This document summarizes some common tax and financial planning challenges for US expats, including: - Owning and renting real estate while living overseas can involve determining whether expenses are deductible or must be capitalized, and what happens when rental properties are sold. - The dependent care credit can apply to care provided by non-US citizens, but special reporting may be required. Eligible expenses are limited and the credit is non-refundable. - The foreign earned income exclusion allows expats to exclude up to $91,400 of foreign earned income per year if they meet residency or presence tests. Proper reporting is complex. - Foreign bank accounts over $10,000 require reporting to the IRS

1. Common Tax & Financial Planning Challengesin the US Expat LifeChristine Elsea Mandojana, CPAOctober 28, 2010

2. AgendaOwning & Renting Real Estate While Living Overseas

3. The Dependent Care Credit & Foreign Providers

4. Foreign Earned Income

5. Foreign Bank AccountsOwning & Renting Real EstateWhile Living Overseas

6. Owning & Renting Real EstateUnrelated Party?YESNOFair Market Rent?Schedule EYESNOSchedule ANote: 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 EDeductible ExpensesCapital Expenses

8. Deductible versus Capital ExpensesWhat is a Deductible Expense?Ordinary and necessary business expenses such as incidental repairs and maintenanceOwning & Renting Real EstateSchedule EExamples Mortgage Interest

9. Real Estate Taxes

10. Repairs

11. Management Fees

12. Commissions

13. Insurance

14. Tax Preparation Fees for Schedule E onlyDeductible versus Capital ExpensesWhat 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 E3 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 UseExamples1§263(a)(1)

17. Owning & Renting Real EstateSchedule EDeductible ExpensesCapital Expenses

18. Line 20: Depreciation ExpenseWhat 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 EHow Do You Calculate It?Depreciable Basisdivided byRecovery Period(apply convention &in some cases pro-rate)

19. Line 20: Depreciation ExpenseWhat is the Recovery Period?Owning & Renting Real EstateSchedule EIRS Publication 527USOutsideUS

20. Line 20: Depreciation ExpenseWhat is the Depreciable Basis?Owning & Renting Real EstateSchedule EExample: Residential RentalAssume 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 EIf 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 suspendedWhat Happens When You Sell?Capital GainsCalculated 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 ESection 1250 Unrecaptured GainEssentially 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 propertySuspended LossesUn-suspend in year of sale or taxable exchangeThe 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; orA 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 yearThe Dependent Care CreditTaxpayer must be earning income (employed), a full-time student and/or looking for workWho’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-refundableWhat Expenses are Eligible?The Dependent Care CreditExpenses 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 2555Foreign Earned IncomeHow 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 considerOther Options?Foreign Tax Credit

41. Itemized Deduction of Foreign TaxesOnce 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 USTax Return Requirements Report the Income on Schedule B

44. Check the Box on Schedule BForeign Bank Accounts Designate the Countries

45. Note the reference to the FBARFBAR RequirementsFile 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 residentForeign Bank Accounts

48. Foreign Bank AccountsSample Page 1

49. Common Tax & Financial Planning Challengesin the US Expat LifeChristine Elsea Mandojana, CPAOctober 28, 2010