The announcement by Internal Revenue Service yesterday via Revenue Procedure 2020-17 offers a big relief to many taxpayers with foreign retirement fund account or education, medical or disability trusts. Following are the salient features of the Rev. Proc.:
- The Rev Proc provides exemption from filing Forms 3520 and 3520-A for an “eligible individual’s” transactions with, or ownership of, an “applicable tax-favored foreign trust” (ATFFT)
- An eligible individual generally means an individual who is a U.S. citizen or resident and who is compliant with all requirements for filing U.S. federal income tax returns and has reported as income (to the extent required) any contributions to, earnings of, or distributions from, an ATFFT.
- ATFFT includes foreign pension or a tax favored foreign retirement trust and foreign medical, disability or educational trust or a tax favored foreign non-retirement savings trust.
- Tax favored retirement trust must be created to operate exclusively or almost exclusively to provide, or to earn income for the provision of, pension or retirement benefits.
- The trust must only permit contributions with respect to income earned from the performance of personal services.
- Contributions to the trust must: (a) be limited by a percentage of earned income of the participant, (b) be subject to an annual contribution limit of $50,000 or less, or (c) be subject to a lifetime contribution limit of $1,000,000 or less.
- Withdrawals from the trust must be conditioned upon reaching a specified retirement age, disability, or death, or penalties must apply to withdrawals made before such conditions are met. However, an exception is provided for early withdrawals for hardship or educational purposes, or for the purchase of a primary residence.
- Employer provided trusts must be non discriminatory
- Trust must be created to operate exclusively or almost exclusively to provide, or to earn income for the provision of, medical, disability, or educational benefits.
- Contributions to the trust must be limited to $10,000 or less annually or $200,000 or less on a lifetime basis
- Withdrawals from the trust must be conditioned upon the provision of medical, disability, or educational benefits, or penalties must apply to withdrawals made before such conditions are met.
Cherry on the top!
- Penalties are not applicable in case of the above trusts because ATFFT is exempt from reporting on 3520 and 3520-A
- Rev Proc also includes procedures for the eligible individuals who have been assessed penalty for failing to comply with IRC 6048, to request abatement of the penalty assessed
- Rev Proc also describes the procedure to claim refund of the previously paid penalty
This is a tremendous news for many taxpayers who have such qualifying accounts/ trusts in foreign countries. For example dual residents of U.S. and Canada who have RESP accounts will now breathe a sigh of relief.
As readers may recall in June 2015 United States and Brazil agreed and signed the Social Security Totalization Agreement. Recently the Brazilian President ratified the agreement and now the agreement has come in to effect on October 1, 2018.
The agreement would be welcome news for the expatriates working in both countries as they will not be subject to pay social security taxes in both countries on the same income. Like in other totalization agreements, the assignment should not exceed 5 years. Additionally, similar to other totalization agreements, the expatriate individual is required to obtain “certificate of coverage” from the other country where he makes the social security contributions.
Another benefit of the totalization agreement is the individuals will be able to combine the periods of coverage to meet the minimum period of coverage requirements in order to qualify for the social security benefits in the home country.
CPA Global Tax & Accounting will be happy to assist with any questions.
The Arizona taxpayers (like taxpayers residing in many other states) have had the benefit of being able to make a charitable contribution to a qualified charity and take that amount not only as a tax credit against their Arizona taxes and get a dollar for dollar back on their tax return, but have also been able to take a federal tax deduction to save federal taxes. However, that could possibly change soon.
You can no longer double-dip, says the IRS!
On Thursday, August 23rd, the IRS issued proposed regulations that could affect your ability to utilize your state dollar-for-dollar tax credit as a federal deduction if you itemize.
Your State dollar-for-dollar tax credit contribution may need to be made by Monday, August 27, 2018 if you are planning to utilize it for a 2018 Federal deduction.
This is just a proposed regulation at this time but will be the final in all likelihood as IRS has been targeting the change for a long time. It states only tax credit contributions made after August 27, 2018 will be affected by these regulations.
To recap, Arizona has five principal tax credit opportunities:
* Public School donation
* Private School donation
* Donation to Military Family Relief Fund
* Donations to Qualifying Foster Care Charitable Organizations
* Donations to Qualifying Charitable Organizations
For those of you that aren’t familiar with all the different deduction opportunities for the Arizona credit, information can be found on Department of Revenue’s information regarding tax credits: https://azdor.gov/tax-credits.
As a reminder, contributions made to a charitable organization overseas are generally not deductible unless a tax treaty provides for the deduction.
Certain U.S. citizens or resident aliens, specifically contractors or employees of contractors supporting the U.S. Armed Forces in designated combat zones, may now qualify for the foreign earned income exclusion.
The Bipartisan Budget Act of 2018, enacted in February, changed the tax home requirement for eligible taxpayers, enabling them to claim the foreign earned income exclusion even if their “abode” is in the United States. The new law applies for tax year 2018 and subsequent years and under this law, the taxpayers can choose to exclude their foreign earned income from gross income, up to a certain dollar amount. For tax year 2018, that dollar amount limit is $103,900.
Under prior law, many otherwise eligible taxpayers who lived and worked in designated combat zones failed to qualify because they had an abode in the United States. The new law makes it clear that contractors or employees of contractors providing support to U.S. Armed Forces in designated combat zones are eligible to claim the foreign earned income exclusion.
The foreign earned income exclusion is not automatic. Eligible taxpayers must file a U.S. income tax return each year with either a Form 2555 or Form 2555-EZ attached. These forms, instructions and Publication 54,Tax Guide for U.S. Citizens and Resident Aliens Abroad, will be revised later this year to reflect this clarification.
What is Foreign Earned Income?
