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There have been a number of tax law changes that will affect the 2011 U.S. Federal Form 1040 as well as tax law changes that will affect 2012 projections of income, tax and estimated tax payments. The major changes affecting U.S. citizens and resident aliens residing outside the United States follow.   WHO MUST FILE A U.S. TAX RETURN?   Likely the most misunderstood tax law affecting expatriates is who is obligated to file an annual tax return. There is a misconception that if your income,... more

In last month’s column we discussed the introduction by the Internal Revenue Service of new Form 8938 which will be used to report Specific Foreign Financial Assets that have an aggregate value over $50,000 for calendar 2011 tax returns. This column will discuss exceptions to the law regarding the filing of Form 8938.   Specific Foreign Financial Asset Reporting   Individuals who are a U.S. citizen, a resident alien of the United States or a nonresident alien who has elected to be taxed as... more

The Internal Revenue Service has made a significant change to the method by which capital gains and losses will be reported of 2011 U.S. Federal individual income tax returns and has also introduced new Form 8938 which will be used to report Specific Foreign Financial Assets that have an aggregate value over $50,000..     Schedule D – Capital Gains and Losses   In 2011 you will now have to use two forms to report capital gains and losses, Form 8949 and Schedule D. New rules have gone into... more

In a recent New York Times article Warren Buffett wrote that the tax rate he paid last year (17%) was lower than that paid by any of his office employees.   Is It Possible for A Millionaire To Have A Lower Tax Rate Than Their Secretary?   Yes. Earned income is taxed at rates that vary from 10% to 35%. And the Alternative Minimum Tax is at 26% or 28%. A single person has a tax rate of 25% on earned income over $34,500. Surely Warren Buffet’s secretary earns more than $34,500. So how does a... more

Estate and Gift Tax   For 2011 and 2012 there is a $5,000,000 exemption for estate and gift tax and a maximum tax rate of 35%.  In 2013 the exemption for estate and gift tax is scheduled to decrease to $1,000,000 with a return to a maximum tax rate of 55%, the same as in effect in the year 2000. An overlooked portion of the law now allows a surviving spouse to claim any unused exemption of the deceased spouse and either make larger lifetime gifts or use it as an estate tax exemption. For... more

With the recent debt crises in the United States postponed for the next 18 months and no new taxes as a result of this legislation the question remains as to how the United States will pay off its debt without raising taxes.   Treasury Debt   The Treasury currently owes $10 trillion dollars. Each month the U.S. government spends about $330 million dollars while incoming revenues are about $190 million dollars. In the next 10 to 20 years some 300,000,000 Americans will be collecting... more

At the time you are reading this article you should have either filed your 2010 US Federal individual income tax return by the June 15, 2011extended filing date or requested an extension of time until October 17, 2011to do so. Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts must be filed or before June 30, 2011. Tax law does not provide for an extension of time to file this Report.   Report of Foreign Bank and Financial Accounts   The obligation to file Form TD F 90-22.1 Rep... more

As the traditional tax filing date of April 15 draws near (it is April 18th this year because it is a holiday in Washington, D.C. on April 15 and the Internal Revenue Service is closed) special tax breaks only applicable to expatriates should be carefully followed.   Extended Filing Date   Taxpayers living outside the United States have an automatic extension of time until June 15, 2011 in which to file their 2010 U.S. Federal individual income tax return. Individuals who are preparing their... more

Buoyed by the success of their 2010 Voluntary Disclosure Initiative the Internal Revenue Service announced on February 8, 2011 a Special Voluntary Disclosure Initiative designed to bring offshore funds back into the United States tax net and to assist individuals with undisclosed income from offshore accounts become current with their taxes. The new program is available until August 31, 2011.   Initial Voluntary Disclosure Program   As of October 15, 2009 over 15,000 individuals entered... more

The recent tax act has brought about a number of changes that affect US citizens and resident aliens living in abroad. The significant changes that are effective for 2011 and 2012 are as follows:   Income Tax Rates   Income tax rates will be slightly lower in 2011 versus 2010. For example, the 2010 tax rate for singles was 10% on the first $8,375 of taxable income. In 2011 the tax rate for singles will be 10% on the first $8,500 of taxable income. The 2010 tax rate for married filing... more

