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Common tax and financial planning challenges 2010

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  • 1. Common Tax & Financial Planning Challengesin the US Expat Life
    Christine Elsea Mandojana, CPA
    October 28, 2010
  • 2. Agenda
    • Owning & Renting Real Estate While Living Overseas
    • 3. The Dependent Care Credit & Foreign Providers
    • 4. Foreign Earned Income
    • 5. Foreign Bank Accounts
  • Owning & Renting Real Estate
    While Living Overseas
  • 6. Owning & Renting Real Estate
    Unrelated Party?
    YES
    NO
    Fair Market Rent?
    Schedule E
    YES
    NO
    Schedule A
    Note: This example assumes a primary residence converted into rental status. Other rules apply to vacation homes rented less than 15 days and residences rented > 15 days but used for personal purposes for more than the greater of 14 days or 10% of total days rented.
  • 7. Owning & Renting Real EstateSchedule E
    Deductible Expenses
    Capital Expenses
  • 8. Deductible versus Capital Expenses
    What is a Deductible Expense?
    Ordinary and necessary business expenses such as incidental repairs and maintenance
    Owning & Renting Real EstateSchedule E
    Examples
    • Mortgage Interest
    • 9. Real Estate Taxes
    • 10. Repairs
    • 11. Management Fees
    • 12. Commissions
    • 13. Insurance
    • 14. Tax Preparation Fees for Schedule E only
  • Deductible versus Capital Expenses
    What is a Capital Expense?
    “Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate1.”
    Owning & Renting Real EstateSchedule E
    3 Prong Test
    • Add to the Value of the Property
    • 15. Prolong the Life of the Property
    • 16. Adapt the Property to a New or Different Use
    Examples
    1§263(a)(1)
  • 17. Owning & Renting Real EstateSchedule E
    Deductible Expenses
    Capital Expenses
  • 18. Line 20: Depreciation Expense
    What is Depreciation Expense?
    Recapturing the cost of a capital asset over it’s useful life (or recovery period as defined by IRS tables!)
    Owning & Renting Real EstateSchedule E
    How Do You Calculate It?
    Depreciable Basis
    divided by
    Recovery Period
    (apply convention &
    in some cases pro-rate)
  • 19. Line 20: Depreciation Expense
    What is the Recovery Period?
    Owning & Renting Real EstateSchedule E
    IRS Publication 527
    US
    Outside
    US
  • 20. Line 20: Depreciation Expense
    What is the Depreciable Basis?
    Owning & Renting Real EstateSchedule E
    Example: Residential Rental
    Assume Adjusted Basis > FMV at rental conversion date
  • 21. Line 22: What Happens to a Rental Loss?
    Owning & Renting Real EstateSchedule E
  • 22. Line 22: What Happens to a Rental Loss?
    Owning & Renting Real EstateSchedule E
    • If MAGI < $100k, $25k of rental losses taken in current year
    • 23. If MAGI is between $100k and $150k, pro-rate the $25k
    • 24. If MAGI > $150k, losses are suspended
  • What Happens When You Sell?
    Capital Gains
    • Calculated as the difference between the net selling price and the adjusted basis (including land)
    • 25. Eligible for the Section 121 gain exclusion rules (including 10 year suspension for eligible EEs)
    Owning & Renting Real EstateSchedule E
    Section 1250 Unrecaptured Gain
    • Essentially the depreciation that you were required to take while the property was rented
    • 26. Must recapture on the tax return in year of sale up to the capital gain realized (even if no capital gain tax due to Section 121)
    • 27. Never able to exclude it and must recapture even if you never depreciated the property
    Suspended Losses
    • Un-suspend in year of sale or taxable exchange
  • The Dependent Care Credit
    & Foreign Providers
  • 28. Who’s an Eligible Taxpayer?
    • Taxpayers who incur employment-related expenses in providing care for:
    A qualifying dependent who has not attained the age of 13 as of December 31 of the tax year; or
    A qualifying dependent or spouse who is physically or mentally incapable of caring for him/herself & has the same principal place of abode as the taxpayer for more than ½ year
    The Dependent Care Credit
    • Taxpayer must be earning income (employed), a full-time student and/or looking for work
    Who’s an Eligible Provider?
    • Can be US citizen or non-US citizen: Non-US citizens qualify but special reporting required on the tax return
    • 29. Household employee or daycare; not Kinder+
    • 30. Relatives qualify as long as they are not a dependent, the taxpayer’s child and are under age 19
  • How Much is the Credit?
    • Up to $3,000 of eligible expenses per child for up to two children
    • 31. Multiply the total eligible expenses by the applicable % based on income…usually 20%
    • 32. The credit is non-refundable
    What Expenses are Eligible?
    The Dependent Care Credit
    • Expenses paid for the care of the qualifying dependent that are required by law (wages, uniforms, insurance, retirement, preschool fees, etc.)
    • 33. School fees for Kindergarten and higher do not qualify; but after-school care does qualify
    • 34. Payments to a relative qualify as long as the relative is not a dependent, the taxpayer’s child and is under age 19.
  • Foreign Earned Income
    & Its Reporting Complexities
  • 35. What Is It?
    Income earned by a taxpayer while working outside the US—Location is Key!
    Can You Exclude It?
    • Bona Fide Residence Test (intend to reside for the indefinite future outside the US)
    • 36. Physical Presence Test (outside the US for at least 330 full days in a rolling 365 day period—prorate if 365 days cuts between tax years)
    • 37. Use Form 2555
    Foreign Earned Income
    How Much Can You Exclude?
    • Up to the maximum exclusion amount per year ($91,400 for 2009)
    • 38. Must prorate if qualifying period cuts tax years
    • 39. Can take two exclusions if married filing jointly and both taxpayers have qualifying income and meet exclusion test
    • 40. Exclusion is for gross income…lots of reporting complexities to consider
  • Other Options?
    • Foreign Tax Credit
    • 41. Itemized Deduction of Foreign Taxes
    Once you elect the Foreign Earned Income Exclusion, you must continue using it for all eligible income until/unless you revoke the election. Once you revoke the election, you cannot elect to use it again for 5 tax years.
    Foreign Earned Income
  • 42. Foreign Bank Accounts
    & Their Reporting Requirements
  • 43. Applies to financial accounts located outside the US
    Tax Return Requirements
    • Report the Income on Schedule B
    • 44. Check the Box on Schedule B
    Foreign Bank Accounts
    • Designate the Countries
    • 45. Note the reference to the FBAR
    FBAR Requirements
    • File report by June 30 for previous calendar year
    • 46. Any foreign financial account (in aggregate) with balance $10k or more at ANY time during the year
    • 47. US citizen or resident
  • Foreign Bank Accounts
  • 48. Foreign Bank Accounts
    Sample Page 1
  • 49. Common Tax & Financial Planning Challengesin the US Expat Life
    Christine Elsea Mandojana, CPA
    October 28, 2010