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The TaxBarron Report
May 2007

US Treasury Secretary Henry Paulson is concerned about US competitiveness on world markets. He wants to see continued foreign investment. Therefore America should remain tax competitive. Nevertheless the weaker dollar encourages foreign spending at home. But according to Fred Bergsten, Washington DC's Institute for International Economics, 'the expanding budget could trigger chaos in the currency markets if it continues to drag the US dollar lower. The world would undoubtedly fall into a much slower growth pattern.' For previous issues of the TaxBarron Report, click here.

In This Issue

Erosion of US Competitiveness

Basic Guide to Green Card Holders

Illegal Refund Scheme

Foreign Tax Credit

Recommended

 

Erosion of US Competitiveness

US Treasury Secretary Henry Paulson in an address at a Forum on International Investment in St Louis has warned that the United States economy is under threat from emerging economies as they compete for foreign investment. Urging Americans to adhere to an open economy lest post 9/11 barriers to investment and trade are dictated, he pointed to a decline in foreign firms employing fewer people in the US between 2000 and 2005. The decline in employment during these years fell from 5.7m to 5.1m.

"The United States has historically been the best place in the world to do business and is a magnet for foreign investment, so it's important to reaffirm both our openness to foreign direct investment and the benefits investment brings to the US economy. And as we seek to attract foreign capital, we must realize that we have a constantly changing world where there are an increasing number of attractive economies across the globe competing for investment dollars. Against this backdrop, we must assess the cost versus the benefits of our regulatory structure and certain aspects of our legal system that may discourage foreign investment," he said.

Paulson felt that the US needs to sustain its tax competitiveness in order to maintain foreign investment interest.

During the first weeks in May, the euro was purchasing between $1.35 and $1.38. The diminished value of the dollar encourages foreigners to purchase cheaper costing American goods. If an American tourist in Europe has to skip some meals to keep travel costs in check, foreign tourists can spend obscene amounts of their own currency sight-seeing in America. Or else just sit at home and order American goods.

In any event, Paulson should not be too concerned in the immediate term with the weak dollar attracting foreign spending.

 

Basic Guide to Green Card Holders

Anyone holding a US green card while living abroad is considered a lawful permanent resident of the United States. This means that the green card holder is considered liable for US taxes on world-wide income. Therefore he or she must file a tax return unless a) there has been a final administrative or judicial determination that your lawful permanent residence status has been revoked or denied, b) your gross income from world-wide sources is less than the amounts that require the filing of a tax return, c) your US residency status is affected by an income tax treaty.

IRS has recently made available Publication 4588 - Basic Tax Guide for Green Card Holders - that addresses several important questions:

• What is my green card has been taken or given to someone in the US government?
• What if I have been absent from the US for a long period of time?
• What if I haven't filed prior US income tax returns?
• What if I have income taxes withheld from income I received from the US?
• What if I'm living in another country? Do I have to pay taxes to both the US and the country where I am living?
• What if I surrender my green card?
• What if I am a long term resident when I surrender my green card?
• How do I give notice to the Department of Homeland Security that I have terminated my residence status?
• What if I have my green card for less than 8 years out of the last 15 taxable years at the time I revoke or abandon my green card?

Green card holders often find that their Social Security pensions are subject to substantial withholding taxes. As reported on Form SSA-1042S - SOCIAL SECURITY BENEFIT STATEMENT, the withholding rate is 85% x 30% of their pension. Suppose Jose Gonzales received $5,124 in 2006 (Box 5 of the benefit statement). Withholding taxes are $1,307 ($5,124 x 85% x 30%). But as Jose has a valid green card despite his having retired to Spain in 2001, he is entitled to file a tax return, report total income and possibly qualify for a refund of these withheld taxes.

 

Illegal Refund Scheme

As part of their crackdown on offshore investment schemes, IRS has targeted a refund scheme in the Commonwealth of the Northern Mariana Islands. Apparently hundreds of non-residents and locals filed tax returns in which they applied for refunds which included the earned income tax credit.

As residents of the islands are not required to file a tax return and therefore ineligible to claim the credit, IRS is requiring that they file Form 1040X to amend their bogus tax returns and repay any refunds to IRS. So far no news about jail time.

 

Foreign Tax Credit

Foreign taxes paid to a foreign tax authority by a US taxpayer can often be credited against US tax liability or else deducted in figuring taxable income. The credit reduces US tax liability with any excess being carried back or forward to other years. A deduction reduces taxable income and may only be taken in the current year. To take the foreign tax credit, Form 1116 must be filed with Form 1040. Form 1116 is used to figure the foreign tax paid or accrued. A credit cannot be taken on foreign income excluded from a US tax return. The form is complicated and is impacted by the kinds of foreign income and corresponding foreign taxes paid.

 

Recommended

Tax Revenues Up

Tax Cut Extensions

Seniors and Investment Scams

IRS Email Intl Tax Help

US Investors Looking Abroad