John Richardson interviews Virginia La Torre Jeker on the new – November 2018 – IRS Voluntary Disclosure Practise.
Author: citizenshiptaxation
Chapter 22: To share or not to share” – Should a U.S. citizen share a bank account with a “non-citizen AKA alien spouse? – Reporting edition
In Chapter 15 – To Be FORMWarmed Is To Be FORMArmed, we discussed the number of forms, complexity of the forms and the exposure to penalties that impact Americans abroad.
Two of the most common forms are the FBAR and Form 8938. Each of these forms requires Americans abroad to report to the U.S. Government information about their financial accounts. The reporting requirement extends to reporting accounts that are held jointly with the non-citizen spouse. This is NOT a small thing. It means that the U.S. spouse is required under threats of fines and penalty to transmit the financial information about the non-citizen spouse to the U.S. Government. The way to avoid this is for the U.S. citizen spouse to NOT hold accounts jointly with the non-citizen spouse.
The reality is that, in the case of joint accounts, this means that the U.S. citizen will report the bank accounts of the spouse to the U.S. Government. Different people have different views of this.
The following discussion take place on Keith Redmond’s American Expatriates Facebook group. This is a closed group (meaning that you would have to join the group to read the post).
The reality of life for many Americans abroad is three-fold:
1. It is common for Americans abroad to marry non-U.S. citizens;
2. Americans abroad are (with few exceptions) required to report to U.S. Financial Crimes (Think Mr. FBAR) bank accounts that they either have signing authority over or where they can control the disposition of the funds.
3. In some countries, because of FATCA, it is very difficult for U.S. citizens to be able to obtain and maintain bank accounts. This is due to a perception (rightly or wrongly) that banks do NOT want to deal with U.S. citizens.
You will see from the Facebook discussion (which assumes all three of the above points), that many Americans abroad are very reluctant to share bank and financial accounts with their non-citizen (AKA “alien”) spouse.
Possible Conclusion: At the very least you understand the implications of a U.S. citizen holding joint accounts with an alien. Separate accounts would ensure that financial information about the alien will NOT be transmitted to the IRS.
The Facebook discussion referenced in the above tweet is very interesting.
Chapter 21: How #Americansabroad can continue to use the #IRA as a retirement planning vehicle
First, you should NOT be using the Sec. 911 FEIE (Foreign Earned Income Exclusion) if you want to invest in an IRA:
Second, okay assuming that you are able to invest in an IRA:
The post is referenced in he above tweet was written by Chad and Peggy Creveling and appeared in the Wall Street Journal on August 23, 2016. It is well written and very interesting. You will find some of their blog posts here. The post will NOT be of interest to “accidental Americans’ and other “long term” Americans abroad. The reason is simple. The rules are so complicated that only short term – “Homelanders Abroad” would undetake the compliance burden.
Nevertheless, I recommend the article to you. It will reinforce the impossibility of navigating U.S. tax rules if you live outside the United States.
Chapter 20: The child tax credit, take it, leave it and how to take it
Chapter 19: Is it better to take the “Foreign Tax Credit” or the “Foreign Earned Income Exclusion” – a discussion
Even for a basic U.S tax return, I have often said that:
Two different tax preparers could produce five different U.S. tax returns.
When filing their U.S. tax returns Americans abroad are faced with tho threshold questions:
1. What filing category should they use? Single, Married Filing Jointly, Married Filing Separately or Head of Household?
2. Assuming they have “earned income”, should they use the Sec. 911 FEIE (Foreign Earned Income Exclusion” or should they use the Sec. 901 FTC (Foreign Tax Credit Rules).
In most cases the Sec. 901 FTC rules lead to better results.
The above tweet references an excellent discussion by CPA Olivier Wagner which explains why in most cases the Sec. 901 Foreign Tax Credit rules would be preferred to the Sec. 911 Foreign Earned Income Exclusion.
The following discussion on Facebook illustrates the general points.
The above tweet references the following Facebook discussion. You will have to log in to your Facebook account to read it live. Note by the way the reference to the article about your “local pension”, which by the way, is considered to be “foreign” (with all the attendant horror) from a U.S. perspective. Note the title refers to your pension as an “unexpected tax trap”. This article had about 43,000 views. On the issue of “foreign pensions” see:
But back to the “Foreign Earned Income Exclusion” vs. the “Foreign Tax Credit” discussion (better to read on Facebook if you can):
Naomi Hoffman
September 25 at 5:58pm · Edited
I’m partway through my 2nd attempt to complete our US tax return, and getting much further with TaxAct than I was a few months ago with HR Block. We emigrated mid 2014, so we have some income from the US, and a lesser amount from the UK. Here is my frustration: after all our foreign income was ‘excluded’ (Form 2555) we owed the IRS $1000 more than before the foreign income was added. In short, our (minuscule) foreign income for 2014 appears to have bumped us into a higher tax bracket and cost us $1000! I will experiment with the Foreign Tax Credit, but meanwhile can anyone please explain WHY a foreign earned income exclusion would negatively effect tax brackets? I don’t see how this is not double taxation. Thanks so much.
