Perhaps you are a non-U.S. resident who was keen on investing in U.S. real property after the housing market crash, hoping the market would improve and you could profit on the real estate sale after a few years. Or possibly, you are a Canadian who purchased a vacation home in sunny Arizona to escape the harsh winters. Whatever your reason may be for investing in U.S. real estate, you should be aware of your U.S. tax filing responsibilities.
First, if you rent out your U.S. real property, you will need to file a U.S. tax return to report the rental activity. Of course, you may have a tax return filing requirement regardless, if you have any other type of U.S. source income.
When you sell the property, you will need to file a tax return and pay tax on any gain from the sale. If you don’t already have a U.S. social security number or Individual Taxpayer Identification Number (ITIN), you will need to apply for one. As a foreign person selling U.S. real estate, the buyer is required to withhold tax (generally 10%) on the sale unless an exception is met. One exception to withholding is if the sales price is less than $300,000 and the buyer uses the property as a residence for a required period of time. The buyer could be responsible for the withholding tax if tax should have been withheld and was not.
Withholding could be reduced if the seller files Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests, and it is accepted by the IRS. A common reason for filing Form 8288-B is if the seller’s tax liability from the sale is less than the amount required to be withheld. In this case, supporting evidence of the sales price, basis, improvements, depreciation, etc. would need to be attached to the 8288-B to support the gain or loss calculation.
It is best to contact a knowledgeable tax professional who can assist with any consultations or tax filing obligations.
By Jill A. Helm, CPAPosted on July 29 2015 by admin
On the IRS.gov website, the IRS announced that for estate tax returns (Form 706) filed on or after June 1, 2015, estate tax closing letters will be issued only upon request by the taxpayer.
Historically, the IRS’s “Frequently Asked Questions on Estate Taxes” website has provided that personal representatives can expect a closing letter to be automatically issued within four to six months from the date that Form 706 is filed if the return is without errors or special circumstances. Closing letters for returns that are selected for examination or reviewed for statistical purposes will take longer.
During estate administration, the personal representative or executor often awaits the arrival of the estate closing letter from the IRS to do the final distribution of the estate assets to the heirs. By not automatically issuing the letter, the IRS adds another task to the already overburdened administrative list.
Per the IRS information, taxpayers should wait at least four months after filing the estate return to request a closing letter.
The IRS also clarified whether, and under what circumstances, it will issue a closing letter for estate tax returns filed before June 1, 2015. One item of note is no closing letter will be issued if the estate was below the filing threshold and the portability election was denied due to late filing.
For more information, see Frequently Asked Questions on Estate Taxes.
By Melinda Nelson, CPAPosted on July 28 2015 by admin
The American Institute of Certified Public Accountants (AICPA) has recently been participating in U.S. House of Representatives, Committee on Small Business hearings on tax reform with the goal of ensuring that main street isn’t left behind. One area of focus in this regard has to do with rules relative to civil tax penalties.
Over the past several decades, there has been an exponential increase in the complexity of the tax laws and a proliferation of increasingly severe civil tax penalties. For example, take the automatic $10,000 penalty for each late filed Form 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations). Penalty provisions imposed by the IRS do not distinguish between: a) large public multinational companies, b) small companies, and c) companies that may only have insignificant overseas operations, or loss companies. Such a blanket approach to imposition of penalties can place undue hardship on smaller corporations that do not have the same financial resources as larger corporations. While for a larger corporation, $10,000 may not be much more than petty cash to them.
IRS discretion to waive and abate penalties where the taxpayer demonstrates reasonable cause and good faith is needed most when the tax laws are complex and the potential penalty is overly punishing, especially where the taxpayer’s state of mind is central to the conduct subject to penalty. Because it is not feasible to anticipate every possible situation to which a penalty might apply, permitting a reasonable cause defense and avoiding fixed-dollar amount penalties help ensure that a disproportionately large penalty is not applied to an unforeseen and/or unintended set of facts.
By Dale F. Jensen, CPAPosted on July 23 2015 by admin
Have you recently gotten married or plan on getting married sometime in the near future? Are you worried about the tax implications? There are a couple of choices that can be made on your upcoming tax returns that can either save or cost you money. Your current situation will be the determining factor in what works best for you. The question is: what should your filing status be? You have two options: married filing jointly or married filing separately. Both of these options have their pros and cons.
Advantages to filing joint:
- Higher standard deduction
- Higher tax credits
- Eligible for certain credits (Adoption Expense Credit & Lifetime Learning Credit)
- Tax rates and taxes owed may be less – generally
- Cheaper to prepare one return instead of two separate returns
- Better retirement planning
Disadvantages to filing joint:
- Both liable for the tax due
- Both responsible for the accuracy of the return
- Deductions are limited by your AGI – worse depending on your situation, medical, and miscellaneous deductions
- Refunds go to the financial obligations of either spouse
Advantages to filing separate:
- Separate ties (example: one spouse owns a business and the other spouse does not want to be connected to the business)
- Different tax liabilities (one spouse may have a refund while one has a liability)
Disadvantages to filing separate:
- Pay the highest marginal tax rate
- No balancing of profits and losses
- Both spouses must use the same system for claiming deductions (standard or itemized)
You can consult with a tax adviser regarding which filing status is most advantageous for you and your spouse.
