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 114, known as the “FBAR” as well as Form 8938, also referred to as “FATCA.”

Note: FBAR is not a tax form, but is due to the Treasury Department by June 30, 2016, and must be filed electronically through the BSA E-Filing System website. Starting in tax years after December 31, 2015, the FBAR will be due on April 15 and 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 2015 (or 2016) 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.

Note: 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 $101,300 of their wages and other foreign earned income they received in 2016 ($100,800 in 2015). 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 18, 2016, qualified for an automatic two-month extension (until June 15) to file their 2015 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. Please call if you haven’t filed a 2015 tax return.

7. 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
• June 18, 2016

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 just made permanent, thanks to the passage of 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 (QSBS) Exclusion?

Sometimes referred to as Section 1202 (after Section 1202 of the Internal Revenue Code, PATH 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.

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

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 are the Tax Benefits of QSBS?

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.

What is Qualified Small Business Stock?

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 pay 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.

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.

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
• June 16, 2016

What should you do if you already filed your federal tax return and then discover a mistake? First of all, don’t worry. In most cases, all you have to do is file an amended tax return. But before you do that, here is what you should be aware of when filing an amended tax return.

Taxpayers should use Form 1040X, Amended U.S. Individual Income Tax Return, to file an amended (corrected) tax return.

You must file the corrected tax return on paper. An amended return cannot be e-filed. If you need to file another schedule or form, don’t forget to attach it to the amended return.

An amended tax return should only be filed to correct errors or make changes to your original tax return. For example, you should amend your return if you need to change your filing status, or correct your income, deductions or credits.

You normally do not need to file an amended return to correct math errors because the IRS automatically makes those changes for you. Also, do not file an amended return because you forgot to attach tax forms, such as W-2s or schedules. The IRS normally will mail you a request asking for those.

Note: Eligible taxpayers who filed a 2015 tax return and claimed a premium tax credit using incorrect information from either the federally facilitated or a state-based Health Insurance Marketplace, generally do not have to file an amended return regardless of the nature of the error, even if additional taxes would be owed. The IRS may contact you to ask for a copy of your corrected Form 1095-A to verify the information.

Nonetheless, you may choose to file an amended return because some taxpayers may find that filing an amended return may reduce their tax owed or give them a larger refund (see below for additional information).

If you are amending more than one tax return, prepare a separate 1040X for each return and mail them to the IRS in separate envelopes. Note the tax year of the return you are amending at the top of Form 1040X. You will find the appropriate IRS address to mail your return to in the Form 1040X instructions.

If you are filing an amended tax return to claim an additional refund, wait until you have received your original tax refund before filing Form 1040X. Amended returns take up to 16 weeks to process. You may cash your original refund check while waiting for the additional refund.

If you owe additional taxes with Form 1040X, file it and pay the tax as soon as possible to minimize interest and penalties. You can use IRS Direct Pay to pay your tax directly from your checking or savings account.

Generally, you must file Form 1040X within three years from the date you filed your original tax return or within two years of the date you paid the tax, whichever is later. For example, the last day for most people to file a 2013 claim for a refund is April 17, 2017. Special rules may apply to certain claims. For more information see the instructions for Form 1040X or call the office.

You can track the status of your amended tax return for the current year three weeks after you file. You can also check the status of amended returns for up to three prior years. To use the “Where’s My Amended Return” tool on the IRS website, just enter your taxpayer identification number (usually your Social Security number), date of birth and zip code. If you have filed amended returns for more than one year, you can select each year individually to check the status of each.

Filing an amended return after receiving a corrected Form 1095-A

If you enrolled in qualifying Marketplace health coverage, then you probably filed a tax return based on a Form 1095-A that you received from the Marketplace.

Some taxpayers may receive a second Form 1095-A because the information on their initial form was incorrect or incomplete. If you filed a 2015 tax return based on the initial Form 1095-A and claimed the premium tax credit using incorrect information from either the federally-facilitated or a state-based Health Insurance Marketplace, you should determine the effect the changes to your form might have on your return. Comparing the two Forms 1095-A can help you assess whether you should file an amended tax return, Form 1040X.

Corrected Form 1095-A

A corrected form generally indicates you previously received a Form 1095-A containing one or more errors.

• If you have not yet filed your tax return, you should use this new form when completing your tax return.
• If you have already filed your tax return, you will need to determine the effect the changes to your form might have on your return. Some changes–such as a corrected address–may not affect your tax return or require any action on your part, while others–such as a change in your monthly premium amount–might. Compare the corrected Form 1095-A to the original form to determine the nature of the change. For a detailed list of these changes, see Corrected or Voided Form 1095-A. This information can help you assess whether you should file an amended tax return, Form 1040X. If you are uncertain whether you should amend your tax return, you may want to consult with a tax preparer.
• If you believe the information on your corrected Form 1095-A is incorrect or you have question about the form, you should contact your Marketplace.

Voided Form 1095-A

A voided form–or letter stating your form was voided–generally indicates you previously received a Form 1095-A that was issued in error. This may happen if you did not complete enrollment in Marketplace coverage. The voided Form 1095-A, as the well as the previously received Form 1095-A, should not be used to file your tax return.

• If you receive a voided Form 1095-A after you have already filed your tax return and claimed the premium tax credit using the original Form 1095-A that the Marketplace sent in error, you should file an amended return.
• If you have not yet filed your tax return, don’t use the information on the voided or on the previously received Form 1095-A to figure a premium tax credit on Form 8962.
• If you had coverage through the Marketplace and you believe they should not have voided your form, you should contact your Marketplace immediately to receive an accurate Form 1095-A.

Please call if you need assistance filing an amended return or have any questions about Form 1040X.

• By Leon Clinton
• June 14, 2016