Tax

If you are living or working outside the United States, you generally must file and pay your tax in the same way as people living in the U.S. This includes people with dual citizenship.

In addition, U.S. taxpayers with foreign accounts exceeding certain thresholds may be required to file Form FinCen114, known as the “FBAR” as well as Form 8938, also referred to as “FATCA.”

FBAR is not a tax form, but is due to the Treasury Department by April 15, 2019, and must be filed electronically through the BSA E-Filing System website. It may be extended to October 15.

FATCA (Form 8938) is submitted on the tax due date (including extensions, if any,) of your income tax return.

Here’s what else you need to know about reporting foreign income:

1. Report Worldwide Income. By law, Americans living abroad, as well as many non-U.S. citizens, must file a U.S. income tax return and report any worldwide income. Some key tax benefits, such as the foreign earned income exclusion, are only available to those who file U.S. returns.

2. Report Foreign Accounts and Assets. Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts.

3. File Required Tax Forms. In most cases, affected taxpayers need to file Schedule B, Interest and Ordinary Dividends, with their tax returns. Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located.

Some taxpayers may need to file additional forms with the Treasury Department such as Form 8938, Statement of Specified Foreign Financial Assets or FinCEN Form 114 (formerly TD F 90-22.1), Report of Foreign Bank and Financial Accounts (“FBAR”).

FBAR. Taxpayers with foreign accounts whose aggregate value exceeded $10,000 at any time during 2018 (or in 2019 for next year’s filing returns) must file a Treasury Department FinCEN Form 114 (formerly TD F 90-22.1), Report of Foreign Bank and Financial Accounts (“FBAR”).

Form 8938. Generally, U.S. citizens, resident aliens, and certain nonresident aliens must report specified foreign financial assets on Form 8938, Statement of Specified Foreign Financial Assets if the aggregate value of those assets exceeds certain thresholds:

• If the total value is at or below $50,000 at the end of the tax year, there is no reporting requirement for the year, unless the total value was more than $75,000 at any time during the tax year
• Taxpayers who do not have to file an income tax return for the tax year do not have to file Form 8938, regardless of the value of their specified foreign financial assets.

The threshold is higher for individuals who live outside the United States and thresholds are different for married and single taxpayers. In addition, penalties apply for failure to file accurately.

Please contact the office if you need additional information about thresholds for reporting, what constitutes a specified foreign financial asset, how to determine the total value of relevant assets, what assets are exempted and what information must be provided.

An individual may have to file both forms, and separate penalties may apply for failure to file each form.

4. Review the Foreign Earned Income Exclusion. Many Americans who live and work abroad qualify for the foreign earned income exclusion when they file their tax return. This means taxpayers who qualify will not pay taxes on up to $103,900 of their wages and other foreign earned income they received in 2018 ($105,900 in 2019). Please contact the office if you have any questions about foreign earned income exclusion.

5. Don’t Overlook Credits and Deductions. Taxpayers may be able to take either a credit or a deduction for income taxes paid to a foreign country. This benefit reduces the taxes these taxpayers pay in situations where both the U.S. and another country tax the same income. However, you cannot claim the additional child tax credit if you file Form 2555, Foreign Earned Income or Form 2555-EZ, Foreign Earned Income Exclusion.

6. Automatic Extension. U.S. citizens and resident aliens living abroad on April 15, 2019, qualified for an automatic two-month extension (until June 15) to file their 2018 federal income tax returns. The extension of time to file also applies to those serving in the military outside the U.S. Taxpayers must attach a statement to their returns explaining why they qualify for the extension.

7. Additional Extension of Time to File. U.S. citizens and resident aliens living abroad may be granted a filing extension of up to six months (October 15, 2019) by filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Returnprior to the due date of the tax return (April 15, 2019). However, a taxpayer filing an extension must pay any tax due by the original date or be subject to late payment penalties and interest.

8. Get Tax Help. If you’re a taxpayer or resident alien living abroad that needs help with tax filing issues, IRS notices, and tax bills, or have questions about foreign earned income and offshore financial assets in a bank or brokerage account, don’t hesitate to call.

• By Leon Clinton
• April 12, 2019

Tax credits can reduce your tax bill or give you a bigger refund, but not all tax credits are created equal. While most tax credits are refundable, some credits are nonrefundable, but before we take a look at the difference between refundable and nonrefundable tax credits, it’s important to understand the difference between a tax credit and a tax deduction.

Tax credits reduce your tax liability dollar for dollar and are more valuable than tax deductions that reduce your taxable income and tied to your marginal tax bracket. Let’s look at the difference between a tax credit of $1,000 and a tax deduction of $1,000 for a taxpayer whose income places them in the 22% tax bracket:

• A tax credit worth $1,000 reduces the amount of tax owed by $1,000–the same dollar amount.
• A tax deduction worth the same amount ($1,000) only saves you $330, however (0.22 x $1,000 = $220). As you can see, tax credits save you more money than tax deductions.

