Monthly Archives: January 2014

Which Form 1040NR income tax filers may claim a spouse or dependent? by Jean Mammen, EA

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A look at form 1040NR shows that it must be possible for some nonresident taxpayers to claim a spouse or dependents. The section labelled Exemptions has boxes to check and lines to complete for  7b Spouse, and 7c Dependents, as well as 7a, Yourself.

If you have heard that non-residents must file alone, whether as single or ‘other married’ (treated as married filing separately), these lines are puzzling. And perhaps tax software seems not to let you place a spouse or child on the completed 1040NR return.

The answer lies partly in the U.S. tax code, and partly in bilateral tax treaties.

Look above Exemptions at the Filing Status section of 1040NR. Three choices list ‘resident’ of a specific country, or a personal status (QW- qualifying widow/er). The countries are Canada, Mexico, or U.S. national, and South Korea.  Residents of those countries may be able to claim a spouse or dependent.  A resident of India who is a student or business apprentice may also be able to claim a spouse or dependents on the tax return.

(A U.S. national, for tax purposes, is someone who owes sole allegiance to the U.S., was born in American Samoa or the Commonwealth of the Northern Mariana Islands, and elected (chose) to be treated as a U.S. national and not a U.S. citizen.)

Some conditions apply equally to each of these situations and some are specific to only one situation.

All people for whom a personal exemption will be claimed on Form 1040NR:

Must have a social security number, or other Individual Taxpayer Identification Number (ITIN), or have a W-7 ITIN application attached to the tax return.

A spouse must not have any U.S. source gross income.

A spouse must not be claimed on another U.S. income tax return. This would disqualify a spouse who is under age 19, or under age 24 and a full-time student, and has been claimed as a dependent on a family member’s tax return.

Most spouses are shown on the last line in the Filing Status section, below the numbered boxes. That line is divided into i, ii, and iii, for first name, last name, and either SSN, ITIN, or a literal (letters) such as NRA.

An Indian spouse is shown in the Dependents section.

A potential dependent must be a U.S. citizen, or a resident of the U.S., Canada, or Mexico. The tax code wording is: a resident of the United States or a country contiguous to the United States. IRC 152(b)(3)(A).   I refer to these three countries as North America.  The first dictionary definition of ‘contiguous’ is touching, in contact. A country contiguous to the U.S. shares a common land border with the U.S.

Country-specific requirements:

South Korea residents: A claimable spouse or dependent must have lived in the U.S. in the same household as the taxpayer for some of the tax year. The amount of the personal exemption that may be claimed is pro-rated according to the ratio of U.S. source income effectively connected to a U.S. trade or business as defined in IRC 864( c ), over total worldwide income.  See Article 4(7) of the U.S. Korea treaty.

Indian Students and Business Apprentices:

A claimable spouse or dependent must meet the conditions in the U.S. – India Treaty article 21(2).  The spouse is claimed on a line for Filing Status 7c, Dependents, not by checking 7b, spouse. Dependents must not have entered the U.S. on an F-2, J-2, or M-2 visa.

The U.S. –  India tax treaty also allows Indian students and business apprentices to claim the standard deduction instead of itemizing deductions, if that is more advantageous.  There is a special worksheet for comparing and making the choice of standard vs itemized deductions.

See worksheet 5.1 in Publication 519.  Specialized tax software will make this calculation and enter the appropriate choice according to the tax rules.

What are the keys to having an eligible spouse or dependents appear on the tax return?

–entering the country of residence or citizenship into tax software usually invokes the rules that may apply

-additional pop-ups appear at key points, such as choice of filing status,  to allow the entry of a spouse or dependents

Go slowly, or you may go right past an entry point!

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Gifts Coming in to U.S. – Client Handout courtesy of Ragini Subramanian, EA and Tax Attorney

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  1. IRC Code Sections 6039F and 2801

As we discussed,  below is brief information on the reporting and special tax payment requirements of a foreign gift from a relative or a friend overseas.  The discussion below is of a general nature only and has not been adapted to your specific situation.  This information is not intended to be tax or legal advice in any nature and form.  A further evaluation of your specific situation including the $ value of the gift, or the vehicle used to make the gift, may make additional tax code provisions apply.   These additional provisions, plus the ones discussed below, include laws in the U.S. state where the gift is received, as well as foreign country tax and other legal requirements that will also need to be evaluated. Feel free to call should you have any other questions as you learn  more about the gift that you may receive.

Brief Information on US Tax code relating to gifts from foreign persons:

As an individual with relatives or friends overseas, one should be aware of information reporting requirements and special tax payment requirements that apply to certain large gifts or bequests from foreign persons.

