Barron's International Tax Service

« The TaxBarron » Serving the American Expatriate Community

The TaxBarron Report
September 2007

Americans making estimated tax payments who missed the 17 September third quarter deadline should send their payment as soon as possible to minimize interest assessed by Internal Revenue Service. They should make their check payable to United States Treasury, being sure to include the last four digits of their Social Security number and the words "3rd quarter estimated payment" or "Form 1040ES 3rd quarter". Payments can also be made by credit card (www.PAY1040.com or www.officialpayments.com). American expatriates should send their payment by registered or certified mail to INTERNAL REVENUE SERVICE, PO Box 660406, Dallas, TX 75266-0406. If possible include Form 1040ES available at www.irs.gov.

Don't forget that October 15 is the deadline for filing that tax return that was extended back on June 15 with Form 4868. The Form 1040 tax return should be at the IRS Service center by the due date. Anyone required to file Form 5471 for Foreign Corporation or Form 8865 for Foreign Partnership as a result of ownership interests in either should make sure to include these information return forms with their tax return. Send Form 1040 and any information return(s) by registered or certified mail to INTERNAL REVENUE SERVICE, Austin, TX 73301-0215.

For previous issues of the TaxBarron Report, click here.

In This Issue

Green Card Legislation

Estate Tax Planning Applies to American Expats Too

Tax Quiz

Income Tax Inequities

Recommended

Green Card Legislation

The US Citizenship and Immigration Services (USCIS), a part of the Department of Homeland Security, is proposing that holders of green cards, which have no expiration date, apply to renew their cards. Filing costs could approximate $400.

This legislation could create significant problems for many foreign executives employed by American corporations in the continental United States as well as for non-citizens who once worked in the United States and whose Social Security pensions are taxed some 30%.

If the legislation is passed, green card holders will have only a four-month window in which to apply to renew their cards. They will have to provide documentation, photographs, fingerprint and signature submissions, and submit to personal interviews.

Up until 1989, green cards were issued without expiration dates to some 1.9m applicants. Although some of these original green card holders will have requested naturalization, some will not want to renew their cards and some will have died, a significant number of these holders will still be affected.

Failure to apply within four months will render unexpired green cards invalid and holders in violation of the law.

The proposed legislation is intended to enhance national security by enabling the USCIS to update cardholder information, conduct background checks, and electronically store applicants' biometric information for comparison and authentication purposes.

Meanwhile, foreign nationals attempting to continue their employment stateside could find themselves barred from re-entering the US. And Social Security pensioners possessing green cards who have been able to file an annual tax return and claim a refund of those 30% withheld taxes will no longer be able to do so. (see www.ACA.ch)

Estate Tax Planning Applies to American Expats Too

American expatriates should know by now that annual income tax filings stateside require that they report and sometimes pay taxes on worldwide income regardless of tax filing requirements in their foreign country of residence. Americans who die in a foreign country may leave behind an estate against which a tax return will also have to be filed. Like income tax reporting on worldwide income, estates of decedents, regardless of property location worldwide, are liable for estate tax filing purposes.

Within nine months of the passing of a decedent, estate assets should have been valued to determine whether the estate must file a tax return and pay taxes to Internal Revenue Service. Generally estates valued in excess of the Applicable Exclusion Amount - $2,000,000 - fall into this tax filing category. Given that the euro has been worth as much as $1.39 this year, an estate with European holdings valued at €1,500,000 can exceed the $2,000,000 applicable exclusion amount!

Estate taxes are steep. A taxable estate valued at $2,100,000 can owe $45,000 in estate taxes. But suppose a decedent leaves behind an estate valued at $10,000,000. After allowable deductions for funeral expenses, debts of the deceased, mortgages and liens, expenses for administering the estate, and charities, the estate could be hypothetically calculated as follows:

Gross Estate $10,000,000
Less Allowable Expenses, $500,000
Taxable Estate $9,500,000
Tentative tax $4,155,800
Unified Credit $780,800 (calculated on the Applicable Exclusion Amount)
Estate Tax Liability $3,375,000

In order to pay these taxes, assets may then have to be sold at below market values. In the event a business is involved, the heirs could also be compelled to liquidate income producing assets.

Estate planning can lower or eliminate these consequences. But care must be taken that assets are efficiently transferred to selected heirs, that liabilities are effectively paid, and that personal care is affirmatively planned in the event of incapacitation.

Tax Quiz

ANSWER TO LAST MONTH'S QUIZ: Yes. IRC Section 642(g) can limit charitable contributions of an estate made pursuant to a will. But Bluestein Est. 15 TC 770, Dec. 17969 allowed the pass-through deduction from the partnership. (NATP)

THIS MONTHS QUIZ: A nonresident alien works for the United Nations in New York. Under Section 893, the income of a nonresident alien employee is exempt from US tax. If this employee marries a US citizen and elects to file a joint return, does this constitute a waiver of the diplomatic privileges and force the nonresident alien to report her worldwide income on the Joint Form 1040 she files with her US citizen spouse?

Income Tax Inequities

FairTax.org is a national campaign to replace the income tax system with a progressive national sales tax. The organization contends that the well-being of the economy and fairness toward taxpayers is being jeapardized by a tax system that is indecipherable to the average person and confounds even the IRS. According to Ken Hoagland of FairTax, the House Ways and Means Committee is exploring why investments are being increasingly moved offshore. The answer he says is that the tax system is driving American wealth and jobs there. (Wouldn't have anything to do with the falling value of the dollar . . .?)

Recommended Articles

The Battered Dollar

2007 Tax Changes

Pope Denounces Tax Evasion

IRS Losing Billions in Tax Revenue

Democrats Encourage Onshore Investing