Expat US Tax Blogs

Where do I submit my Form 720?

You can file them electronically using the Electronic Federal Tax Payment System (EFTPS) or by mail to the following address: Department of the Treasury Internal Revenue Service Ogden, UT 84201-0009.

The IRS recommends businesses file electronically because it’s quicker, safer, and less prone to mistakes. You can use IRS-approved software or get help from a tax professional to file online.

When do I file Form 720?

You must file Form 720 every quarter of the period you owe excise taxes. Here are the specific deadlines:

April 30: For the quarter ending March 31
July 31: For the quarter ending June 30
October 31: For the quarter ending September 30
January 31: For the quarter ending December 31

What are the penalties for filing Form 720 late?

Here is a guide to the penalties you could incur for late filing:

Penalties for Late Filing: If you file Form 720 late, the IRS may charge a penalty of 5% of the unpaid tax for each month it’s late, up to 25% of the tax owed.
Penalty for Late Payment: If you don’t pay excise taxes on time, the IRS usually imposes a penalty of 0.5% of the unpaid tax for each month the payment is late, up to 25% of the tax owed.
Interest Charges: On top of the penalties you can incur, interest will also be charged on unpaid taxes. The IRS charges interest on unpaid taxes at the federal short-term rate plus 3%. This interest keeps adding up until you pay the taxes in full.
Fraud Penalty: If the IRS finds that your failure to file or pay was due to intentional fraud, the penalty could be as high as 75% of the amount you owe.

What tax credits are available when using Form 720?

Credit for Sales by Registered Vendors: Credits can be claimed for specific fuel sales, such as kerosene used for heating or gasoline sold at a tax-exempt price.
Alternative Fuel Credit: This credit applies to fuels such as liquefied petroleum gas (LPG), compressed natural gas (CNG), and other alternative fuels used in vehicles or other related purposes.
Nontaxable Use of Fuel: This can apply to nontaxable uses of gasoline, diesel, and other fuels, such as for farming or specific governmental purposes.
Biodiesel and Renewable Diesel Credit: This credit can be offered to businesses that manufacture biodiesel or renewable diesel mixtures, offering credits for producing or using these fuels.
Aviation Fuel Credit: This applies to certain types of fuel for aviation used for exempt purposes or sold under specific conditions.
Kerosene Used in Aviation: This is for registered vendors selling kerosene for aviation purposes under special rules that may be eligible for credits.
Alternative Fuel Mixture Credit: This is for businesses that blend alternative fuels with conventional fuels can claim this credit.
Sales of Undyed Kerosene: This applies to undyed kerosene used for certain nontaxable purposes.
Tax Credit for LUST (Leaking Underground Storage Tank): This applies to specific environmental excise taxes, like the tax on LUST, which can result in credits.
Credit for the Patient-Centered Outcomes Research Fee (PCORI): This is for specific circumstances related to health research funding.

September 27 2024

W-9 Form

Published on September 27, 2024
by Aya Takriti, EA

Aya Takriti, an IRS Enrolled Agent with 10 years of expat tax experience, specializes in US tax preparation, tax planning and tax advice for US citizens and Green Card holders living and working in the Middle East.

Why do I need to submit a W-9 Form?

A W-9 Form is used to provide your correct Taxpayer Identification Number (TIN) to the person who is required to file an information return with the IRS.

This form can verify personal information like your name, address, and Social Security Number (SSN) for individuals or Employer Identification Number (EIN) for businesses.

Who is required to complete a W-9 Form?

For individuals, anyone who will receive income as a non-employee:

Freelancer
Self-employed individuals
Independent contractors
Temporary or gig employees under non-employment structures
Individuals receiving interest or dividends from investments

This is for businesses providing another service for an entity or engaging in financial transactions.

NOTE: W-9 is made for individuals who are US citizens or residents.

What if I’m not a US citizen?

You can submit a W-8 Form instead of the W-9 Form.

I want to know more about US taxes abroad

How do I complete a W-9 Form?

Here’s a guide to completing a W-9 Form:

Line 1. Name: Enter your full legal name as it appears on your tax return.
Line 2. Business Name: Only if you classify as a business or use a different name. If not, leave it blank.
Line 3a. Tax Classification: To clarify your current status, like an individual, sole proprietor, or corporation.
Line 5 and 6. Address: Provide the mailing address where you wish to receive tax-related documents. This is also the address where the requester of Form W-9 will mail your information returns.
Line 7. Social Security Number (SSN) or Employer Identification Number (EIN): Enter your SSN for individuals and EIN for businesses.
Signature: Sign and date the form to confirm everything is correct.

