WHO NEEDS AN ITIN AND HOW TO GET ONE

Effective January 1, 2013, the IRS has updated procedures that affect the Individual Taxpayer Identification Number (ITIN) application process.

TAXPAYER IDENTIFICATION NUMBER

An Individual Taxpayer Identification Number (ITIN) is a tax processing number issued by the Internal Revenue Service. It is a nine-digit number that always begins with the number 9 and has a range of 70-88 in the fourth and fifth digit. IRS issues ITINs to individuals who are required to have a U.S. taxpayer identification number but who do not have, and are not eligible to obtain a Social Security Number (SSN) from the Social Security Administration (SSA). ITINs are issued regardless of immigration status because both resident and nonresident aliens may have a U.S. filing or reporting requirement under the Internal Revenue Code. Individuals must have a filing requirement and file a valid federal income tax return to receive an ITIN, unless they meet an exception.

ITINs are for federal tax reporting only, and are not intended to serve any other purpose. IRS issues ITINs to help individuals comply with the U.S. tax laws, and to provide a means to efficiently process and account for tax returns and payments for those not eligible for Social Security Numbers (SSNs).  An ITIN does not authorize work in the U.S. or provide eligibility for Social Security benefits or the Earned Income Tax Credit. Examples of individuals who need ITINs include:  

• A nonresident alien required to file a U.S. tax return    

• A U.S. resident alien (based on days present in the United States) filing a U.S. tax return    

• A dependent or spouse of a U.S. citizen/resident alien   

• A dependent or spouse of a nonresident alien visa holder

HOW TO GET AN ITIN

If you do not have a SSN and are not eligible to obtain a SSN, but you have a requirement to furnish a federal tax identification number or file a federal income tax return, you must apply for an ITIN. Use the latest revision of Form W-7, Application for IRS Individual Taxpayer Identification Number to apply. Attach a valid federal income tax return, unless you qualify for an exception, and include your original proof of identity or copies certified by issuing agency and foreign status documents. Because you are filing your tax return as an attachment to your ITIN application, you should not mail your return to the address listed in the Form 1040, 1040A or 1040EZ instructions. Instead, send your return, Form W-7 and proof of identity and foreign status documents to:

Internal Revenue Service

Austin Service Center

ITIN Operation

P.O. Box 149342

Austin, TX 78714-9342

You should complete Form W-7 as soon as you are ready to file your federal income tax return, since you need to attach the return to your application.

 

The form W7 needs to be signed by an enrolled registered ITIN agent who is authorized to sign the document .

If you meet one of the exceptions to the tax filing requirement, submit Form W-7, along with the documents that prove your identity and foreign status. You are also required to include supplemental documents to substantiate your qualification for the exception, as soon as possible after you determine that you are covered by that exception. You can apply for an ITIN any time during the year. However, if the tax return you attach to Form W-7 is filed after the return’s due date, you may owe interest and/or penalties. You should file your current year return by the prescribed due date to avoid this situation. If you qualify for an ITIN and your application is complete, you will receive a letter from the IRS assigning your tax identification number usually within seven weeks. If you have not received your ITIN or other correspondence seven weeks after applying, call the IRS toll-free number at 1-800-829-1040 to request the status of your application if you are in the United States. If you are outside the United States, call 267-941-1000 (not a toll-free number).

FOREIGN EARNED INCOME EXCLUSION: BONA FIDE VS PHYSICAL PRESENCE TEST

People who live and work outside the United States may be able to exclude all or part of their foreign-source wages and self-employment income from the federal income tax through a provision called the foreign earned income exclusion. To qualify for the foreign earned income exclusion, a person needs to:
•Work and reside outside the United States, and
•Meet either the Bona Fide Resident or Physical Presence tests.

