“Things as certain as death and taxes, can be more firmly believ’d.” - Daniel Defoe
Most U.S. nonresidents are aware these days that if you move to the United States or have U.S. investments, you may become subject to U.S. income tax laws. But what may not be as well known is that you may also be subject to U.S. estate tax, even if you don’t earn any income or file income tax returns.
The Internal Revenue Code is notoriously complex and this area is no exception. The Internal Revenue Code actually has two separate determinations for taxing a foreign person: residency for the income tax, and domicile for the estate tax. Even if you are not a resident for income tax, you can still be considered domiciled for the estate tax.
The IRS defines residency for income tax under a number of different tests, including whether the taxpayer holds a green card or if they’ve been in the country for a substantial portion of the year. You can also make the First-Year Election to declare your residency on the first U.S. income tax return you file.
When it comes to the estate tax, federal regulations determine a “domicile” as living somewhere for a period of time without any immediate plans of leaving. Domicile depends on both physical presence and intention to stay in the country. Simply put, if you intend to stay, you’re domiciled, but if you plan to leave, you need to actually leave.
If a person is deemed to be a U.S. resident for estate tax, their worldwide assets are subject to the estate tax. If someone is a nonresident, only assets with situs in the United States are subject to inclusion in his or her estate.
What Can You Do if You Are Subject to U.S. Estate Tax?
At this point, you may be thinking, “I have U.S. and foreign assets, so how can I reduce or avoid U.S. estate tax?”
The answer to that question largely depends on your current situation.
If you’re a nonresident alien who has a domicile in the United States, there’s a certain amount of preplanning you can do in anticipation of this tax, such as gifting intangible property before establishing a domicile in the U.S. There are other measures you can take, such as having U.S. real estate and equities owned by a foreign corporation, to make sure you are in the most advantageous position in the U.S. and the foreign country.
It’s also important to consider whether a nonresident’s country of citizenship has a tax treaty in force with the United States. The U.S. has active tax treaties with many countries, and depending on the country, a nonresident individual may be entitled to the full $5,495,000 estate exclusion or only a statutory $60,000 exclusion.
Expatriation might seem like a good way to avoid the U.S. estate tax—and this may be the case in certain situations—but Section 2107 of the Internal Revenue Code makes nonresident aliens subject to U.S. estate tax if they were domiciled in the United States for a period of five years or more. The window for being subject to this tax is ten years and you are taxed on any assets (tangible or intangible) that are situated in the United States.
If you are a foreign national living and owning property in the U.S. and have concerns that you may be subject to U.S. estate tax, we can help you sort out your options. We at Freed Maxick pride ourselves on our experience and expertise with these and other international tax matters. Please contact us if you have any questions.View full article
If you or your business qualifies as a U.S. tax person, you might have to file tax returns and you might have to pay taxes. Or you might not.
In a previous post, we focused on the 3 ways an individual business can qualify as a “U.S. person” for tax purposes. Once someone crosses that threshold, there are 3 important questions to answer:
- Am I required to file anything in the U.S. and if so, what?
- Am I required to pay anything to the U.S. and if so, how much?
- If I’m not required to file and pay in the U.S., is there any reason I would still choose to do so?
Filing Obligations in the U.S.
Once you show up on the Internal Revenue Service’s radar as a “person” for U.S. tax purposes, what do you have to file? That can vary based on individual circumstances and is best determined by consulting with a tax professional familiar with your specific situation. Here are a few possibilities, but this list is by no means exhaustive.
- An application for some type of tax i.d. number. The U.S. system cannot function on names alone. Anybody who needs to file tax forms in the States will need to have some type of identifying number registered with the IRS in order to track filings and payments accurately.
- An income tax return. Keep in mind that there is a difference between filing an income tax return and paying income tax. That will be discussed in the next section. For now, understand that your main interaction with the U.S. tax system is likely to be through the filing of income tax forms, regardless of whether income tax is owed or not.
