Are you double dipping on your charitable contributions? IRS says no more!

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.

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Combat-zone contract workers could qualify for foreign earned income exclusion – it’s the new Law!

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!

Missed April 15, 2018 deadline for making IRC 965 repatriation tax instalment? Proposed regulations come to the rescue

For individual taxpayers who have a net tax liability under IRC section 965 in the individual’s 2017 taxable year of less than $1 million (i.e., the total of all eight installments is less than $1 million) and make a timely election under IRC section 965(h) but missed the April 18, 2018 deadline for making the first of the eight annual installment payments, the guidance in IRS FAQ#16 still applies: The IRS will waive the late-payment penalty (but will not waive the interest) and will not accelerate subsequent installments under IRC section 965(h)(3) if the individual pays the full amount of the first installment (and the second installment) by the due date for its 2018 return (determined without regard to extensions) (i.e., April 15, 2019 for most calendar year taxpayers).

Watch out however for state tax liability. Nearly all states require payment of the liability in the year of the section 965 inclusion and do not allow for the section 965(h) election, or otherwise spreading the liability over 8 years.

Repatriation tax – IRS provides penalty reliefs to many

In recently published Newswire, IRS announced that it will grant penalty relief in certain cases with regard to repatriation tax under IRC 965.

In nutshell, following are the new three relief provisions:

In general, the questions and answers indicate that:
• In some instances, the IRS will waive the estimated tax penalty for taxpayers subject to the transition tax who improperly attempted to apply a 2017 calculated overpayment to their 2018 estimated tax, as long as they make all required estimated tax payments by June 15, 2018.
• For individual taxpayers who missed the April 18, 2018, deadline for making the first of the eight annual installment payments, the IRS will waive the late-payment penalty if the installment is paid in full by April 15, 2019. Absent this relief, a taxpayer’s remaining installments over the eight-year period would have become due immediately. This relief is only available if the individual’s total transition tax liability is less than $1 million. Interest will still be due. Later deadlines apply to certain individuals who live and work outside the U.S.
• Individuals who have already filed a 2017 return without electing to pay the transition tax in eight annual installments can still make the election by filing a 2017 Form 1040X with the IRS. The amended Form 1040 generally must be filed by Oct. 15, 2018.

IRS accordingly updated the FAQ page and added these reliefs.

Please contact CPA Global Tax (www.cpaglobaltax.com) team if you have any questions regarding repatriation tax as well as GILTI tax.

 

Payments to foreign persons and 1042 – Don’t miss the March 15 deadline

IR 2017-43

The Internal Revenue Service today reminded non-U.S. citizens who may have taxable income, such as international students and scholars who may be working or receiving scholarship funds, that they may have special requirements to file a U.S. tax return.

The IRS also reminded withholding agents — such as payroll professionals or universities — that accurately filed Forms 1042-S help speed any refunds due to their non-U.S. citizen taxpayers. Errors on forms or returns could result in some refunds being delayed.

What Non-U.S. Citizen Taxpayers Must Do

The Internal Revenue Code generally requires non-U.S. citizens, whom the code defines as either resident or non-resident aliens, who are engaged in a trade or business within the U.S. to file tax returns. Non-resident aliens such as foreign students, teachers or trainees temporarily in the United States on F, J, M or Q visas are considered engaged in a trade or business.

Most individuals in F-1, J-1, M-1, Q-1 and Q-2 non-immigrant status are eligible to be employed in the U.S. and are eligible to apply for a Social Security number if they are actually employed in the United States. Those not eligible for an SSN but who have a tax filing requirement may request an Individual Taxpayer Identification Number from the IRS.

The non-U.S. citizen’s name must be reported exactly as it appears on the official documentation provided to the withholding agent (such as a Social Security Administration card or some other form of official governmental documentation).

Filing a Form 1040-NR or 1040NR-EZ is required by non-U.S. citizens who have a taxable event such as:

A taxable scholarship or fellowship, as described in Chapter 1 of Publication 970, Tax Benefits for Education;

  • Income partially or totally exempt from tax under the terms of a tax treaty; and/or
  • Any other income, which is taxable under the Internal Revenue Code.

Non-U.S. citizens also must attach one copy (generally Copy B) for each Form 1042-S received to their tax returns. Non-U.S. citizens should review the Form 1042-S to ensure it accurately reflects their name and income. If the form does not contain accurate information, they must contact the withholding agent for an amended Form 1042-S.

What Withholding Agents Must Do

Generally, non-U.S. citizens who have taxable income also may have withholding of taxes by the source of their income. Withholding agents are required to complete Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding.

Withholding agents must provide five copies of the Form 1042-S. Copy A should go to the IRS; Copies B, C and D to the recipient of the income; and copy E should be retained by the withholding agent. All information, including the name of the taxpayer, must match exactly on all copies of Form 1042-S.

If withholding agents create a substitute Form 1042-S, all five copies must be in the same physical format. The size, shape and format of any substitute form must adhere to the rules of Publication 1179, General Rules and Specifications for Substitute Forms 1096, 1098, 1099, 5498, and Certain Other Information Returns. The official Form 1042-S is the standard for substitute forms.

A common error is to have a Form 1042-S listing two or more recipients in box 13a. The 2016 instructions to Form 1042-S have been updated to clarify that in the case of joint owners, Form 1042-S can only list one of the owners in box 13a.

Withholding agents should review Fact Sheet 2017-03, where they can find the latest changes to Form 1042-S instructions and common errors that delay processing of tax returns.

Who says MNCs want to keep the earnings offshore

IRS recently stated that the U.S. based holding companies claimed $18.3 billion in foreign tax credit in 2013 which is up from $8.17 billion in the previous year. The foreign tax credit was generally claimed for the tax paid in foreign countries on the dividend income repatriated to the U.S. by these holding companies. The data says that the holding companies reported $25.1 billion in such dividend income in 2013.

The data suggests that U.S. companies are bringing in more income from the foreign earnings to finance U.S. operations.

Since the tax incentives are not the motivation for repatriating the earnings, the economic factors seem to be the driving such a trend.

Alert: FIRPTA withholding rate goes up effective today, February 16th

Foreign investors are generally not subject to US tax on US source capital gain unless it is effectively connected with a US trade or business, or it is realized by an individual who meets certain physical presence requirements. 

Gain from the disposition of a U.S. real property interest (USRPI), however, is treated as income effectively connected with a US trade or business under the Foreign Investment in Real Property Tax Act (FIRPTA). This FIRPTA gain is subject to tax and withholding under Code Sec. 897 and Code Sec. 1445. 

Stock or a beneficial interest in a US real property holding corporation (USRPHC) is a USRPI. 

Under pre-2015 PATH Act law, in the case of any disposition of a USRPI by a foreign person, the transferee was required to deduct and withhold at the rate of 10% of the amount realized on the disposition. 

Effective dispositions made on or after February 16, 2016, the new PATH Act increases the FIRPTA withholding rate to 15% on the dispositions of USRPIs and other prescribed transactions. 

However, the PATH Act provides for a reduced FIRPTA withholding rate of 10% in the case of a disposition of property which is acquired by the transferee for use by the transferee as a residence, and the amount realized for the property does not exceed $1,000,000, provided the exemption for a residence bought for $300,000 or less does not apply.