What mistakes should I avoid when filling out a W-8 form?

Ensure that the name you entered is the same as your income tax return identification.
Incorrect or missing Social Security Number (SSN) or Employer Identification Number (EIN).
Incorrect tax classification. The IRS has provided a summary table for guidance as part of the instructions on Form W-9.
Not signing the form is considered incomplete. Always sign and date it.

If you submit a W-9 form incorrectly, you must notify the requester and complete a new form as soon as possible.

Where do I submit a W-9 form?

You need to submit the form to the person or business that requested it from you, not the IRS. Since the W-9 form is intended for the requestor, payments made to you to the IRS.

To protect your sensitive information, avoid sending the form via email. It’s always better to fax or mail it. A requestor can face legal consequences if they share your personal information without permission.

What happens if I don’t submit a W-9 form?

Failure to submit a W-9 form automatically causes the requestor to take 24% of payments made to you as instructed by the IRS.

Backup withholding

Backup withholding is used by the IRS to collect a percentage of your reportable income to ensure compliance with paying taxes.

This is triggered when you fail to submit a W-9 form or incorrectly submit a W-9 form.

The current backup withholding rate is 24%.

Not submitting a W-9 form when needed could also lead to other issues, such as delayed income or tax penalties.

Can I be exempt from backup withholding?

Yes, you are generally exempt if you have provided the correct information on your W-9 form and it matches the IRS records.

Some types of income are not subject to backup withholding:

Wages or salary
Retirement account distributions
Unemployment compensation
Real estate transactions
Interest and dividend payments

How long is my information on the W-9 form valid?

The W-9 form remains valid as long as the information provided is correct and up-to-date.

If you decide to change your personal information and it connects with the W-9 form, you need to submit a new W-9 form to update your details for the benefit of the requestor and the IRS.

If you submitted a W-9 a long time ago, it’s a good idea to check with your payer to ensure the accuracy of the details.

How do a W-9 Form and a W-4 Form differ?

A W-9 form is for freelancers, independent contractors, or anyone who gets paid but isn’t an employee. It provides the person or company paying the individual with correct taxpayer information.

A W-4 form is for employees. It tells their employer how much tax to withhold from their paycheck.

How do a W-9 Form and a 1099-MISC Form differ?

A W-9 Form is requested by businesses to collect tax information from non-employees they are paying like independent contractors and freelancers for tax reporting.

A 1099-MISC Form is used by businesses to report payments made to non-employees to the IRS for the taxable year.

In summary, the W-9 form collects information on non-employees, and the 1099-MISC form reports payments of non-employees to the IRS. The two forms work together.

September 26 2024

W-8 Form

Published on September 26, 2024
by Aya Takriti, EA

Why do I need to submit a W-8 form?

If you are a foreign individual receiving US-sourced income, submitting a W-8 Form benefits you by possibly reducing your tax withholding and establishing your foreign status for tax purposes.

Depending on your home country’s tax treaty with the US, you might be able to be exempt from US taxes because your income is already taxed in your country of residence.

Why are the W-8 forms necessary for foreign individuals and entities?

Here are the benefits of using W-8 forms:

Certification of Foreign Status: The forms confirm that the income recipient is not a US citizen or resident, ensuring they are treated as a foreign person for tax purposes.
Claim Tax Benefits: These allow individuals or entities to claim reduced tax rates or exemptions under tax treaties they are entitled to, helping them avoid overpaying taxes.
Ensure Correct Tax Withholding: The form certifies that the right amount of tax is withheld from your US income. Without it, a higher tax rate of 30% may be applied.
Avoiding Penalties: Failure to submit the form may result in potential penalties for not following the US tax regulations.

These forms help the IRS identify foreign individuals or entities that qualify for reduced tax or exemptions based on international tax treaties.

It’s important to note that the W-8 form has different versions for various entities and types of income.

What are the different types of W-8 forms?

There are five distinct types of W-8 forms that ensure the correct tax reduction based on foreign status and income type:

W-8BEN: For individuals to claim their entitled tax treaty benefits for income, such as dividends, interest, or royalties
W-8BEN-E: For foreign businesses or entities, such as a foreign company claiming income from US clients.
W-8ECI: For individuals or entities receiving income connected with a trade or business in the US, such as a foreign individual operating a business in the US.
W-8IMY: For foreign intermediaries (agent, nominee, or custodian) to report income on behalf of other foreign individuals or entities, such as a foreign bank that receives interest payments from a US company on behalf of its clients.
W-8EXP: For foreign governments, international organizations, and tax-exempt entities.

I want to know more about US taxes abroad

How do I fill out the W-8 Form?