- Information reports. If you’re required to file a tax return in the U.S., you may very well be subject to information reporting requirements regarding non-U.S. bank accounts. This report goes through the “Financial Crimes Enforcement Network” (“FinCEN”) on the network’s form 114, “Report of Foreign Bank and Financial Accounts” (FBAR). The general rule states that U.S. persons, including individuals and businesses, must file an FBAR if:
- The U.S. person has a financial interest or signature authority over at least one financial account located outside the U.S., and
- The aggregate value of all financial accounts in number 1 above exceeded $10,000 at any time during the calendar year reported.
Payment Obligations in the U.S.
Not everybody who is required to file forms in the U.S. incurs an obligation to pay taxes there. You might meet the requirements for filing a U.S. income tax return but not have the necessary income to owe taxes. This list describes some (but not all) of the common types of taxes owed once you meet the thresholds:
- Income taxes. The U.S. system allows a credit for taxes paid in foreign countries. It’s not unusual for a business or individual to meet the requirements to be a U.S. tax “person” and to report income in the states, but to wind up owing nothing in the U.S. due to tax obligations in another country.
- Payroll Taxes. If you hire U.S. employees and withhold federal income, social security and Medicare taxes from their wages, the government expects the money withheld to be paid to the Treasury in relatively short order. Depending on the number of employees or the amounts withheld, an employer may be required to pay as frequently as every 2 weeks.
- Penalties. This area is perhaps the biggest “trap for the unwary.” A failure to file any tax form required by the government can lead to the assessment of a penalty. Often the penalty is calculated based on a percentage of the amount owed, so those who don’t have a balance due may not accrue significant obligations in this area. Failure to file an FBAR, however, can lead to penalties up to $10,000 for non-willful violations or $100,000 or more in the case of willful failures to file.
Filing When Not Required
In most cases, people don’t want to file any tax form that they don’t have to. In the U.S. tax system, there is a situation that might make the filing of an income tax return worthwhile even if it’s not required. Non-U.S. taxpayers who invest in U.S. businesses, particularly partnerships, might get an information report back that says the partnership lost money. The taxpayer might not meet any requirement for filing a U.S. income tax return under those circumstances, but the U.S. system allows for losses that cannot be deducted in a particular year to be carried forward. So even though the only entry on the tax form is a report of the loss from the partnership, that loss can serve to reduce taxable income in future years if and when the investment starts to make money.
In addition, we often advise businesses that have sales in the U.S. but no other significant presence to begin filing returns proactively even before required. It’s important to establish a track record of compliance from the earliest days of your presence in the U.S.
The key to effective tax compliance for non-U.S. businesses and individuals is solid advice and planning from the start. If you’re contemplating starting operations in the U.S., it’s never too early to contact a tax professional who is familiar with the intricacies of the tax obligations facing non-U.S. taxpayers.View full article
The Supreme Court’s decision on DOMA and Prop 8 is not only a civil rights win for same sex couples- it’s a financial win for many.
In an unprecedented event last week, the Supreme Court ruled that the 1996 Defense of Marriage Act (“DOMA”) singled out same-sex marriage and treated same-sex couples "as living in marriages less respected than others." This week’s ruling will now give same-sex couples many of the same benefits (and in some cases, drawbacks) as any other married couple in the eyes of the law. Married same-sex couples in a dozen states and the District of Columbia will now be eligible for more than “1,000 spousal benefits previously off limits under DOMA.” And the court's other decision on Wednesday, striking down California's Prop 8, paves the way for same-sex marriages to resume in that state.
Key Aspects of the DOMA Ruling Include:
Income tax: Same-sex couples will now be able to file their federal income taxes jointly. For many couples -- especially those where one person earns significantly more than the other -- merging incomes for tax purposes will result in big savings. In addition, many education benefits, such as the American Opportunity Tax Credit and Lifetime Learning Credit, are now available to the spouse in a same-sex marriage where one spouse pays for qualified expenses of the other.