Persons who qualify are eligible to exclude up to $100,800 in foreign earned income annually, depending on the year. The amount of the foreign earned income exclusion changes each year.
Persons may also be eligible to to exclude an additional amount for housing using the foreign housing exclusion or deduction. Types of Income to Which the Foreign Earned Income Exclusion Applies: The foreign earned income exclusion applies only to income arising from performing services either as an employee or as an independent contractor. “The term ‘earned income’ means wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered (Internal Revenue Code section 911(d)(2)(A)). Thus, wages and self-employment income may qualify for the foreign earned income exclusion. Other types of income cannot be excluded using this provision. From Which Tax is Income Excluded? The foreign earned income exclusion functions to exclude earned income from the federal income tax. The foreign earned income exclusion does not exclude income from Social Security or Medicare taxes. Thus, the foreign earned income exclusion does not reduce the self-employment tax, which is the mechanism by which self-employed persons pay in the Social Security and Medicare taxes.  Further, self-employed persons are eligible to take the foreign housing deduction instead of the foreign housing exclusion. Persons must meet one of two qualification tests to claim the Foreign Earned Income Exclusion. A person must meet either the bona fide residence test or the physical presence test.
BONA FIDE

A person is considered a “bona fide resident” of the foreign country if that person resides in that country for “an uninterrupted period that includes an entire tax year.” A tax January 1 through December 31. The qualifying period for the bona fide residence test must include one full calendar year.Trips outside the Foreign Country. Brief trips or vacations outside the foreign country will not jeopardize a person’s status as a bona fide resident, as long as the trips are brief and the person clearly intended to return to the foreign country. A person can even make brief trips to the United States.

Statement to Foreign Authorities
A person is not be considered a bona fide resident of a foreign country if a person has submitted a statement to the foreign country that he or she are not a resident of that country, and the foreign government has determined that the person is not subject to their tax laws as a resident.

Tax Treaty
Special treatment of income under an income tax treaty does not prevent a person from meeting the bona fide residence test.

Physical Presence Test
A person is considered physically present in a foreign country (or countries) if the person resides in that country (or countries) for at least 330 full days in any consecutive 12-month period.
A person can live and work in any number of foreign countries but must be physically present in those countries for at least 330 full days.
Full Day
A “full day” is 24 hours. So, the day of arrival in and the day of departure from a foreign country are generally not counted towards the physical presence test.12-Month Period
The qualifying period can be any consecutive 12-month period of time. A person does not have to begin his or her qualifying period with the first day in a foreign country. A person can choose which 12-month period to use for the physical presence test. This gives the taxpayer freedom to choose a 12-month period that provides the greatest income exclusion. Both vacation and business days spent in the foreign country count towards meeting the 330 day threshold.
Travel Outside the Foreign Country

Travel outside of the foreign country where a person resides generally will not jeopardize the 330 full days requirement for the physical presence test. The IRS explains it this way, “You can move about from one place to another in a foreign country or to another foreign country without losing full days. If any part of your travel is not within any foreign country and takes less than 24 hours, you are considered to be in a foreign country during that part of travel.”

How does the Foreign Earned Income Exclusion Impact the Tax Calculation?

Taxpayers claiming the foreign earned income exclusion will pay tax at the tax rates that would have applied had they not claimed the exclusion. In other words, the federal income tax is calculated by first calculating the amount of income tax on income without taking the foreign earned income exclusion into account, and then subtracting the tax as calculated on the amount of foreign earned income that is excluded. The result is the amount of the federal income tax liability. To facilitate this calculation, taxpayers use the Foreign Earned Income Tax Worksheet found in the Instructions for Form 1040. This special method of figuring the tax has been in effect since 2006.

Do I have to file a state income tax return if I am living overseas?

If you are a US Citizen or resident alien living abroad not only do you have to ensure you file an income tax return with the IRS each year if you meet the minimum filing requirements, you may have to file a state tax return.

Depending on which state you most recently lived in before your move, you may need to file a non-resident state income tax return even if you are living abroad. Do not assume that since you have left the US you are not obligated to file a state tax return. Each state has its own set of rules about whom it considers a “resident” and their own minimum filing requirements. Most states, but not all, also allow the foreign earned income exclusion in determining taxable income.

If you are like many expats and green card holders, you may have kept your home in the US when you moved overseas and started renting it. States want to tax individuals on the income they earn in that state. So the income from your rental property will be taxed in the state that the property is located in. So if you meet the minimum filing requirements for that state, you will have to file a state income tax return. Also depending on how much you earn on your rental property, it may be wise to make estimated tax payments to the state and the IRS.

