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 roll over amounts from a company pension plan directly to a Roth IRA if your adjusted gross income is less than $100,000. The rollover will be a taxable event, but the company will not be required to withhold a 20% tax.
Why subject your pension to tax now? This could make sense for individuals who have been downsized, who are between jobs, or who are relatively new to the workforce and who are in a low income bracket in 2008.
529 Education Plans
When these plans first came into being it became quickly apparent to the sophisticated tax advisor that these plans could be used to circumvent the amount that could be contributed to qualified retirement plans. Any person could be the beneficiary of a 529 education plan and if the funds were not used for education, they could be taken out at a later date and taxed as ordinary income, and would also be subject to a 10% penalty.
But if one did the math and took $100,000 that was in a brokerage account with the annual income subject to the maximum rate of tax, and compared the after tax return to putting the funds in an account where they would grow tax free, that even with the 10% penalty, the funds coming from the 529 plan many years later gave you a 25% to 33% better return on your investment.
Suppose you had 8 children and grandchildren. You could make multiple gifts of up to $120,000 a year to a 529 plan for each and you now how $960,000 in 8 different plans. But the law allows one to change the beneficiary at any time and you could change the beneficiary of each account to your own name. You now had $960,000 earning income tax free and these funds were not subject to any minimum distribution rules, like qualified retirement plans. And if you didn’t need these funds during your lifetime, you could always change the beneficiary to perhaps a great grandchild.
The IRS announced some dozen years too late, that such planning, while legal, is abusive and that regulations will be issued in 2008 to stop this abuse.
Do You Owe the IRS Back Taxes?
The IRS has a right to put a levy on your pension plan. But the IRS cannot force you to start taking distributions to satisfy your tax debt. However, when you do start taking distributions the IRS can seize the funds to satisfy the debt.
Rebate Checks
To obtain a rebate retirees who normally would be below the threshold for filing a tax return were required to file to obtain the rebate. Individual who did this online had to enter (even though they did not have it) one dollar of earned income. This online filing uncovered a glitch in the IRS computers. Not only did these individuals obtain their rebate, but they also received a check from the IRS for $2. The IRS computers mistakenly calculated a $2 earned income credit and the computers sent out the check. The IRS announced that they will not attempt to get their money back.
Alternative Minimum Tax
In late December Congress finally passed a bill to keep millions of additional taxpayers from being subject to the Alternative Minimum Tax in 2007 by increasing the exemptions to $66,250 for married filing joint returns and to $44,350 for single individuals. But this relief only applies to 2007. It is expected that Congress will not again address the 2008 problem until after the November 2008 election.
What Are Your Chances of Being Audited
One out of every 561 taxpayers will likely have a full blown face to face audit each year. One out of every 124 taxpayers is likely to have a correspondence audit each year.
Real Estate Tax Deduction
If you do not itemize your deductions and use the standard deduction for 2008 only a pending bill will allow you to also take a deduction for real estate taxes paid up to $1,000 for married filing jointly and $500 for single taxpayers.
Retired Insurance Agents
An insurance agent is entitled to a lifetime commission on an insurance policy as long as the annual premiums are paid. The IRS recently ruled that the retired agent has taxable income on the day that the renewal premiums are paid, and that payroll taxes are due on this income.
Estate Planning
The exemption in 2008 is $2,000,000 and goes to $3,500,000 in 2009. In 2010 the estate tax is eliminated. In 2011 the exemption goes back to $1,000,000 and the top tax rate jumps to 55%.
While 2010 seems to be the ideal time for one’s demise, the heirs will bear a higher tax when assets are sold. Assets inherited through 2008 have a step up in basis to fair market value on date of death. Assets inherited in 2010 have to use the original basis in determining gain or loss on sale.
It is doubtful that either party in power will allow the estate tax to expire in 2010. However, action likely will not be taken until late 2009.
Annual Gifts
You can continue to give up to $12,000 a year or $24,000 if the gift is made jointly with your spouse, to your children, grandchildren, parents or anyone else. And if you pay for tuition this amount is not counted against your $12,000 annual exclusion.
Awards for Nonphysical Injury
The IRS and the Courts have bounced this issue, is the award taxable or nontaxable, for years. An appeals Court recently ruled that awards for mental distress and damage to professional reputations are taxable.
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