insurance through an Obamacare marketplace to make sure I estimate my self-employment income correctly? If I get a subsidy, I don’t want to end up owing thousands of dollars to pay it back.
Answer: Go to the website of your state insurance marketplace or the federal marketplace to get information on how to estimate your 2014 income and to report higher or lower-than-anticipated income as it comes in next year. “All indications show that the taxpayers will be responsible for monitoring their income during the year to ensure that they are receiving the correct amount of subsidy,” Midwood says.
Michael D’Addio, a principal and co-chairman of the health-care reform task force at Marcum, an accounting and advisory company, predicts that the uncertainty around many self-employed individuals’ income will make the subsidies messy. “When people get the subsidy as a premium credit based on their 2012 income and then file their taxes for 2014 and find out they’re ineligible and have to pay it back, there’s going to be a lot of screaming,” he says.
Tallman recommends that self-employed people reevaluate their revenues and expenses monthly, or at least quarterly, and contact their exchanges to be recertified for subsidies if they have large income increases. “That periodic adjustment should keep them from paying back large sums at the end of the year,” he wrote.
But even diligent individuals who notify their marketplaces that they’ve landed a new client, say, and are making more money than expected, face another problem, as D’Addio sees it: “Say you’ve set aside money to pay for your premiums, then you bring in more income. Your out-of-pocket expense will increase. That makes it difficult to know up front how much to save for your insurance costs.”
On the other hand, he notes, the new law will benefit many individuals with preexisting medical conditions by opening up competitive marketplaces to them.
Question: Under Obamacare, can a self-employed individual deduct health insurance premiums as an expense on line 29 of the 1040 tax return as in the past?
Answer: The ACA made sweeping changes to the health-care market, but it did not substantially change the individual health insurance deduction. As always, the line 29 deduction is available to those whose business income shows a profit, D’Addio says, and who are not eligible for employer-provided insurance, either from a side job or a spouse’s job.
If you list unreimbursed medical expenses, including insurance premiums, as itemized deductions on your Schedule A, you can continue to do that, Midwood says. You would list the actual out-of-pocket cost to you, not including any subsidy you receive.
Obamacare does raise the threshold for that deduction starting in this year, however, unless you are 65 or older. “You can only deduct medical expenses to the extent that they exceed 10 percent of adjusted gross income,” D’Addio says. “It used to be if they exceeded 7.5 percent.” The 10 percent threshold will apply to everyone, regardless of age, after 2017.
Posted on 5:52 AM | Categories:

