Presentation of Services for - World Banksiteresources.worldbank.org/1818SOCIETY/Resources/... · body of this presentation was not intended or written to be used, and cannot be used,

The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500

1818 Society US Income Tax and the Exit Tax

Dale Mason, CPA

Robert Len, CPA, PFS

The Wolf Group

Pursuant to Circular 230, promulgated by the Internal Revenue Service, any U.S. tax advice contained in the body of this presentation was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

© 2011 The Wolf Group

The Exit Tax Agenda

History

Overview

Applicable Provisions /Compliance Issues

Planning


History

“Exit tax provisions” applicable to persons who relinquish their U.S. citizenship or terminate their long-term residence status after June 16, 2008

Prior law: Generally a 10 year alternative tax regime

• First enacted 1966

• Strengthened in 1996 to include “long-term residents”

• Presumptive tax avoidance if assets/income thresholds reached

• 2004 law eliminated subjectivity & increased asset/income thresholds


Exit Tax Overview

Section 877A: “Mark-to-Market” tax on gains exceeding $651,000 (2012) and distribution of certain deferred compensation

Deemed sale of worldwide assets on the day prior to expatriation

Applies to “covered expatriates” • Renounce or relinquish U.S. citizenship

• Termination of “long-term residency” status (GCH 8 out of 15yrs)

• Net worth exceeds $2 million

• Average 5 year tax liability exceeds $147,000 (2012)

Exceptions for dual-nationals (at birth) and expatriation before 18 ½ years old.


Exit Tax Overview

Imposition of a tax at the highest gift or estate tax rates on receipt by a U.S. person of a “covered gift” or bequest from a “covered expatriate”

Recipient pays the tax

Special rules apply to assets held in trust by a “covered expatriate”

Compliance requirements: Form 8854 and W-8CE


Provisions

IRC Section 877A

IRS Notice 2009-85

IRS Notice 97-19

Form 8854 and Instructions

Form W-8CE and Instructions


Covered Expatriate

U.S. citizens who relinquish U.S. citizenship Termination of “Long-term residency”

• Green Card Holders cease to be lawful permanent residents

o8 out of 15 years

oCounting of years important

oRevoked or abandoned (not simply expired)

oTreaty tie-breaker provision

Failure to file Form 8854


Income & Net Worth Tests

Net income test

• Each taxpayer responsible for joint liability

Net worth test

• Global assets minus global liabilities

• Present value of pension is included in net worth calculation


Net Worth Test Cont.

Present value of World Bank pension included in net worth test

• We believe that the taxpayer should use a special discount rate applicable to defined benefit plans

• Actual calculation should be made by an actuary



Q & A

Mark-to-Market Tax

$627K exclusion amount allocated pro rata to all assets having built-in gain

Green card holders are deemed to have basis in assets equal to FMV of assets on date first became resident

Gains/income included in final U.S. resident tax return


Tax on Deferred Compensation

Not part of “Mark-to-Market” tax calculation

Deferred compensation

• U.S. and foreign retirement plans

Eligible deferred compensation

• Applicable to payments of deferred compensation made by U.S. payors

• Payor must deduct and withhold 30% withholding tax



Ineligible deferred compensation

• Non-U.S. payor who fails to make the election to become U.S. payor

• Present value of the covered expatriate’s “accrued benefit” is treated as being received on the day before expatriation



Present value of “accrued benefit” does not include ineligible deferred compensation attributable to services performed outside the U.S. before the person became a U.S. citizen or green card holder.


Specified Tax Deferred

Accounts

Not included in the “Mark-to-Market” tax

Specified Tax Deferred Account:

• Individual Retirement Account

• 529 Plans

Deemed distributed on the day before expatriation date

No early withdrawal penalty



Q & A

Compliance Issues

Dual status tax return required for year of expatriation

File Form 1040NR in subsequent years

Form 8854

• Must certify compliance with all U.S. tax obligations for past 5 years (otherwise will automatically be considered a “covered expatriate”)

• File the Form 8854 by the due date of tax return

• Penalty for failure to timely file is $10,000

Form W-8CE


U.S. Gift/Estate Tax

Consequences U.S. citizen or resident receives property either by gift or

bequest from a “covered expatriate”

Transfer of the property is subject to tax

• $13,000 annual exclusion applies

Equal to the value of the property multiplied by the highest rate of tax for federal estate tax or gift tax

The tax is payable by the recipient


Exit Tax Planning

Hold on to “long-term resident” status

Surrender green card before becoming a long-term resident (less than 8 year threshold) and obtain non-immigrant visa

Surrender green card before income tax/asset thresholds met and obtain non-immigrant visa

Become a U.S. citizen!

• File U.S. taxes forever



Q & A

“Taxmageddon”

Top two income tax rate increases from 33% to 36%, and 35% to 39.6%

Additional 3.8% Medicare Hospital Insurance tax for those with Modified Adjusted Gross Income greater than $250,000

• On income from nonqualified investments (capital gains, dividends, taxable portion of annuity payments, rental income, and royalties)

Foreign Account Tax Compliance Act

• UBS scandal

• Levin Hearings

o$293 billion in interest/dividends/rents paid to foreign persons

oEncourages U.S. persons to masquerade as foreign persons

FATCA enacted on March 18, 2010

FATCA Overview

Designed to force U.S. citizens and residents to report all foreign income

FATCA provisions adds an entirely new Chapter 4 to the Internal Revenue Code. 400 pages of proposed regulations .

