| | Tax Return Filing Deadlines and Payment Dates |
| | Published - October 15, 2007 |
| | 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 file their tax return and the date on which they need to pay their taxes.
Treasury Regulation 1.6081-5 states that in the case of United States citizens and residents whose tax homes and abodes are outside the United States, an extension of time for filing the tax return and for paying any tax shown on the return is hereby granted to June 15.
What is misunderstood is that the automatic extension of time to pay the tax waives the penalty that would have been imposed from April 15 to June 15 for failure to pay the tax on time, but does not waive the interest for late payment of tax.
The same misunderstanding applies to the timing of the payment of estimated tax payments
For example, your income tax liability for 2006 was required to be paid in equal increments on what the Internal Revenue Service deems to be a quarterly basis, namely the 15th day of April, June, September and January 2007. If you estimated your 2006 tax liability to be $10,000, you should have paid in $2,500 per quarter. So if you did not make all of your 2006 estimated tax payments, you can pay the remaining amount due with the tax return on June 15, 2007, but the IRS will still charge you interest for the late payment of tax.
Many expatriates believe that since their 2006 tax return is due on June 15, 2007, that they can make their 2007 first and second quarter estimated tax payment, or $5,000 on June 15th and that everything is okay. If you do this, the Internal Revenue Service will assess you an underpayment penalty for April 15 to June 15.
Pending Tax Legislation
With the change in control the makeup of the Congress from Republican to the Democrats in January 2007, many individuals have made a false assumption that no new tax bills will be passed until after the next Presidential election. The reality is that there are many tax bills in the works. Some of the ones that will affect expatriates are as follows:
Kiddie Tax
The 2006 retroactive change in the law that raised the age to 18 at which children’s income is still subject to tax at the parent’s tax rate is apparently not the end of Congress attempting to increase the tax on children’s income. One tentative bill will increase the tax rate on capital gains for dependents over 18 from 5% to 15%. Under current tax law, once a child reaches the age of 18 any income that a child has is taxed at the child’s tax rate. A popular scheme was for mom and dad to gift appreciated stock to a child who was usually not working and in college. The student would sell the stock and pay a 5% capital gains tax. Mom and dad would have had to pay a 15% capital gains tax had they sold the stock, so the tax savings was a solid 10% of the realized gain. The purpose of the legislation is to do away with this perfectly acceptable tax planning.
Alternative Minimum Tax
Will it be repealed? Highly unlikely. Why? It is raising billions of dollars in tax revenue and Congress has nothing palatable to replace this lost revenue. Will they do anything? They will most likely tweak the law. The 26% and 28% alternative minimum tax rates have been around for over 20 years. And the exemption amounts have barely changed. Consideration is being given to raising the exemption to eliminate middle class taxpayers from being subject to the alternative minimum tax and to raise the tax rates to have individuals who are subject to the alternative minimum tax to make up for the lost revenue. The bottom line attitude is that the rich can afford to pay more and the middle class cannot.
Foreign Housing Exclusion
The Treasury Department is still fine tuning the maximum housing costs that are allowed in different cities and countries. What is alarming is a Treasury notice that indicates that some of the last minute 2006 housing cost amounts that were obviously done in haste may be reduced for 2007. Expatriates had a difficult enough time in 2006 in attempting to make estimated tax payments. So to the extent that expatriates uses 2006 housing costs to estimate their 2007 estimated taxes, this calculation could be underestimated if the Treasury reduces the maximum housing costs.
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