New Medicare Tax Creates Withholding Problems

Thomson Reuters for MarketWatch writes: Thomson Reuters tax analyst explains what taxpayers need to know about withholding before year-end. As 2013 comes to an end, employers, employees, and self-employed individuals should make sure they are complying with the new, 0.9% additional Medicare tax. "While it became effective at the beginning of 2013, its effects are not fully felt until your wages earned during 2013 reach a threshold level which, for many employees, will not occur until the last quarter of the year," warns Michael Sonnenblick, Esq., a tax analyst at Thomson Reuters.
Beginning in 2013, employers are required to withhold a 0.9% additional Medicare tax on the wages they pay an employee in excess of $200,000. Self-employed individuals must do their own withholding.
The tax applies only to employees and self-employed individuals, not to employers, and is in addition to the 1.45% / 2.9% (regular) Medicare tax that all wage earners/self-employed individuals pay.
Up-to-date analyses of legislation and regulations, authored by Sonnenblick and hundreds of other experts, are available to tax and accounting professionals on the industry-leading, award-winning Thomson Reuters Checkpoint research platform.
Following, Sonnenblick explains what employees need to know about new Medicare tax:
Withholding of the additional Medicare tax begins in the pay period in which your employer pays you wages in excess of $200,000. But employers are not required to notify you when they begin withholding. Wages for this purpose are defined the same as for the regular Medicare tax and so may include items such as taxable non-cash fringe benefits, tips, and third-party sick pay.
You should be aware that required withholding of the additional Medicare tax may result in over- or under- withholding of the actual tax you may owe. That is because, even though the 0.9% additional Medicare tax applies to wages in excess of $250,000 for joint filers ($125,000 for a married individuals filing separately, and $200,000 for all others), employers are required to withhold on wages paid in excess of $200,000 regardless of the your filing status; wages paid to you by another employer; or any self-employment income you might receive.
If you have additional wage income from another job or your spouse also has wage income amounts withheld, although proper for that particular job, may not be sufficient to cover your actual additional Medicare tax liability.
Example 1: In this scenario, assume that you earn $210,000 annually and your spouse earns $150,000, and you file jointly. Your employer will withhold additional Medicare tax on the $10,000 it pays you that is in excess of the $200,000 withholding threshold, and your spouse's employer will not withhold additional Medicare tax because your spouse's earnings do not exceed $200,000. But, you will owe additional Medicare tax on $110,000 (the excess of your combined earnings over $250,000).
If you are concerned about not having the proper amount of the tax withheld, you cannot specifically request that your employer withhold additional 0.9% additional Medicare tax. Instead, to avoid under-withholding, you should file a new W-4 with your employer to request that additional income tax be withheld, or make estimated tax payments.
The withholding rules may even require that employers withhold additional Medicare tax where you have no additional Medicare tax liability. And you cannot ask your employer to stop or reduce required withholding.
Example 2: In this scenario, assume you earn $210,000 annually, your spouse does not work, and you file jointly. Your employer is required to withhold additional Medicare tax on $10,000 of the $210,000 you receive. But you and your spouse will not owe any additional Medicare tax because your combined annual salary is under $250,000, the threshold for application of the tax for joint filers. And your employer is not allowed to reduce or stop this required withholding. Instead, you will have to claim a refund for those amounts on your tax return.
An employer that does not deduct and withhold the additional Medicare tax as required is liable for the tax unless the amount that should have been withheld is paid by the employee. And, regardless of liability, an employer that does not meet its additional Medicare tax withholding, deposit, reporting, and payment responsibilities may be subject to penalties.
The IRS has provided detailed guidance on the additional Medicare tax withholding requirements. Among the topics the IRS addresses are: when employers must withhold and how withholding applies to the payment of noncash fringe benefits, tips, group-term life insurance, third-party sick pay, and nonqualified deferred compensation. Your tax advisor can help you navigate these rules or visit http://www.irs.gov.
While there is still time in 2013, all parties have some actionable items. Employers should be checking their payroll systems to make sure they have properly begun to withhold from their high-earners; employees should be making some calculations to see if they need to increase their withholding; and self-employed individuals should be talking with their tax return preparers to insure proper estimated tax payments are being made. If you act now, you can minimize any penalties and interest that apply because of a failure to pay this new additional Medicare tax.
Taxpayers should consult with a personal tax adviser before applying these or other tax strategies.
Posted on 5:52 AM | Categories:

Five Year-End Tax Tips for U.S. Corporations

Thomson Reuters for MarketWatch writes:  Thomson Reuters tax analyst touches on bonus depreciation, expensing limits, and automobile depreciation:  As the end of 2013 approaches, corporate tax planners face challenges from the pending expiration of many significant tax provisions and the lack of certainty as to whether, when, and how Congress will deal with them.
"The political climate of 2013 has so far proven to be as challenging as in prior years," says Catherine Murray, Esq., a tax analyst at Thomson Reuters. "And given the continued budgetary concerns, coupled with a slow but palpable economic recovery, the justifications for extending a number of popular tax breaks for businesses may not hold up this year."
Up-to-date analyses of legislation and regulations, authored by Murray and hundreds of other experts, are available to tax and accounting professionals on the industry-leading, award-winning Thomson Reuters Checkpoint research platform.
Murray offers the following strategies that tax planners can use to keep corporate clients ahead of the game, regardless of what actions Congress chooses to take:
- Bonus depreciation. Under current law, a 50% bonus first-year depreciation allowance generally applies only to qualified new property acquired and placed in service by year-end. The post-2013 fate of this provision is unknown, so companies that intend to acquire eligible property should consider taking advantage of this opportunity if doing so makes good business sense. This deduction is determined without any proration based on the length of the tax year, meaning that it is available even if qualifying assets are in service for only a few days in 2013.
Example: A calendar-year business intends to buy $500,000 of bonus-depreciation-eligible, five-year property. If it purchases and places the property in service in 2013, it can claim a $300,000 depreciation allowance for that year ($250,000 in bonus depreciation, plus $50,000 in regular depreciation). In contrast, if it does not purchase the assets until 2014 and bonus depreciation is not extended, then its regular first-year depreciation allowance for that year would be only $100,000.
- Expensing limits. The generous expensing rules that we have seen for the past few years are also currently set to expire at the end of the year. Under the current rules, the maximum amount that a taxpayer can expense - that is, deduct currently -- is $500,000, reduced by the amount by which the cost of qualifying property placed in service during tax years beginning in 2013 exceeds the $2 million "investment ceiling." For tax years beginning after 2013, these amounts are slated to drop to $25,000 and $200,000, respectively.
Therefore, businesses that intend to purchase machinery and equipment in the near future should consider doing so by year-end. As with bonus depreciation, so long as the purchase is made by year-end, the amount of the expensing deduction will not be affected. And careful timing of purchases can enable a business to make the most of today's generous expensing limits.
Example: During the first eleven months of 2013, a calendar-year business bought and placed in service $400,000 of expensing-eligible property, and plans to buy an additional $125,000 of expensing-eligible property in the near future. If feasible to do so from the business standpoint, it should consider accelerating $100,000 of the purchases into 2013 and placing these assets in service before year-end. This way, even if the expensing limit drops to $25,000 next year, it will be able to fully expense its purchases ($500,000 for 2013 and $25,000 for 2014).
- Expensing-eligible real property. Under current rules, within the overall $500,000 expensing limit, a taxpayer may elect to expense up to $250,000 of certain types of real property. This property consists of certain leasehold improvement property, restaurant property, and retail improvement property, all of which must be depreciable, acquired for active business use, and meet technical tax law definitions. Like other aspects of the expensing rules, it is uncertain whether this provision will continue for tax years beginning after 2013, so businesses should consider whether accelerating purchases of qualifying real property into this year makes sense for them.
- Generous rules for business "luxury" autos. To maximize first-year deductions, a business that plans to buy a new automobile, light truck, or van for trade or business use should buy the vehicle and place it in service this year. The first-year dollar depreciation cap for 2013 is $11,160 for autos and $11,360 for light trucks or vans (passenger autos built on a truck chassis, including minivans and sport utility vehicles (SUVs), except as noted below) that qualify for the bonus depreciation allowance. Under current law, these first-year depreciation caps include an $8,000 additional first-year depreciation allowance that is set to expire at the end of 2013. If the vehicle is not bought until next year, first-year depreciation deductions will plummet if this allowance is not extended.
Heavy SUVs, defined as those that are built on a truck chassis and are rated at more than 6,000 pounds gross vehicle weight, are exempt from the above depreciation caps because they aren't considered passenger automobiles. Within the overall expensing limit, taxpayers can deduct up to $25,000 of the cost of a new SUV (bought and placed in business in 2013) as a business expense in the placed-in-service year. The remaining costs are also eligible for 50% first-year depreciation, meaning that taxpayers who buy and place in service new heavy SUVs by year-end may be entitled to write off most of the cost of the vehicle in 2013.
- Work Opportunity Tax Credit (WOTC). This tax break, available to businesses that hire workers from certain targeted groups including qualifying veterans, currently applies only to qualifying hires that begin work for the employer by year-end. Therefore, employers, who are considering hiring WOTC-eligible individuals, should make their move before year-end if they want to lock in these credits. An early start is generally recommended because of the involved process of certifying eligible workers.
Corporate taxpayers should consult with their tax advisers before applying these or other tax strategies.
Posted on 5:52 AM | Categories:

Overtaxed and over there / Loopy tax rules spur expats to renounce their American citizenship / Comments

From the Economist we read: LARS was born in the United States to Swedish parents. Last year he renounced his American citizenship. Not because he hates America, but because he hates dealing with the Internal Revenue Service (IRS). Lars (not his real name) has not lived in the land of his birth since the mid-1990s. Yet each year the IRS would require him to fill out a 65-page tax return, foreign-account declarations and an extra 30-page form because he was a director of a company (in Europe). By contrast, the paperwork in the Nordic country where he lives is just 12 pages. He was sad to give up his passport, he says, but keeping the IRS happy grew ever more time-consuming and costly, until it became intolerable.
With a tax system based on citizenship rather than residence, America is the only advanced country that chases its nationals—even those who have long had no links to their homeland—for a slice of their worldwide earnings. Many of the 7.2m living abroad end up owing nothing, because they get credit for payments to foreign exchequers, which are often higher. But they still have to fill out the forms—or, more likely, pay someone to help. Even in simple cases this can cost $2,000 or more, says Marylouise Serrato of American Citizens Abroad (ACA), an advocacy group.