US Citizens and Resident Aliens United States citizens and resident aliens are taxed on their global income, whether they reside inside or outside of the United States. Qualifying U.S. citizens and resident aliens who live and work abroad may be able to exclude all or part of their foreign compensation and they may also qualify to exclude certain foreign housing costs. A common myth is that if you earn less that the excludable foreign earned income amount ($91,500 in 2010) that you do n... more

With the 2010 tax year coming to close, tax information which will need to be reported on a 2010 US Federal individual income tax return will begin to arrive in your mailbox in January 2011. As all US citizens and resident aliens residing abroad have an extended due date of June 15, 2011 in which to file their 2010 individual tax return and until June 30, 2011 in which to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, care should be taken that all information you receiv... more

As the tax year 2010 comes to a close tax planning for 2011 should begin, but how is it possible to plan given the legislative gridlock in Washington DC? The answer is that tax planning needs to focus on what is known and not the unknown.   What Is Known   Your 2009 US Federal individual income tax return should have been filed by now. Consequently, carry forward items such as capital losses, net operating losses, losses from private activities, charitable contributions, minimum... more

Taxes and scams seem to go together hand in hand. While the Internal Revenue Service has long been subject to individuals claiming that there is no law stating that they must pay tax, individuals  who owe the Internal Revenue Service large sums of money apparently are being scammed by the people who they turn to for help.   American Tax Relief   According to a recent NY Times article “over 20,000 people have turned to American Tax Relief of Beverly Hills, California, to do just... more

Over the past 6 years there has been significant publicity regarding changes to the U.S. tax law that would negatively affect Reinsurance companies doing business in Bermuda. This column will explore why this is an issue and what is currently happening in Congress.   The Issue   Insurance companies based in the United States are currently able to claim a deduction on their corporate tax return for the amount of reinsurance premiums paid to a Bermuda affiliate. In turn, the Bermuda... more

We continue to receive queries from clients as to whether tax rates will be raised by Congress in 2011. The question revolves around the issue as to whether income should be accelerated into 2010 to take advantage of the current low tax rates versus an unknown tax rate in 2011. Traditionally tax planning has taken the form of deferring income and accelerating deductions. In 2010 taxpayers might consider doing both.   Congress Does Not Have to Pass Legislation In Order for Taxes to... more

With elections coming in November, 2010 it is doubtful that a major tax bill will be passed in the next 4 months, but what we are seeing is “revenue raisers” being attached to spending bills as an offset. One such measure is a Social Security increase on small personal service firms.   Subchapter “S” Corporations The income tax law has long allowed small business owners to form a corporation to limit legal liability but for tax purposes to make an “S” election to treat the... more

The Hiring Incentives to Restore Employment (HIRE) Act was signed into law on March 18, 2010. The centerpiece of the Act is the creation of tax breaks for businesses hiring new workers and extending higher expensing limits for small businesses that make capital investments. To pay for these $18 billion tax breaks, however, the Act incorporates provisions of the Foreign Account Tax Compliance Act of 2009, which has far-reaching implications for Bermuda trusts with U.S. beneficiaries and... more

With the reincarnation and passage of the President’s Health Care Bill, the tax increases to pay for the health care legislation have now been enacted. While the health care legislation will be phased in over the next 10 years, taxes to support he legislation will be phased in over the next 8 years. Following is a time line for implementation of some of the major health care changes as well as the new taxes to pay for these changes.   2010   Tanning salons will be subject to an excis... more

With the recent demise of the President’s Health Care Bill, the proposed income taxes that were to pay for the increase in health care costs have not been enacted. However, as both parties agree that health care legislation is needed, when health care legislation is passed at a future date, it is likely that the proposed income taxes that we will discuss will be enacted, as other measures have already been discussed and discarded.   2010 TAX LAW CHANGES   The foreign earned... more

At times young children have trouble sleeping as they are afraid of the monster under their bed or in the closet. This, of course, is imaginary. At other times US citizens in Bermuda may have trouble sleeping because they have not properly filed their US income tax returns. These nightmares are about to become a reality.   Internal Revenue Service Targets Bermuda   We recently learned that a senior international agent of the Internal Revenue Service spent time in Bermuda earlier... more