Choose the correct W-8 form: Based on your situation, choose the appropriate form (e.g., W-8BEN for individuals, W-8BEN-E for entities).
Provide personal or entity details: (Lines 1-4)
- Enter your full legal name or business name.
- Provide your country of citizenship or incorporation. If you are a dual citizen, enter the country where you are both a citizen and a resident when you complete this form.
- Enter your permanent address; your permanent residence address is where you live and are a citizen for income tax purposes.
- Enter your mailing address only if it differs from the address you show in your permanent address.
Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN):
- You can provide your SSN if you have one. If you do not have an SSN and are not eligible, you can get an individual taxpayer identification number (ITIN).
- If applicable, you can also provide your foreign tax identification number (FTIN).
Claim tax treaty benefits (if applicable): Check if your country has a tax treaty with the US and see what benefits you qualify for, like lower tax rates on dividends, interest, or royalties.
Certification of foreign status: The form must be signed and dated by the beneficial owner confirming that you are a foreign person/entity and meet the requirements for reduced tax withholding or a foreign status.
Submit the form: Give the completed form to the withholding agent or company paying you, not the IRS.

What mistakes should I avoid when filling out a W-8 form?

Creating mistakes might make your W-8 form invalid. To avoid rejection, here’s what you can take into consideration:

Providing a US address on your permanent address
Incorrect Individual Taxpayer Identification Number (ITIN) or Social Security Number (SSN)
Incorrect Foreign Tax Identification Number (FTIN)
Not claiming tax treaty benefits properly
Leaving fields blank on applicable sections
Using the wrong form
Forgetting to sign
Failing to renew the form

If any information on the W-8 forms becomes incorrect, you must submit a new form within 30 days to prevent further issues.

Where do I submit my W-8 form?

You can submit your W-8 form directly to the withholding agent paying you US-sourced income.

Do not send the form to the IRS unless instructed; the agent uses it to determine the correct amount of tax to withhold from your payments.

What is a withholding agent?

A withholding agent is any person or entity responsible for handling income subject to a US tax return and withholding.

This includes US companies, banks, partnerships, or individuals who pay foreign persons or entities income.

When do I need to submit a W-8 Form?

Initially, You should submit your W-8 form before you start receiving income from the US. Without the form, the payer may apply a higher withholding tax rate, usually 30%.

How long is my W-8 Form valid?

W-8 form is valid for 3 years from the date you sign it unless you want to update your information.

Once the three years are over, you need to re-submit the form if you continue to claim income from the US and want to maintain your reduced tax rate. Make sure to resubmit before expiration to avoid withholding issues.

What happens if I don’t submit a W-8 form?

Failing to submit a W-8 form could result in higher taxes and delays in receiving payments.

US payers are required to withhold a default 30% tax on your income even if you qualify for a lower rate. Remember that this applies to types of payments such as interest, rents, royalties, dividends, annuities, premiums, and substitute payments, to name a few.

September 19 2024

IRS Form 56

Published on September 19, 2024
by Aya Takriti, EA

Do I need to file a Form 56?

If you officially entered a fiduciary relationship, you must file Form 56 to the IRS.

Form 56 is a notice concerning fiduciary relationships; reporting to the IRS upon establishing or terminating this relationship is essential to ensure transparent and accurate communication.

Purpose of a fiduciary relationship

A fiduciary relationship is a legal relationship composed of two or more parties. The fiduciary has a duty to assume responsibilities in good faith to the other party in the relationship.

A common example of this relationship is between a trustee and a beneficiary. The trustee must file Form 56 for the IRS to recognize assumed responsibility, such as managing assets with tax responsibilities for the beneficiary’s benefit.

What is the scope of the relationship with Form 56?

A fiduciary takes on the taxpayer’s powers, rights, duties, and privileges related to tax matters. For the IRS, the fiduciary is simply the taxpayer.

Upon appointment, the fiduciary automatically takes the responsibilities required by the IRS and has the right to perform them.

The fiduciary should continue with the legal rights and responsibilities until the relationship terminates, which should be reported to the IRS under section 6903 of the US Internal Revenue Code (IRC).

What’s under Section 6903?

You are obligated to address the formation and termination of a fiduciary relationship with the IRS.

Formation: Providing the IRS with essential information regarding fiduciary relationships facilitates accurate and necessary tax reports and filings

Termination: The fiduciary must complete a new form 56 indicating the termination of the fiduciary relationship to ensure the transfer of tax matters and keep IRS records updated.

What are the risks of not filing IRS Form 56?

The IRS will not recognize the supposed fiduciary and their assumed tax obligations, which will result in missed or undelivered deadlines or unaddressed tax concerns. There is no penalty for not filing Form 56, but you will still be penalized for any late filing or errors in tax submissions.