If one, while a U.S. citizen or resident, received during the tax year either (1) more than $100,000 from a nonresident alien or a foreign estate, or (2) more than $10,000 (indexed to $15,102 for 2013) from foreign corporations or foreign partnerships, and if those amounts are treated as gifts or bequests, an information reporting requirement applies to such US citizen or resident on Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Form 3520 is due on the date your federal income tax return is due, including extensions.

Failure to report such foreign gifts is subject to a penalty equal to 5 percent of the amount of the foreign gifts for each month for which the failure to report continues (not to exceed a total of 25 percent). No penalty will be imposed if the taxpayer can demonstrate that the failure to comply was due to reasonable cause and not willful neglect.

Additionally, if a U.S. citizen or resident is subject to a special tax on the value of the covered gift or bequest received from a covered expatriate, the tax is imposed at the higher of:

(1) highest estate tax rate; or

(2) the highest gift tax rate in effect on the date of receipt, but only to the extent the gift’s or bequest’s value exceeds the annual exclusion amount in effect for the year.

A covered gift or bequest is generally any property acquired by gift directly or indirectly from an individual who is a covered expatriate at the time of the acquisition, or directly or indirectly by reason of the death of an individual who was a covered expatriate immediately before death.

The tax on any covered transfer is reduced by any gift or estate tax paid to a foreign country for the gift.   The tax however does not apply to:

(1) any transfer of property that is reported as a taxable gift on a timely filed gift tax return of the covered expatriate, or included in the gross estate and included on a timely filed estate tax return of the covered expatriate’s estate, or

(2) certain transfers to charity or the covered expatriate’s spouse.

Covered transfers to a domestic trust are treated the same way as covered transfers to U.S. citizens or residents, with the tax being imposed on the trust. Covered transfers to foreign trusts are subject to the tax at the point any distribution attributable to the transfer is made from the trust to a U.S. citizen or resident. The recipient is allowed an income tax deduction for the special tax paid or accrued on the distribution from a foreign trust, but only to the extent the tax is imposed on the portion of the distribution that is included in the recipient’s gross income. A foreign trust can elect to be treated as a domestic trust for purposes of these rules.

Feel free to call me for any clarification you may need as the situation unfolds for you.

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See related page in 1040NR? or 1040?: U.S. Income Tax Returns for Visa Holders   +   International Organization and Foreign Embassy Employees, by Jean Mammen, EA

Page 54  Money Coming to U.S. Individuals from Foreign Gift, Inheritance, or Own Money ________________________________________________________website website: 1040NR? or 1040?:  www.1040nror1040.com
blog site 1040NR? or 1040?: http://blog.1040nror1040.com/
email: jean@1040nror1040.com

 

 

The NEW way to file an ‘FBAR’, or, FinCEN 114 Courtesy of David Treitel david.treitel@americantaxreturns.co.uk.

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 Please add comments to this blog post if you learn of workarounds, solutions, or  changes that resolve any issues you may find in working with this recently-launched program.

FBARs are separate to and in addition to United States income tax returns, Beginning with the 2016 forms, due in 2017, the filing date is the same as for a Form 1040 tax return, that is, mid-April. There is an automatic filing date extension to the Form 1040 extension date, mid-October. No action by the taxpayer is needed to request an extension. The date change came from the PATH Act. The decision not to require a formal extension request was announced in a December 16, 2016, press release.

FBAR’s are required when a taxpayer has foreign bank accounts that total more than $10,000 at any point during the calendar year.

History: The US Department of Treasury announced that in a change of process effective from 1 July 2013, all FBAR reports for all years are expected to be filed electronically using the BSA (Bank Secrecy Act) section of the US Treasury website: http://bsaefiling.fincen.treas.gov/NoRegFBARFiler.html

Paper filing of FBARs is no longer permitted. FBAR forms are now downloaded to your own computer or memory stick; prepared by you in your own time, saved, and then re-uploaded and filed by you when you feel ready, again from this link:

US Treasury website: http://bsaefiling.fincen.treas.gov/NoRegFBARFiler.html

Incidentally, the Form TD F 90-22.1 that you may remember of old was honourably retired on 30 June 2013; after more than 40 years of publication. The replacement form is virtually identical but only in electronic format; and is re-named as FinCEN Form 114.

The only permissible FBAR exchange rate is the US Treasury rate.

Exchange Rates

These returns (reporting non-US financial accounts) typically require conversion into US dollars using the US Treasury exchange rate on 31st December each year.