Health insurance: Some same-sex couples pay income tax on imputed income for the medical benefits one partner receives through the other's health insurance plan; this will now likely change. Meanwhile, many federal employees will likely be granted spousal benefits like partner health insurance.
Estate and Gift tax: Same-sex couples will also be exempt from gift tax when transferring assets to each other. Under DOMA, any gift between same-sex spouses of more than $14,000 (the 2013 annual gift tax exclusion) began utilizing the lifetime exclusion limit of $5.25 million-- after which tax was assessed on gifts exceeding the exclusion. Opposite-sex couples have never been subject to that tax. Same-sex couples will also be eligible to “split” gifts to take advantage of a doubled annual gift tax exclusion ($14,000 above x 2 married individuals or $28,000 for 2013) In addition, the unused lifetime exclusion of the decedent spouse is now portable and will allow the estate of the surviving spouse to utilize it.
Social Security benefits: Same-sex couples will now be eligible for the same federal tax treatment and Social Security benefits as opposite-sex couples in the event that one spouse passes away. This means a surviving spouse will be eligible for Social Security survivor’s benefits and will be exempt from the federal estate tax on assets exceeding $5.25 million. Note: In states where same-sex marriage is banned, this issue still has to be sorted out as the Social Security Administration has based these benefits on the state of residence.
While many will receive the benefits of this ruling; they will also receive its downside. For example, same-sex couples who divorce may be subject to the federal gift tax when dividing assets, or be partially responsible for the back taxes of the divorcing partner. Also, same-sex married couples will now have to file as either married filing joint, surviving spouse or married filing separate. Thus, the “marriage penalty” will impact some same-sex couples.
What the decision doesn't do: While many specifics of the Supreme Court's ruling are still blurry, it appears that couples must be married at a state level for all of these federal benefits to apply -- meaning domestic partnerships and civil unions don't qualify. It's also unclear whether federal benefits will apply to same-sex couples who marry in a state where same-sex marriage is legal but move to a state where it's not recognized.
To learn more check out this special report detailing Post DOMA Tax Implications
We may be based in New York State, however Freed Maxick CPAs provides tax services to business all over the U.S., no matter your location: Alabama, AL; Alaska, AK; Arizona, AZ; Arkansas, AR; California, CA; Colorado, CO; Connecticut, CT; Delaware, DE; Florida, FL; Georgia, GA; Hawaii, HI; Idaho, ID; Illinois; IL; Indiana, IN; Iowa, IA; Kansas, KS; Kentucky, KY; Louisiana, LA; Maine, ME; Maryland, MD; Massachusetts, MA; Michigan, MI; Minnesota, MN; Mississippi, MS; Missouri, MO; Montana, MT; Nebraska, NE; Nevada, NV; New Hampshire, NH; New Jersey, NJ; New Mexico, NM; New York; NY, North Carolina, NC; North Dakota, ND; Ohio, OH; Oklahoma, OK; Oregon, OR; Pennsylvania, PA; Rhode Island, RI; South Carolina, SC; South Dakota, SD; Tennessee, TN; Texas, TX; Utah, UT; Vermont, VT; Virginia, VA; Washington, WA; West Virginia, WV; Wisconsin, WI; Wyoming, WY. We Serve all 50 States.
Contact us to learn more about our tax services
As the first legislative quarter for 2013 comes to an end and the second quarter begins, elected officials across the country are considering a large number of state income and franchise tax law changes. Some proposals have been audacious, recommending significant tax reform (e.g., eliminating the corporate and individual income taxes), while others stay true to the current tax policies and play around the edges (e.g., eliminating tax breaks).