Foreign earned income is the income a taxpayer receives for performing personal services in a foreign country or countries during a period in which he or she meets both of the following requirements:
• His or her tax home is in a foreign country, and
• He or she meets either the bona fide residence test or the physical presence test.
Taxpayers choosing the foreign earned income exclusion cannot take advantage of any other exclusion, deduction or credit related to the excluded income. This includes any expenses, losses or other items that would have been deductible had the exclusion not been claimed. CPA Global Tax (www.cpaglobaltax.com) specializes in international tax issues and will be glad to assist if you have any questions!
New trade laws were recently enacted after President Obama signed them into law recently.
One of the provisions is affecting child tax credit claimed by certain expatriates. Under the provisions of new law, expatriates claiming foreign earned income exclusion under IRC 911 will no longer be entitled to claim refundable child tax credit. The change is effective from the tax years beginning after December 31, 2014.
Pertinent to note here that IRC 911 exclusion limit for 2015 tax year is $100,800.
Recently in Rogers case, the DC court affirmed the Tax Court’s decision that a flight attendant who performed some duties in and over the U.S. and international waters could not exclude all of her wages under IRC 911 as foreign earned income.
The taxpayer worked as an international flight attendant based in Hong Kong. She performed in-flight duties and some pre-departure and post-arrival work and was generally paid according to her flight time. She received vacation time and benefits, and could receive guarantee pay for work that she would have performed on flights that were canceled. When she received guarantee pay, she was required to remain in Hong Kong awaiting reassignment to another flight. The airline provided the taxpayer with an apportionment of her estimated duty time between minutes spent in or over foreign countries, in or over the U.S., and over international waters. The taxpayer and her husband filed a joint return and excluded all of the taxpayer’s earnings as foreign earned income under IRC 911.
IRS and later Tax Court disallowed the foreign earned income exclusion for the portion of income allocated to her time within U.S. and allowed exclusion only for the flight time that the taxpayer was outside the U.S.
Foreign earned income exclusion is claimed on Form 2555 and the taxpayer must meet either bona fide residence test or physical presence test. There are several exceptions and rules as well as planning opportunities. CPA Global Tax professionals can help you navigate this.
Recently Companies Act 2013 was enacted in India. One of the concepts that was introduced for the first time is OPC or One Person Company concept. Practitioners of the erstwhile Companies Act of 1956 never could imagine that a Company can be formed just by one person! However, siding with the developed countries’ corporate laws, this certainly is a welcome change. It is remaining to be seen as to how the concept will be received by the business as well professional community in India.
The Companies (Incorporation) Rules, 2014 provides as following:
- A natural person who is an Indian citizen and resident in India shall be eligible to incorporate an OPC and to become a nominee for the sole member of the OPC.
- Corporations, foreigners or a non resident individual cannot incorporate an OPC;
- A person cannot incorporate more than one OPC or become a nominee in more than one OPC. However, such a person can be a member of one OPC and nominee of another OPC;
- Where a member of an OPC becomes a member of another OPC by virtue of his nomination in that second OPC, he shall opt out of either one of the OPC within a period of 180 days;
- A minor cannot become a member or nominee of an OPC or hold shares with beneficial interest; An OPC cannot carry out NBFC activities including investment in securities of anybody corporate.
- Every OPC will mention “One Person Company“ in brackets below the name of such company wherever it is printed, affixed or engraved. Hence, the name should be mentioned as “ABC (One Person Company)“ and not any other way.
It is perceived that the new development will not be attractive from the Indian income tax point. Indian tax law imposes a secondary tax on dividend (called distribution tax) on the Companies. If OPC has to pay the dividend tax, it looses its attractiveness as compared to a sole proprietorship.
It will be interesting to watch the evolution of the concept and see if the law will accommodate foreign investors and allow them to use OPC in future.
In a recent court case, the taxpayer who argued that by living in Germany for many years and selling his US properties a long time back, he had relinquished his Lawful Permanent Residence (LPR) or a green card and hence should not be subject to US taxes on his income. However, IRS did not accept this and court agreed with IRS making the taxpayer liable for the tax.
IRS contended that the taxpayer was liable for income tax deficiencies for 2004 and 2006 – 2009 (almost all of which was attributable to the gain on his installment sale of stock). IRS argued that (1) because the taxpayer did not formally abandon his LPR status (obtained in ’77) until 2010, he remained an LPR during the years in issue, and (2) because he was not taxable by Germany as a German resident during those years, he was not a German resident under Article 4 of the Treaty. Therefore, he was not exempted from U.S. taxation by the Treaty.
The Tax Court reasoned that the taxpayer did not formally renounce or abandon that status until Nov. 10, 2010, when he filed a Form I-407 and surrendered his green card to the USCIS consistent with the requirements of Reg. § 301.7701(b)-1(b)(3).The Court rejected the taxpayer’s argument that he “informally” abandoned his LPR status. The Court held that for Federal income tax purposes, the taxpayer’s LPR status turns on Federal income tax law and was only indirectly determined by immigration law. The taxpayer’s reliance on an immigration case that recognized “informal” abandonment was misplaced. Unlike immigration law, the Code and regs were not silent on the point at which a taxpayer’s LPR status was considered to change. The requirements set out in Code Sec. 7701(b)(6)(B), Reg. § 301.7701(b)-1(b)(1), and Reg. § 301.7701(b)-1(b)(3) for abandoning LPR status
UK recently published a draft legislation that the tax treatment of all employment related securities be the same for all globally mobile employees. Accordingly a portion of any equity award paid to such employees should be apportioned to UK income based on the number of UK days in such financial year.
This legislation can create additional costs to the internationally mobile employee and should be reviewed carefully.