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The TaxBarron Report
November 2006
This month marks the third edition of our international tax newsletter. New subscribers are on the increase which indicates an appreciation for the content of our Report. How U.S. taxation impacts on Americans living abroad is the purpose of this publication. For previous issues of the TaxBarron Report, click here.
In This Issue
Alternative Minimum Tax Targeted
Taxation of Foreign Life Insurance Annuity
Tax Planning Before Christmas?
Alternative Minimum
Tax Targeted
In our last issue, we reported that the Alternative Minimum Tax had lost some of its bite. Now it seems that Democratic leaders have announced their intention to debate the Tax in the coming year.
AMT impacts mostly on households earning between $100,000 and $500,000. With the euro consistently outperforming the dollar by 25%, more Americans working in Europe could be in for an unpleasant AMT experience in coming years. This year, for instance, some 3.8m taxpayers will be affected whereas in 2007 23m will be at risk.
Until now, Congress has primarily raised the exemption amount in order that the AMT not affect increasing numbers of taxpayers. The Democrats are also concerned that more middle class households are not affected by the AMT in coming years. But the government's fiscal requirements presently require more revenue. And the AMT provides an indirect way to raise needed taxes. So when next year's budget is being proposed in Congress, how well will the Democrats debate?
Taxation of Foreign Life Insurance Annuity
Life insurance has long been touted to provide three benefits: at death, a beneficiary receives the face value; upon disability, the premiums are waived; and at retirement, income may be provided from the purchase of an annuity with the accumulated cash values. Financial advisors often recommend the insurance annuity for foreign investment as a way to avoid U.S. income taxes. Planning is sophisticated yet often confusing to the average invetor who must rely on the integrity of t he advisor or institution handling his or her funds. There are certain disadvantages to the annuity . . .
More on Foreign Life Insurance Annuity
Tax Planning Before Christmas??
As an American expatriate, year end tax planning may not appear to be a priority. In the states, we used to advise small business clients to consider whether their projected year-end profits would be taxed at lower or higher brackets and subsequently plan their spending or holding accordingly. Anyone with significant capital gains might also have needed to sell off stocks with capital losses to offset. There is some tax planning you might want to consider . . .
A Question of Compliance
Many foreign countries require their citizens and residents to report and pay taxes on their world-wide income. U.S. citizens living abroad are therefore faced with the issue of whether or not to comply with the authority. As a form of protest they may justify non-reporting of income earned outside their foreign country of residence because they are already reporting world-wide income to the Internal Revenue Service. The problem of whether to report really comes down to whether there is a tax treaty and whether the foreign country enforces that treaty. Many countries impose penalties for neglecting tax reporting. The most severe form of fine for failure to report appears to be China where tax evasion, according to the 13 November 2006 issue of Time, is punishable by execution.
Double Taxation Treaties have been concluded between many countries and the United States. While the purpose of such treaties may be said to avert the chances of taxpayers being taxed on the same income twice, taxation treaties enable tax authorities to share information and thereby entrap foreign residents...