I want to know more about US taxes abroad

Who should file Form 56?

Here are some examples of when you are required to take on a fiduciary role:

Trustee: If you manage the trust of a beneficiary.
Guardian: If you are appointed as a guardian of an individual.
Executor: If you are managing the tax affairs of a deceased person’s estate.
Receiver: If you are managing a business or property by court order.

How do I fill out Form 56?

Here’s a step-by-step process for filling out Form 56:

Part I: Identification

Enter your name, address, and taxpayer identification number (TIN).
Provide the name, address, and TIN or SSN of the person or entity you are acting on

Part II: Court and Administrative Proceedings

Indicate if a court or other administrative process set up the fiduciary relationship.
Include related details such as dates and case numbers.

Part III: Authority

Identify your fiduciary role (e.g., executor, trustee, guardian).
Indicate the date when you started or ended the fiduciary relationship.

Part IV: Signature

Sign and date the form to confirm that the information is accurate.

Here are a few notes to remind yourself of:

Identification: You must provide the Social Security number or other ID of the person or entity you represent. This helps the IRS correctly identify the taxpayer and access their records to respond to your request.
Updating the address: You cannot use Form 56 to update the address of the individual or organization you’re acting for. Refer to Form 8822 or Form 8822-B.
There is more than one fiduciary: Each must file a separate Form 56 or otherwise notify the IRS of their status.
Incomplete information provided: The IRS may suspend processing the notice of fiduciary relationship and not consider a proper notification until you provide the necessary information.
Providing false information: You may be subjected to penalties.

When and where should I file Form 56?

You can submit your Form 56 as soon as you begin your fiduciary duties to the IRS office, where the person or entity you act as a fiduciary typically files their tax returns. The exact address you need to file depends on your state of residence and the corresponding IRS service center for your state.

However, when filing for an estate, you might need to submit it to the Department of the Treasury (Kansas City, MO 64999) where the estate tax return is filed, depending on your specific circumstances.

Can I submit my Form 56 alongside my tax return?

Yes, you can include Form 56 upon submitting your tax return. However, if you inform the IRS that you’re the taxpayer’s authorized representative, you should use Form 2848 (Power of Attorney and Declaration of Representative) instead.

How does Form 56 affect the processing of other IRS forms?

IRS Form 56 coordinates with various other IRS forms to ensure effective management of tax matters for the individual or entity you are responsible for. Here are several examples:

Form 2848 (Power of Attorney):
Form 2848 grants the right to represent you on your behalf in other tax obligations.
For other tax matters, you can broaden the extent of the authority granted with Form 2848.

Form 8822 (Change of Address)

Form 8822 is used to notify the IRS of a change or update in your mailing address to ensure timeliness on file. If your address changes after filing Form 56, you should file Form 8822 to update the IRS with your new address.

Form 706 (Estate Tax Return)

Form 706 is used to report a deceased person’s estate tax liability.
Executors who submit Form 56 must frequently file Form 706 to report and settle any estate taxes owed.

Form 1041 (Income Tax Return for Estates and Trusts)

Form 1041 is used to report an estate or trust’s income, deductions, and credits.
Trustees who file Form 56 will use Form 1041 to report the trust’s annual income and pay any taxes owed.

August 30 2024

IRS Form 8938

Published on August 30, 2024
by Aya Takriti, EA

What is IRS Form 8938?

US taxpayers use IRS Form 8938 to report foreign financial assets.

If your foreign financial assets surpass specific thresholds, this form must be included with your annual 1040 tax return.

The IRS generally uses Form 8938 to monitor US taxpayers’ foreign financial holdings, including foreign bank accounts, securities, and stakes in foreign entities.

Who is required to file Form 8938?

US citizens and green card holders who hold foreign financial assets above certain limits are required to file Form 8938.

However, these thresholds vary based on your filing status and whether you live in the US or abroad.

Thresholds for Filing:

Single or Married Filing Separately:
- Living in the US: File if your foreign financial assets exceed US$50,000 at year-end or US$75,000 at any time during the year.
- Living Abroad: File if your foreign financial assets exceed US$200,000 at year-end or US$300,000 at any time during the year.
Married Filing Jointly:
- Living in the US: File if your foreign financial assets exceed US$100,000 at year-end or US$150,000 at any time during the year.
- Living Abroad: File if your foreign financial assets exceed US$400,000 at year-end or US$600,000 at any time during the year.

What types of foreign assets need to be reported?