Filing requirements have grown stricter since 2008. The “tipping point”, says Ms Serrato, was the Foreign Account Tax Compliance Act (FATCA) of 2010, which will take effect next year. This imposes an array of new reporting obligations, especially on foreign financial institutions that serve Americans. The sheer hassle of dealing with all this is prompting more Americans to renounce their citizenship. In 2012 around 900 gave up their passports or green cards. Twice as many did so in the first half of 2013 alone.
Designed to catch tax dodgers, FATCA has made foreign financial firms wary of serving even honest Americans. David Kuenzi of Thun Financial Advisors says he speaks almost daily with ordinary Americans who are having trouble setting up foreign bank accounts or investments, or who have had existing accounts closed.
“FATCA is strangling us economically,” says Genevieve Besser, an American who has lived in Germany for 25 years. Last year her youngest daughter, a dual citizen, had her local brokerage account closed by Deutsche Bank because her mother had signing authority over it. German arms of American fund-management firms are just as unwelcoming, says Mrs Besser. Americans are even being forced out of products that are not subject to FATCA reporting: some have been forced to pay off mortgage balances with Swiss banks, for instance. “When you’re locked out of basic financial services, renouncing citizenship can be a matter of survival,” says Ms Serrato.
Some predict that things will get easier as foreign banks grow more familiar with the new law. But a foreign bank with only a few American expat clients may decide that they are not worth the bother. American banks and brokerages are growing frostier too. Some are closing the accounts of citizens who no longer have an American address because of FATCA. Ellen Lebelle, who has lived in France for 43 years, was recently told by her broker, Fidelity, that although she can keep her account she can no longer use it to buy securities.
Mr Kuenzi says his clients’ biggest worry is being clobbered for inadvertently failing to comply. An American in Europe may have investments there, on which he has long been paying local tax, which he never realised should technically have been declared to the IRS as “passive” foreign investments. Even greater numbers, including Americans studying abroad, may have innocently failed to fill out “FBAR” forms, on which foreign accounts holding $10,000 or more must be declared.
FATCA will expose such unintentional sins. Penalties for non-filing can be up to 50% of the account balance. The IRS may go easy if the mistake was innocent or the taxpayer has entered the agency’s voluntary disclosure programme. But sorting out the mess can still take 18 months and cost $20,000 in legal fees, plus a similar amount in penalties. Mr Kuenzi says this deters some non-American companies from promoting Americans to the executive suite, where their tax affairs will be even more complicated. If they are caught accidentally breaking an unintelligible rule, that would embarrass their employer.
The ACA tries to raise awareness of its members’ plight. But politicians are unsympathetic, since voters assume that the complainers are tax-dodging high-rollers rather than honest students or small-business owners. So for many Americans abroad writing a cheque for $450, the standard expatriation fee, may increasingly seem like a bargain.



FloydT

In September 2013 the US Treasury Department apparently felt compelled to publish a blog article called "Myth vs. FATCA: The Truth About Treasury’s Effort To Combat Offshore Tax Evasion" in light of the ongoing blowback to this US extra-territorial law. Two of the alleged myths are:
1) Myth No. 2: Some claim that U.S. citizens living overseas will become outcasts in the international financial world.
2) Myth No. 3: Some claim that Americans living abroad will give up their U.S. citizenship because of liabilities and burdens created by FATCA.
The Economist's article rightly strikes back that these two myths are indeed facts. The "Myth vs. FATCA" piece is propaganda on the part of US Treasury and its Deputy Assistant Secretary, responsible for the FATCA roll-out, Robert Stack.


SwissTechie

I renounced US citizenship when banks began denying Americans services, since I need a local checking account to make mortgage payments. Later on, my bank published that it had gotten rid of all but 30 Americans who had not yet responded to the cancellation letters.
America is a beautiful nation with many nice people, but my life and family is here. Thus, there is no point in being burdened, harassed, threatened by a distant nation for all the wrong reasons, simply because one hasn't renounced yet.