Tax Credits: Refundable vs. Nonrefundable

A refundable tax credit not only reduces the federal tax you owe but also could result in a refund if it more than you owe. Let’s say you are eligible to take a $1,000 Child Tax Credit but only owe $200 in taxes. The additional amount ($800) is treated as a refund to which you are entitled.

A nonrefundable tax credit, on the other hand, means you get a refund only up to the amount you owe. For example, if you are eligible to take an American Opportunity Tax Credit worth $1,000 and the amount of tax owed is only $800, you can only reduce your taxable amount by $800–not the full $1,000.

Refundable Tax Credits

• The Earned Income Tax Credit
• The Child and Dependent Care Credit
• The Saver’s Credit

Nonrefundable Tax Credits

Examples of nonrefundable tax credits include:

• Adoption Tax Credit
• Foreign Tax Credit
• Mortgage Interest Tax Credit
• Residential Energy Property Credit
• Credit for the Elderly or the Disabled
• Child Tax Credit (tax years prior to 2018)

Partially Refundable Tax Credits

Some tax credits are only partially refundable such as:

• Child Tax Credit (starting in 2018)
• American Opportunity Tax Credit

Questions about tax credits or deductions?

If you have any questions or would like more information about either of these tax topics, please call.

• By Leon Clinton
• April 9, 2019

As the driving force in today’s economy, small businesses benefit from numerous tax breaks in the tax code. One of these, the Qualified Small Business Stock (QSBS), was made permanent by the PATH Act (Protecting Americans from Tax Hikes Act of 2015). If you’re a small business investor, here’s what you need to know about this often-overlooked tax break.

What is the Qualified Small Business Stock Exclusion?

Sometimes referred to as Section 1202 (after Section 1202 of the Internal Revenue Code, the PATH Act made permanent for taxpayers (excluding corporations) the exclusion of 100 percent of the gain on the sale or exchange of qualified small business stock (QSBS) acquired after September 27, 2010, that is held longer than five years.

Two tax provisions apply to gain from the sale or trade of qualified small business stock. Taxpayers may qualify for a tax-free rollover of all or part of the gain, or they may be able to exclude gain from income.

Qualified stock must also meet the active business test, and it can’t be an investment vehicle or an inactive business. A corporation meets this test for any period of time if, during that period, both the following are true:

• It was an eligible corporation, defined below.
• It used at least 80 percent (by value) of its assets in the active conduct of at least one qualified trade or business.

Further, QSBS gain excluded from income is not subject to the 3.8 percent Net Investment Income Tax from capital gains (and other investment income) on high-income taxpayers.

Qualified Small Business. The definition of a qualified small business under the IRS varies; however, examples of businesses that do NOT qualify include, but are not limited to:

• A regulated investment company,
• A real estate investment trust (REIT)
• One involving services performed in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services;
• Any business of operating a hotel, motel, restaurant, or similar business.
• Any farming business (including the business of raising or harvesting trees).

What is Qualified Small Business Stock (QSBS)?

Qualified small business stock is stock that meets all of the following tests:

1. It must be stock in a C corporation.
2. It must have been originally issued after August 10, 1993.
3. The corporation must have total gross assets of $50 million or less at all times after August 9, 1993, and before it issued the stock. Its total gross assets immediately after it issued the stock must also be $50 million or less.
4. When figuring the corporation’s total gross assets, you must also count the assets of any predecessor of the corporation. In addition, you must treat all corporations that are members of the same parent-subsidiary controlled group as one corporation.
5. You must have acquired the stock at its original issue, directly or through an underwriter, in exchange for money or other property (not including stock), or as payment for services provided to the corporation (other than services performed as an underwriter of the stock). In certain cases, your stock may also meet this test if you acquired it from another person who met this test, or through a conversion or trade of qualified small business stock that you held.
6. The corporation must have met the active business test, defined next, and must have been a C corporation during substantially all the time you held the stock.
7. Within the period beginning two years before and ending two years after the stock was issued, the corporation cannot have bought more than a de minimis amount of its stock from you or a related party.
8. Within the period beginning one year before and ending one year after the stock was issued, the corporation cannot have bought more than a de minimis amount of its stock from anyone, unless the total value of the stock it bought is five percent or less of the total value of all its stock.

Questions?

The QSBS exclusion, as with many tax provisions, is complicated. Don’t hesitate to call if you have any questions or would like more information on this topic.

• By Leon Clinton
• April 6, 2019