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Comments
Tricia Moon
Tricia Moon Are you converting the UK income to US values before you apply the FEIE?
Like · Reply · 2 · September 25 at 8:40pm · Edited
Ashraf Khatib
Ashraf Khatib Did you use Form 2555 for each you and your spouse? Each can dedcut $99,200 from 2014 income for a total of $198,400, MFJ with both spouses working. Also, if you have any deductable income (i.e. mortgage interest) you stilll claim that on Schedule A.
Like · Reply · 2 · September 25 at 9:20pm
Scott Hochgesang
Scott Hochgesang It’s hard to imagine a scenario where taking the exclusion causes you to pay more US tax. Is it a partial year issue perhaps as you said you moved part year?
Like · Reply · 3 · September 25 at 9:24pm
Orlando Gotay
Orlando Gotay There’s something called the “Stacking rule”. The exclusion in effect excludes income at the lower ends of the tax “ladder” and not from the top where it is taxed at a higher rate. I’m not surprised you get that result.
Trivia: California does an analogous thing to its part year residents, too.
Orlando Gotay’s photo.
Like · Reply · 2 · September 25 at 11:28pm · Edited
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Naomi Hoffman
Naomi Hoffman Good to know you can take a FTC on tax paid on passive income. Looking for glimmers of hope to level the playing field!
Like · Reply · 20 hrs
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Susan De Paul
Susan De Paul You can only exclude “earned” foreign income on the 2555, but other types of foreign income (such as contributions of a foreign employer to a foreign pension plan) are added directly to your income and cannot be excluded. Is something like that causing the problem?
Like · Reply · 1 · Yesterday at 1:18am
Tom Paine
Tom Paine If you are in the UK, it is probably NOT to your advantage to use the Foreign Earned Income Exclusion period. To summarize the reasons given in the previous comments: (1) only what qualifies as “earned income” (not investment or pension income) can be …See More
Like · Reply · 2 · 21 hrs
Naomi Hoffman
Naomi Hoffman Orlando Gotay you are spot on. After seeing your email this morning my husband and I spent the last few hours doing calcs and reading through the article you linked (very informative & helpful article BTW) and that is exactly what is happening. Unbelie…See More
Like · Reply · 21 hrs
Sigrid Ore
Sigrid Ore To determine the actual tax bracket, your total income before exclusions is used. That means if your US income plus your foreign income is for example 120.000$, you are in the 28% tax bracket. Let’s say your income from the US is only 40,000$, than this income is taxed at 28%. The foreign earned 80,000$ is tax excempt.
Like · Reply · 20 hrs · Edited
Naomi Hoffman
Naomi Hoffman Many thanks everyone for your comments, the ‘Stacking Rule’ mentioned by Orlando is the cause. Tricia we did make the conversion to USD, Scott I agree hard to imagine but the FEIE does indeed cause us to pay more US tax -$1000 more. I will include my c…See More
Like · Reply · 1 · 20 hrs
Naomi Hoffman
Naomi Hoffman Scott in our preliminary calcs we would owe $75 using the FTC instead of $1000 using the FEIE. Now to go see if we can master Form 1116 & see if it concurs with our calculations…
Like · Reply · 20 hrs
Scott Hochgesang
Scott Hochgesang You must have a lot of passive income (interest, dividends, rent) which is not picked up by FEIE. Many here use local US tax accountants Down Under – they cost around $400-500 but do tax returns and FBARs too.
Like · Reply · 20 hrs
Susan De Paul
Susan De Paul Yes, I’m really saying that your employer’s contributions must be added to your income IF the foreign pension is not considered “qualified” under U.S. tax law. [This will depend on the nature of the tax treaty between your country and the U.S. I don’t …See More
Like · Reply · 1 · 20 hrs · Edited
Susan De Paul
Susan De Paul Here’s an article that explains the situation with the foreign pension plans:
http://www.forbes.com/…/pensions-create-yet-another…/…See More
Pensions Create Yet Another Tax Trap For U.S. Expatriates
forbes.com|By Janet Novack
Like · Reply · 1 · 20 hrs
Naomi Hoffman
Naomi Hoffman Thanks so much for your response Susan. Its just all unbelievable. And of course, because the foreign employers contributions are pre-tax, you could not claim tax credit on your 1040. I just don’t see how it is legal to tax ‘potential’ vs ‘actual’ inco…See More
Like · Reply · 1 · 19 hrs
John Hanson replied · 2 Replies · 6 hrs
Marco Sewald
Marco Sewald I like the FTC, you can carry unused credits forward or carry back if needed for several years – so the only U.S. tax you may face, while living in a high tax country and having a quite high income, might be the 3,8% Net Investment Income Tax / Medicare surtax…which is bad enough if you will never get any benefits from medicare…
Like · Reply · 16 hrs
Chapter 18: I don’t pay taxes in the country where I live. Can I “exclude” my foreign income from the U.S. tax return?