Over the next 3 months the current trickle of new tax laws should turn into a torrent. While the current health care bill is receiving every ones attention, a tax bill has been proceeding through Congress. Among tax changes in place for 2009 and 2010 are the following:   Health Care Excise Tax   In the September 16th version of a bill "Americas Health Future Act of 2009" there is wording which would cause great hardship on American citizens living outside the US. ... more

  As a follow up to last months column on distributions from a Bermuda trust to a U.S. beneficiary, this month we will review the ramifications of a U.S. citizen creating a Bermuda trust. As this subject involves both tax and legal issues, I have again asked Dina Kapur Sanna, a partner in the New York office of the US law firm of Day Pitney LLP to host the column for this month and her response follows. US Tax Implications of US Citizens Creating Bermuda Trusts US citizens residing in... more

  United States citizens and resident aliens who maintain offshore financial accounts with assets of $10,000 or more at any time during a calendar year, in addition to reporting and paying income tax on the investment income from these accounts, are required to report the existence of these accounts to the Department of the Treasury by filing Form 90-22.1 on or before June 30, 2009.   As has been widely reported, approximately 52,000 Americans had accounts with UBS AG in... more

  Are Bermuda National employees who travel to the United States on business subject to U.S. Federal and State individual income tax? It is very likely that they are.   Is a Bermuda employer who sends a Bermuda national to work in the United States responsible for withholding and paying U.S. Federal and State income tax, Social Security and Medicare tax and Federal Unemployment tax? Definitely.   U.S. Taxation of Bermuda Nationals   Under the Internal Revenue Code... more

We have yet to meet an individual who enjoys paying income taxes to the US Federal and State tax authorities under the United States voluntary system of taxation. However, many individuals take their unhappiness to an extreme to avoid paying income taxes. With the 2008 tax return filing deadline looming we have noted below a sampling of arguments used in a vain attempt to avoid paying US Federal individual income tax. Why Pay Taxes? — The Truth About Frivolous Tax... more

If you are a single taxpayer with income of $200,000 or more or married filing jointly with income of $250,000 or more, President Obama has painted a big target on your wallet. Taxpayers with this demographic will be expected to bear the brunt of tax increases which are now scheduled to take place in 2011.   2011 Projected Tax Increases   Tax increases will come in the form of a three pronged attack on your wallet. The 33% tax bracket will be increased to 36% and the 35% tax... more

  With a new administration in place Congress is working on a big package of tax cuts to stimulate the economy. The tax cuts are primarily aimed at low and middle income taxpayers.   6.2% Payroll Tax Credit   To insure an increase immediately, single individuals who earn $75,000 or less and who earn at least $8,064 will receive a $500 tax credit, and married individuals who earn $150,000 and who earn at least $16,128 will receive a $1,000 tax credit.   High Income Taxp... more

The tax benefit for United States citizens living and working in Bermuda continues to diminish and this is before legislation proposed by the incoming administration has even been introduced.    Background   The tax benefit of living and working in Bermuda started to decline in 2006 when legislation was passed that changed how the tax benefit of the foreign earned income exclusion and the foreign housing exclusion was calculated. Prior to 2006 the foreign earned income... more

Calendar year 2009 will likely see massive tax law changes that could negatively impact United States citizens living and working outside the United States. For calendar 2008, expatriates will experience a small tax decrease because of an increase in the foreign earned income exclusion and the foreign housing exclusion.    Foreign Earned Income Exclusion   The foreign earned income exclusion , which was $85,700 in 2007, will increase to a maximum amount of $87,600 for... more

As the Internal Revenue Service updates its computer systems, taxpayers need to more closely follow the tax rules to avoid having to navigate a still antiquated Internal Revenue Service system.   Your Name and Your Social Security Number   Are you newly married and are now using your husband’s last name? If so, it is important to notify the Social Security Administration so that they can issue a new Social Security card to you.   The Internal Revenue Service computers... more

With the presidential election about a month away, this month’s column will compare the tax positions that have been publicly taken by the Presidential candidates, Senator McCain and Senator Obama.   President Bush Tax Cuts   Senator McCain is in favor of retaining the tax cuts for all taxpayers.   Senator Obama is also in favor of retaining the tax cuts, but only for individual taxpayers with income under $200,000 and married couples with income under... more

