Month: May 2016

Are you approaching retirement age and wondering where you can retire to make your retirement nest egg last longer? Retiring abroad may be the answer. But first, it’s important to look at the tax implications because not all retirement country destinations are created equal. Here’s what you need to know.

Taxes on Worldwide Income

Leaving the United States does not exempt U.S. citizens from their U.S. tax obligations. While some retirees may not owe any U.S. income tax while living abroad, they must still file a return annually with the IRS. This would be the case even if all of their assets were moved to a foreign country. The bottom line is that you may still be taxed on income regardless of where it is earned.

Unlike most countries, the United States taxes individuals based on citizenship and not residency. As such, every U.S. citizen (and resident alien) must file a tax return reporting worldwide income (including income from foreign trusts and foreign bank and securities accounts) in any given taxable year that exceeds threshold limits for filing.

The filing requirement generally applies even if a taxpayer qualifies for tax benefits, such as the foreign earned income exclusion or the foreign tax credit, that substantially reduce or eliminate U.S. tax liability.

Note: These tax benefits are not automatic and are only available if an eligible taxpayer files a U.S. income tax return.

Any income received or deductible expenses paid in foreign currency must be reported on a U.S. return in U.S. dollars. Likewise, any tax payments must be made in U.S. dollars.

In addition, taxpayers who are retired may have to file tax forms in the foreign country in which they reside. You may, however, be able to take a tax credit or a deduction for income taxes you paid to a foreign country. These benefits can reduce your taxes if both countries tax the same income.

Nonresident aliens who receive income from U.S. sources must determine whether they have a U.S. tax obligation. The filing deadline for nonresident aliens is generally April 15 or June 15 depending on sources of income.

Income from Social Security or Pensions

If Social Security is your only income, then your benefits may not be taxable and you may not need to file a federal income tax return. If you receive Social Security you should receive a Form SSA-1099, Social Security Benefit Statement, showing the amount of your benefits. Likewise, if you have pension or annuity income, you should receive a Form 1099-R for each distribution plan.

Retirement income is generally not taxed by other countries. As a U.S. citizen retiring abroad who receives Social Security, for instance, you may owe U.S. taxes on that income, but may not be liable for tax in the country where you’re spending your retirement years.

However, if you receive income from other sources (either U.S. or country of retirement) as well, from a part-time job or self-employment, for example, you may have to pay U.S. taxes on some of your benefits. You may also be required to report and pay taxes on any income earned in the country where you retired.

Each country is different, so consult a local tax professional or one who specializes in expat tax services.

Foreign Earned Income Exclusion

If you’ve retired overseas, but take on a full-or part-time job or earn income from self-employment, the IRS allows qualifying individuals to exclude all, or part, of their incomes from U.S. income tax by using the Foreign Earned Income Exclusion (FEIE). In 2016, this amount is $101,300. This means that if you qualify, you won’t pay tax on up to $101,300 of your wages and other foreign earned income in 2016.

Note: Income earned overseas is exempt from taxation only if certain criteria are met such as residing outside of the country for at least 330 days over a 12-month period, or an entire calendar year.

Tax Treaties

The United States has income tax treaties with a number of foreign countries, but these treaties generally don’t exempt residents from their obligation to file a tax return.

Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from U.S. income taxes on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and specific items of income.

Treaty provisions are generally reciprocal; that is they apply to both treaty countries. Therefore, a U.S. citizen or resident who receives income from a treaty country and who is subject to taxes imposed by foreign countries may be entitled to certain credits, deductions, exemptions, and reductions in the rate of taxes of those foreign countries.

Affordable Care Act

Starting in 2014, the individual shared responsibility provision calls for each individual to have minimum essential coverage (MEC) for each month, qualify for an exemption, or make a payment when filing his or her federal income tax return.

All U.S. citizens are subject to the individual shared responsibility provision. If you are not yet eligible for Medicare, U.S. citizens living abroad are generally subject to the same individual shared responsibility provision as U.S. citizens living in the United States.