You must report a variety of foreign financial assets on Form 8938, including:

Foreign bank accounts
Foreign brokerage accounts
Foreign stocks and securities
Interests in foreign partnerships
Foreign mutual funds
Foreign life insurance or annuity contracts with cash value

I want to know more about US taxes abroad

Are there any penalties for failing to file Form 8938?

Yes, not filing Form 8938 can lead to severe penalties.

The IRS may impose a US$10,000 fine for failing to disclose required information, with an additional US$10,000 penalty for every 30 days of non-filing after notification, up to a maximum of US$60,000.

Criminal penalties may also apply in certain cases.

How does Form 8938 differ from FBAR (FinCEN 114)?

Form 8938 and FBAR (FinCEN 114) serve different purposes:

Form 8938: Filed with your tax return and reports foreign financial assets if the total value exceeds the thresholds.
FBAR/FinCEN 114: Filed separately from your tax return and reports foreign bank and financial accounts if their total value exceeds US$10,000 at any point during the year.

What should be included on Form 8938?

When completing Form 8938, you need to report the following assets:

Foreign bank accounts: Include checking, savings, and deposit accounts held at foreign financial institutions.
Foreign brokerage accounts: Report accounts holding foreign stocks, bonds, or other securities.
Foreign stocks and securities: Report direct ownership of foreign stocks and bonds that aren’t in a brokerage account.
Foreign partnership interests: Include ownership stakes in foreign partnerships.
Foreign mutual funds: Report ownership in foreign mutual funds.
Foreign life insurance or annuity contracts: Include contracts with cash value issued by foreign insurers.
Foreign trusts and estates: Report beneficial interests in foreign trusts or estates.

Can you file Form 8938 electronically with your tax return?

Yes, Form 8938 can be submitted electronically along with your tax return. When filing your annual tax return (Form 1040 or Form 1040-SR) through the IRS e-file system, you can include Form 8938 in your electronic submission.

Do Form 8938 and FBAR require reporting the same accounts?

Yes, if you are required to file both Form 8938 and the FBAR (FinCEN Form 114), you must include the same accounts on both forms, provided they meet each form’s specific reporting criteria.

Are there situations where you don’t need to file Form 8938?

Yes, there are exceptions to the filing requirement for Form 8938:

No Income Tax Return Filing: If you aren’t required to file a US income tax return for the year, you don’t need to file Form 8938, even if your foreign financial assets exceed the reporting threshold.
Assets Already Reported: If you’ve already reported certain foreign assets on other forms (like Form 3520 or Form 5471), you can simply note those forms on Form 8938 without repeating the detailed information.
Excluded Assets: Certain assets, such as directly owned foreign real estate, foreign currency, and precious metals, are not required to be reported on Form 8938.

How do you determine the value of foreign financial assets for Form 8938?

Identify Foreign Financial Assets: List all assets that qualify as specified foreign financial assets.
Determine Maximum Value: For each asset, calculate the highest value it reached during the tax year, including any income generated from the asset.
Estimate Values if Necessary: If exact figures aren’t available, use reasonable estimates based on reliable sources like bank statements.
Convert to US Dollars: Convert the value of each asset to US dollars using the Treasury Department’s exchange rates as of December 31st of the tax year.
Example: If your foreign account had a maximum value of €50,000, you would convert that amount to US dollars using the year-end exchange rate.
Total Asset Values: Add together the values of all specified foreign financial assets to see if they meet or exceed the reporting thresholds.
Complete Form 8938: Report the total value of your specified foreign financial assets on Form 8938 and file it with your annual tax return (Form 1040 or Form 1040-SR).

August 22 2024

Child Tax Credit 2024

Published on August 22, 2024
by Jeff Patterson

Jeff Patterson is an American living in Scotland and joined the team at Expat Tax Online after experiencing the complexities of living abroad with a family.

What exactly is the Child Tax Credit (2024)?

The Child Tax Credit (CTC) is a tax benefit provided to help parents or guardians with the costs of raising children. It works by reducing the amount of federal income tax you owe, giving families some financial relief.

Are you living abroad? Here’s what you need to know

If you’re living outside the United States, you may qualify for a version of the Child Tax Credit called the Additional Child Tax Credit (ACTC). This is different from the regular CTC and the Advanced Child Tax Credit, so it’s important to make sure you’re claiming the right one.

Who can get the Additional Child Tax Credit in 2024?

To qualify for the ACTC in 2024, you need to meet certain requirements:

Child’s Age: Your child must be under 17 by the end of the tax year.
Relationship: The child must be your son, daughter, stepchild, foster child, sibling, or a descendant of any of these.
Dependent Status: You must list the child as a dependent on your tax return.
Citizenship: The child needs to be a US citizen, US national, or US resident alien.
Social Security Number (SSN): Your child must have an SSN issued before the tax year ends.
Living Situation: The child must have lived with you for more than half of the tax year.
Financial Support: The child should not have paid more than half of their own expenses.

