Question:

I am a U.S. citizen living abroad. Do I have to file a US tax return even though I don't live or work in the US?

Answer:

United States citizens living abroad

• Are required to file annual U.S. income tax returns.
• Must report their worldwide income if they meet the minimum income filing requirements for their filing status and age.
• Must contact the government of the country you are living in to determine whether you must file and pay taxes there.
• May be able to elect to exclude some or all of their foreign earned income, if certain requirements are met, or to claim a foreign tax credit if taxes are paid to that country.

Question:

Under my visa as a temporary nonresident alien, I'm not subject to social security and Medicare withholding. My employer withheld the taxes from my pay. What should I do to get a refund of my social security and Medicare?

Answer:

If social security tax and Medicare were withheld in error from pay received that was not subject to the taxes, you must first contact the employer for reimbursement. If you are unable to get a refund from the employer, file a claim for refund with the Internal Revenue Service

Question:

If I am a permanent resident of the U.S. am I always a resident for tax purposes?

Answer:

You are a lawful permanent resident if you have been given the privilege, according to the immigration laws, of residing permanently in the United States as an immigrant. You generally have this status if the US Citizenship and Immigration Services (USCIS) has issued you an alien registration card, also known as a green card. You are a U.S. resident for tax purposes beginning on the first day you are present in the U.S. as a lawful permanent resident. Therefore, for the first year of your residency, if you were a nonresident prior to obtaining permanent residency status, you will be classified as a dual-status alien for tax purposes. As a dual-status alien you must file a separate return, cannot claim the standard deduction, and generally cannot claim dependency exemptions.
As a resident taxpayer you must report, for U.S. tax purposes, your worldwide income. You are also eligible to claim the deductions and credits available to U.S. citizens once you are a full-year resident.

Question:

What is foreign earned income? Is it income from a foreign source or income paid by a U.S. company while living abroad?

Answer:

Earned income is pay for personal services performed, such as wages, salaries, or professional fees. Foreign earned income is income you receive for services you perform in a foreign country during a period when your tax home is in a foreign country and during which time you meet either the residence test or the physical presence test. It does not matter whether earned income is paid by a U.S. employer or a foreign employer. Foreign earned income does not include the following amounts.

• The previously excluded value of meals and lodging furnished for the convenience of your employer.
• Pension or annuity payments including social security benefits.
• Payments by the U.S. Government, or any U.S. government agency or instrumentality, to its employees.
• Amounts included in your income because of your employer's contributions to a nonexempt employee trust or to a nonqualifying annuity contract.
• Recaptured unallowable moving expenses
• Payments received after the end of the tax year following the tax year in which you performed the services that earned the income.

Question:

Do I have to meet the 330-day physical presence test or have a valid working resident visa to be eligible for the foreign earned income exclusion?

Answer:

To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction:

• You must have foreign earned income,
• Your tax home must be in a foreign country, and
• You must be one of the following:
  • A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year,
  • A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty with a nondiscrimination article in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
  • A U.S. citizen or resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
  • U.S. tax law does not specifically require a foreign resident visa or work visa for this purpose, but you should comply with the foreign country's laws.

Question:

Under what circumstances would a company become subject to U.S. NRA reporting or withholding requirements?

Answer:

When a company makes a payment of U.S. sourced fixed or determinable annual or periodic (FDAP) income to a foreign person not associated with such person's U.S. trade or business that company may have an NRA reporting or withholding responsibility. There are some exceptions to these requirements even for U.S. sourced payments.

Question:

Who is considered a foreign person for U.S. tax purposes?

Answer:

A foreign person is an individual that is not a U.S. person. Generally, this includes non-resident alien and it also includes U.S. branches of foreign corporations, foreign estates, foreign corporations and partnerships. For example, a foreign corporation is a corporation that was created or organized outside of the United States or under the law of a country other than the United States. In general a non-resident alien is an individual whose permanent residence is outside of the United States and who is not a U.S. citizen. The U.S. or foreign status should be documented for those payees who are paid FDAP income.

Question:

Please define FDAP income and include some specific examples.

Answer:

In general, in order for a payment to be subject to NRA withholding, it must be a payment of FDAP income. FDAP is an acronym for Fixed or Determinable, Annual or Periodic. Some of the more common expenses paid by US withholding agents which would result in FDAP income to their vendors and other service providers are interest, royalties, compensation for personal services, rents, pensions or annuities and gains from the sale or exchange of the patents, copyrights and similar intangibles that are described in I.R.C. Sec. 865(d). See also Q&A-4 directly below.

Question:

What is U.S. sourced income?

Answer:

For FDAP income paid to a foreign person to be subject to NRA reporting and withholding, the payment must be U.S. sourced.
Below are some basic rules for sourcing of certain types of FDAP payments by withholding agents and multi-nationals:

• Interest – If the debtor is a U.S. resident, the interest is generally U.S. sourced.
• Royalties – If the subject property is used in the U.S., the royalty payment is U.S. sourced. Payments made in connection with the sale of certain intangible assets, including copyrights and patents, are generally sourced similar to royalties when the payments are contingent on the productivity, use or disposition of the intangible.
• Rents – If the rental property is located in the U.S., the rental payment is U.S. sourced.
• Personal Services – If the services are performed in the U.S., the payment for those services is generally U.S. sourced.

Income tax treaties may modify these rules.

Question:

Do I have to report a foreign bank account?

Answer:

U.S. persons are required to file a Report of Foreign Bank and Financial Accounts (FBAR), Form TD F 90-22.1, each year if they have a financial interest in or signature authority or other authority over any financial accounts, including bank, securities or other types of financial accounts, in a foreign country, if the combined value of these financial accounts exceeds $10,000 at any time during the calendar year.

Question:

I had a foreign bank account and failed to report it. What should I do?

Answer:

Requests for an extension of time to file a FBAR are not granted as with tax returns. If you learn you were required to file FBARs for previous years, you should file the delinquent FBAR reports and attach a statement with an explanation of the late filing. If IRS determines that the late filings were due to legitimate reasons late charges may not be assessed.
Penalties are severe for non-compliance with FBAR filing requirements and may include civil and criminal penalties. Civil penalties for a non-willful violation can range up to $10,000 per violation. Civil penalties for a willful violation can range up to the greater of $100,000 or 50 percent of the amount in the account at the time of the violation. Criminal penalties for violating the FBAR requirements while also violating certain other laws can range up to a $500,000 fine or 10 years imprisonment or both. Civil and criminal penalties may be imposed together.

Question:

As a U.S. citizen working for a U.S. company in a foreign country, are any of my wages or expenses tax deductible?

Answer:

• U.S. citizens and resident aliens are taxed on their worldwide income.
• Some taxpayers may qualify for the foreign earned income exclusion, foreign housing exclusion, or foreign housing deduction.
• The taxpayer may be able to claim a foreign tax credit if required to pay a foreign income tax to the foreign country, if he or she has not elected the foreign earned income exclusion with respect to that income.
• The taxpayer may also qualify to deduct away from home expenses (for travel, meals, and lodging), but not against excluded income.

Question:

I have a temporary nonresident alien visa and I'm not subject to social security and Medicare withholding. My employer withheld the taxes from my pay. How do I get social security and Medicare?

Answer:

If social security tax and Medicare were withheld in error from pay received that was not subject to the taxes, you must first contact the employer for reimbursement.
If you are unable to get a refund from the employer, file a claim for refund with the Internal Revenue Service on Form 843 (PDF), Claim for Refund and Request for Abatement. Contact our offices to help you resolve this issue.

Question:

I am a U.S. citizen living and working overseas. Can I have a tax credit on my U.S. taxes for the taxes I pay to the foreign country?

Answer:

You can choose each tax year to take the amount of a qualified tax paid or accrued during the year as a foreign tax credit or as an itemized deduction.
The foreign tax credit is intended to relieve U.S. taxpayers of the double tax burden when their foreign source income is taxed by both the United States and the foreign country from which the income is derived.
Only income taxes paid or accrued to a foreign country or a U.S. possession qualify for the foreign tax credit.
You can choose to take the amount of any qualified foreign taxes paid or accrued during the year as a foreign tax credit or as an itemized deduction.

Question:

Do I have to report a foreign disregarded entity, trust, corporation or partnership?

Answer:

A foreign disregarded entity is an entity or¬ganized outside the United States that is treated as a disregard¬ed entity. Special reporting rules apply to U.S. Per¬sons who are owners of a foreign disregarded en¬tity. The disregarded status of the foreign entity is determined under U.S. law, not the law under which the entity was organized. A U.S. Person that controls a foreign corporation or a foreign partnership, which owns a foreign disregarded entity, may also have a reporting obligation. A U.S. Person may be required to file a Form 8858 with their tax return, even when the person has no direct ownership in the foreign disregarded entity, and the constructive or indirect ownership is less than 100 percent.
Any U.S. Person that is treated as the owner of the assets or liabilities of a foreign disregarded en¬tity is required to file a Form 8858 with its timely filed income tax return, including extensions.
The penalties for failing to file a Form 8858, which include (1) a fixed $ 10,000 penalty, (2) 10 percent foreign tax reduction, and (3) additional penalties for failure to respond to an IRS notice of violation.

Question:

I owned an entity and didn't report it. What do I do?

Answer:

To file a late FDE return late, you must amend the entire return and include the entity in the return.

Question:

What is FATCA?

Answer:

The Foreign Account Tax Compliance Act (FATCA) is a series of provisions that are included in the Hiring Incentives to Restore Employment Act that was signed into law on March 18, 2010. The law becomes effective January 1, 2013 and it is a far-reaching statute aimed to combat offshore tax evasion by U.S. persons through offshore accounts. FATCA requires foreign financial institutions ("FFI") to identify to the Internal Revenue Service accounts owned by, or for the beneficial interest of United States taxpayers; failure to do so will result in a 30% withholding tax on certain payments. Identification of affected accounts is not a simple task and will likely require coordination by FFI personnel across business lines and around the globe.

Question:

Does FACTA Apply to Me?

Answer:

It may apply to you. As part of FATCA certain U.S. taxpayers holding specified foreign financial assets with an aggregate value exceeding $50,000 will need to report information about those assets on new Form 8938 to be attached to the taxpayer's annual income tax return.

You must file Form 8938 if:

1. You are a specified individual (U.S. citizen, resident alien, Nonresident alien who is a bona fide resident of American Samoa or Puerto Rico)
2. You have an interest in specified foreign financial assets required to be reported.
3. The aggregate value of your specified foreign financial assets is more than the reporting thresholds that applies to you.

Question:

What qualifies as an FFI and how will the financial transactions be monitored/reported?

Answer:

FATCA may apply to both financial institutions and non-financial operating companies. The rules require FFI's enter into an agreement with U.S. Department of Treasury to avoid FATCA withholding on payments it receives. The FFI's will need to report the following information on their U.S. accounts:

• Name, address, and Taxpayer Identification Number (TIN) of each account holder which is a specified U.S. person and, it the case of any account holder which is a U.S. owned foreign entity, the name, address, and TIN of each substantial U.S. owner of such entity.
• The account number
• The account balance or value
• In some case, gross receipts and gross withdrawals or payments from the account.

The FFI may elect to provide full IRS Form 1099 report on each account holder that is a specified U.S. person or U.S. owned foreign entity as if the holder of the account were a natural person and citizen of the United States.

Planning is the key. Contact the Esquire Group to begin preparation for FATCA's implementation. Allow us to answer additional questions you may have and analyze the impact FATCA may have on your company's holdings overseas.