NAgizEx7U6

The tax jihad against so-called offshore tax cheats, and the corresponding implementation of FATCA, are prime examples of the US shooting itself in the foot. Collateral damage in this war are more than 7 million expatriates who were sympathetic supporters of their homeland.
Now they are adversaries, flocking in large numbers to consulates and embassies to ditch what has become an expensive liability -- US citizenship. Because the US (and Eritrea) tax based on citizenship rather than residence, their expatriates are forced to try and comply with two often contradictory tax codes. The US makes sure that any compliance conflict works for the IRS, not the taxpayer.
If the fools in Congress don't open their eyes, soon there will be no US expatriates anywhere in the world. They will all have either moved home, or renounced their citizenship, because life for an American abroad has become untenable.
Is that what they had in mind?


guest-iesonsn

Thank you so much for presenting a fair and accurate article about the casualties of FATCA. As an expat living overseas, I find it hard to convince my friends and family back home that US expats are being targeted by the IRS/Treasury Department as the new government meal ticket. Most people simply don't believe that the US government could treat their own citizens in such a manner. Is it any wonder that US expats are giving up their citizenship in droves?
It will be interesting to see how FATCA unfolds over time. At the moment, the Treasury Dept and IRS are striking inter-governmental agreements with many countries with promises of reciprocity - they are promising that the US will supply information on US foreign account holders in the US in exchange for data on US account holders overseas. However, there are no laws allowing or requiring US financial institutions to turn such data over to foreign countries, and it is unlikely there ever will be, as the US is the biggest tax haven in the world. If there is ever a true reciprocal exchange of tax data, foreign investment will leave the US quicker for save havens. In fact, the states of Florida and Texas (who have a large proportion of foreign account holders) have already filed suit against the government regarding reciprocity.
I would very much enjoy further analysis by the Economist on the 'the worst law most Americans have never heard of'. FATCA will never do what it was meant to do - stop tax evasion. The word on the street is that those with high wealth are already devising ways around FATCA, while the punishment will be born by US expats and the poor/middle class immigrants living in the US.


Ruth12

I relinquished my citizenship this year. I waited to find out if some of the more punitive difficulties for low income expats would be addressed. I waited as Nina Olsen made her report to congress and told them of the horrendous situations they were causing for innocent expat families. Most of those most harmed owed no taxes and were in their late fifties and sixties. I waited as ACA submitted the horror stories of innocent expats to the Ways and Means committee and no response came.
I could wait no more. It is clear to me now that this is a penalty fund raiser on FBARs. FBARS were forms that not even the IRS was telling anyone even existed. They know that.
I make zero income. My Canadian spouse makes all of our income here in Canada. He absolutely was not going to turn over his banking information *or have it turned over for him by our bank* to a foreign country, the U.S. There is no good reason why he should need to do this except we both have our names on our checking account, mortgage and savings. I make zero of the dollars in those accounts but, he had the misfortune to be married to an American. Had he married a citizen of any other modern nation in the world he would have have all of this coming down on him. The cost to comply, the personal violation of even foreign citizen spouses and children is just too much.
The U.S. would have been far better served to go to residency based taxation then concentrate on those living there who are actual "tax cheats" Instead it has treated expats who were formerly supportive of the U.S. as criminals until proven otherwise. This is from the lowest of the low, stay at home mom's and the elderly to those more well off. It matters not to them that we pay taxes most of us much higher in our home countries. They have threatened us with big stick punishment, they have demeaned us in the press and when harm has come to our families because of their actions we have been called a "myth"
The renouncing figures given by the FBI are 4600 for 2012 not the low numbers that state has. It's a LOT more than they want you to know because we cannot do anything else. When the cost to your family is so high that the U.S. person in the family becomes a liability then you have to get out whether you want to or not. Who wouldn't want to after the way this has been handled?
State dept. knows what is driving this and were very,very kind to me when I went in to relinquish. They fully understand that many of us will have no other option. What kind of country does this to innocent expat families all over the world? CBT is wrong and that is why most countries do not do it.


John Hanson

This post fails to address the basic problem all of us face. We are trying to balance two tax systems, make financial investment decisions based on what may fall out of two pairs of tax hands. My company pension is an example. I claim it on my Canadian taxes but the IRS won't allow it because it is not American. How stupid is that? I live abroad, work abroad, but cannot take advantage of retirement instruments? There are some allowances such as the foreign income exclusion and RRSP recognition. But how long will it be before congress wipes these out? Bills are already lined up. The income exclusion goes, it becomes a clear cash grab and I go too. Then idiots like Tierney force my hand.


jgunnc

Meanwhile, the ability of multinational corporations to manipulate overseas tax shelters is unabated, and it's still possible to set up shell companies in Delaware and Nevada at a faster pace than the IRS can ever hope to wade through them one by one. So indeed, the innocent suffer and the guilty go free.