By Kelsey OlsenPosted on July 22 2015 by admin
Now that the 2014 tax deadline is behind us, do you have a good idea of where all your tax dollars went? If you’re like most Americans, you probably have a vague idea of how your hard-earned money is spent on the federal level, but aside from that, you probably don’t know exactly how that money is divvied up.
In an effort to be more transparent, the White House created a “Federal Taxpayer Receipt” website a few years back which is updated annually to correspond to annual spending. This site allows you to enter your income tax, social security taxes, and Medicare taxes to see the specific allocation of your tax dollars across the various federal programs.
Not unexpectedly, the highest percentage of income tax spending according the calculator is on healthcare and national defense; however, you can also see a further breakdown of these categories as well as many others. For example, about 1.13% is spent on science, space, and technology programs, but of this amount, only 0.66% goes to NASA. It’s pretty interesting to see how your tax dollars translate to federal budget spending.
To check out your own personal “tax receipt,” click here.
By Kristen Janik, CPAPosted on July 21 2015 by admin
The IRS has proposed a rule issued on Friday, June 19, 2015, with guidelines for the “Achieving a Better Life Experience (ABLE) Act”. The ABLE act was designed for people who became disabled before the age of 26, to enable them and their families to save and pay for disability related expenses. Here are some key notes you may want to know:
- Account owner and designated beneficiary of the account is the disabled individual.
- Must have been disabled before 26th birthday.
- Can have only one ABLE account at a time.
- Currently, $14,000 (adjusted annually) can be contributed to an ABLE account on an annual basis, and the distributions are TAX-FREE if used to pay qualified disability expenses.
Qualified disability expenses are expenses that relate to the designated beneficiary’s disability and help that person maintain or improve health, independence and quality of life. As noted on the IRS website (link below) these expenses can include housing; education; transportation; health, prevention and wellness; employment training and support; assistive technology and personal support services; and other expenses.
The IRS is welcoming comments and the proposed regulations are available now for public inspection. Comments must be received by September 21, 2015. Please follow this link to the IRS website and scroll to the bottom if you would like to view the regulations or leave comments. You can also get additional information from the National Disability Institute here.
By Chris MorrisonPosted on July 16 2015 by admin
Hiring your kids can be very beneficial for many reasons, not the least of which includes tax benefits. So consider putting your kid to work (so long as you follow all child labor laws!) and reap these potential benefits:
- Wages that you pay to your child are deductible by your business provided that your child is actually doing work for your business and you are paying them for the work at reasonable compensation levels.
- If you have a sole proprietorship or partnership where each partner is a parent of the child, wages paid to a child under the age of 18 are exempt from social security and Medicare taxes.
- Under these same rules, wages paid to a child under the age of 21 are also are exempt from Federal Unemployment taxes.
- Earned income is not subject to the kiddie tax, regardless of age.
- Income can effectively be shifted to your kids at a potentially lower tax bracket and sheltered by the child’s standard deduction.
- Earned income allows your child to get a head start on contributing to a retirement plan (i.e. traditional or Roth IRA).
- If your kid is also in college, the taxable income may allow them to file their own tax return and claim education credits that would otherwise go unused if your income is too high.
Here’s a nice little example of how the above points can benefit your family:
Say you have a sole proprietorship catering business. You hire your 17-year-old son or daughter to help you with the business and pay wages to him/her in the amount of $16,000. You get a deduction for the wages on your business which ultimately reduces your personal income tax by $5,600 at the 35% rate ($16k * 35%). You were also not required to pay social security, Medicare or FUTA taxes on any of those wages which saved you additional money. Your kid doesn’t have any other significant sources of income and they opt to contribute $10,000 to a retirement plan, thereby reducing their taxable income. The remaining $6,000 of income is reduced by their standard deduction, thus making taxable income equal to zero. It’s a win-win situation for the whole family!
By Kristen Janik, CPAPosted on July 15 2015 by admin
Getting a notice in the mail from the IRS can be unnerving, especially if it involves responding in a short number of days. A “B notice” is a notification that one or more tax ID numbers were missing from a 1099 or do not match IRS records. The IRS calls it a “B notice” because backup withholding of 28% is required on future payments to those payees if the correct ID number is not included in future information filings. The “B notice” requires action within 15 days of receipt, but the necessary steps to deal with it are fairly straightforward, so don’t panic!
Generally, the first thing to do is to send a W-9 form and a copy of the “B notice” to the payee or payees that have missing or mismatched ID numbers on the 1099s sent to the IRS. Depending on the relationship a business owner has with the payee, the issue can also be cleared up with a phone call or email explaining the situation. For a payee that is no longer doing business with the company, no action is required, as no further payments or 1099s will be sent to them. However, it may still be a good idea to send those payees a W-9 if the possibility of doing future business with them still exists.
Most “B notices” can be avoided altogether by ensuring that a W-9 is received at the commencement of business with any partnership, sole proprietor and professional corporation, regardless of whether they will be paid $600 during the year. Businesses should keep a file of W-9s and ID numbers received and double check that they have a number for each 1099 recipient before sending the 1099s to the IRS.