Most states will allow you to be released from you residency status if you can prove your residency somewhere else for more than six months of the year.

Only four states make ending your residency very difficult:

California,

New Mexico

South Carolina

Virginia

If you moved from one of these states, it is unlikely you have been released from your filing obligation. In each of these states you must prove that you will not return to the state. If you cannot prove this, you must file a state income tax return. They look at several different factors to determine if you may return to the state at some time. These factors among others include: property mortgages, leases, voter registration, driver’s license, and utility bills.

If you have moved from a state that does not collect an individual state income tax, consider yourself lucky not having to deal with the hassle and cost of preparing and filing a state income tax return. The states that do not impose a state income tax are:

Alaska

Florida

Nevada

South Dakota

Texas

Washington

Wyoming

Two states have a limited income tax on individuals. The tax is based on income received in the form of dividends and interest only.

Tennessee

New Hampshire

For the Other States you will generally only need to file a state income tax return when you are a no resident if you have income generating in the state while you are a nonresident of the state such as rental property or a business generating income in that state . You will then need to file a non – resident state tax return whereby the taxes due will be favorably less than if you were a sate resident. Additionally some states require a part year state tax return if you were a art year resident of the state during the year.

Each State tax laws needs to be analyzed accordingly in accordance to each individuals  residency status .

WHY EXPATS NEED TO FILE A TAX RETURN

If you are a U.S. citizen or resident alien, the rules for filing income and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside.

If you are a U.S. citizen or resident alien residing overseas, or are in the military on duty outside the U.S., on the regular due date of your return, you are allowed an automatic 2-month extension to file your return and pay any amount due without requesting an extension. For a calendar year return, the automatic 2-month extension is to June 15. If you qualify for this 2-month extension, penalties for paying any tax late are assessed from the 2-month extended due date of the payment (June 15 for calendar year taxpayers). However, even if you are allowed an extension, you will have to pay interest on any tax not paid by the regular due date of your return (April 15 for calendar year taxpayers).

If you qualify for the 2-month extension but are unable to file your return by the automatic 2-month extension date, you can request an additional extension to October 15 by filing Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, before the automatic 2-month extension date. However, if you qualify for the 2-month extension, penalties for paying any tax late are assessed from the extended due date of the payment (June 15 for calendar year taxpayers). Otherwise, if you do not qualify for the 2-month extension, penalties for paying late are assessed from the original due date of your return (April 15 for calendar year taxpayers). Also, even if you are allowed extensions to June 15 and/or October 15, you will owe interest on any unpaid tax amount from the original due date of the return (April 15 for calendar year taxpayers).

Each taxpayer who files, or is claimed as a dependent on, a U.S. tax return will need a social security number (SSN) or individual taxpayer identification number (ITIN). To obtain a SSN, use form SS-5, Application for a Social Security Card. To get form SS-5, or to find out if you are eligible for a social security card, contact a Social Security Office or visit Social Security International Operations. If you, or your spouse, are not eligible for a SSN, you can obtain an ITIN by filing form W-7 along with appropriate documentation.

You must express the amounts you report on your U.S. tax return in U.S. dollars. If you receive all or part of your income or pay some or all of your expenses in foreign currency, you must translate the foreign currency into U.S. dollars. Taxpayers generally use the yearly average exchange rate to report foreign-earned income that was received regularly throughout the year. However, if you had foreign transactions on specific days, you may also use the exchange rates for those days. Exchange rates can be found at Foreign Currency and Currency Exchange Rates. Yearly average currency exchange rates for most countries can be found at Yearly Average Currency Exchange Rates.

Failure for US citizens living outside the US to file US tax returns may result in penalties and in certain cases the US Government to seize your US passport upon entering the US at immigration.

If you have any other questions feel free to send us an email at info@universaltaxprofessionals.com. At Universal Tax Professionals we offer personalized service for reasonable rates – email us today for a quote.