RepealFATCA.com

It's excellent that the Economist has highlighted the problem FATCA is causing US citizens abroad -- a problem the Treasury problem denies. In fact, financial institutions' dumping of US clients doesn't protect them one iota from FATCA's crushing compliance costs, which apply even without a single American account. Meanwhile resistance to FATCA is building both internationally (a pending referendum in Switzerland, the Opposition taking the Government to task in Canada), and perhaps more importantly in the US. Instead of finding a way to live with FATCA, it's time to work for its repeal.


osgood11

Good to see a mainstream article reporting the truth, rather than the rhetoric spewed from the US Treasury department. In the not too distant future I (and my non US born children) will join the ranks of former US Citizens by formally renouncing an unwanted citizenship.
According to Robert Stack of the US Treasury Department, we are "myths". Wrong Mr Stack - you might want to try contacting the State department to find out the real number of former US Citizens.


USEXPAT491

Thank you so much for reporting on this issue. It's highly unlikely for anything to change given the small number of American expats and the "bigger" issues facing the U.S.
Also amazing that the U.S. is on record for criticizing Eritrea for having a similar citizen-based tax system.
Unfortunately I will either have to renounce as well or move back.


Kroneborge

Another great example of why we should switch to the Fair Tax. If you spend money in the US you would be taxed on it, if you spend it outside you wouldn't. Easy as pie, no more hundreds of billion of dollars (and manhours) wasted on compliance costs.


Billy T

I'm US citizen still, but have contacted US consulate about ceasing to be one. Due to my 19 years as permanent resident of Brazil, (with no criminal record) it is very easy to become a Brazilian citizen instead.
My Brazilian wife was a full professor at best university in all of S. America and as her spouse I get free medical care in their very good clinic. I have had two major operations at zero cost, so if I am forced to pay for not taking out "obamacare" medical insurance I don't need, that will probably force me to become Brazilian not US citizen.
I don't want to do this; I have Ph.D. in physic from Ivy League school, gained on 100% scholarships and grew quite wealth in 30 year career in US with it and good / lucky investments, so feel a great debt to US / gladly pay my taxes, but there is a limit on how much abuse I will take as an ExPat.


Unhappycitizenabroad

The Economist deserves credit for this article. Americans abroad most choose between moving to the U.S. or renouncing U.S. citizenship. It's that simple. For those who do not intend to move to the U.S., renouncing is a defensive measure - the best investment you can make in your future.



No, it does not work that way. Obtaining a 2nd citizenship does not terminate your US citizenship. And US law requires tax filing for all US citizens no matter where they live. FATCA is going to force banks all over the world to report on the financial holdings of all 'US persons' (citizens, green card holder, joint account holders who may not be US citizens, etc.) The only way out from under FATCA and citizenship-based taxation is to formally renounce your US citizenship.

Expand 2 more replies

DualUSAbroad

I am pleased that the Economist has published an article on what is, for many U.S. expats, a never ending escalating list of horrors inflicted solely as a result of the American government's insistance of continuing citizenship based taxation (vs the world standard of residence based taxation). In what can only be called insanity, American companies (not individuals) can hold profits overseas tax free until (if ever) repatriated (e.g. Apple, Starbucks et al), but individual U.S. citizens are tracked, traced, fined and taxed on every Pound, Mark, Ringgit, Baht, earned and invested overseas with no connection to any U.S. source income whatsoever. Logically, in a functioning government you would expect the IRS/Treasury to step back, recognize the system is not working and is unfair and ask Congress to fix it. Instead the IRS just continues to try to fit a round peg in a square hole with horrible collateral damage to U.S. expats and their international families worldwide. The U.K. approach to taxation of expats (residence based taxation) is rational, fair and humane. The U.S. needs to come into compliance with the world standard.


RogerioC

I am an expat that came home as a result of the Tax Reform Act of 1976, shutting down a business in Brazil selling US made telecommunications products; having opened that market myself. When I came home a French company with no previous presence in Brazil established a subsidiary there; took over the market I had opened, hiring our former employees. Eight years later that company accounted for $1 billion in French exports to Brazil, while US exports to this specific market dropped to almost zero
Hundreds of thousands of Americans around the world came home as a result of the TRA of 1976, handing over foreign markets to competitors from other countries. In 1975 the US recorded the largest trade surplus in US history, but the very next year the US trade balance became negative. There has not been even one US trade surplus since. The cumulative 1976to date US trade deficit new exceeds $7 trillion. The current US 12-month trade deficit is $715.6 billion. Tiny Germany, which never taxes its overseas citizens but encourages them to go abroad, considering those who do as patriots. has a $249.7 trade surplus, balanced trade with China and the lowest unemployment rate in 21 years.
Exports create jobs. Trade deficits destroy jobs. It takes feet on the ground to capture foreign markets which the US, thanks to our unique citizenship-based taxation, no longer has. Americans are punished with double taxation if they go abroad to sell exports or for any other purpose, so they stay home or renounce citizenship to survive abroad.
Just 715 cases like mine (and there were thousands more)clearly explain why we have the job-destroying $715 billion trade deficit we now have. Territorial taxation is the international norm. Only Eritrea and the US are UN Security Council Resolution 2023 (2011) in December 2011 condemned citizenship based taxation as a violation of the UN Declaration of Universal Rights because it violates the right to freely leave and return to one's country. Unbelievable the US, the principal violator, voted imposing sanctions on Eritrea without even looking in the mirror.


