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The TaxBarron Report
February 2007

American expatriates filing their 2006 tax returns are going to be in for an unpleasant surprise due to a tax increase related to the Foreign Earned Income Exclusion (FEIE).  Elaborated in the October 2006 issue of TaxBarron Report, the Tax Increase Prevention and Reconciliation Act (TIPRA) signed into law in 2005 provides that the tax applicable to income not covered by FEIE will now be calculated as though the exclusion had not been elected. For previous issues of the TaxBarron Report, click here.

In This Issue

U.S. Monitoring Swift Transfers

Changes in FEIE to Affect Americans Abroad

Preparing for Filing Your 2006 Tax Return

U.S. Transfers to a Foreign Corporation

Recommended

 

U.S. Monitoring Swift Transfers

Brussels has announced that eight European Union nations are unaware that Washington has had access to the details of international bank transfers in its quest to identify terrorist suspects.  Swift, a private company that handles some $11m money transfers annually, has been passing banking information to U.S. authorities in violation of EU privacy laws. While Swift disputes this allegation, it turns out that any EU citizen or business involved in making money transfers since 2004 has been monitored by the U.S. Department of Homeland Security (DHS). EU Justice Commissioner Franco Frattini has described this monitoring as a blatant breach of human rights.DHS has stated that targeting bank transfers is intended to expose high-risk individuals previously not known to enforcement officers.  The DHS target system applies a numeric score to anyone entering the U.S. based on some predetermined measure of that person's risk; informaiton that can then be shared with police and foreign governments.  European Parliament members naturally want to know whether DHS has targeted anyone using the Swift transfer system.  But DHS isn't talking.The U.S. Patriot Act which Congress enacted following 9/11 reads in part:  'It (Patriot Act) reinforces federal anti-money laundering laws and regulations in an effort to deny terrorists the resources necessary for future attacts.'  Financial institutions were then made to be watchdogs of monetary flows.  They were required to report suspicious activity or transactions over $10,000 to the Treasury Department.  They were required to better know their customers.  They were required to report on businesses using traveler's checks in excess of $2,000.  And they were required to implement costly regulations under the Patriot Act.  Negligence penalties can include criminal charges and fines up to $1m.

More on Patriot Act Fallout

 

Changes in FEIE to Affect Americans Abroad

In the past forty-four years, the Congress of the United States has vaciliated in its tax treatment of Americans living abroad.  From 1962 it has in fits and starts raised the Foreign Earned Income Exclusion (FEIE) from $15,000 to $82,400.  In the interim, it actually eliminated the Exclusion for a time, replacing it with specific deductions.  In 1986, Congress limited it to $80,000.During these years, American expats with investment earnings (which they reported strictly stateside) and foreign earned income below these $70,000 and $80,000 thresholds could find all or some of those investment earnings taxed at 15% and later 10%.  Where foreign earned income was above FEIE, the Foreign Tax Credit could eliminate or at least mitigate taxes on that excess foreign earned income.  The word mitigate means to 'make less severe' (the impact of being double taxed on this income).  Of course many foreign countries require residing Americans to report and pay taxes on income world-wide.  TIPRA affects double taxation adversely.  It assesses taxes on income above $82,400 as though FEIE had not been taken.  Simply stated, this new legislation significantly increases taxes on foreign income already taxed abroad beginning in the 2006 filing season.

More on Double Taxation and Americans Abroad

 

Preparing for Filing Your 2006 Tax Return

Do tax filing deadlines have you stressed?  Anticipating and preparing are the keys to reducing stress-related anxiety.  Estimated tax payments are due in mid-January, mid-April and mid-June (and mid-September).  The 2006 tax liability is due April 16.  And the 2006 tax return is due June 15 for Americans living abroad.  But not infrequently Americans are not quite sure what documents to put together for the annual tax return and those tax payments related to their return.  Often where a beloved spouse or parent dies who took care of filing the tax return, surviving kin can be at a loss how to proceed.  Usually a good starting-point is to refer to the deceased person's 2005 tax return to identify income flows and reductions.  Another step can be to consult with those professionals who were involved in the financial affairs of t he expired relative:  tax accountants, lawyers, investment broker/advisor, etc. Sometimes a close friend of the deceased can prove a surprising source of information.Generally any papers related to income should be put in one place:  interest, dividends, stock sales, property sales, income from self-employment, pensions, social security, gambling winnings, income from partnerships and trusts, rental income, alimony, etc.  Anyone with business income from self-employment or rents should have prepared a listing of verifiable expenses related to those income flows.  Americans living abroad will want to include their foreign earnings from emloyment and investments, and foreign taxes related to those earnings. Any foreign earnings must be converted to US dollars using an appropriate exchange rate.

Click for Tax Checklist

 

U.S. Transfers to a Foreign Corporation

IRS has mandated that any US person, domestic corporation or domestic estate/trust must file Form 926 - Return by a US Transferor of Property to a Foreign Corporation - to report any exchanges or transfers of property to a foreign corporation.  This form is to be filed with the tax return of the US transferor for the year that includes the transfer.  Failure to file this form can result in a penalty equal to 10% of the fair market value of t he property being transferred not to exceed $100,000 unless the failure to file is due to reasonable cause and not willful neglect.  Persons filing Form 926 may also be required to file Form TDF 90-22.1 - Report of Foreign Bank and Financial Accoiunts.  There are certain exceptions granted to filing this Form that may not be readily understood by the average lay person.

 

Continuing AMT News

The Joint Committee on Taxation projects that in the next decade some 2m taxpayers with incomes as low as $30,000 will have to file Form 6251 - Alternative Minimum Tax - to prove they do not owe this tax.  By 2010, 32m taxpayers with incomes below $100,000 will owe this tax.  These taxpayers will be responsible for 52% of AMT revenue.  Finally, taxpayers will lose the benefit of $12b in tax credits due to AMT.The computation of AMT is so complex that many taxpayers are unaware they are subject to the tax becasue alternative minimum tax rules differ from regular tax rules.  What works to reduce regular income taxes does not necessarily apply to lowering the AMT.  IRS has a site to help with calcuating this tax.

Calculate AMT Liability

 

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