Archive for the ‘Thoughts’ Category

A recent study conducted by the Treasury Inspector General for Tax Administration (TIGTA) indicates that a large number of taxpayers living abroad are calculating incorrectly one of the most important elements of their tax return: The foreign earned income exclusion.
This code provision allows taxpayers living abroad to exclude the first $92,900 (2010) earned abroad. However, it is subject to certain requirements being met:

1. First, the taxpayer must establish their abode in the foreign country. This means their economical, familial and personal ties must be stronger with the foreign country than with the USA.
2. Second, they must meet the criteria of either the Bona Fide Residence test, or the physical presence test.

TIGTA audited over 230,000 tax returns for the tax year 2008 and found that over 10% of these returns incorrectly calculated the exclusion – and that some of the taxpayers were not even entitled to the coveted tax break.

TIGTA estimated that these errors resulted in over $450 Million dollars of lost revenue, According to J. Russell George, Treasury Inspector General for Tax Administration. Given these figures it is not surprising that, even in light of the recent budgetary crisis, the IRS is requesting to increase their workforce by at least 5,100 agents in 2012.

The challenge for taxpayers is that the IRS does not make it easy to be compliant with US Taxes. The definitions surrounding eligibility are vague and lack a much needed checklist that taxpayers can rely on; instead, they must seek qualified advice, which is not in-expensive given the qualifications needed to find the most advantageous tax position. There are several firms dedicated to the compliance of taxpayers living abroad, but the self service tools available are limited.
Tax Planner CPA provides some resources, such as the foreign earned income exclusion eligibility test and the Physical Presence Test Calculator – but makes us wonder why the IRS is not providing these resources and establishing a clear framework that allows taxpayers to be compliant without incurring significant expenses with their US CPAs.

The full study can be found here:
http:www.treas.gov/tigta/auditreports/2010reports/201040091fr.pdf.

The expatriate life, once the province of artists, intellectuals and adventure-seekers, is fast becoming a realistic option for millions of Americans looking to lower their living costs and stress levels.
Being an expat used to mean waiting weeks for letters from home, rarely seeing a US newspaper and paying sky-high long distance rates for the occasional call to the States. The Internet has changed all that, and the new global connectivity is another reason more and more Americans are deciding to give the expat lifestyle a try.
A little planning goes a long way, however, once there’s a decision to move to a foreign country. For example, a US citizen’s federal tax obligations do not stop at the border, although there certainly can be distinct tax advantages in being an expat.
The amount of taxes a US citizen must pay the IRS while living in a foreign country can depend to a great extent on decisions he or she makes prior to the big move. For instance, will the expat have two homes, one in the US and one in the foreign country? This could affect tax liability. And how many days each year will the expat spend visiting the US? Believe it or not, one poorly timed visit to the States could wind up adding thousands of dollars to the IRS bill of an unwary expat.
The US tax code is the world’s most complicated, and its sections on expat tax responsibilities, which take hours just to read, can be a challenge to understand. Yet the dense government prose contains provisions that are as good as gold for expats, for example the foreign income exclusion, which allows US citizens residing in foreign countries to earn up to $91,000 in tax-free income.
In most cases the best approach for the expat who wants to fulfill his or her tax responsibilities while minimizing tax liabilities is to seek professional tax help. It’s important, however, that the chosen tax professionals have both knowledge and experience in expat tax issues.
A good starting point for learning about US expat tax issues is this blog; we are a firm devoted exclusively to the tax needs of Americans living abroad. The blog is written by the our CPAs and legal professionals, and it explains, in everyday language, many of the significant factors affecting the tax liabilities of American expats.

US citizens who move to a foreign country to reduce their living expenses often find that their expat taxes are lower than when they lived in the States, at least the taxes they must pay to the United States government.
That’s because the IRS allows hefty income exclusions for US citizens living overseas that can result in significant tax savings. The agency has specific rules governing income exclusions, however, and these rules are not always easy to understand. Due to their length and complexity, it takes hours just to read the IRS regulations for expat taxes.
What those regulations spell out is a generally favorable tax system for expats, but one that requires careful study and a thorough understanding.
The responsibility of a US citizen living abroad to file timely US tax returns never ends as long as that person retains their citizenship. The amount of expat taxes due depends to a great extent on the taxpayer’s ability to qualify for what is called the foreign income exclusion. The expat taxpayer must establish foreign residence by meeting the requirements of either the bona fide residence test or the physical presence test in order to qualify for the “tax free” income exclusion, which is currently the first $91,000 of income for expats.
Determining whether an American living in a foreign country can earn up to $91,000 “tax free” often requires professional expertise. A CPA firm that specializes in expat taxes is the safest bet for a US citizen living abroad who wants to minimize his or her tax liability while complying with all US tax laws.

