Categories
Tax Planning

Understanding tax breaks for higher education

If you’ve been effected by the economic downturn and decided to return to school to further your own education, or you support a dependent that is a college student, there are three education tax breaks that you should be aware of.

Each of the three is unique, and only one of them can be claimed for any particular student in a given tax year. But, you can claim one type of education credit for a child, for example, and another type of credit for yourself.

The three most common tax breaks for higher education are:

  1. American Opportunity Credit (AOC)
  2. Lifetime Learning Credit (LLC)
  3. Tuition and fees deduction

All three of these tax benefits can be claimed regardless of whether you itemize or claim the standard deduction. The AOC and LLC are claimed using Form 8863, and while the IRS didn’t start processing tax returns filed with this form until late in the current tax return filing season, they are now doing so. The tuition and fees deduction is claimed using form 8917.

A few legislative notes:

  1. The “fiscal cliff” bill passed Jan 2, 2013 by Congress extended the AOC through tax year 2017.
  2. The same law also retroactively extended the tuition and fees deduction through tax year 2013, since it actually had expired at the end of 2011.
  3. The LLC is a permanent part of the tax code (at least for now – that could change tomorrow, of course).

It should be noted that none of these tax benefits can be claimed by a non-resident alien, nor a person filing as Married Filing Seperately.

The AOC is aimed at full time college students completing their first four years of undergraduate education. Students must be at least a half-time student for at least 5 months out of the year to claim this credit, and they must also not have any felony drug convictions. The Lifetime Learning Credit, as the name implies, is applicable to all students, including part-time and graduate students. The tuition and fees deduction generally provides the least direct tax benefit, but can usually be claimed by people that can’t claim one of the other two for some reason.

The most common reason for not being eligible for one of the other two tax credits is due to income limitations. For 2012, the AOC starts to phase out for single taxpayers with adjusted gross incomes over $80,000 (double that for married couples), and the LLC starts to phase out for single taxpayers with AGI’s over $52,000 (also doubled for married couples).

The AOC can be as much as $2,500, and up to $1,000 of that is refundable. These amounts are per student. Refundable credits increase your refund even when your annual tax liability is zero. The AOC is also the only education tax break for which expenses other than tuition and fees can be claimed. The most common example is textbooks, which are AOC-eligible expenses, but are not for the other two tax breaks.

The LLC can be a maximum of $2,000 for an entire tax return, and is not a refundable credit. This means that the LLC can be used to reduce your tax liability to zero, but you don’t get a refund of the excess.

The tuition and fees deduction is just that — a deduction against taxable income. The maximum deduction for 2012 is $4,000, and the full amount can be claimed by joint filers with modified AGI of up to $130,000 (half that for single filers). The tuition and fees deduction requires only one course to be taken, and it does not need to be part of an actual degree program, but it does still need to be taken at an eligible post-secondary institution.

One of the most common questions I get regarding education tax breaks has to do with what’s reported on the student’s 1098-T. The tuition and fees reported on the 1098-T may actually differ from what you can actually claim as expenses for the tax credits, so be sure to speak with a tax professional or refer to the form instructions for clarification on what to actually claim.

It should also be noted that tuition and fees paid with loan proceeds are still eligible to be claimed, but not so for tuition paid with scholarships, grants, and tuition assistance. You must subtract scholarship and grant money from tuition and fees paid, and only claim the remainder for purposes of these education tax breaks. Also note that scholarship money in excess of tuition could be taxable income, and if it’s used to pay for living expenses, it’s definitely taxable income.

If you or a dependent are in school, I would encourage you to take advantage of these tax breaks. Remember the motto: Pay what you are legally required to in taxes, but not a single penny more!

Categories
Tax Planning

Cheapest Tax States To Reside In

Choosing to reside in a state with low tax rates can be an effective way to reduce your cost of living, often by a double digit percentage. State taxes come in a variety of forms, including income, sales, real estate, and personal property taxes. All states charge at least one of these taxes, and most charge all four to varying degrees. Your lifestyle will often dictate which type of tax is most critical for consideration when evaluating where to live. In this article, I’m going to present four states that offer different tax benefits for residents.