I want to know more about US taxes abroad

Have there been any changes to eligibility?

The eligibility rules for the ACTC haven’t changed recently, but there have been updates to other types of Child Tax Credits.

It’s a good idea to stay informed about these changes.

How much is the Child Tax Credit worth in 2024?

For 2024, the Child Tax Credit offers up to US$2,000 for each child under 17.
If you owe US$2,000 in taxes, the credit can cancel that out entirely. However, if you don’t owe taxes, you can get a refund of up to US$1,600 per child through the ACTC.

Does the child’s age affect the credit amount?

No, the credit amount doesn’t change based on your child’s age, as long as they are under 17 at the end of the year.

How do you claim the Child Tax Credit?

Here’s how you can claim the Child Tax Credit:

Check If You Qualify: Make sure your child meets the eligibility criteria.
Fill Out Your Tax Return: Use Form 1040 or Form 1040-SR to file your federal taxes.
Include Child Details: Provide your child’s name, SSN, and your relationship to them on the tax return.
Calculate the Credit: Use the Child Tax Credit Worksheet (Schedule 8812) to figure out how much you can claim.
File Your Return: Submit your tax return to the IRS, making sure everything is correct to avoid any delays.

Is the Child Tax Credit refundable?

Yes, it is. If the credit amount is more than the taxes you owe, you can get the rest back as a refund. For 2024, you could receive up to US$1,600 per child as a refund.

How does your income affect the Additional Child Tax Credit?

The amount of Additional Child Tax Credit (ACTC) you can receive depends on your income. There are specific income limits where the credit starts to decrease or “phase out.”

Single Filers: If your adjusted gross income (AGI) is above US$200,000, the credit starts to decrease.
Married Filing Jointly: For couples filing jointly, the phase-out begins at US$400,000.

Once your income exceeds these amounts, your credit is reduced by US$50 for every US$1,000 over the limit until it phases out entirely.

Example 1: A married couple filing jointly with an AGI of US$350,000 and two kids can still claim the full credit of US$3,200 (US$1,600 per child) because their income is below the US$400,000 limit.

Example 2: A single filer with an AGI of US$210,000 and one child will see a reduction in their ACTC. Their income is US$10,000 over the US$200,000 threshold, so their credit is reduced by US$500 (US$50 for each US$1,000 over the limit), leaving them with US$1,100.

Can self-employed qualify for the Additional Child Tax Credit?

Yes, if you’re self-employed, you can still qualify for the Additional Child Tax Credit as long as you meet the requirements.

Your self-employment status doesn’t affect your eligibility for the ACTC.

You just need to ensure your child qualifies based on age, relationship to you, dependency, citizenship, residency, and financial support.

Has the Additional Child Tax Credit changed for children with disabilities?

For 2024, there haven’t been any specific changes to the Additional Child Tax Credit for children with disabilities.

Parents or guardians of children with disabilities are still eligible for the ACTC under the same rules as other children. Additionally, other tax credits like the Earned Income Tax Credit (EITC) or the Credit for Other Dependents might offer extra financial benefits.

It’s a good idea to speak with a tax professional to ensure you’re taking advantage of all the tax credits available to you.

How does the Additional Child Tax Credit work with other tax credits?

You can claim the ACTC along with other credits like the Earned Income Tax Credit (EITC), the Credit for Other Dependents, and the Child and Dependent Care Credit.

However, each credit has its own set of rules, so you’ll need to calculate them separately on your tax return.

What if your income changes during the year?

If your income changes during the year, it can impact how much ACTC you receive.

A significant increase in income might reduce your credit, while a decrease in income could make you eligible for a larger credit or even a refund through the refundable ACTC.

Can a non-custodial parent claim the Additional Child Tax Credit?

Usually, the parent who has the child living with them for most of the year—the custodial parent—claims the ACTC.

However, the non-custodial parent can claim the credit if the custodial parent signs Form 8332, allowing them to do so. After which, this form must be attached to the non-custodial parent’s tax return to claim the credit.

August 15 2024

Form 1120-F

Published on August 15, 2024
by Aya Takriti, EA

What does Form 1120-F cover?

Form 1120-F is the document that foreign companies use to report income they earn from US sources.

This form is important because it helps the IRS track the income of foreign corporations that have business activities in the US and ensure they are complying with US tax laws.

Why is it necessary to file Form 1120-F?