When do you need to file Form 5471

If a US Citizen own 10% or more of a foreign corporation (a corporation organized outside of the USA) you are obligated to filed Form 5471 each year with your personal tax return (or your business corporation or LLC tax return if that is the owner of the foreign corporation). ( see following paragraph ) On this form you must report the ownership of the corporation and other data. It also includes a balance sheet for the corporation and income and expense sheet for the current year for the corporation.

You are only required to file the form 5471 if your holdings are in excess of 50% however in any year if your equity interests increases or decreases by 10% you are required to file the form .

The return also must include data on transactions between you and the foreign corporation, original capital contributions, and other relevant data. That return is 4 pages and several other schedules are required which can make it a 6 or seven page return. The amount of schedules required are based on your ownership interest in the foreign corporation.

Subpart F Income

If you combined with other US taxpayers own more than 50% of actual or equitable interest in your foreign corporation, it is then defined as a Controlled Foreign Corporation (CFC), If it is a CFC, certain types of income (Subpart F income) may be taxed and flow through to the US shareholders and cause them to pay tax on that income on their US personal or business tax returns. The rules are complex with respect to determining the types income of a CFC are subpart F income.

Certain types of income such as dividends, interest, rental income, insurance income, offshore shipping income and personal service income is treated as Subpart F income. Subpart F income whether distributed or not is taxable to the US shareholders personal return (or corporate return if a US corporation is the owner) in the year it occurs as ordinary income. However, the income in a Controlled corporation from other types of operating businesses such retail stores, factories, etc. that do not have operations in the US and do not purchase goods from a US affiliate of the business is not taxed to the Controlled Corporation shareholders until it is actual distributed to them.

Dividends paid to shareholders of Foreign Corporations sometimes are eligible for the reduced qualified dividend rate (same rate as capital gains) when paid from the foreign corporation that is located in a country with which the US has a tax treaty and not subpart F income from a Controlled Foreign Corporation.

Certain types of foreign corporations (the type varies by Country) have been identified by the IRS as eligible to elect, for US tax purposes only, to be treated as flow through entities. This means that if the election is made by filing the appropriate form with the IRS, all of the income and expenses of that foreign entity will flow through and be taxed on the income tax returns of the US shareholder in the same manner as US partnership and LLC income flows through and is taxed on the tax returns of the owners. This often is an advantage if most of the net income is distributed to the shareholders since it allows them to claim the foreign taxes paid by the foreign corporation as a foreign tax credit against their US income tax on that flow through income and partially or totally offset that us income tax.

If you own part of a foreign partnership, foreign LLC or Foreign Trust, you are also obligated to file special forms with your US tax return or you may incur substantial penalties of $10,000 or more for filing those forms late or not at all. The IRS is currently on a serious crusade to force all US taxpayers to report their foreign income or ownership of foreign business or investment entities. It is not advisable to ignore these rules due to the possible severe penalties you will incur if your are caught not complying with the law or filing those forms late
Preparation of Form 5471 is often complex and confusing. Even many tax preparers do not know how to prepare the forms and may need assistance. Contact us at info@universaltaxprofessionals.com if you need assistance with preparing a form 5471.

What is a Tax Treaty?

US EXPATTAX TRETAIES

Overview

The United States has an income tax treaty with a number of foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from U.S. income taxes on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and specific items of income.

The following are countries that have tax treaties with the US: Armenia, Australia, Austria, Azerbaijan, Bangladesh, Barbados, Belarus, Belgium, Bulgaria, Canada, China, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Georgia, Germany, Greece, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Jamaica, Japan, Kazakhstan, Korea, Kyrgyzstan, Latvia, Lithuania, Luxembourg, Malta, Mexico, Moldova, Morocco, Netherlands, New Zealand, Norway, Pakistan, Philippines, Poland, Portugal, Romania, Russia, Slovak Republic, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Tajikistan, Thailand, Trinidad, Tunisia, Turkey, Turkmenistan, Ukraine,  , Uzbekistan, and Venezuela.

If the treaty does not cover a particular kind of income, or if there is no treaty between your country and the United States, you must pay tax on the income in the same way and at the same rates shown in the instructions for Form 1040NR, U.S. Nonresident Alien Income Tax Return.