The IRS has a helpful document on their website called Publication 1281. It contains FAQs, a flowchart, and detailed information on what to do in case of various contingencies. Most businesses will send the required ID information with no trouble when they learn that the alternative is to receive only 72% of their money due to the backup withholding rules. The “B notice” can seem intimidating when it comes in the mail, but one or two simple administrative tasks may take care of the underlying issue that generated the notice.
By Brandon Harbeke, CPA
Source: IRS Publication 1281Posted on July 14 2015 by admin
The benefit of having a net operating loss (NOL) is that you can use it to shield some or all of your income from taxes. The NOL rules allow for carrybacks. So in some situations, you can get an immediate refund of taxes paid in prior years. Unfortunately, the alternative minimum tax treats NOLs differently. So even if you have no taxable income, it doesn’t necessarily mean that you don’t owe AMT.
A taxpayer with a net operating loss in one year can carry that loss back up to two years to use it against income that was already taxed, or carry it forward up to 20 years to shield future income. If the NOL is large enough it can completely shield income for one or more years, resulting in no taxable income for those years. But the AMT rules are different.
AMT essentially imposes lower tax rates on a larger income base. The AMT tax rates are lower than the normal rates, but AMT allows for fewer deductions, which results in more income being subject to the tax. The AMT rules add an another layer of complexity onto an already complex tax system, which is probably why the President’s Advisory Panel on Federal Tax Reform found that 75% of AMT payers utilize a CPA firm to prepare their taxes.
One major difference under AMT is the NOL deduction. The basic idea is that for AMT purposes the NOL deduction is limited to 90% of the income for the year. So even if your NOL deduction was larger than your income for the year, AMT could still apply to 10% of your income. The actual calculation is more complicated than that, but the general takeaway is clear: AMT can apply even if you don’t have taxable income.
By Michael AndersonPosted on July 9 2015 by admin
One of the considerations you have to keep in mind if you are thinking of hosting a foreign student is the cost of having another person living in your home. Fortunately, the tax law provides some help to offset that cost. You can deduct as a charitable contribution up to $50 a month for the cost of hosting a student in your home under a written arrangement with a sponsoring organization.
The student must be in the 12th grade or lower, cannot be your relative or dependent and must be attending school on a full-time basis. The student must be a member of your household under a written agreement between you and an organization to implement a program of the organization to provide educational opportunities for students in private homes. The organization must be a charitable organization, war veterans’ organization or domestic fraternal lodge. It cannot be a government agency.
If you qualify, you can deduct your expenses for hosting the student, limited to $50 for each full calendar month of qualification. (A month in which the student qualifies for at least 15 days counts as a full month.) Expenses include amounts you pay to ensure the student’s well-being and to further their education, e.g., expenses for books, tuition, food, clothing, transportation, medical and dental care, and recreation. You cannot include costs you would incur in any event, such as for insurance, repairs, taxes, or mortgage interest on your home. You also cannot include amounts for depreciation, or for the value of lodging or any services you provide the student. And if you receive any payment (partial or full) as compensation or reimbursement for your costs, no deduction is available.
While it is common to refer to a student taken into your home as an “exchange” student, in fact, if the student is foreign and the arrangement is under a mutual exchange program under which a child of yours lives with a family in a foreign country, the deduction isn’t allowed.
In connection with this deduction, you must keep records of your qualifying expenses. You also have to attach a copy of the agreement with the sponsoring organization to your tax return, as well as a summary of the expenses paid for the student and a statement as to (i) the date they became a member of your household, (ii) the school’s name and location and (iii) the student’s period of attendance.
Note that since the student is in the U.S. only temporarily, they aren’t considered a U.S. resident and therefore, you can’t claim them as a dependent on your return.
It certainly doesn’t turn hosting a foreign student into a money-making deal, but $50 a month does help reduce the cost of having another person living in your home and makes it that much more rewarding to be a host family.
By Michael Anderson-- Older Entries »
There is nothing more complex than the world of taxes. We know this and yet we chose careers where we face these issues everyday. We get questions day in and day out about new tax laws, forms and news items and how they affect everyday people and businesses. Well, here at Henry & Horne, LLP we have set out to do what we do best; help everyday people understand what is going on in the world of state, local, federal, estate and international taxation. We will provide these weekly posts and we encourage you to give us feedback on those posts as well as letting us know what else you would like to know more about. Welcome to "Tax Insights." We hope you find this blog informative and worthy of your time.
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- Foreigners Selling U.S. Real Estate
- IRS: No More Estate Tax Closing Letters…Unless You Ask
- Pushing for Tax Reform – Civil Tax Penalties
- Tax Implications of Marriage on Your Filing Status
- Where Did Your Tax Dollars Go?
- IRS Regulations Proposed for ABLE Act
- The Tax Benefits of Hiring Your Kids
- I Received a “B Notice” from the IRS – What Do I Do?
- I have a Net Operating Loss, Do I Need to Worry about AMT?
- Tax Deduction for Hosting a Foreign Student