Filing Form 1120-F is important for foreign corporations as it allows them to report their US income and claim any deductions or credits they are entitled to. Doing this can also help reduce the tax amount they owe, ensuring they don’t pay more than required.

When must a foreign company file Form 1120-F?

Foreign companies need to file Form 1120-F if they are engaged in business in the US or if they have income connected to a US business. Here are some common reasons why a foreign company would need to file:

Conducting Business in the US: If the company regularly conducts business activities in the US, they are required to file this form.
Income Tied to US Operations: Any income that comes from the company’s US operations must be reported on Form 1120-F. This includes earnings from selling products or services, owning US real estate, or having branches in the US
US Partnership Involvement: If the company is a partner in a US-based partnership that is doing business in the US, they must file the form.

I want to know more about US taxes abroad

How do you fill out Form 1120-F?

Completing Form 1120-F involves several steps, but it can be broken down as follows:

Basic Information:
- Start by entering the company’s name, address, and employer identification number (EIN).
- Indicate the tax year for which the form is being filed.
Income Reporting:
- Total Income: Report all income earned from US sources.
- Specific Income Types: Provide details on income from various sources such as sales, dividends, or interest.
Deductions:
- List all allowable deductions, including business expenses like salaries, rent, and taxes.
- Add up these deductions to determine the total amount.
Tax Calculation:
- Calculate the tax owed based on the taxable income after deductions.
- Report any credits or prepayments that can reduce the total tax owed.
Additional Information:
- Answer questions about the company’s US activities and ownership.
- Provide information on any previous US tax returns filed.
Reconciliation:
- If there are differences between the company’s book income and the income reported on the tax return, reconcile them here.

When is Form 1120-F due?

For Calendar Year Companies: The form must be filed by April 15 of the year following the end of the tax year.
For Fiscal Year Companies: The form is due by the 15th day of the fourth month after the end of the fiscal year. For example, if the fiscal year ends on June 30, the deadline is October 15.

Can you get an extension for filing Form 1120-F?

Yes, foreign companies can request a six-month extension by submitting Form 7004.

This gives the company more time to prepare and file Form 1120-F without incurring penalties for late filing.

What are the consequences of filing Form 1120-F late?

The IRS may charge penalties and interest if Form 1120-F is filed late and taxes are due.

Typically, the penalty is 5% of the unpaid tax for each month the return is late, up to a maximum of 25% of the unpaid tax.

Where should you send Form 1120-F?

If you’re mailing Form 1120-F, address it to the Department of the Treasury, Internal Revenue Service Center, Ogden, UT 84201, USA.

For those using private courier services like FedEx or UPS, the correct address is Internal Revenue Service, 1973 Rulon White Blvd., Ogden, UT 84201, USA.

Can foreign businesses file Form 1120-F online?

Yes, foreign corporations can submit Form 1120-F electronically.

Choose an IRS-Approved e-file Provider: Start by selecting an e-file provider recognized by the IRS.
Complete the Form: Use tax software that supports Form 1120-F to fill it out, including any required attachments.
Consult a Tax Professional: Working with a tax professional can help ensure everything is completed correctly, saving you potential issues later.
Submit the Form Online: Follow the steps provided by your e-file provider to send the form to the IRS electronically.

What does ECI have to do with Form 1120-F?

Effectively Connected Income (ECI) is income that a foreign corporation earns from its business activities in the US.

ECI is especially important because it’s the type of income that needs to be reported and taxed using Form 1120-F.

How can you tell if a foreign company has ECI?

Business Activities in the US: If the company is regularly doing business in the US, such as selling products or services, it likely has ECI.
Types of Income:
- US-Based Income: Income from sales, services, or other sources within the US.
- Passive Income: Income like dividends or interest may also count as ECI if it’s tied to US business operations.
Asset-Use and Business-Activities Tests: If the income is generated from assets or activities related to the corporation’s US operations, it qualifies as ECI.

What tax deductions and credits can foreign companies claim on Form 1120-F?

What deductions are available?

Business Expenses: This includes everyday business costs, like:
- Employee Wages: Payments made to workers.
- Office Rent and Utilities: Costs for office space and utility bills.
- Supplies and Equipment: Purchases necessary for running the business.
- Travel and Business Meetings: Expenses related to work travel or meetings.
Depreciation: Companies can deduct the cost of equipment or property used in the US over time.
Interest Payments: Interest paid on business loans can be deducted, within certain limits.
State and Local Taxes: Taxes paid at the state or local level related to US operations can be deducted.

What credits can reduce taxes?

