The TaxBarron Report
January 2007

A new year has begun as another Christmas season recedes into the treasury of human experience, and thoughts return to the business of living. Uppermost in the minds of many Americans and indeed other peoples across the globe is President Bush's announcement this month that he is deploying over 20,000 additional troops to Iraq. Will this re- enforcement of troop strength quell the unrest that threatens Iraq with civil war? The world waits and watches. For previous issues of the TaxBarron Report, click here.

In This Issue

Expatriates and Income Tax Filing

President Bush's Surge and U.S. Taxation

Tax Cuts Benefit the Wealthy

2006 Tax Law Changes Summary

Banking Services Denied American Expatriates Recommended Articles

 

Expatriates and Income Tax Filing

U.S. citizens and resident aliens who live in a foreign country must file a tax return if their global income exceeds their standard deduction and exemption amount(s). For Married Couples, the Standard Deduction is $10,300; for Singles, $5,150; Heads of Household, $7,550; Married Couples Filing Separately, $5,150; Qualifying Widow(er), $10,300.

The Standard Deduction is increased by $1,250 for an unmarried individual age 65 or blind, and $2,500 for a combination of the two. It is increased $1,000 for any married person 65 years or older, or blind, or $2,000 for both conditions. The Exemption amount is $3,300 per dependent. A married couple with two children would therefore not be required to file a tax return if their global income in 2006 was under $23,500 ($10,300 + ($3,300 x 4)), unless either spouse had foreign earned income. A couple marrying the last day of the calendar year may file as though married for the entire year. But a couple who divorces on 31 December is considered unmarried for the entire year.

Regardless of whether foreign earned income (salaries, wages, earnings from self-employment) can be excluded from U.S. taxation by the $82,400 Foreign Earned Income Exclusion resulting in an American expatriate filer falling below the Standard Deduction + Exemption threshold, a tax return must be filed. Otherwise, in a future audit, IRS can deny a non-filer the FEIE and tax him or her on the foreign earnings.

A resident alien living outside the United States can be 1) a resident in the U.S. for 183 days in the past three years plus 31 days during the recent calendar year, or 2) a green card holder.

A nonresident alien may have to file a tax return based on income from U.S. sources. Income effectively connected with a U.S. business and capital gains from the sale of U.S. real estate are subject to regular income tax rates. Otherwise income is taxed at 30% or lower treaty rate. A U.S. citizen living abroad can file a tax return as Married Separate but might well consider the possibility of a better tax break by filing jointly with his or her alien spouse. Under certain circumstances a person arriving in or departing from the U.S. could be classified as both resident and nonresident for tax purposes.

American expatriates owing taxes for 2006 must pay by 16 April 2007 even though a tax return need not be filed until 15 June. Form 4868 can extend this latter filing deadline to 15 October.

More on Filing Requirements

 

President Bush's Surge and U.S. Taxation

The news is in. President Bush is sending over 20,000 troops to Iraq to more effectively combat insurgents. Mr Bush has announced that most of the five brigades being sent will 'help Iraqis clear and secure neighborhoods, help them protect the local population, and help them ensure that Iraqi forces left behind are capable of providing the security that Baghdad needs.' Otherwise he is concerned that radical Islamic extremists will grow in strength, topple moderate governments and fund their ambitions with oil revenues.

Apparently, according to CNN, the Democrats who have just assumed control of both houses of Congress are unlikely to block funding for this latest surge in troop deployment; the sentiment being to protect troops already in place and prevent a U.S. defeat. Opponents of the war point to the 3,000 lives already lost and a $400b price tax after nearly four years of fighting. They want Congress to deny President Bush the additional funding needed to pay for a military campaign that is increasingly unpopular and costly. According to a CBS poll conducted earlier this month, Mr Bush's overall approval rating is just 30% (87% of Democrats disapprove of his job performance) while the costs of conducting the war are running $200m a day.

Senate Majority Leader Harry Reid said on 8 January that the real costs of sending more troops will be $100b unless the war effort can be wound down. 'I think we've got to tell the president what he's doing is wrong. We've got to start bringing our folks home,' he said. Possible presidential candidate Senator Obama has said: 'Is there a way of conditioning appropriations so that the president is constrained . . . that is something we're investigating right now.'