Em R.

Even though I was born, raised, educated, employed and am currently retired in Canada, FATCA affects me. At least I became aware of its existence a year or so ago but there are millions of US "persons" who do not know about "the worst law most Americans have never heard of", as James Jatras at http://repealfatca.com/ calls it. Many thanks to The Economist for publishing this article which features "loopy tax rules" instead of the all too prevalent "tax cheats" that less informed publications seem to highlight.


Concerned_Northlander

Canada is a battleground state for FATCA. That’s because Canada is estimated to have > 600,000 people who fit FATCA's definition of "US person". Many have "indicia of a US place of birth". However, the majority of these are also Canadian citizens, many of whom have only tenuous ties to the US. Many are long term Canadians who relinquished their US citizenship by becoming Canadian citizens, only to see it re-instated after the fact by FATCA. There are also many border babies: Canadian citizens who by happenstance or medical referral were born in the US to Canadian parents temporally there. And there are also Canadians who were not born in the US, but are considered so-called “US persons” because their Canadian parents were US citizens.
The coming train wreck is when FATCA runs into this vast population of affected Canadians; about 3% of Canada’s population, plus spouses, partners, family and business associates all dragged along for the ride. However Canada is an advanced human rights state and they have recourse to law. Canada’s Charter of Rights and Freedoms and Human Rights laws (both Federal and Provincial.) One of Canada’s top constitutional experts, Peter Hogg, wrote a very thoughtful opinion letter spelling out how discrimination against certain Canadians because of a US place of birth (as opposed to economic activity or residence) would certainly violate the Charter. (to read Hogg’s letter simply Google “Peter Hogg + FATCA + Green Party Canada) Canada’s official opposition have stepped up their scrutiny of FATCA, and there is no doubt that any attempt for the current government to enter into a FATCA Intergovernmental Agreement will meet political and legal opposition.
Meanwhile, the sad procession of Canadians visiting US Consulates to renounce or document their relinquishment of US citizenship continues unabated. It has become routine; there are on-line guides where renunciants share experiences and peer support.
The fear, anger, angst and ill-will caused by FATCA among the people of Canada is a vast tragedy and also a diplomatic error of irreparable long-term consequence. I wonder if anyone at the US Department of State is making any note of the demographics of Canadians lining up to renounce their US connection. Does anyone question– or care – why so many educated, successful, articulate and law-abiding Canadians are doing this?


itacaf

Good article. I've been in Canada since I was 13 years old. It took me $35K to get free. I'm glad I did because it's nice to say I'm 'just' a Canadian. It also means that my Home, RRSP, Tax Free Saving Account, Canadian Pension Plan, Employers Pension Plan and children's education funds are now safe. The millstone is gone!


Vnr6RueQTo

What I do not understand is how do they intend to enforce that law against those expats or accidental citizens who simply decide to ignore it and who have no arrestable accounts/property in the US? I am such a person. I have not filed a single tax return since I left the US and I most certainly do not plan on starting to do it now. What in the world are they going to do to me for that? Even if they do sign some agreement with my current country of residence and find out that I have bank accounts and income here, so what? Sure, they can track and arrest me next time I enter the US, but short of that I am not really all that worried.



Under FATCA, if your 'foreign' bank finds out you have US citizenship, you and any joint account holders (regardless of citizenship) will be required to file a W9, effectively signing away your rights to any sort of financial privacy. Failure to sign the forms could result in the closing of your accounts. Once you have given your financial institution permission to share your data, your name, account number, account balances, and financial transactions will be forwarded to the IRS on an annual basis.
It's great that you have nothing to hide - most of us don't. However, personally for me, it is more the intrusion on my (and my non-US spouse's) personal privacy without any due process that will make me renounce.


f7NyNuoDkC

I agree with VnrRueQto that we should just be a citizen of one country. So I renounced Sept 7 in Vancouver Canada. Its too complicated to fill out US tax returns when I end up owing nothing (in fact, my US tax return is about $4,000 less per year as taxes are higher in Canada). Also while there is a tax treaty between USA and Canada, there are many elements of double taxation that have not been resolved.


