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While American expatriates come to terms with filing their 2007 US tax returns, decide this year to keep good records for tax purposes. Set up a computer or file system to record deductible transactions and store necessary cancelled checks and other essential documents for the tax year. If you use your car for medical, moving, charity, or business, keep a log. Come next tax season, you'll be glad you did. For previous issues of the TaxBarron Report, click here.
In This Issue:
Often American expatriates do not file a US tax return under several mistaken assumptions. The first is they file and pay taxes to a foreign country of residence. The second is they earn less than the Foreign Earned Income Exclusion. The third is after many years of not filing to remain under the radar.
Actually US tax laws require US citizens and resident aliens to report their worldwide income annually unless their income is below the combination of a Standard Deduction and Exemption amounts. In 2007 a Single filer's Standard Deduction was $5,350 and Exemption $3,400. So unless as a Single filer you were below this $8,750 ($5,350 + $3,400) threshold, filing an income tax return in a foreign country does not excuse you from filing stateside.
The Foreign Earned Income Exclusion (FEIE), worth $85,700 in 2007, is intended to help US filers from being taxed twice on their foreign income. But FEIE cannot be applied against investment and other forms of income. Nor can it be taken if IRS challenges a nonfiler to report prior year foreign earnings and decides against allowing FEIE. So even if those foreign earnings are excluded from US taxation, they are still reportable.
Staying under the radar is risky, especially as IRS is steadily increasing its reach via international tax treaties and auditors. The worst scenario is to be discovered and face possible criminal sanctions for tax avoidance.
Under IRS Statute of Limitations, taxpayers have three years to claim a tax refund. IRS has three years to audit a tax return or assess additional taxes. And ten years to collect outstanding tax liabilities. Anyone who has not filed a US tax return for some years from overseas should take the offensive approach by filing rather than being put on the defensive by an aggressive and suspicious IRS auditor. The Service asks that three years returns be filed.
Suppose your spend-thrift daughter owes a major credit card company $20,000, and you successfully negotiate a $5,000 settlement. Well, once the payment is made, the credit card company will issue her a Form 1099-C reporting the amount she didn't pay as a discharge of indebtedness income. This income can later be taxable to her.
For American expatriates, the tax filing deadline this year is 16 June. This means that the tax return must be at the IRS Service Centre in Austin, Texas by the due date. Postmarks do not count. For this reason, electronic filing is the better option over snail mailing.
The due date can be extended by filing Form 4868 - APPLICATION FOR AUTOMATIC EXTENSION OF TIME TO FILE U.S. INDIVIDUAL INCOME TAX RETURN. This form extends the due date to 15 October 2008.
However you will owe interest on any unpaid taxes that were due 15 April 2008 for the 2007 calendar year. IRS may also assess a late payment penalty of 1/2 of 1% of any tax not paid by the regular due date up to 25%. A late filing penalty of 5% per month up to 25% can also be assessed if the return is filed late.
Form 4868 can either be filed electronically or by post. Expatriates making a payment with the Form should send to the IRS Service Centre at: PO Box 660575; Dallas, TX 75266-0575. Those not making a payment can send to: Austin, TX 73301-0215.
ANSWER TO LAST MONTH'S QUIZ: Yes. The salary the employee earned is considered foreign earned income. Provided the employee otherwise qualifies, he or she is eligible for the foreign earned income exclusion using Form 2555. The source of the salary is the place where the services are performed.
THIS MONTH'S QUIZ: A taxpayer who is regularly employed as a mechanic took a month off stateside and helped a neighbor install windows and received $4,000 as an independent contractor. Is this considered self-employment income subject to self- employment tax?
In 1974 Congress enacted legislation permitting any worker lacking a retirement plan at his or her job to set up an individual retirement account (IRA). The attractiveness of this arrangement was readily apparent. Contributions were tax deductible. Earnings could accumulate tax free. Withdrawals at retirement were taxable but at a time when, generally speaking, the retiree was in a lower tax bracket.
In 1997 the Roth IRA was introduced as an alternative to the traditional IRA. The Roth IRA was not tax deductible. Earnings could still accumulate tax free. But at retirement, withdrawals were not taxed. It would have wide appeal to anyone anticipating a "comfortable" retirement.
So the Roth IRA was mainly a savings vehicle. Over time, the amount that can be set aside annually has risen. In 2008, the maximum contribution amounts are $5,000 per person unless over age 50 ($6,000). But contributions must be made out of qualified income.
When the US stock market crashed in October 1929, the US economy gradually slipped into what has been called the Great Depression. Lasting over a decade, the Depression saw some 27% of the American work force unemployed. Soup lines formed to feed the hungry. Shanty towns sprang up to house the indigent. And Americans migrated in search of illusive work.
Then President Herbert Hoover mistakenly saw the Depression as a consequence of market forces. Convinced that the best government strategy was noninterference, he essentially sat on his hands while conditions worsened. His attitude cost him the presidency, for in 1933 Franklyn Delano Roosevelt was elected by a population demanding change.
Fast forward sixty-three years to 2008. Between May and July this year, the federal government will be handlng out $110b in economic stimulus payments to some 130m American households. ... Coming at a time when the US economy is clearly in recession, the president is hopeful that these rebate checks will give the economy a much-needed boost. But these payments also come at a time when the national debt is a staggering $9.3t with no relief in the foreseeable future for the US dollar to strengthen, something Americans abroad who receive pensions and social security checks in dollars are keen to want to know.
PONDERABLE: Most people never feel secure because they are always worried that they will lose their job, lose the money they already have, lose their spouse, lose their health, and so on. The only true security in life comes from knowing that every single day you are improving yourslef in some way, that you are increasing the caliber of who you are and that you are valuable to your company, your friends, and your family. - Anthony Robbins