FATCA Overview

IRS Agreement:

• Required of all worldwide foreign financial institutions (“FFI”) and certain non-financial institutions who receive any U.S. source payments.

OTHERWISE:

• 30% withholding tax applied to any “Withholdable Payment”

FATCA Overview

To avoid U.S. withholding, Foreign Financial Institutions (“FFIs”) that hold U.S. investments :

• Identify U.S. persons;

• Report information to IRS (or foreign government) on U.S. persons;

• Withhold 30 percent on certain payments to “recalcitrant account holders” and other FFIs that do not meet FATCA requirements.

FATCA Overview

FATCA - Practical Implications

Many foreign financial institutions have and will decide to terminate U.S. clients’ accounts

Strict enforcement of PFIC rules and cost of information reporting will also cause U.S. persons to move financial assets to the U.S.

Self-reporting will be cross checked with institutional (foreign government) reporting. Discrepancies will be easy to identify.

Foreign Bank Account Reporting

“FBAR” – TD F 90-22.1

Who should file:

• U.S. persons

oFinancial interest in or

oSignature authority over

• Foreign financial accounts if in the aggregate the accounts equal or exceed $10,000 at any point during the year


What Foreign Financial

Accounts are Reportable?

Bank & saving deposit accounts

Securities accounts

Life insurance policies with a cash value

Mutual funds

Hedge funds & private equity funds not reportable

Assets not held in an account are not reportable


FBAR Filing Requirements

Filing deadline is June 30 of the following year

• Must be received by June 30

• No extensions

• Filed at Detroit Service Center

Not filed with tax return

• Form 1040 Sch. B question


FBAR Penalties

Non-willful penalty

• $10,000

Willful failure penalty

• Greater of $100,000 or 50% of account balance

Criminal penalties

6 year statute of limitations


2012 IRS Offshore Voluntary

Disclosure Program

FBAR and certain international tax reporting

Pay all taxes and interest for the past 8 years

Waiver of penalties for informational forms

Penalty: 27.5% of the highest account balance

Penalty: 12.5% if unreported foreign account < $75K

No penalties in certain situations

Currently no deadline; subject to change


New Specified Foreign

Financial Assets Report Form 8938

Interest in “Specified Foreign Financial Assets” with an aggregate value exceeding $50,000

Information statement attached to the individual's U.S. income tax return

Effective for 2011


Foreign Financial Asset

Report Cont. “Specified foreign financial asset”

• Foreign financial account

• Stock or security issued by a foreign person

• Financial instrument/contract with a foreign issuer

• Any interest in a foreign entity

Information statement

• Maximum value of assets, account numbers, names and addresses of foreign financial institutions, etc.


Form 8938 Filing Thresholds

Year-End Aggregate Value of All Specified Foreign Financial Assets Exceeds:

Highest Annual Balance Exceeds:

Single, living in the U.S. $50,000 $75,000

Single, living outside the U.S.

$200,000 $300,000

MFS, living in the U.S. $50,000 $75,000

MFS, living outside the U.S. $200,000 $300,000

MFJ, living in the U.S. $100,000 $150,000

MFJ, living outside the U.S. $400,000 $600,000


Form 8938: World Bank Pension

Subject to special valuation rules

Value of participant’s share of defined benefit plans generally not ascertainable

Value equal to distributions received during the year

• Gross distribution reported on Form 1099-R

Foreign Financial Report Cont.

Penalties

• Minimum penalty $10,000

• Maximum penalty $50,000

• Presumption is that the value of the account is in excess of $50,000

• Extends Form 1040 statute of limitations


Foreign Financial Report Cont.

Substantial duplication of information with that of FBAR

“Specified foreign financial asset” broader in definition than the FBAR “foreign financial account”


Passive Foreign Investment

Company Reporting (PFIC) Foreign nationals with diversified investment portfolio

often own foreign mutual funds

Foreign corporation is a PFIC if it meets the asset or income thresholds

There is no ownership percentage threshold


What’s wrong with

having a PFIC?

Excess distribution regime:

• Default regime

• Income and gains are taxed at the highest marginal rate (e.g. 35% in 2012)

• No qualified dividend treatment

• No preferential capital gain rate

• Interest is assessed on the deferred tax


New PFIC Reporting

New IRC 1298(f) reporting requirements

• HIRE Act, March 18, 2010

• Annual information statement required

• Notices 2010-34 and 2011-55


Contact Us

Dale Mason, CPA

[email protected]

Tel: (703) 502-9500 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033

1875 I Street, NW (International Square), Suite 500, Washington, DC 20006

www.thewolfgroup.com


mailto:[email protected]

http://www.thewolfgroup.com/

Documents

Presentation of Services for - World Banksiteresources.worldbank.org/1818SOCIETY/Resources/... · body of this presentation was not intended or written to be used, and cannot be used,