However, U.S. citizens or residents living abroad for at least 330 days within a 12 month period are treated as having MEC during those 12 months and thus will not owe a shared responsibility payment for any of those 12 months. Also, U.S. citizens who qualify as a bona fide resident of a foreign country for an entire taxable year are treated as having MEC for that year.

State Taxes

Many states tax resident income as well, so even if you retire abroad, you may still owe state taxes–unless you established residency in a no-tax state before you moved overseas.

Some states honor the provisions of U.S. tax treaties; however, some states do not, therefore it is prudent to consult a tax professional.

Relinquishing U.S. Citizenship

Taxpayers who relinquish their U.S. citizenship or cease to be lawful permanent residents of the United States during any tax year must file a dual-status alien return and attach Form 8854, Initial and Annual Expatriation Statement. A copy of the Form 8854 must also be filed with Internal Revenue Service (Philadelphia, PA 19255-0049), by the due date of the tax return (including extensions).

Note: Giving up your U.S. citizenship doesn’t mean giving up your right to receive social security, pensions, annuities or other retirement income. However, the U.S. Internal Revenue Code (IRC) requires the Social Security Administration (SSA) to withhold nonresident alien tax from certain Social Security monthly benefits. If you are a nonresident alien receiving social security retirement income, then SSA will withhold a 30 percent flat tax from 85 percent of those benefits unless you qualify for a tax treaty benefit. This results in a withholding of 25.5 percent of your monthly benefit amount.

Consult a Tax Professional Before You Retire

Don’t wait until you’re ready to retire to consult a tax professional. Call the office today and find out what your options are.

• By Leon Clinton
• May 21, 2016

Given current economic conditions, you may be faced with tax questions surrounding a job loss and unemployment issues. Here are some answers:

Q: What if I receive unemployment compensation in 2016?

A: Unemployment compensation you receive under the unemployment compensation laws of the United States or of a state are considered taxable income and must be reported on your federal tax return. If you received unemployment compensation, you will receive Form 1099-G showing the amount you were paid and any federal income tax you elected to have withheld.

Types of unemployment benefits include:

• Benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund
• Railroad unemployment compensation benefits
• Disability payments from a government program paid as a substitute for unemployment compensation
• Trade readjustment allowances under the Trade Act of 1974
• Unemployment assistance under the Disaster Relief and Emergency Assistance Act

You must also include benefits from regular union dues paid to you as an unemployed member of a union in your income. However, other rules apply if you contribute to a special union fund and your contributions are not deductible. If this applies to you, only include in income the amount you received from the fund that is more than your contributions.

Q: Can I have federal income tax withheld?

Yes, you can choose to have federal income tax withheld from your unemployment benefits by filling out Form W-4V, Voluntary Withholding Request. If you complete the form and give it to the paying office, they will withhold tax at 10 percent of your payments. If you choose not to have tax withheld, you may have to make estimated tax payments throughout the year.

Q: What if I lost my job?

A: The loss of a job may create new tax issues. Severance pay and unemployment compensation are taxable. Payments for any accumulated vacation or sick time are also taxable. You should ensure that enough taxes are withheld from these payments or make estimated tax payments to avoid a big bill at tax time. Public assistance and SNAP (formerly known as food stamps) are not taxable.

Q: What if I searched for a job?

A: You may be able to deduct certain expenses you incurred while looking for a new job, even if you did not get a new job. Expenses include travel, resume preparation, and outplacement agency fees. Moving costs for a new job at least 50 miles away from your home may also be deductible.

Q: What if my employer went out of business or into bankruptcy?

A: Your employer must provide you with a W-2 Form showing your wages and withholdings by February 1 (the exact date may vary in a given tax year). You should keep up-to-date records or pay stubs until you receive your Form W-2. If your employer or its representatives fail to provide you with a Form W-2, contact the IRS. They can help by providing you with a substitute Form W-2. If your employer liquidated your 401(k) plan, you have 60 days to roll it over into another qualified retirement plan or IRA.