Tax treaties reduce the U.S. taxes of residents of foreign countries. With certain exceptions, they do not reduce the U.S. taxes of U.S. citizens or residents. U.S. citizens and residents are subject to U.S. income tax on their worldwide income.

Treaty provisions generally are reciprocal (apply to both treaty countries). Therefore, a U.S. citizen or resident who receives income from a treaty country and who is subject to taxes imposed by foreign countries may be entitled to certain credits, deductions, exemptions, and reductions in the rate of taxes of those foreign countries. Treaty benefits generally are available to residents of the United States. They generally are not available to U.S. citizens who do not reside in the United States. However, certain treaty benefits and safeguards, such as the nondiscrimination provisions, are available to U.S. citizens residing in the treaty countries. U.S. citizens residing in a foreign country may also be entitled to benefits under that country’s tax treaties with third countries.

Foreign taxing authorities sometimes require certification from the U.S. Government that an applicant filed an income tax return as a U.S. citizen or resident, as part of the proof of entitlement to the treaty benefits..

Note: You should carefully examine the specific treaty articles that may apply to find if you are entitled to a:

  • tax credit,
  • tax exemption,
  • reduced rate of tax, or
  • other treaty benefit or safeguard.

The Effect of Tax Treaties

The rules given to determine if you are a U.S. tax resident do not override tax treaty definitions of residency.

If you are treated as a resident of a foreign country under a tax treaty, you are treated as a nonresident alien in figuring your U.S. income tax. For purposes other than figuring your tax, you will be treated as a U.S. resident. For example, the rules discussed here do not affect your residency time periods to determine if you are a resident alien or nonresident alien during a tax year.

If you are a resident of both the United States and another country under each country’s tax laws, you are a dual resident taxpayer. If you are a dual resident taxpayer, you can still claim the benefits under an income tax treaty. The income tax treaty between the two countries must contain a provision that provides for resolution of conflicting claims of residence.

The USA has a tax treaty with many countries and the specific tax treaty for each country should be read from the related tax treaty between the USA and the specific Country .

.

What is a Social Security Totalization Agreement?

Totalization agreements are the bilateral Social Security agreements between the United States and other countries that eliminate dual Social Security taxation of earnings and provide additional benefit protection for employees who divide their careers between the Unites States and other certain other countries. The 25 such countries are Austria, Australia, Belgium, Czech Republic, Canada, Chile, Denmark, France, Finland, Greece, Germany, Italy, Ireland, Luxembourg, Japan, Norway, Netherlands, Portugal, Poland, Slovak Republic, South Korea, Spain, Sweden, Switzerland and the United Kingdom.

U.S citizens working abroad

When employers transfer employees abroad to work for an American company, they are subject to pay into the American Social Security system in addition to paying a social security tax in the country where they work that results in dual Social Tax liabilities. Totalization agreements provide an exemption to this whereby the worker will be subject only to the social security tax laws of the country where he or she is working. Employers are required to request a Certificate of Coverage issued by SSA on their behalf, which should be retained in the company’s files to produce as proof of entitlement in the event the IRS question why they have not paid any taxes for that worker. The company can then immediately stop withholding and paying U.S Social Security taxes establishing the fact that another country’s system covers the employee. In other words, a U.S citizen working in any one of the 25 countries (excluding Italy) that have entered into agreements is exempt from coverage and continues to be covered by the U.S Social Security.

Aliens working in the U.S

In the case of foreigners working in the U.S if they wish to claim an exemption from U.S taxes under the totalization agreement they must obtain a Certificate of Coverage as evidence of exemption from their home country’s social security agency. They should then present the Certificate to the employer in the United States who must retain a copy of it. This Coverage Certificate is effective retroactively to the starting date of employment.

Self-employed US citizens working abroad

According to the Revenue Procedure 84-85, freelance or independent U.S. citizens or residents living abroad must request their certificate and prove exemption from U.S self-employment Social Security taxes for the period shown on the certificate by attaching a copy of the foreign certificate to the U.S tax return each year.