One of the amendments to the current tax policies in New York State applies to corporate franchise tax, bank franchise tax, tax on unrelated business income, personal income, and insurance tax. Royalty income (sometimes called running royalties) are usage-based payments made by one party (the "licensee") to another (the "licensor") for the right to ongoing use of an asset, sometimes an intellectual property. Royalties are typically agreed upon as a percentage of gross or net revenues derived from the use of an asset or a fixed price per unit sold of an item of such, but there are also other modes and metrics of compensation. A royalty interest is the right to collect a stream of future royalty payments.
Changes to New York’s royalty income add-back and exclusion provisions, which apply to taxable years beginning on or after January 1st 2013, eliminate the exclusion of royalty income received, if the related member that made the royalty payment was required to add back the payment to its income. Further, the bill creates new exceptions:
The royalty payment was paid, accrued or incurred by a taxpayer that is organized under the laws of a foreign country that has a tax treaty with the US. The taxpayer was subject to tax in the foreign country on a tax base that included the royalty payment paid, accrued or incurred by the taxpayer; the effective tax rate equals that imposed by New York; and the royalty payment was paid, accrued or incurred pursuant to a transaction that was undertaken for a valid business purpose and using terms that reflect an arm’s length relationship.
If the taxpayer was subject to tax on or measured by its net income in New York or another state; the tax base for the tax included the royalty payment paid, accrued or incurred by the taxpayer; and the aggregate effective tax rate (a nominal rate multiplied by the recipients apportionment percentage) applied to the related member in those jurisdictions is not less than 80% of the applicable New York statutory rate.
If the taxpayer was subject to tax in New York, another state or foreign nation on a tax base that included the royalty payment paid, accrued or incurred by the taxpayer; the related member during that same taxable year directly or indirectly paid, accrued or incurred such portion to an unrelated third party; and the transaction giving rise to the royalty payment between the taxpayer and related member was undertaken for a valid business purpose.
The new legislation is forth coming, applying to tax years beginning January 1st, 2013 and all applicable taxes related to this, filed thereafter.
When it comes to taxes, Freed Maxick CPAs is different than most accounting firms in Western New York. What matters to you, matters to us; giving you the most up to date alerts to any changes that may affect you and help you respond in a timely way. We serve all 50 states. Contact us to today.
In April of 2010, the Department of the Treasury and the IRS asked for public comment regarding guidance projects and issues concerning interpretation and implementation of the new Foreign Account Tax Compliance Act (FATCA) provisions that stemmed from the HIRE Act of 2010. Unlike its FBAR compliance efforts that rely on delegated authority from the FinCEN and that are restricted due to concerns in the use of tax return or tax return information under Internal Revenue Code ( I.R.C.) 6103, the new provision eliminates these concerns and allows the IRS to use its own tax administration authority.
While there are benefits to the IRS using its own tax administrative authority, there are still some issues. Many of the issues encountered with the FBAR will continue to plague the new provision as well. For example:
The IRS will face the same problem with the new FATCA provisions as it does with the FBAR provisions, as there is no easy method to determine what constitutes the potential population filing base.
The new provision will be self-reported, similar to the FBAR.
Other roadblocks include the burden of what taxpayers will face, and increases filing requirements that have become considerably more complicated as a result of the addition of the FATCA filing. For example:
In addition to the required FBAR filing, taxpayers are now required to file the new FATCA information.
Taxpayers may also find that certain terms are defined differently in the BSA regulations and the Internal Revenue Code. For example, the term United States is defined in the BSA regulations as …the States of the United States, the District of Columbia, the Indian lands, and the Territories and Insular Possessions of the United States.20 While in the I.R.C. it is defined as “United States” when used in a geographical sense includes only the States and the District of Columbia
(Source from IRS.gov/pub/IRS-wd I.R.C 7701(a)(9) (2010).
Are you hitting roadblocks in filing your FBAR and FATCA? Do you have questions on how to navigate the complex IRS tax rules? If so, we can help. Freed Maxick is committed to helping you! Contact us today to get started.