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”.

Advertisements

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 …

IRCAll

IRCSubtitleA

IRCChapter2A

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

Continue reading Chapter 14: The Obamacare “Net Investment Income Tax” – Pure double taxation of #Americansabroad

Chapter 13: “Married filing separately” and the “Alien Spouse” – the “hidden tax” on #Americansabroad

Marriage is a difficult relationship. That said, there are two kinds of marriages that have particular difficulties resulting form the “circumstances of a U.S. birth”.

Type 1 – A U.S. citizen married to a non-U.S. citizen

Type 2 – A non-U.S. citizen married to a U.S. citizen

(Yes, they are the same.)

I call these kinds of marriages an “FBAR Marriage“.

The problems of the “FBAR Marriage” begin with filing a tax return at all. They continue from there.

(Both the U.S. citizen and the alien need to fully understand the problems that U.S. citizenship will cause in various aspects of the marriage! Perhaps specialized pre-marriage counselling is desirable. )

See the posts referenced in the following two tweets.

Chapter 12: Relinquishing citizenship and your IRA – bringing your IRA home

Are you living outside the United States?

Are you thinking about relinquishing U.S. citizenship?

Do you have an IRA or other retirement planning account in the United States?

Are you wondering about the effect of relinquishing U.S. citizenship has on your IRA?

This post will be for  you!

Coming soon!

In the interim, if you wish a consultation feel free to contact me.

John Richardson

 

 

 

Chapter 10: Paying into Social Security – #Americansabroad, double taxation and the payment of “Self-employment” taxes

Introduction:

The article reference in the above tweet includes:

Although 25 countries have signed a bi-national social security agreement (what the IRS calls a Totalization Agreement) with the U.S. that prevents double taxation of income with respect to social security taxes, Morocco isn’t one of them. In fact, not one country in the Middle East has signed the agreement, and Chile is the only Latin American country to do so. In Asia, only Japan and South Korea have totalization agreements with the U.S.

“The double taxation makes me crazy, especially because Morocco and the U.S. have so many treaties relating to trade, the military, and many other things,” Ms. Ponzio-Moutakki said. “This just penalizes Americans who are living abroad.”

 

The problem:

Self-employed “Homelanders” are required to pay a tax on self-employed earnings. This is a tax “Social Security” tax. This tax is found in the Internal Revenue Code. The Internal Revenue Code treats Americans abroad and “Homelanders” the same.

An excellent description from U.S. tax lawyer Virginia La Torre Jeker includes:

What is Self-Employment Tax?

The self-employment tax is a social security and Medicare tax based on net earnings from “self- employment”.  We’ll review what it means to be “self-employed” later in this posting.  The dollar threshold trigger for paying self-employment tax is quite low – you must pay self-employment tax if your net earnings from self-employment are at least US$400.

For self-employment income earned in 2013, the self-employment tax rate is 15.3% imposed on your net earnings. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).

If you are a “self-employed” US citizen or US resident, the rules for paying self-employment tax are generally the same whether you are living in the United States or living and working overseas.

Effect of Foreign Earned Income Exclusion (FEIE)

You must take all of your self-employment income into account in figuring your net earnings from self-employment, even income that is exempt from income tax because of the FEIE. Briefly, for those who may not be familiar with the FEIE, Americans working abroad may be eligible to exclude certain foreign earned income (wages, compensation for services) from US taxable income under the rules governing the Foreign Earned Income Exclusion (FEIE), and certain foreign housing costs paid by their employers. If one is self-employed, then instead of taking a housing exclusion, a housing deduction is taken which further reduces the amount of taxable income. For self-employed persons, both the FEIE and the housing deduction will be calculated based on the individual’s net income as figured on Schedule C or Schedule F. Calculating the right amount of the exclusion depends on figuring one’s business income accurately.

The above-mentioned beneficial rules apply regardless of whether any foreign tax is paid on the foreign earned income or housing amounts. These tax benefits can be claimed, however, only if a US tax return is filed within certain time deadlines. More details can be found in my write-up here.

Therefore the question becomes:

Under what circumstances do Americans abroad become exempt from paying the U.S. “self-employment” tax? There are two possible ways to avoid the U.S. “self-employment tax”.

First – the “Totalization Agreement”

Americans abroad are exempt if they reside in a country that has a “Totalization Agreement” with the U.S. Government. So, what’s a “Totalization Agreement” and what purpose does it serve?

The short answer is that if you are “self-employed” in a country that has a “Totalization Agreement” you will NOT have to pay the U.S. Social Security tax.

This means that as a “self-employed” U.S. citizen abroad your U.S. tax liability is largely determined by your country of residence. If you don’t live in a country with a “totalization agreement” you will pay higher U.S. taxes! You cannot use your Foreign Tax Credit to offset Social Security taxes. The message is:

The takeaway: U.S. citizens abroad need to carefully consider the implications of being “self-employed”!