The Internal Revenue Service recently announced a program that will measure payment, filing and reporting compliance by United States citizens who live outside the United States. Currently there is no specific data to indicate the gap between taxes that should be paid and taxes that are being paid by expatriates.   How Does the Internal Revenue Service Obtain Information About Foreign Source Income of U.S. Citizens?   While the Internal Revenue Service does not generally receive F... more

2008 continues to bring about a number of new tax laws as well as changes in existing laws. Some of these laws are either creative or bizarre, as a credit is no longer a credit, and is in fact a loan from the US Treasury. The Housing Assistance Tax Act of 2008 included the following changes.   First Time Home Buyer Temporary Tax Credit   The word temporary is not a misprint. The Housing Act gives first time home buyer a temporary refundable tax credit of up to 10% of the purchase... more

    On June 17, 2008 President Bush signed into law the Heroes Earnings Assistance and Relief Tax (HEART) Act of 2008. The primary purpose of this bill is to provide $1.2 billion dollars of tax relief to veterans and military families. The bill, H.R. 6081 was introduced on May 16, 2008 by Rep. Charles Rangel, Democrat, New York, and passed, with a near unanimous vote, by the House of Representatives on May 20, 2008 and by the Senate on May 22, 2008.   While few will... more

2008 has brought about a number of new tax laws as well as changes in existing laws. Some of the major changes that impact expatriates are as follows.   Rollovers to a Roth IRA   If you are participating in a company pension plan or have made deductible contributions to an IRA, when you receive distributions from the plan you will have taxable income. If you set up a Roth IRA, when you receive distributions from the Roth IRA you will have tax free income. In 2008 and 2009 you can... more

During the last week in April I made two speeches in Bermuda as well as appearing on Channel 88 to discuss US tax issues affecting US citizens residing in Bermuda. Based on the questions from the audiences it is clear that a significant number of United States citizens living in Bermuda whose compensation was less than $85,700 in 2007 or prior years continue to believe that they do not have a requirement to file a US tax return.   Myths and Misunderstanding   One of the all time ... more

This column usually covers the changes in United States tax law that invariably increase the amount of income tax an expatriate will pay or will discuss methods to minimize income tax. Today we are taking a different tack and will discuss how to turn a life insurance policy that has minimal cash value into a “cash cow”.   As one starts off in life with a young family and not much in the way of income, a... more

    Though we are already at the end of January 2008, Congress is still talking about tax legislation that will be retroactive to January 1, 2007.   Tax Rebates   At the time I was writing this column, Congress still had not passed the tax rebate legislation. The House version of the bill would give a check of $1,200 for married taxpayers and $600 to single taxpayers. Individuals with children under 17 would get an additional $300 per child. However, the rebates will... more

Draft legislation in the United Kingdom will significantly change the method by which individuals resident but not domiciled in the United Kingdom will be taxed on income realized from outside the United Kingdom. Under current law individuals not domiciled in the United Kingdom are taxed more leniently than individuals domiciled in the United Kingdom.   Domicile   As defined under United Kingdom law, domicile usually is based on a person’s nationality as well as the country... more

Though we are already at the end of January 2008, Congress is still talking about tax legislation that will be retroactive to January 1, 2007.   Tax Rebates   At the time I was writing this column, Congress still had not passed the tax rebate legislation. The House version of the bill would give a check of $1,200 for married taxpayers and $600 to single taxpayers. Individuals with children under 17 would get an additional $300 per child. However, the rebates will start to phase... more

2008 will bring about a number of new tax laws as well as changes in existing laws that are indexed for inflation. Some of the major changes that impact expatriates are as follows.   2008 Foreign Earned Income Exclusion   The foreign earned income exclusion will increase from $85,700 in 2007 to $87,600 in 2008.   2008 Foreign Housing Exclusion   The base amount of the foreign housing exclusion will increase from $13,712 in 2007 to $14,016 in 2008. Thus, if the... more