Evil Overlord

I'm an American who has lived abroad for most of my life. Compliance with IRS rules has simply not been difficult, and it's certainly never entered my mind to give up citizenship over it - no more than when I have to send my ballot in by international mail. It's a tiny inconvenience. I think TE is being played by a small, but noisy contingent.



Do you have any money invested outside the U.S.? Do you own a brokerage account outside the U.S.? Do you invest in a retirement plan in the country where you live? Have you ever bought a whole-life insurance policy outside the U.S.? Have you ever run your own business outside the U.S.? If you haven't done any of these things, then you haven't experienced the problems that people are having with citizen-based taxation. Someone whose income outside the U.S. is confined to a modest salary and who keeps his savings in the U.S. doesn't have many reporting problems. The trouble starts when your economic life is based abroad.


Markus Aurelius The Great

It is simply not possible to live overseas and run a local business (boots-on-the-ground, Americans Selling American Products worldwide). It takes more than 800 IRS-calculated hours to report personal tax back to USA, to prove that the US person is not guilty of the tax evasion which is assumed--simply for not being inside USA.
If you remain a US person while on non-US unemployment, non US parental support or other locally non-taxed income, or while collecting upon your local non-taxable retirement benefits, you will be taxed by USA as these are likely to be non-excludable and non-creditable according to the US tax model.
Indeed, one could remain a US person, but then one will be living as an illegal and in a small number of countries, the local tax authorities indeed have a tax treaty with US which would allow that country to garnish US taxes from local accounts.


Mad Hatter

I split my time between the three countries I hold passports for.
Until now I have compartmentalised my tax payments but worry about the consequences even thought my income in each country is less than $7,500.
This sounds as mad as Labour's "tax the rich and successful" policies in the UK.


RogerioC

Some mistakenly assume that because there is a tax treaty between the US and the country abroad where a US citizen resides, this will eliminate double taxation. Nothing could be further from the truth. US tax treaties all contain a "saving" clause which provides that, without regard to what the tax treaty itself states, the US shall have the right to tax "US Persons," which means both citizens and green-card holders living in that country, plus citizens of the foreign country who have been present 183 days in the US during any calendar year.
By these tax treaties the foreign country guarantees the right of the IRS to levy and collect taxes within the sovereign borders of that other country. US tax laws also obligate US persons resident in another country to violate foreign laws. If you have signature authority over accounts you do not own, for example, by signing checks for your employer or being a director of a foreign corporation, you must reveal the details of your employers or that corporation's confidential financial records in your annual FBAR reports to the Treasury Department, and if you live in one of the 35 countries with foreign currency exchange controls you are likely forced to buy dollars on the black market, which under those laws is often a criminal felony, in order to pay US tax, which can only be paid in US dollars.
Laws which obligate persons living abroad to violate the laws of their country of residence are an outright violation of the UN's Declaration of Universal Rights. The author of that declaration was Eleanor Roosevelt and its provisions are obligatory for all member nations of the UN.


ToTellTheTruth

It is such a relief to see a serious article about this subject in the mainstream media. Thank you!
There seem, however, to be two errors, both potentially seriously misleading for readers who are not experts in US tax matters (especially those in the expat community).
First:
" Even greater numbers, including Americans studying abroad, may have innocently failed to fill out “FBAR” forms, on which foreign accounts holding $10,000 or more must be declared."
should, correctly, have read:
" Even greater numbers, including Americans studying abroad, may have innocently failed to fill out “FBAR” forms, on which all accounts, including pension savings, held outside the US must be declared if their value *in aggregate* exceeds $10,000 (a figure unchanged since it was first introduced more than 40 years ago, although not yet widely understood or meaningfully enforced even now)."
Second: " The IRS may go easy if the mistake was innocent or the taxpayer has entered the agency’s voluntary disclosure programme."
should probably have read: "The IRS may go easy if the mistake can be proven (by extremely stringent measures) to have been innocent, but almost certainly not if the taxpayer has entered the agency’s voluntary disclosure programme."

Posted on 5:51 AM | Categories: