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TaxBarron Report
February 2008
February is the month that American expatriates begin to focus their attention on filing those tax returns if only because they should have received information statements from payers of investment income - interest, dividends, capital gains, etc.. Although for Americans living overseas, the tax filing deadline for the individual income tax return is not until 16 June 2008, any taxes due from 2007 must be paid by 15 April. So the pot may not yet be boiling. But it is simmering. For previous issues of the TaxBarron Report, click here.
In This Issue
President Signs Stimulus Package
Most Common Tax Filing Deadlines
President Signs Stimulus Package
On 13 February, President Bush signed into law the Economic Stimulus Act of 2008 (H.R. 5140). Following the Fed's lowering of the prime interest rate in response to the threat of recession, Congress approved a $168b economic rescue package that includes rebates for taxpayers and tax breaks for businesses. Lawmakers hope that the package will stimulate an anaemic economy, one that they insist is not yet in recession.
Most taxpayers should receive two notices from IRS. The first one will explain the stimulus payment program. The second one will confirm the recipient's eligibility, payment amount and anticipated payment date. Tax filers should save this notice when they prepare their 2008 tax returns in 2009.
The rebate is based on filing status and income tax liability. To qualify all persons listed on a tax return must have a valid Social Security number to determine the amount of the credit. Taxpayers must have a net tax liability greater than zero and gross income greater than the sum of the Standard Deduction plus Exemption(s) for Single or Married Joint filers. Or the taxpayer must have $3,000 in qualified income which can be from a) net self- employment, b) veteran's disability payments, c) Social Security benefits.
The maximum rebate is $600 and $1,200 for these filers. Taxpayer's rebate will be equal to the minimum of his tax liability or 10% of the first $6,000 or $12,000 of taxable income according to filing status. The maximum credit is capped for those whose Adjusted Gross Income exceeds $75,000 or $150,000 (Single or Married filers).
Another component of the Act is an increase in the Child Tax Credit. Taxpayers who receive at least $1 of the tax rebate will also receive an additional $300 for each qualifying child.
But be careful of scam artists, claiming to be IRS agents needing your personal information for paying these rebates. IRS never asks for personal information - Social Security numbers, bank account information - by email, telephone or letter.
The Stimulus package includes business provisions as well. Section 179 expense election is increased from $125,000 to $250,000. Businesses will be allowed to depreciate an additional 50% of the cost of the following properties: tangible property with a recovery life not exceeding 20 years, computer software, water utility property, and leasehold improvement property. Bonus depreciation will also be allowed under the Alternative Minimum Tax.
Critics in Congress have questioned whether the Stimulus package will help or harm the economy, pointing out that it increases an already bloated deficit.
Nevertheless the new law is intended to encourage spending and in turn restore confidence in the economy. And as results originate in causes, economic circumstances whether familial, national or global, are influenced by the expectations of the participants, as any congressman who voted for the Stimulus package surely knows.
Responding to IRS
The most common form of audit from Internal Revenue Service (IRS) is by letter. A letter audit usually comes in duplicate. It informs the taxpayer about the problem, a time limit to resolve the problem and a contact person for discussing the problem.
The IRS can cause Americans, even those overseas, difficulties. It can penalize and charge interest against unpaid taxes, attach property for unpaid taxes, and impede re-entry into the US for unpaid taxes.
So if you received a notice from IRS, deal immediately with it. Keep copies of whatever you send to the IRS. Gather records from copies that pertain to the notice. Respond promptly to the notice. Note the name of the auditor, badge number and subject matter of any conversation you have with an auditor (who may not be the one listed on the notice).
If you ask a tax professional for help resolving an IRS notice, be sure to describe the problem, send a copy of the notice, provide Power of Attorney, and sign an Engagement Agreement.
Most IRS notices are routine. A tax return has not been received or signed. A tax payment has been improperly credited. A math error has been made. So don't panic!