Alaska
Alaska has the lowest overall tax burden per resident of any state in the Union. Alaska is one of only two states that has neither a state income tax nor a state sales tax. Local municipalities in Alaska are allowed to levy their own local sales taxes, which can be as high as 7.5 percent, although many towns do not levy a sales tax. Alaskan property taxes are on par with the national average. Because of oil revenues to the state, Alaska is the only state that actually pays residents for living there. Alaska Permanent Fund Dividends vary each year, and were $878 per eligible resident in 2012.

New Hampshire
New Hampshire is the other state with no state sales tax and no state tax on ordinary income. The state does levy a tax on dividends and capital gains, so individuals who earn a large portion of their income from these sources should take this into consideration. Local municipalities in New Hampshire do not have sales tax, but New Hampshire’s state and local property taxes are the highest in the United States. Therefore, New Hampshire can be a zero tax state if you are a wage earner and do not own property.

South Dakota
While South Dakota does levy a 4 percent state sales tax, and local municipalities may also levy sales taxes, South Dakota has the second lowest overall tax burden for residents of any state. This is primarily because of the lack of a state income tax, and some of the lowest personal property taxes in the country. However, while real property tax rates exceed New York state’s, low property values statewide keep the actual property tax bills low. South Dakota is one of the most popular residency states for full time RVers that don’t own real estate, and is growing in popularity as a “tax home” for Americans living abroad for extended periods of time.

Nevada
Like most low-tax states, Nevada lacks a personal income tax. The state’s 6.85 percent state sales tax, with up to an additional 1.25 percent tacked on in some municipal areas, makes Nevada less attractive in comparison to other low-tax states. Nevada is unique among all states in that it charges property taxes on only 35 percent of the assessed value of property. Of particular interest to retirees, Nevada will rebate up to 90 percent of property taxes paid by those over age 62 who meet certain income criteria, making Nevada particularly attractive to retirees who engage in limited shopping.

Conclusion
While there is no one perfect state in regards to taxation, some states are definitely more attractive than others. Factors such as whether you will own a home or not, and how you earn your income, are important factors in determining whether one state or another is better for your situation.

Categories
Tax Planning

The Tax Shelter Over Your Head Is Still a Good Idea For 2013

Home prices, which had been on a tear, have leveled out and even fallen in places. The housing “bubble” definitely appears to be over. So, the question becomes: Is real estate still a good place for your money?

Despite uncertain real estate prices, buying a house is still a smart choice for most families. Buying, rather than renting, replaces nondeductible rent with deductible mortgage interest. You can borrow tax-free against your home’s growing equity. And you can still sell your home for up to $500,000 profit, tax-free. This particular capital gains tax break isn’t likely to disappear in 2013, despite all the rhetoric about classic tax breaks disappearing.

Mortgage Interest

Tax-deductible mortgage interest is a cornerstone of tax planning for many families. You can deduct interest on up to $1 million of “acquisition indebtedness” you use to buy or substantially improve your primary residence and one additional home. You can deduct interest on up to $1 million of construction loans for 24 months from the start of construction. (Interest before and after this period is nondeductible.) Plus, points you pay to buy or improve your primary residence are generally deductible the year you buy the home if paying points is an established practice in your area. This deduction, while discussed as one that could get the axe by Congress, is too politically sensitive to actually be taken away from American voters in 2013.

Home Equity Interest

You can deduct interest you pay on up to $100,000 of home equity loans or lines of credit secured by your primary residence and one additional residence. Using home equity debt to pay off cars, colleges, and similar debts lets you convert nondeductible personal interest into deductible home equity interest.

Make sure you compare after-tax rates before you refinance consumer debt with home equity debt. If you can buy a car with a special interest rate, your nondeductible personal interest may still cost less than deductible home equity interest. If you can transfer a credit card balance to a new card with a low introductory rate, you could save money and avoid the paperwork needed to refinance your home.

If you pay points to refinance your home, you can’t deduct those points immediately. However, you can amortize them over the life of the loan. If you pay off the loan before fully deducting your points (including refinancing with a new lender), deduct the remaining balance the year you retire the loan.

You can still deduct the interest you pay on home equity balances over $100,000 if you use the proceeds for a deductible purpose. If you use home equity debt to buy stocks, for example, you can deduct it as investment interest; if you use it to finance your business, you can deduct it as a business expense.

Property Tax

You can also deduct property taxes you pay on your primary residence and vacation homes. Microsoft founder Bill Gates can deduct over $1,000,000 he pays on his Seattle-area compound. But be aware that property tax deductions may be limited by the AMT.

Tax-Free Income From Selling Your Home

The Taxpayer Relief Act of 1997 made important changes when you sell your primary residence. The old law, effective for sales before May 5, 1997, let you roll unlimited gains into a new home and offered a one-time $125,000 exclusion if you sold your home after age 55. The new law lets you exclude up to $250,000 of gain ($500,000 for joint filers) every two years, with no need to roll your gains into a new home.

You can exclude $250,000 if:

  1. You owned the home for two of the last five years,
  2. You occupied it as your primary residence for two of the last five years, and
  3. You haven’t used the exclusion within the last two years.

You and your spouse can exclude up to $500,000 if:

  1. Either of you owned it for two of the last five years
  2. Both of you used it as your primary residence for two of the last five years, and
  3. Neither of you has used the exclusion within the last two years.

You can exclude part of your gain (calculated by dividing the number of months you qualify by 24) without meeting that two-year minimum, if your move is due to:

  • Change in employment (you, your spouse, a co-owner of the house, or any other person whose principal abode is in the home accepts a job whose location is at least 50 miles farther from the home than their previous place of employment);
  • Health (a qualifying person or their relative moves to treat a disease, illness, or injury or to obtain or provide medical care for a qualified individual); or
  • “Unforeseen circumstances” (including, but not limited to, involuntary conversion, natural or man-made disaster, or a qualifying individual’s death, unemployment, change in employment or self-employment status, divorce, or multiple births from the same pregnancy).

Taking advantage of the tax shelter over your head won’t guarantee gains. You have to consider how long you will own your home, the cost of maintaining and repairing it, and the eventual cost of selling it. But the tax shelter over your head is still likely to prove a long-term winner.

Categories
Tax Planning

2013 Tax Numbers Announced, Plus 2013 Tax Planning Advice

A variety of numbers that are important for 2013 tax planning were recently released by the Internal Revenue Service and Social Security Administration.

First, let’s talk retirement accounts. In 2013, maximum 401(k) contributions from your own paycheck will be capped at $17,500 for the year, an increase of $500 over 2012. For folks 50 and older, the “catch-up” limit remains the same, at $5,500. Personal IRA contributions will be limited to $5,500 for those under 50, and $6,500 for those age 50 and older. For SIMPLE accounts, the maximum contribution increases to $12,000, with a $2,500 catch-up limit for those 50 and over.

While elimination of the Social Security taxable wage limit is one of the proposals on the table in Washington, D.C., the inflation adjusted cap for 2013 is currently slated to be $113,700, up from $110,100 for 2012. This is the maximum salary level per year per person on which Social Security taxes are charged. Your wages above that amount are not subject to that particular tax. Expect this to be a hotly debated item during the next Congressional session.

Also on the Social Security front, retirees that have not yet reached full retirement age for their birthdate can earn up to $15,120 in 2013 from employment without losing any Social Security benefits.

If you provide cash gifts to others, you’re in luck in 2013: The annual gift tax exclusion has increased to $14,000 for 2013. Do note, however, that this is als a hotly contested item, and may be on the retroactive chopping block for 2013.

Lastly, Health Savings Account (HSA) contribution limits will increase to $3,250 for individuals and $6,450 for families next year.

Categories
Tax Planning

5 Simple Steps To Achieving Mitt Romney’s Tax Rate

Republican presidential candidate Mitt Romney has been getting blasted for months about the fact this effective tax rate is so incredibly low. As an Enrolled Agent, I find the discussion surrounding Romney’s tax situation to be particularly interesting, because there isn’t a single taxpayer on the face of the Earth that personally wants to pay more taxes than they have to. If such a strange person does exist, there is no government that won’t happily cash your check (in fact, the U.S. government happily accepts credit cards for donations).

I’d really like to get on the phone with all these reporters and news anchors blasting Romney for his tax reduction strategies. I’d bet $100 that you can’t find one that would, themselves, personally agree to pay more taxes than they need to. Yet, they will happily ridicule somebody else for doing so.

Actually, I need to back up, because there is actually one person I know of that voluntarily pays more taxes than he’s required to. Guess who that is? Mitt Romney.

That’s right. In order to keep a campaign promise earlier this year stating that he has paid at least 13% in taxes each of the past 10 years, Mitt Romney voluntarily failed to claim $1.75 million in charitable contributions on his 2011 Form 1040. In other words, he only deducted $2.25 million of the total $4 million he actually donated to non-profits. If he had claimed the full deduction, his 2011 effective tax rate would only have been 12%.

Mitt Romney’s strategy for only paying an effective tax rate in the low teens is perfectly legal.

The Internal Revenue Code requires every American citizen, at home or abroad, to pay taxes on all income, from whatever source derived, whether that money is made in America, or overseas. The law requires everybody to pay their mandatory tax amount, and not a single penny more. The tax laws are the tax laws, and the law is the same for every citizen. Just because you are rich does not magically change the tax laws (just ask Wesley Snipes, serving three years for tax fraud).

Some people complain that the tax code favors the wealthy. This simply isn’t true. The tax code provides equal opportunity for all. Equal opportunity to minimize, but also equal opportunity to get screwed.

What does this mean, and and how can you take advantage of it?

First of all, realize that Congress typically makes thousands of changes to the Federal tax code each and every year. Just about every bill passed has some minor tweak to the tax code associated with it.

Second, understand that the tax code is used by the government as a tool for social engineering and economic stimulus. This isn’t a secret — it’s a well documented fact. Certain elements of the tax code exist for the sole purpose of wealth redistribution, such as the Child Tax Credit and Earned Income Credit, both of which are social welfare programs that the government simply chose to implement via the income tax system. Other elements of the tax code exist in order to encourage small business investment, such as tax credits for research and development and domestic production activities. Other pieces of the tax code are intended to attempt to create jobs, such as payroll tax credits for hiring veterans or displaced workers.

The secret behind Mitt Romney paying such a low effective tax rate has to do with his income sources. As I write this, I’m looking at Romney’s 2011 Form 1040, page 1. This return lists the following major income sources and amounts:

  • $4.1 million in taxable interest
  • $3.2 million in taxable dividends
  • $10.8 million in capital gains
  • $2.8 million partnership and trust income

Romney’s tax on all this income isn’t figured using the regular tax tables, and not just because the numbers don’t go that high. Currently, his interest and partnership/trust income is taxed at normal income tax rates, but the $14 million in dividends and capital gains are taxed at much lower rates, currently only 15%.

That 15% tax rate is scheduled to expire at the end of 2012, as part of the expiring Bush tax cuts. However, the U.S. has a long history of creating special reduced tax rates for dividends, capital gains, and other forms of investment income, and there is a perfectly valid reason for doing so: Investment income derives from putting your money to work within the company, which generally creates jobs.

Economic investment has long been the primary source of jobs within modern economies. Without investment, most economies would grind to a screeching halt (been to Greece lately?). In order to encourage people with money to put that money to work within the economy, rather than just saving it under a mattress, governments offer incentives for investment. One such incentive is a reduced tax rate on the investment earnings. Those investments stimulate the economy, create jobs, and keep the economic engine churning for the rest of us. It’s a very critical component of keeping a modern economy operating.

When I flip to page 2 of Romney’s 1040, I see $5.7 million in itemized deductions. Looking at his Schedule A, I can see $4 million in charitable donations alone, of which he only claimed $2.25 million. He paid $2.6 million in tithing to his church. He also deducted $1.5 million in state and local taxes he paid.

Romney could have claimed the entire $4 million in charitable donations. I also see that he claimed absolutely zero business expenses on his Schedule C, and thus paid income tax and self-employment taxes both on every dime of speaking fees he collected.

I’m not going to review every line of this 104 page tax return. What becomes readily apparent, however, is that a tax minimization strategy is possible for everybody, no matter how much or how little your income. I’ll recap the “Mitt Tax Reduction Strategy” in a short list of steps, in case you didn’t pick them up through the course of this article:

Step 1: Own and operate your own small business.
Step 2: Invest in dividend-generating securities.
Step 3: Invest in activities that will produce capital gains.
Step 4: Invest in tax-free investments, such as municipal bonds.
Step 5: Donate a large percentage of your income to non-profit organizations.

Not only does this strategy work for rich people, it works for working class stiffs like us, also. If you’re self-employed, you get to write off an amazing array of things that people that work for other companies can’t, including deductions for business use of your home and your vehicle. Everybody can invest in securities that provide tax-free interest income, generate dividends, and produce capital gains. And everybody can donate to their favorite worthy causes.

Even people earning $30,000 per year can make this sort of thing happen: I’ve not only seen it with clients, I’ve done in myself.

No matter how much or how little money you make, the tax code can either work for you, or against you – the choice is really up to you. Prudent investment management, careful personal financial management, and proactive tax planning can all work together together to drastically reduce your effective tax rate, also.

To schedule a tax planning appointment, browse our directory of top tax firms in your area.

Categories
Tax Planning

Where did your tax debt come from?

For the vast of taxpayers, both individuals and businesses alike, their very first tax bill stems from a series of events.

For individuals, it can be that you simply don’t pay attention to your tax situation throughout the year (hint: you should!). You think of your taxes as a once a year affair, rather than taking a proactive approach to regular tax planning. Perhaps you got a bonus, a raise, or a gambling win at some point in the year that boosted your overall income for the year into a higher tax bracket, and didn’t adjust your withholding at that time to compensate. Or perhaps you had a large debt forgiven or took money out of an IRA early, and didn’t plan for the tax consequences. Failing to take into consideration a significant life change, such as no longer being a homeowner or losing an exemption and tax credits because of a child growing too old to claim, can also have a major impact on your tax situation.

For businesses, it can start with a rough month, and simply not having the cash laying around on the 15th to make the payroll tax deposit for last month’s payroll. Essentially, it becomes a matter of convenience to skip that Federal Tax Deposit one time. Well, in my experience, that one time becomes an expedience for the entire quarter, then two quarters, with no warning or anything from the IRS. Then, suddenly 8 straight quarters have gone by and you get a tax lien notice and a call from IRS Collections, not to mention you are suddenly informed of the massive penalties, which can double the size of your initial tax debt.

Whenever you have a “life event”, be sure to take into consideration the potential tax consequences. What is a life event? Anything to do with large asset acquisition or disposal (such as a home), anything to do with children, marriage, divorce, bankruptcy, foreclosure, job change, moving, or anything that drastically changes your bank account balance. If you are self-employed, there are even more definitions for a “life event”.

For business owners, don’t fall into the “it’s easier not to pay this month” trap, especially with payroll taxes. The long term consequences simply aren’t worth it. In fact, it’s cheaper to raid your personal retirement plan and pay the 10% early withdrawal penalty than it is to pay the penalties that add up for not paying payroll tax deposits. If you have a short-term cash crunch, it’s also better to put off paying OTHER bills, rather than the IRS. It’s simply cheaper to catch up on rent, utilities, vendors, and other business bills, rather than paying the IRS’ extortion-level penalties.

If your business is experiencing a longer term cash crunch than just one month, than you need to take a serious examination of your business. Cut costs wherever you can. If you have insufficient revenue coming in to cover the complete costs of maintaining an employee (their salary, benefits, worker’s comp, payroll taxes, etc.), then you need to start cutting hours, considering temporary layoffs, and letting some employees go entirely. Yes, it sucks to cut somebody’s hours or lay them off, but you’re running a business, so run it like one.

You should also look at ways to increase revenue. I do not discuss business growth and marketing on this particular blog, as it is not the place for it, but I do substantial marketing consulting and coaching for a number of businesses in various industries, and the most fundamental thing I tell each and every business I work with is this: As a business owner, you are first and foremost a marketing and sales professional, and a contractor, trucker, baker, childcare provider, or chef second. If you don’t embrace this concept, your business won’t survive, pure and simple, so invest the time and money into better marketing your products and services, and you will make more money.

If you take a proactive approach to tax planning, you will never have an unexpected tax liability. Discuss with your professional tax advisor any potential consequences of a life event. Business owners, keep your books up to date and be sure to review your financial statements every month. The vast majority of businesses that I have helped resolve tax problems for over the past four years kept their business records in a drawer, if at all, and failed to properly maintain accounting records (which is required by law, just for the record).

If you need assistance getting your books in order, setting up QuickBooks, selecting a payroll service, or need advice about the tax consequences of a personal life event, please contact me.

Categories
Tax Planning

Tips for Avoiding a 2012 Tax Bill

With the summer of 2012 coming to a close, it’s a good time to look at your tax payments you’ve made this year and see if you’re likely to accrue a tax liability for this year or not.

You should act soon to adjust yor tax withholding to bring the taxes you must pay closer to what you actually owe. If you’re ahead of schedule in terms of payments for the year, then you can reduce your withholding and actually keep more of your paycheck for the rest of the year.

Most people have taxes withheld from each paycheck or pay taxes on a quarterly basis through estimated tax payments. Each year millions of American workers have far more taxes withheld from their pay than is required. Many people anxiously wait for their tax refunds to make major purchases or pay their financial obligations. It is best, however, to not tie major financial decisions to your anticipated refund — especially if you owe back taxes for previous years, because the IRS is simply going to keep that refund, even if you filed an Offer in Compromise this year.

Here is some information to help bring the taxes you pay during the year closer to what you will actually owe when you file your tax return.

Employees

New Job? When you start a new job your employer will ask you to complete Form W-4, Employee’s Withholding Allowance Certificate. Your employer will use this form to figure the amount of federal income tax to withhold from your paychecks. Be sure to complete the Form W-4 accurately.

Life Event? You may want to change your Form W-4 when certain life events happen to you during the year. Examples of events in your life that can change the amount of taxes you owe include a change in your marital status, the birth of a child, getting or losing a job, and purchasing a home. Keep your Form W-4 up-to-date.

You typically can submit a new Form W–4 at anytime you wish to change the number of your withholding allowances. However, if your life event results in the need to decrease your withholding allowances or changes your marital status from married to single, you must give your employer a new Form W-4 within 10 days of that life event.

If you need help determining how many exemptions to claim on your new W-4, feel free to get in touch with me.

Self-Employed

Form 1040-ES: If you are self-employed and expect to owe a thousand dollars or more in taxes for the year, then you normally must make estimated tax payments to pay your income tax, Social Security and Medicare taxes. You can use the worksheet in Form 1040-ES, Estimated Tax for Individuals, to find out if you are required to pay estimated tax on a quarterly basis. Remember to make estimated payments to avoid owing taxes at tax time.

Categories
Tax Planning

Overseas assets, FBARs, and FATCA

Last month while I was in Switzerland, I had the “opportunity” of visiting the US Embassy in Bern so that I could obtain a replacement for my stolen U.S. passport.

While I was there, I met several interesting people. One was attempting to obtain a U.S. Social Security Number so that she could file the U.S. income tax returns that the IRS was demanding that she file, since she was born in America, although technically German and Swiss. She had never been to the U.S. since she was 5 years old, and was now in her 50’s and the IRS wanted her returns.

Another lady was there to renounce her U.S. citizenship, under very similar circumstances. She had also been born on U.S. soil, technically making her a U.S. citizen. She had no family or other ties to the U.S., and not visited the U.S. since her teens, but had dutifully filed a U.S. tax return for the past dozen years. She was in her mid-30’s, had no intention of ever living in the U.S., and was very happily Swiss. She was renouncing her U.S. citizenship and turning in her U.S. passport for no other reason than to get away from the hassle of filing a U.S. tax return.

For those two individuals, it made absolutely no sense for them to being filing an American tax return.

But what if you do live in America, or intend to keep your U.S. citizenship, but spend time overseas? If you have overseas assets, especially banking and investment accounts, the IRS has you right in their crosshairs, and they are increasing the pressure.

The recently enacted Foreign Account Tax Compliance Act is the latest in a series of measures by the U.S. government to track down overseas assets and make sure that they are getting their cut. This legislation created a new form for us all to fill out, Form 8938, for certain overseas accounts. This is on top of the old Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts (FBAR).

Now keep in mind, there is absolutely nothing wrong, immoral, or illegal about having overseas assets or investments. Holding overseas assets can be a perfectly valid component of your financial planning strategy.

But what the IRS doesn’t like is when you are earning returns on that money, and not paying U.S. income tax on it. You see, America is one of the few countries in the world that taxes it’s citizens on their global income, even if it wasn’t generated here. If you have overseas bond income, for example, then that is unearned income and subject to income tax, without the benefit of the Foreign Earned Income Exclusion (which allows you to exclude a certain amount of earned income each year that you earn overseas).

The IRS even wants to know how much money you have sitting in foreign bank accounts, even if that money has no tax impact, and has already been taxed as earnings here in the States. If you have more than $10,000 in a foreign bank or investment account at any time during the year, you have traditionally been required to file an FBAR report by June 30th of each year.

In addition, you must now file Form 8938 with your annual personal income tax return (Form 1040) if you have a foreign bank accounts, foreign stocks or other securities, or any other foreign financial interest if the total value of all your foreign stuff exceeds $50,000. The failure to report a foreign holding can result in a fine of up to $10,000.

Here’s the biggest part of the new FATCA legislation: The U.S. government is now imposing a reporting requirement on foreign banks. That’s right: The U.S. government is forcing sovereign nations and their financial institutions to report information about American account holders to the U.S. government. Failure to make these reports will result in the U.S. government seizing 30% of any transaction coming into or out of the U.S. to or from that bank.

Some countries, such as Switzerland, that have traditionally had very strict bank secrecy protections, have been capitulating to the U.S. government and forcing their banks to send this information to the IRS, because American banking business is so important to the Swiss economy. However, many foreign financial institutions are simply choosing to no longer do business with American customers. There are nearly 6 million American citizens that legitimately live and work abroad that this could impact.

If you require assistance with FBAR compliance, taking advantage of the voluntary disclosure initiative open right now that waives criminal prosecution and some penalties, need help filling out Form 8938 or TD F 90-22.1, or have any questions regarding U.S. tax treaties with other countries or how to minimize your tax burden to the U.S., you need to retain professional representation from a CPA, Enrolled Agent, or tax attorney that has specific experience working with these situations. Be sure to search our directory to find such a tax professional near you.