U.S citizens who have worked abroad and in the U.S

U.S workers who have divided their careers between a foreign country and the United States sometimes may not have worked long or recently enough to qualify for retirement, pensions or disability insurance benefits from one or both countries. Under the totalization agreement, such people may be eligible for partial U.S or foreign social security benefits if they have “insured status requirements”, i.e., at least, six quarters of U.S coverage and a minimum coverage under the overseas system. Thus, the combined or “totalized” coverage credits from both countries would enable the workers to meet the eligibility requirements. The partial benefit would depend on the proportion of the person’s entire career completed in the paying country.

Totalization agreements are beneficial both for those whose working careers are over and for those who are currently working. For current workers, it avoids the dual taxation. For those whose working careers are over and have divided their professional life between the United States and a foreign country it results in partial payment of benefits, which they otherwise would not have been entitled. Companies with personnel abroad can reduce their cost of doing business overseas by taking advantage of this agreement.

Countries with the Highest Tax Rates

Countries-with-the-Highest-Tax-Rates

Claiming Social Security Benefits Early

 

It is worth exploring what your options are when deciding to claim your social security benefits early to take full advantage of your retirement money. Deciding the retirement age at which you would get the maximum amount can be tricky. Depending on the circumstances, for some people claiming their social security benefits before full retirement age may turn out to be financially rewarding. But if you know that you could live well into your 80s and 90s delaying until at least full retirement age would be more prudent. Your full retirement age is 66 if your birth year is from 1943-1959 and 67 if your birth year is 1960 and later.

If your retirement age is 66 and claiming your benefits early, they would be up to 25% less depending on the number of months remaining until your full retirement age and 30% less for those for were born in 1960 or later. See table below.

Full retirement age (FRA) – 66 Full retirement age (FRA) – 67
Claiming benefits at age 62 25% less Claiming benefits early Up to 30% less
Claiming benefits at age 63 20% less
Claiming benefits at age 64 13.3% less
Claiming benefits at age 65 6.7% less

There is no increase or decrease in your benefits if you decide to start claiming at your full retirement age. If you apply for it more than six months upon reaching full retirement age, you will only be paid for the previous six months.

If you wait until 70 to claim your benefits, they will be increased by 8% per year and your benefits will be 76% larger for the rest of your life. Moreover, in the case of death early in retirement, that would imply a comfortable nest egg to the next generation. However, if you wait until 70 you are going to miss out on 96 payments. That is approximately four years worth of age-70 payments. Social Security Administration (SSA) reckons that early or late retirement will fetch you about the same Social Security benefits over your lifetime.

It can be a daunting task to determine your best retirement age, as there are various factors to consider. The SSA website offers online calculators to estimate your benefits at each age.

Should you run away with your money at age 62 or stretch it out until your full retirement age? Or are you a baby boomer who believes in delayed gratification? Here are some factors to help you in your decision-making process.

  • Consider your employment status. If you have a high-salaried job and are still able-bodied, then avoid claiming early retirement benefits as you may miss out on your opportunity to significantly boost your Social Security amount. But if you are physically unable to work and don’t qualify for disability then your best bet is early retirement. Additionally, you may be a good candidate for early retirement if you are inclined to believe that you have a shorter lifespan on medical grounds.
  • If you are married, then the greater contributing spouse should wait longer to claim benefits and the other spouse should start collecting benefits at the age of 62. That way if the higher-earning partner dies first, the survivor can take advantage of the deceased spouse’s full benefit. And until that time the couple enjoys both benefits of the lesser-earning spouse and the salary of the higher-earning spouse.
  • Claiming benefits before retirement age make sense if you are out of work and have no other means to pay for your dependent children or aging parents.
  • If you claim early retirement benefits your family’s survivors’ benefits would be reduced but your spousal or dependent benefits would remain the same.
  • Consider other sources of your retirement income including 401(k), workplace retirement, IRS and pension and weigh them against your individual situation.
  • Legitimate arguments also exist for investing it in a portfolio that can earn more than 7% returns.

With so many options and with as many as 8,000 strategies to choose from especially for a married couple it cannot be emphasized enough the importance of consulting with a tax professional.

 

Countries with the Lowest Tax Rates [Infographic]

Lowest tax countries infographic