The inaction and gridlock in the U.S. Congress will again cause problems for the Internal Revenue Service with respect to the 2007 U.S. Federal tax filing season. There are a number of tax relief bills that have not been passed, but that are likely to be passed by year end, that will affect 2007 Federal individual income tax returns. The problem is that the Internal Revenue Service needs 10 weeks to reprogram its computers for new tax law changes.  Also, at this late date, all 2007 tax... more

The Internal Revenue Service, the Courts and the U.S. Congress have instated significant safeguards against aggressive tax planning that in some cases borders on, or is, criminal conduct. But have the above institutions done away with tax planning in its entirety? The answer is no, there are a number of creative actions that an individual can take to reduce their current income tax liability.   Creative Use of Your IRA Account   Most U.S. citizens use the funds in their IRA to... more

The Internal Revenue Service has released Notice 2007-77 that provides guidance on the adjustments to the foreign housing expense limitation for certain foreign locations on the basis of differences in housing costs in relation to the United States. The limitation for an individual residing in Bermuda for 2007 is $72,000, the same as it was in 2006.   Foreign Housing Exclusion   There continues to be confusion as to what the $72,000 represents. Many U.S. citizens residing abroad... more

The news has been dominated the past few months by the topic of Sub-Prime mortgages and the resultant failure of mortgage companies due to defaults in payment. One topic that has floated under the radar is the tax affect on the individual defaulting on the mortgage payment. Sub-Prime Mortgages and Taxable Income Mortgage companies have been making loans to individuals who are a poor credit risk, have no down payment, and who take out adjustable interest rate mortgages. As the interest... more

While the summer is not normally a time when one thinks about 2008 tax planning while lying on the beach with a rum swizzle in hand, the United States Congress and the United States Treasury continue to enact new laws and regulations to increase your income tax. Kiddie Tax While it is difficult for one to think of a 24 year old child as a “kiddie”, Congress and the Treasury have no problem in doing so. For years, wealthy parents have moved their investment income to their children who... more

While the main focus of CPA’s and taxpayers has been on the filing of 2006 U.S. Federal individual income tax returns, Congress has been focused on numerous changes to the Internal Revenue Code and the Treasury Department and the Courts have been busy with new interpretations of current tax law. Education Credits It would appear as though Congress will eliminate the HOPE credit, the Lifetime Learning credit and the college tuition deduction and replace all three with a credit of $3,000 a... more

The 2006 tax filing season has seen more retroactive changes by the Internal Revenue Service and Congress than we can recall in the past 30 years. Normally our tax software provider will furnish us with an updated CD about 3 times during the period January through April 15. This year, we were getting 2 to 3 updated CD’s every week. Filing and Payment Deadlines One of the most misunderstood aspects for United States citizens living outside the United States is the date on which they need to... more

The 2006 individual income tax return filing season continues to be plagued with doubt and uncertainty. As noted in last months column, the Internal Revenue Service has not changed the 2006 tax forms to reflect the last minute December 2006 tax legislation, and obtaining an intelligent answer to a question from the Internal Revenue Service 800 telephone number or their website has proved to be difficult, if not impossible Filing Deadline For Your 2006 Tax Return The normal deadline for... more

The Tax Increase Prevention and Reconciliation Act of June 2006 limited the amount of foreign housing exclusion that can be elected by US citizens and resident aliens living outside the United States. The Tax Relief and Health Care Act of 2006 that was enacted on December 20, 2006 brought back tax cuts and credits such as the sales tax deduction retroactive to January 1, 2006. Given that the Internal Revenue Service started to print 2006 tax forms in the fall of 2006, this last minute tax... more

The Internal Revenue Service has released Notice 2007-77 that provides guidance on the adjustments to the foreign housing expense limitation for certain foreign locations on the basis of differences in housing costs in relation to the United States. The limitation for an individual residing in Bermuda for 2007 is $72,000, the same as it was in 2006. Foreign Housing Exclusion There continues to be confusion as to what the $72,000 represents. Many U.S. citizens residing abroad believe... more

The Tax Increase Prevention and Reconciliation Act of 2005 limited the amount of foreign housing exclusion that can be elected by US citizens and resident aliens living outside the United States.   Under the new tax law, foreign housing costs could be excluded to the extent that they exceed 16% of the foreign earned income exclusion or $13,184 (16% x $82,400). However, the maximum housing expenses that can be taken into account are limited to 30% of the foreign earned income exclusion or... more

