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Common tax and financial planning challenges 2010
 

Common tax and financial planning challenges 2010

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    Common tax and financial planning challenges 2010 Common tax and financial planning challenges 2010 Presentation Transcript

    • Common Tax & Financial Planning Challengesin the US Expat Life
      Christine Elsea Mandojana, CPA
      October 28, 2010
    • Agenda
      • Owning & Renting Real Estate While Living Overseas
      • The Dependent Care Credit & Foreign Providers
      • Foreign Earned Income
      • Foreign Bank Accounts
    • Owning & Renting Real Estate
      While Living Overseas
    • 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.
    • Owning & Renting Real EstateSchedule E
      Deductible Expenses
      Capital Expenses
    • 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
      • Real Estate Taxes
      • Repairs
      • Management Fees
      • Commissions
      • Insurance
      • 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
      • Prolong the Life of the Property
      • Adapt the Property to a New or Different Use
      Examples
      1§263(a)(1)
    • Owning & Renting Real EstateSchedule E
      Deductible Expenses
      Capital Expenses
    • 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)
    • Line 20: Depreciation Expense
      What is the Recovery Period?
      Owning & Renting Real EstateSchedule E
      IRS Publication 527
      US
      Outside
      US
    • 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
    • Line 22: What Happens to a Rental Loss?
      Owning & Renting Real EstateSchedule E
    • Line 22: What Happens to a Rental Loss?
      Owning & Renting Real EstateSchedule E
      • If MAGI < $100k, $25k of rental losses taken in current year
      • If MAGI is between $100k and $150k, pro-rate the $25k
      • 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)
      • 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
      • 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)
      • 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
    • 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
      • Household employee or daycare; not Kinder+
      • 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
      • Multiply the total eligible expenses by the applicable % based on income…usually 20%
      • 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.)
      • School fees for Kindergarten and higher do not qualify; but after-school care does qualify
      • 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
    • 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)
      • 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)
      • Use Form 2555
      Foreign Earned Income
      How Much Can You Exclude?
      • Up to the maximum exclusion amount per year ($91,400 for 2009)
      • Must prorate if qualifying period cuts tax years
      • Can take two exclusions if married filing jointly and both taxpayers have qualifying income and meet exclusion test
      • Exclusion is for gross income…lots of reporting complexities to consider
    • Other Options?
      • Foreign Tax Credit
      • 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
    • Foreign Bank Accounts
      & Their Reporting Requirements
    • Applies to financial accounts located outside the US
      Tax Return Requirements
      • Report the Income on Schedule B
      • Check the Box on Schedule B
      Foreign Bank Accounts
      • Designate the Countries
      • Note the reference to the FBAR
      FBAR Requirements
      • File report by June 30 for previous calendar year
      • Any foreign financial account (in aggregate) with balance $10k or more at ANY time during the year
      • US citizen or resident
    • Foreign Bank Accounts
    • Foreign Bank Accounts
      Sample Page 1
    • Common Tax & Financial Planning Challengesin the US Expat Life
      Christine Elsea Mandojana, CPA
      October 28, 2010