Tax Quiz
ANSWER TO LAST MONTH'S QUIZ: Yes. The "substantial equal periodic payments" exception applies to each separate account. If the taxpayer takes an extra distribution or skips a year, the 10% penalty applies to all distributions going back to the first. It may be worthwhile to break an IRA into two or more accounts and have the periodic payments based on only one account. In this manner, if more monies are needed, the taxpayer could take a distribution from a different account without affecting the account with the periodic payments, thus only paying the 10% penalty on the separate distribution.
THIS MONTH'S QUIZ: In March 2007, a taxpayer terminated his employment. On his last day of employment, he received the entire balance in his employer's 401(k) plan. On July 3, 2007, the employee reached age 55. Because the taxpayer reached age 55 after he terminated service and after he received his retirement plan distribution, is he subject to the 10% premature distribution penalty?
EU VAT Changes
The European Council on St Valentine's Day has enacted legislation that ensures most types of services are taxed in the member state of consumption. The legislation also proposes that EU wide VAT reporting obligations be fulfilled in a single member state.
Although the effective date is not until 1 January 2010, the main features of the new rules follow:
For business-to-business transactions, taxation will be at the place where the customer is situated and no longer at the service provider's country of establishment.
For business-to-consumer services, taxation will be at the place of consumption for transport, cultural, sporting, scientific, educational services, telecommunications, broadcasting and electronic services.
Telecoms, broadcasting and electronic service providers will be able to register, declare and pay VAT at a single location.
Most Common Tax Filing Deadlines
31 January - Forms 1099 and 1098, W-2 wage statements.
17 March - Forms 1120, 1120A or 1120S Corporate tax returns. File Form 7004 for automatic 6-month extension.
15 April - 2007 Form 1040 tax return for stateside filers. Taxes due for Americans living abroad. File Form 4868 to extend filing Form 1040 to 15 October. First-quarter 2008 estimated tax payment.
16 June - 2007 Form 1040 tax return for Americans abroad. Second-quarter 2008 estimated tax payment.
17 September - Third-quarter estimated tax payment.
15 October - Form 1040 tax return extended by Form 4868.
UK's Foreign Rich Spooked
Taxation in the UK depends on domicile. This is a term that loosely refers to where a person has his permanent residence. But not necessarily. Last year the International Monetary Fund published a paper on offshore tax havens: Switzerland, the Cayman Islands, Jersey, the Bahamas and the United Kingdom. British citizens who are considered domiciled in the UK pay up to 40% in taxes whereas residents who were not born in the UK can be considered nondomicile. What this means is that foreigners can live in Britain with their cash tucked away in an offshore trust without the earnings being taxed by Inland Revenue.
Recently the British Treasury has announced several new rules to be imposed on nondomiciled super rich. One is an 18% tax rate for capital gains. Another is a proposed annual fee of $60,000 to apply to any foreigner who has lived in the UK for more than seven years. Otherwise these individuals will be taxed as if domiciled.
Chancellor of the Exchequer Alistair Darling thinks that the move will bring an additional $1.28b in tax revenue while the Treasury reckons that only 3,000 of the 115,000 registered nondomiciled rich will bolt. But Britain's money managers are predicting that there will be a mass exodus of the super rich along with their billions, surely affecting property prices and luxury goods.
The $60,000 fee is not yet official. But the 28th of February may see the tax enacted. And the 29th - yes, it's a leap year - will see the coffers of non-UK tax havens benefiting. UK accountants are calling for a delay of at least twelve months on the proposed enactment of this legislation in order to avoid, as they say, total chaos.
Ponderable: For every tax problem there is a solution that is straightforward, uncomplicated and wrong. - Bob Parker
Recommended
Taxation of Americans Abroad: Viewpoint
Proposed Legislation Could Affect Americans Overseas
New Website
After several months of hard work, the Taxbarron is nearly ready to launch his new website. The site contains a wealth of tax related information affecting American expatriates in navigational pages. If you go to our site - www.taxbarron.com - upon receiving this month's Taxbarron Report, you might see the old site. But before the end of February, we expect the new one to be online. It's the more colorful one!