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, earned and unearned, is below the foreign earned income exclusion of $92,900 that you are not required to file. That is a misconception that does not seem to go away.
The tax law requires that a single individual with gross income greater than $9,500 and individuals who are married and filing a joint tax return with gross income greater than $19,000 must file a 2011 U.S. Federal Form 1040. Within the tax return that is filed the individual(s) can then elect, if they meet the eligibility requirement, to claim the foreign earned income exclusion of $92,900 by completing Form 2555 and including it in the filed return.
FOREIGN EARNED INCOME EXCLUSION
The foreign earned income exclusion for 2011 is $92,900. If you are married and both spouses work each is entitled to separate $92,900 exclusion. The exclusions cannot be combined. If one spouse earns $120,000 and the other $50,000, the maximum exclusion for 2011 is $92,900 and $50,000.
The foreign earned income exclusion for 2012 has been increased to $95,100.
FOREIGN HOUSING EXCLUSION
The maximum foreign housing expense that can be deducted for individuals residing in Bermuda (note-amounts differ by country of residence) is $90,000 for 2011. The actual foreign housing costs excludable are reduced by a base amount:
$90,000
- 14,864
$75,136
The maximum foreign housing expense that can be deducted for individuals residing in Bermuda is $90,000 (estimate) for 2012. The actual foreign housing costs are reduced by a higher base amount:
$90,000 (estimate)
- 15,216
$74,784
STANDARD DEDUCTION
In the 2011 tax return a single individual can claim a standard deduction of $5,800 and individuals who are married and filing a joint tax return can claim a standard deduction of $11,600.
In 2012 a single individual can claim a standard deduction of $5,950 and individuals who are married and filing a joint tax return can claim a standard deduction of $11,900.
PERSONAL EXEMPTION
In 2011 the personal exemption that can be claimed is $3,700 and this will increase in 2012 to $3,800.
ESTATE TAX
In 2011a taxpayer can exclude $5,000,000 of assets from their taxable estate. The tax rate applicable to taxable assets is 35%. Individuals who are married have what is known as an unused exclusion carry forward. As an example, suppose spouse A dies first and has amounting to $3,000,000. Hence, spouse A has an unused exclusion of $2,000,000 that can be passed to Spouse B. Upon spouse B’s demise $7,000,000 of assets can be excluded from the taxable estate.
In 2012 the exclusion will increase to $5,120,000. It is expected that this amount and the tax rate will change in 2013 after the upcoming Presidential and Legislative elections.
SOCIAL SECURITY
The Social Security wage base for 2011 was $106,800 with a Social Security tax rate of 6.2% being applied to this amount and a Medicare tax of 1.45% being applied on all earned income. Self employed taxpayer’s paid15.3% on the first $106,800 of income and 2.9% on amounts above that.
In 2012 the Social Security wage base will increase to $110,100.
ITEMIZED DEDUCTIONS
For both 2011 and 2012 itemized deductions are 100% deductible. However, legislation proposed by President Obama would limit the tax benefit of itemized deductions to 28% if the individual is in a higher tax bracket
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 a U.S. resident must file Form 8938 if they have an interest in one or more foreign financial assets that have an aggregate market value exceeding $50,000 on the last day of the taxable year or $75,000 at any time during the taxable year.
The penalty for failure to file Form 8938 is $10,000 plus a penalty up to an additional $50,000 for continued failure to file.
During the past month, the vast majority of questions that we have received relate to the new Form 8938. Clients are confused as to what needs to be reported and are also having difficulty ascertaining the highest fair market value of their assets during 2011. As with many foreign investments, day to day information may not be readily available.
The filing of Form 8938 with the 2011 tax return does not relieve the individual of having to separately file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts with the U.S. Department of Treasury on or before June 30, 2012.
Pursuant to the requirements relating to practice before the Internal Revenue Service, any tax advice in this communication is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing or recommending to another person any tax related manner.
The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own U.S. tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.
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