Common tax and financial planning challenges 2010


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Common tax and financial planning challenges 2010

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