As historic rates are not published in full in the Treasury website, the IRS has also been kind enough to provide several years of earlier rates here: http://www.irs.gov/Businesses/Small-Businesses-&-

Self-Employed/Treasury-Department-End-of-Year-Exchange-Rates

Instructions

The bsaefiling site has much helpful information, from a how-to video, to line-by-line instructions, as well as FAQ.

Do take a look at the instructions before beginning.

http://www.fincen.gov/forms/files/FBAR%20Line%20Item%20Filing%20Instructions.pdf

Registration or Enrollment

There is no need to register or login to the system in order to file the individual FBAR.

An institution or bulk filer would register.

See BSA home: http://bsaefiling.fincen.treas.gov/main.html

E-filing Help Desk

Telephone: 1-866-346-9478 (option 1)

E-mail:         BSAEfilingHelp@fincen.gov

 

Editorial Note

American Tax Returns Ltd is a leading firm providing US tax advice and completing US tax returns.

David Treitel | Managing Director | American Tax Returns Ltd

Enrolled Agent to the United States Internal Revenue Service

Accountant and Chartered Tax Adviser

Email: david.treitel@americantaxreturns.co.uk.

Blog: http://www.accountingweb.co.uk/blog/advising-american-client

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email: jean@1040nror1040.com

 

 

Which visa holders should put in new withholding forms now?

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Visa holders may need to submit new withholding forms to adjust for treaty income exclusions or changes in tax status. Tax residency will affect how payors should withhold for income tax and FICA taxes (social security and Medicare). A visa holder should alert payors to these situations.

International students and exchange visitors (F, J, M, Q visa holders) may need to submit updated withholding documents for 2014 to their sponsors or employers. The payor needs a signed withholding form from the payee to start or change special withholding even if it is aware of every change in the situations of all its payees,

Treaty Exclusions: People who claim bilateral income tax treaty exclusions submit Form 8233 to the payor. They should submit new forms each year they claim the exclusion. If the treaty-based income exclusion will end this year, before the income does, the payor may find this information helpful.

If the treaty excludes only part, and not all, of the income from U.S. taxation, submit both a W-4 and a Form 8233 to the payor.

Residency change: Some visa holders will become tax residents during the year by meeting the substantial presence test. Some will be married to a U.S. citizen or resident and the couple will elect to file jointly as residents on Form 1040. Either change will make certain compensation subject to FICA – social security and Medicare tax – from the beginning of the year. And, changing tax filing from form1040NR to 1040 may change the taxable income and the withholding needed.

FICA – Federal Insurance Contribution Act: Provides for collecting social security tax and Medicare tax. There is no form for starting or stopping FICA withholding. If your payor is erroneously collecting FICA when you are exempt from paying it, or not collecting FICA when you are not exempt from paying it, you should so notify your employer in person and in writing. You may need to cite government regulations or publications to make your case.  These situations are presented in a single IRS article which can be found by going to the IRS website, www.irs.gov, and entering into the search box ‘J visa and FICA’.  Looking in Publication 519, or the Internal Revenue Code,  requires synthesizing information from three different locations. This is more confusing than the IRS article for those who are not tax nerds.

F,J,M,Q visa holders are exempt from paying FICA income earned in compliance with their visa while they are considered to be temporarily in the U.S. This ends when they are no longer exempt from counting days towards substantial presence and have qualified as tax residents by the substantial presence test.

All students who are at least half-time students at the school, college, or university that pays them, and are not career employees, are exempt from paying FICA on that income. This ‘student FICA exemption’ has many twists and turns, known as ‘facts and circumstances’. Rev. Proc. 2005-11 is meant to clarify who qualifies, even when at first glance they might not, for instance, might seem to be career employees

(Note: Visa – based FICA exemptions apply only to the primary visa holder, as, J1. Spouses or dependents on secondary visas, as, J2, would generally pay FICA tax as well as income tax on compensation).

Citations

INA (Immigration and Naturalization Act) 101 (a)(15) – Definitions of types of visas

IRC (Internal Revenue Code) 3121(b)(19) – F,J,M,Q visa holders temporarily present in U.S. do not pay FICA taxes – social security and Medicare

IRC 7701(b) – Defines how visa holders determine (tax) resident alien or non-resident alien status

IRC 3121(b)(10) – Students employed by their school, college, or university do not pay FICA on those wages. (The ‘student FICA exemption’)

    Rev. Proc. 2005-11 elaborates on how facts and circumstances determine     eligibility for the student FICA exemption.

 

Social Security Handbook Citations

    Section 939 – Foreign Students, Exchange Visitors, and International Cultural     Visitors

IRS Publications

    Publication 519 – U.S. Tax Guide for Aliens

    Publication 515 – Withholding of Tax on Nonresident Aliens and Foreign Entities

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