The short answer is, as long as it is “earned income”, kind of YES!!!
It’s about the S. 911 of the Internal Revenue Code Foreign Earned Income Exclusion or the “FEIE” for short
If you live in a country that does NOT impose income taxation at all, or you just want a very simple filing situation, read on!
The “Foreign Earned Income Exclusion” – For those who are NOT interested in claiming tax credits on “earned income” (Form 2555)
The Foreign Earned Income Exclusion is found in S. 911 of the Internal Revenue Code. I strongly recommend that you read the actual section in the Internal Revenue Code.
See form 2555 or (better yet) Form 2555EZ.
Continue reading Chapter 18: I don’t pay taxes in the country where I live. Can I “exclude” my foreign income from the U.S. tax return?
Chapter 17: How to get “credit” for taxes (foreign) paid to your country of residence
The United States will give you “some” but NOT all credit for non-U.S. taxes paid to your country of residence. In other words, you will NOT get credit for all taxes paid to your country of residence.
In order for you to get “credit” for a tax paid to your country of residence it must be recognized as a “tax” under U.S. law. Even then, then you may or may not get credit for the “tax” paid.
Non-creditable taxes (ouch!) commonly paid to non-U.S. governments
You know the answers.
- It includes the “sales tax” or common “VAT” tax that is imposed in many countries (including Europe and Canada). These are very significant sums paid. They are a significant percentage of the total tax you pay to your country of residence. Yet, you will get no credit for them under U.S. law.
- Social Security taxes in a country that does not have a “Totalization Agreement” with the U.S. government.
Non-creditable taxes (when filling out your local tax return) that have been paid to the U.S. government
- Possibly the brand new and exciting “Obamacare Surtax”! If Americans don’t pay for the medical care of Homelanders, then who else will?
- The U.S. capital gains tax on your principal residence.
The point is that the Americans abroad will be subjected to double taxation and the worst of the rules of the United States and your country of residence.
There are two ways to get some “credit” for some of the taxes you have paid to other countries.
1. Taxes that may be taken as “Itemized Deductions” but are not subject to the “Foreign Tax Credit” (Form 1116) rules.
An example of this might be property taxes paid on your principal residence.
2. Taxes that may be taken as “Foreign Tax Credits” (Form 1116)
Earned income: The taxes paid in your country of residence may (in general) be taken as a tax credit ONLY against U.S. taxes imposed on “Earned income”. Think wages, salaries and small business (non incorporated) profits.
Passive income: Passive income includes: dividends, interest and capital gains. In general the non-U.S. taxes that you pay on “passive income” can be taken ONLY as a “tax credit” against U.S. tax imposed on the same income.
Income resourced by treaty: Harder to understand but a separate bucket. Here is an example of how that might work.
“Earned income”, “passive income” and “income resourced by treaty” are treated as separate “baskets of income”. In both cases you an “build up” significant “foreign tax credits” that can be used in other years. This is why you would want to use “Foreign tax credits”. (Plus you will get a better result than using them as an itemized deduction.)
Chapter 16: Most “Form Crime” penalties can be abated if there is “reasonable cause”
This will be the shortest chapter. I am certain that after having read Chapter 15 about “Form Crime” and the possible penalties (usually $10,000 a form”) you will want to know how get “Form Crime Relief”.
Speaking of $10,000 – the “Standard Form Crime Penalty”
It is important for you to know that:
– “reasonable cause” does exist as a defense; and
– If you were truly ignorant of the form (who wouldn’t be?) then you it may work for you.
First, “Form Omissions” are generally what the IRS would call “Delinquent Information Returns“.
Second, what’s “reasonable cause” anyway?
Remember, …
Many “Form Crime” penalties can be abated based on “reasonable cause”.
Chapter 15: To be “FORMWarned is to be “FORMArmed” – It’s “FORM Crime” stupid!!
Introduction …
Since beginning the draft of this post, I have written a separate post:
Homelanders (and most U.S. tax preparers) really don’t understand the problem of “forms”. They seem to think that filling out, say Form 8938 is like completing a survey. The post referenced in the above tweet was an attempt to explain what the “form thing” is really about. well, I tried …
Forms and the life of an American citizen …
Continue reading Chapter 15: To be “FORMWarned is to be “FORMArmed” – It’s “FORM Crime” stupid!!
Chapter 14: The Obamacare “Net Investment Income Tax” – Pure double taxation of #Americansabroad
Introduction …
Looking for the Net Investment Income Tax …
The argument for why Americans abroad are required to pay the Obamacare surtax AND why foreign tax credits cannot be applied to offset the tax
Citizenship Taxation - Theory vs. Reality 