If you have experienced a job loss and have questions, please call. You need to be prepared for the tax consequences.

• By Leon Clinton
• May 19, 2016

If you’re age 70 1/2 or older, you can now take advantage of recent legislation allowing you to avoid paying income tax on IRA withdrawals transferred directly to a qualified charitable organization.

Referred to as Qualified Charitable Distributions (QCDs), they can also be used to satisfy all or part of your required minimum distribution. Here’s an example:

Let’s say your required minimum distribution in 2016 is $22,000. If you make a qualified charitable distribution of $15,000 for 2016, then you would need to withdraw another $7,000 to meet the amount required for your 2016 required minimum distribution.

Required minimum distributions (RMDs) must be taken each year beginning with the year you turn age 70 1/2–whether you are still working or not. The RMD for each year is calculated by dividing the IRA account balance as of December 31 of the prior year by the applicable distribution period or life expectancy. This rule does not apply to your Roth IRAs.

What is a Qualified Charitable Distribution (QCD)?

Generally, a qualified charitable distribution (QCD) is an otherwise taxable distribution from an IRA (other than an ongoing SEP or SIMPLE IRA), that is owned by an individual who is age 70 1/2 or over that is paid directly from the IRA to a qualified charity.

What are the Rules?

Unlike most tax-related rules, the rules for QCDs are fairly straightforward:

• You must be age 70 1/2 or older
• The QCD must be made from a traditional IRA, Roth IRA, or individual retirement annuity, but not from a simplified employee pension, a simple retirement account or an inherited IRA
• The QCD must be a direct transfer from the IRA trustee to the charitable organization
• The organization must be one that qualifies for a charitable income tax deduction of an individual, that is, no private foundations (i.e. that give out grants)
• The organization must acknowledge the charitable contribution similar to a charitable income tax deduction or donor advised fund

Tax Advantages of QCDs

Generally, taxable IRA distributions must be included in adjusted gross income (AGI)–even if donated to charity. You may be able to take a deduction for a charitable donation, but could be subject to a 50 percent AGI limitation, which means you wouldn’t be able to deduct the full amount in that tax year and might be subject to income tax on the difference.

QCDs bypass this potential problem because they are exempt from taxation–and you get to take the full amount as a charitable deduction.

Another tax advantage is that there is no increase in your AGI that could, for example, increase your income tax on Social Security income or cause Medicare insurance premiums to increase. It could also reduce deduction amounts for say, medical expenses, which are limited to amounts more than 10 percent of AGI (7.5 percent for those 65 and older in 2016).

In addition, because there is no addition to income, you may be able to take the standard deduction (often a higher dollar amount and more beneficial than itemizing) and claim the deduction for a charitable contribution.

The $100,000 limit is an annual amount, so you can take advantage of a QCD for as many years as you wish–and it applies to each spouse’s IRA. As such up to $200,000 ($100,000 per spouse) could be donated in a given tax year and still qualify for the exclusion.

Reporting a QCD on your Income Tax Return

Charitable distributions are reported on Form 1099-R for the calendar year the distribution is made. You should receive Form 1099-R by February 1, 2017. To report a qualified charitable distribution on your Form 1040 tax return, you generally report the full amount of the charitable distribution on the line for IRA distributions. On the line for the taxable amount, enter zero if the full amount was a qualified charitable distribution and enter “QCD” next to this line.

You must also file Form 8606, Nondeductible IRAs, if you made the qualified charitable distribution from a traditional IRA in which you had basis and received a distribution from the IRA during the same year, other than the qualified charitable distribution; or the qualified charitable distribution was made from a Roth IRA.

Questions?

Don’t hesitate to call if you would like more information about qualified charitable distributions or have any questions about IRAs and minimum required distributions for IRAs and how it affects your taxes.

• By Leon Clinton
• May 17, 2016