Sometimes American expats wonder, “Why should I pay any taxes to the US at all if I’m not even living there?” It’s important to remember that as long as a person holds US citizenship, he or she still enjoys all the protections that go along with that citizenship, regardless of where they choose to live. With careful and informed calculation of one’s expat taxes, that can prove to be a pretty good bargain .

With three days to go before yearend here are some last minute tax suggestions.

Mortgage To claim the January 2011 interest this year mail your January mortgage check today. Better yet pay it online today so your year end mortgage statement is correct.

Property TaxesIf you aren’t likely to owe the Alternative minimum tax this year prepay your January property tax bill. Don’t do this if you owed the alternative minimum tax last year and expect to owe it again this year since property taxes aren’t a deduction for the alternative minimum tax.

Charitable DeductionsAny charitable deductions need to be finalized (ie check received AND cashed) before yearend to count as a 2010 deduction. At this late stage best to pay contributions online by credit card – Remember that charitable contributions to a non US organization are not deductible.

Estimated TaxesEstimated tax payments are due January 15. If you don’t expect to owe the alternative minimum tax prepay the state estimated tax deduction today. It will count as a 2010 deduction if it is paid before yearend.

Schedule C and Sub S TaxpayersAll our clients who own small businesses are cash basis tax payers. This means for something to count as a 2010 deduction it must be paid by Friday. Likewise and receivables not collected will count as 2011 income. This week is also a good time to buy any equipment since you will be able to deduct the full cost of any equipment (must be new) this year. Special rules apply for cars and trucks.

Stock PortfolioReview your portfolio for any winners and losers. Some of our clients still have large capital loss carryovers for the last couple of years. Consider using them this year to offset portfolio gains

IRARemember any IRA contributions need to be funded by April 15th, 401K contributions by this Friday, SEP Contributions can wait till the extended due date of your tax returns.

Energy Tax CreditIf you haven’t already it is probably too late to take advantage of the 30% energy tax credit (up to $1500) but we do have one client who is having a new furnace installed this week saving $1500 in the process.

FSA DollarsThis week is your last opportunity to spend down any health savings account dollars for 2010

As you pull together your 2010 tax information please be sure you keep back up documentation. Anything you give us, we scan in and save for at least 3 years – but we did see a lot more people come in over the summer with IRS audit letters (fortunately not our clients). The IRS is getting much more sticky about having support for any deductions claimed. This is especially true for car expenses, charitable deductions and Schedule C deductions. It is important to remember the IRS can go back three years and if you can’t support a deduction claimed they will just throw it out.

Christopher Jenkins,CPA

Of course, my thoughts are biased – but I will provide you with as much information so you can make your own decision.

When looking for help with their US tax returns, many taxpayers search for “Tax preparation Service”, “tax preparer” or “tax return preparation”. It worries me that an American taxpayer with complicated issues such as the foreign earned income exclusion or the foreign tax credit would place the responsibility of preparing their tax returns with any tax preparer.

While many may choose to work in the accounting field, just like all professions there are specialties. An accountant is not a CPA – Certified Public Accountant. A CPA undergoes stringent training and testing before the government decides to trust him/her with the duty of helping the public comply with tax laws. Besides specific education in certain areas, a set of tests need to be passed – which by the way I’ve heard of the pass rate being about 40% these days. One of those tests has to do with regulation, or tax law.

Based on our legislation, any individual can be a tax preparer. They can undergo a tax preparation service training module given by any of the big “fast-food” style tax preparation firms, and then go work in your neighborhood. This is a great business model, obviously, and I am not saying anything about their quality. What I am saying is that a 10 hour course will never compare with the amount of studying a CPA has to undergo in order to obtain and maintain their license.

I would also comment that a small firm is likely to pay closer attention to your returns – just like any other small business. I personally like to deal with smaller businesses.

But back to my thoughts on searching for “Tax preparation Service”, “tax preparer” or “tax return preparation”. If I could, I would suggest to these taxpayers that they search instead for US CPA, US Certified Public Accountant – and even better: Foreign earned income exclusion + US CPA!

Why?

Why you should not self prepare.

What is a CPA?