The Social Security site describes “Totalization Agreements” in the following way:

107. Totalization Agreements

107.1 What are Totalization agreements?

The Social Security Act allows the President to enter into international agreements to coordinate the U.S. Social Security Act’s title II (old age, survivors and disability) insurance programs with the social security programs of other countries. These agreements are known as “Totalization agreements.”

107.2 With what countries does the U.S. have Totalization agreements?

The United States currently has social security agreements in effect with 24 countries – Australia (2002), Austria (1991), Belgium (1984), Canada (1984), Chile (2001), Czech Republic (2009), Denmark (2008), Finland (1992), France (1988), Germany (1979), Greece (1994), Ireland (1993), Italy (1978), Japan (2005), Luxembourg (1993), the Netherlands (1990), Norway (1984), Poland (2009), Portugal (1989), South Korea (2001), Spain (1988), Sweden (1987), Switzerland (1980), and the United Kingdom (1985).

107.3 What are the purposes of Totalization agreements?

Totalization agreements have three main purposes:

  1. To eliminate dual social security coverage and taxation. This situation occurs when a person from one country works in the other country and is required to pay social security taxes to both countries for the same work;

  2. To avoid situations in which workers lose benefit rights because they have divided their careers between two countries. Under an agreement, such workers may qualify for partial U.S. or foreign benefits based on combined work credits from both countries.

  3. To increase benefit portability by guaranteeing that neither country will impose restrictions on benefit payments based solely on residence or presence in the other country.

107.4 Totalization Agreements – Other Resources

For additional information on “Totalization agreements” see: http://www.socialsecurity.gov/international/agreements_overview.html

Second – the creation of a “Foreign Corporation”

I will create a separate chapter on this issue. For the moment, borrowing again from Virginia La Torre Jeker:

Circumventing Self-Employment Tax

One method that can be considered is the creation of a foreign entity, such as a foreign corporation and being hired by that entity as an employee, generally with full salary being eligible for the FEIE and elimination of self-employment tax concerns .  Whether this is a viable solution will require very careful consideration of many factors and professional tax advice should be sought.   For starters, one must consider the US tax impact of owning a foreign corporation.  Some initial guidance can be found in my tax blog posting here.

 

 

 

 

 

Chapter 9: Receiving U.S. Social Security – #Americansabroad and entitlement

Introduction:

The above tweet references the following comment on a Wall Street Journal article:

Social Security is a separate program that people “pay into” every year. In return for “paying in” the U.S. agrees to “pay out” when he reaches a certain age. How is his citizenship or residence in any way related to that?

Self employed Americans abroad (unless they live in a country with a “Totalization Agreement”) are required to pay the Social Security Tax ON INCOME EARNED OUTSIDE THE UNITED STATES. Surely you would agree that they should receive the benefits even if they live outside the United States.

How is it that the “U.S. provided a livelihood” for him? Maybe he provided a “livelihood” for Americans. Maybe he “put food on the table of American families”.

Your comments remind me a little bit of President Obama’s “You didn’t build that that …”

Finally – “never getting citizenship …” There are many reasons people don’t acquire U.S. citizenship. In some cases they are citizens of countries that don’t allow dual or multiple citizenships.

This man worked. He paid into the system. He should be presumptively entitled to the benefits.

Listening in … An interesting Facebook discussion …

_______________________________________________________________________________

An identification of and “breakdown” of the issues …

 

General rule …

In general, Americans abroad are eligible for U.S. Social Security and eligible for having their payment sent to their country of residence. Nevertheless, because it’s the United States of America, there are always issues …

Understanding the issues …

The U.S. Government Social Security Site – Start here

This post includes a number of tweets which will reference you to “third party posts” about U.S. Social Security. Nevertheless, I strong recommend that you begin with the Official U.S. Government Social Security site. This site includes a specific “International Section“. Obviously it will always remain current. In fact, I urge you to make the Official U.S. Government site your most important “stopping point”. The site even includes an amazing tool to determine your entitlement to benefits.

An introduction:

Let’s break the “issues” into the following categories:

1. As an American Abroad, are you entitled to U.S. Social Security at all?

2. What if part of my working life was in the United States and part of it was abroad? – The impact of “Totalization Agreements”

3. As a U.S. citizen abroad, does my country of residence affect my entitlement to U.S. Social Security?

4. What if I renounce U.S. citizenship. How does that the fact that I am no longer a U.S. citizen and am now a “Non-Resident Alien” affect my entitlement to U.S. Social Security?

You become a “Non-resident alien”. Your eligibility for benefits is determined here:

See also:

Taxation of Social Security Benefits Received

5. Okay, great I am receiving U.S. Social Security payments but am living outside the United States. How are these U.S. Social Security payments taxed by the United States and/or my country of residence?

In general:

In Canada:

6. How much U.S. Social Security do I receive anyway? I have heard that there is a “Windfall elimination provision”. Is that true?

Yes it is.

http://www.ssa.gov/pubs/EN-05-10045.pdf

See here:

EN-05-10045