Tax

Say you have a friend who moved to the U.S. from Greece. Here is a high-level look at eight tax considerations your friend needs to know:

1. Tax residency. A foreign individual’s income tax obligation in the U.S. hinges on their tax residency status—whether they are a resident alien or non-resident alien. Resident aliens are taxed on their worldwide income, whereas non-resident aliens report only U.S. source income.

2. U.S. resident alien. There are three primary ways to become a U.S. resident alien:

1. being a lawful permanent resident (e.g., green card holder),
2. meeting the substantial presence test (a formula based on days spent in the U.S.), or
3. making a first-year election.

3. Non-resident aliens are generally taxed only on U.S. source income and are subject to different rates based on the nature of that income.

4. Reporting and filing. Resident aliens use Form 1040, similar to U.S. citizens. Non-resident aliens utilize Form 1040-NR. State tax rules apply uniformly for both, though rules vary by state.

5. Taxpayer identification. The U.S. requires every taxpayer, including foreigners, to have a Taxpayer Identification Number, either through an Individual Taxpayer Identification Number (ITIN) or a Social Security Number (SSN).

6. Social Security and Medicare taxes. Totalization agreements exist to eliminate dual taxation on Social Security and Medicare. For certain countries, such as Greece, credits from both the U.S. and the native country can be combined for benefit eligibility.

7. Foreign financial accounts reporting. Those with foreign financial assets might have reporting duties beyond mere income tax returns, including the FBAR and IRS Form 8938.

8. Tax treaties. The U.S. has multiple tax treaties to prevent double taxation. The treaty with Greece, for instance, offers a tax credit system to avoid taxing the same income twice.

You can see that your friend’s move from Greece to the U.S. triggers many tax possibilities. If your friend would like to discuss what’s involved or needs a referral to an international tax specialist, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• October 17, 2023

When enacted, the Affordable Care Act (ACA) eliminated most small business health plans that reimbursed individually purchased health insurance. Consequently, many small business owners chose health savings accounts (HSAs) or opted to provide no health coverage at all.

As of 2022, over 35 million HSAs were active, with assets amounting to $104 billion. The Devenir survey expects this to increase to 43 million accounts with $150 billion in assets by 2025.

HSA basics:

• To open an HSA, you must have high-deductible health insurance.
• 2023 contribution limits are $3,850 for individuals and $7,750 for families. These limits increase slightly in 2024.
• If you’re 55 or older by the end of the year, you can contribute an extra $1,000
• HSAs come with substantial tax benefits, including deductible contributions, tax-free earnings, and tax-free withdrawals for qualified health expenses.

Monies taken from HSAs are tax-free when used for qualified medical expenses. If you don’t use the funds for medical expenses, they grow. Once you reach Medicare age,

• you can withdraw the funds and pay taxes or
• use the funds tax-free for medical expenses.

You generally cannot make HSA contributions if you have a non-high-deductible health plan that overlaps with the high-deductible plan. Similarly, you cannot contribute to an HSA and a general-purpose healthcare flexible spending account (FSA) in the same year.

HSAs are similar to IRAs. They are trust or custodial accounts you set up at banks, insurance companies, or brokerage firms. The purpose of your HSA is solely to pay your qualified medical expenses. Like IRAs, HSAs can offer various investment options, though some trustees might limit choices to more conservative options.

The benefits of HSAs have grown significantly in recent years, making them a mainstream and advantageous choice for many. Given their tax advantages and flexibility, the HSA could be a good fit for you as a business owner.

If you would like to explore the HSA as a possibility for you, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• October 13, 2023

I hope this letter finds you well. I am writing to bring to your attention some recent developments regarding the “hobby loss rule.” Given that you have diverse sources of income, some of which might be considered hobbies, I believe this information could be of great importance to you.

What Is the Hobby Loss Rule?

The hobby loss rule might apply to you if you have any activity that results in a tax loss. Under this rule, you might lose out on your deductions and end up paying taxes on the income you earned from the hobby.

For instance, if you earned $200,000 from a hobby and incurred expenses of $350,000, the rule would lead you to pay taxes on the $200,000 of hobby income, even though you suffered a net loss of $150,000. That would be unpleasant, since you would be out of pocket $150,000 and paying taxes on $200,000.

Recent Developments

A significant recent case resolved in 2023 involves Carl and Leila Gregory, who chartered their yacht, Lady Leila, in 2014 and 2015, not for profit but as a hobby. Even though they generated income from this activity, they also had significant expenses. The IRS denied the deductions, and the courts agreed, which resulted in the Gregorys owing an additional $267,221 in taxes.

The takeaways from this case are:

• Depth of Impact. The hobby loss rule can have profound tax implications for individuals, partners, and S corporations if they are involved in activities that produce a tax loss.
• Income Irrespective. The hobby loss rule applies irrespective of the income generated—be it $20,000 or in the hundreds of millions.
• Understanding Is Crucial. The Gregory case applied to 2014 and 2015 when the hobby loss rule allowed hobby deductions up to the amount of hobby income but made the expenses itemized deductions subject to the 2 percent of adjusted gross income floor. Things are worse today: you can’t deduct any hobby expenses other than the cost of sales.

What Should You Do?

If you have any activity that might be considered a hobby from a tax perspective, call me on my direct line at 408-778-9651.

• By Leon Clinton
• October 11, 2023