The recently signed Pension Protection Act of 2006 is composed of almost 1,000 pages of text concerning new pension plan rules and retirement tax breaks. A few more prominent features of the new law follow.   Employer 401(k) Plans   Your company pension plan could be the source of additional compensation to you, but it is up to you to ascertain how to attain this additional compensation. We are referring to the new pension law that does not automatically enroll employees in a... more

The so called Tax Reduction Act of 2006 effectively increased the U.S. Federal individual income tax for U.S. citizens residing in Bermuda. Many individual employees are wondering whether they would be better off if their employer’s had a tax equalization policy. This column explores that question.   What Is Tax Equalization?   Tax equalization is a corporate policy utilized in the relocation of employees outside their home country. The underlying concept of the policy is... more

The so called Tax Reduction Act of 2006 effectively was a Tax Increase Act for U.S. citizens residing in Bermuda. This tax legislation significantly increased the U.S. Federal individual income tax for U.S. citizens residing in Bermuda. A question that many individual are asking themselves is whether the reduced U.S. tax savings makes it worthwhile to continue to work in Bermuda. This column explores that question.   How Much Tax Would I Pay If I Stayed In the United States?   Our... more

The Tax Increase Prevention and Reconciliation Act of 2005 is a misnomer for U.S. citizens residing in Bermuda. This tax legislation that was recently passed by Congress will significantly increase U.S. Federal individual income tax for U.S. citizens residing in Bermuda. The legislation pertaining to expatriates is retroactive to January 1, 2006.   Old Law   Once an individual met certain qualifications, an election could then be made to exclude $80,000 of foreign earned income... more

The Internal Revenue Service recently issued an alert for schemes in which federal employment taxes are not properly withheld or paid. Some of the more common schemes are as follows.   Offshore Employee Leasing   This scheme adds a fraudulent twist to the legal business practice of employee leasing. For example, you may have a doctor who works in the U.S. as self employed, has an LLC, and earns $500,000. A combination of Federal income tax, State income tax, and the self-employed... more

The Tax Relief Bill of 2005 that was expected to be passed in 2005 has been deferred until 2006. The Senate version of the bill that was approved in November 2005 significantly changes the method in which United States citizens who relinquish their United States citizenship and foreign nationals who have resided in the United States for at least 8 years will be subject to tax,   Current Tax Law   Under current tax law, if a United States citizen relinquishes their citizenship,... more

The Tax Increase Prevention and Reconciliation Act of June 2005 limited the amount of foreign housing exclusion that can be elected by US citizens and resident aliens living outside the United States. A revision to the Bermuda housing cost tables a few months ago by the Treasury did little to bring the Bermuda housing cost table in line with the actual costs of rental housing in Bermuda. As an early Christmas present, the Treasury Department indicated that they may revise the table again in... more

This is the fourth of a series of articles that will summarize the Economic Growth and Tax Relief Reconciliation Act of 2001 that was approved by Congress over the Memorial Day weekend and signed by President Bush on June 8. This legislation, which will be phased in over a 10-year time frame, provides significant and varied tax reductions to individuals. One of the more complex tax changes deals with estate tax. Over the next 8 years, the estate tax will be gradually phased out, until it is... more

There are a number of tax law changes that were passed 4 years ago, that had an effective date of January 1, 2001 that will of interest to United States citizens and resident aliens residing abroad. Qualified 5 Year Gain Beginning in 2001, the 10% capital gain rate is lowered to 8% for “qualified 5 year gain.” A “qualified 5 year gain” is defined as a long-term capital gain from the sale of property that was held for more than 5 years. Beginning in 2006, the 20%... more

Both the terrorist attack on the World Trade Center and the Economic Growth and Tax Relief Reconciliation Act of 2001 have spawned current changes to the tax law as well as proposed legislation. 2001 Estimated Tax Payments On Friday, the Internal Revenue Service delayed the deadline for the payment of the 2001 3rd quarter estimated tax payment by individuals and certain corporations from September 17 to September 24. Further, taxpayers directly affected by the attacks, particularly those... more