More on Deployment and Tax Impact

 

Tax Cuts Benefit the Wealthy

According to a study conducted by the nonpartisan Congressional Budget Office and reported recently in the New York Times, families earning over $1m a year benefited more than any other group from President Bush's tax cuts. More specifically households in the top 1% of earnings saw their tax rate drop from 24.2% in 2000 to 19.6% in 2004, allowing an average tax savings of $58,000.

Not surprisingly in fiscal 2006 IRS audited the tax returns of 17,015 tax filers who reported income in excess of $1m This number is up from 12,835 audits in fiscal 2005 of millionaire earners. The Service is particularly intent on targeting Americans abroad, even those who earn less than $1m and who invest in foreign corporations (see previous issue our Report). 75% of audits are conducted by correspondence with the remaining 25% face-to-face.

More on Audits

 

2006 Tax Law Changes Summary

1. Alternative Minimum Tax - Exemption amounts: Estates and Trusts, $22,500; Married Filing Jointly, $62,550; Single or Head of Household, $42,500; Married Filing Separately, $31,275.
2. Capital Gains Rates - Remain at 5% and 15% for 2006 and 2007.
3. Section 179 - Taxpayers may expense up to $108,000 of qualifying property.
4. Child and Dependent Care Credit - 35% with reduced credits starting at $15,000 of AGI. Amount of eligible expenses is $3,000 for one child and $6,000 for two or more children.
5. Child Tax Credit - $1,000 for each qualifying child.
6. Qualified Dividends - Taxed at 5% and 15% through 2007.
7. Education Credits - Maximum Go Zone Lifetime Learning Credit, $4,000; Others, $2,000. Hope Credit, $3,300; Others, $1,650.
8. Salary Reduction Agreements - Maximum amount of elective deferrals that could be contributed to a qualified plan increased to $15,000 ($20,000 if taxpayer is age 50 and up). SIMPLE plans amount increased to $10,000 ($12,500 age 50).
9. Exemption Amount - $3,300 in 2006 and $3,400 in 2007.
10. Hurricane Katrina Exemption Amount - For taxpayers providing housing for victims, the amount is $500 per month; maximum $2,000 MFJ.
11. The Foreign Earned Income Exclusion - $82,400 of qualified income for 2006, and $85,700 in 2007.
12. Health Savings Accounts - Taxpayers can contribute the lesser of the annual deductible for medical insurance coverage or up to $2,700 for singles or $5,450 for families in 2006.
13. Traditional and Roth IRAs - Under age 50, smaller of $4,000 or earned income; age 50 and over, smaller of $5,000 or earned income.
14. Kiddie tax - Tax on net unearned income of under 18 age child if over $1,700 computed at parent's highest marginal tax rate.
15. Meal Expenses - Generally limited to 50% if business- related but 75% if meals occur incident to Department of transportation's 'hours of service' limits.
16. Archer Medical Savings Account - Self only annual deductible is $1,800 - 2,700; family, $3,650 - 5,450.
17. Standard Mileage Rates - Business miles, $.445; Charity, $.14; Medical, $.18; Moving, $.18 In 2007, $.485, .14, .20 and .20 respectively.

 

Banking Services Denied American Expatriates

On 12 December 2006 a U.S. citizen residing in Europe received the following letter from an American-based financial services firm: 'Dear client. At (firm) we take pride in our commitment to deliver the highest quality service to all of our clients. Despite this commitment, current securities regulations now make it difficult for us to continue providing investment services to many residents outside the United States. As a result, you will be required to make arrangements to transfer your account to another firm of your choosing within the next sixty (60) days.'

The client receiving this letter contacted the investment firm and was informed that the Patriot Act is the reason behind her being purged.

Apparently, as a consequence of the Patriot Act, some U.S. banks will no longer open or maintain accounts for American expatriates with foreign addresses. A letter has, however, been prepared by the State Department to assist U.S. citizens living abroad with maintaining a U.S. bank account. (Gilbert Wells, contributor)

More on State Department Letter
 

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