Foreign Tax Credit: If the corporation pays taxes in another country on income that’s also taxed in the US, this credit can help avoid double taxation.
General Business Credits: Depending on eligibility, companies can claim credits like those for Research and Development (R&D) or investments.
Withholding Tax Credit: Any taxes withheld on US-based income can be credited against the company’s US tax liability.

July 10 2024

MAGI vs AGI, What is the difference?

Published on July 10, 2024
by Grace Lorraine Angeles

What are the key differences between MAGI and AGI?

The main distinction between Modified Adjusted Gross Income (MAGI) and Adjusted Gross Income (AGI) is in the additional adjustments added back to AGI to derive MAGI. Both figures are important for US taxpayers, particularly when qualifying for various tax-related benefits.

What does adjusted gross income (AGI) mean?

Adjusted Gross Income (AGI) is the total of your gross income after subtracting specific allowable deductions. AGI is crucial as it determines your taxable income and your eligibility for various tax credits and deductions.

To determine AGI, you start with your gross income, which includes earnings such as wages, dividends, capital gains, business income, and other types of earnings. You then subtract certain allowable deductions to get your AGI. These deductions can help lower your taxable income, potentially reducing the amount of taxes you owe.

Which adjustments are subtracted from gross income to calculate AGI?

Here are some common adjustments that can be subtracted from your gross income to calculate your AGI:

Student loan interest: Deduct up to $2,500 of interest paid on qualified student loans.
Retirement contributions: Contributions to traditional IRAs, 401(k)s, and other retirement accounts can be deducted.
Tuition and fees: Subtract qualified education expenses up to a certain limit.
Health savings account (HSA) contributions: Contributions to an HSA can lower your gross income.
Self-employment taxes: Deduct a portion of your self-employment tax.
Alimony payments: Deduct alimony payments for divorces finalized before 2019.
Moving expenses: Deduct moving expenses if you are active-duty military personnel.

These adjustments are intended to account for significant expenses that reduce your disposable income. Subtracting these from your gross income provides a clearer picture of your financial situation for tax purposes.

I want to know more about US taxes abroad

How do you calculate AGI?

Assume your total gross income is $85,000, which includes wages, salary, and other income sources.

Adjustments to income:

Student loan interest: $1,500
Traditional IRA contribution: $3,000
Health savings account (HSA) contribution: $2,000

AGI = Gross income – (Student loan interest + IRA contribution + HSA contribution)
AGI = $85,000 – ($1,500 + $3,000 + $2,000)
AGI = $85,000 – $6,500
AGI = $78,500

What does modified adjusted gross income (MAGI) mean?

Modified Adjusted Gross Income (MAGI) starts with AGI and includes certain deductions that were initially excluded. These additions often encompass foreign income, tax-exempt interest, and student loan interest deductions.

To calculate MAGI, you begin with your AGI and then add back specific items that were previously deducted. This provides a fuller picture of your income for certain tax purposes.

What items are typically added back to AGI to determine MAGI?

Common adjustments added back to AGI to calculate MAGI include:

Foreign earned income: Add back any excluded foreign earned income.
Tax-exempt interest: Include interest from tax-exempt bonds.
Student loan interest deduction: Add back this deduction.
IRA contributions: Include deductions for contributions to traditional IRAs.
Rental losses: Depending on circumstances, rental losses may be added back.

These additions help ensure that MAGI reflects a more complete view of your income, which is crucial for determining eligibility for certain tax benefits.

How do you calculate MAGI?

Starting with the previously calculated AGI of $78,500:

Add the following items:

Foreign earned income exclusion: $5,000
Tax-exempt interest: $1,000
Student loan interest deduction: $1,500 (added back)
IRA contribution deduction: $3,000 (added back)

MAGI = AGI + (Foreign earned income + Tax-exempt interest + Student loan interest + IRA contribution)
MAGI = $78,500 + ($5,000 + $1,000 + $1,500 + $3,000)
MAGI = $78,500 + $10,500
MAGI = $89,000

How does AGI determine eligibility for tax credits and deductions?

AGI, or Adjusted Gross Income, determines your eligibility for many tax credits and deductions. Knowing your AGI is essential because it affects whether you qualify for specific tax benefits. You can increase your potential tax savings by reducing your AGI through allowable adjustments.

Here are some examples:

Earned Income Tax Credit (EITC): This credit is aimed at low- and moderate-income workers and is based on your AGI.
Child Tax Credit: If your AGI exceeds certain thresholds, the amount of this credit can be reduced.
American Opportunity and Lifetime Learning Credits: These education-related credits also depend on your AGI.
Medical and Dental Expense Deductions: These expenses can only be deducted if they surpass a certain percentage of your AGI.

How does MAGI affect eligibility for specific tax benefits and programs?

Modified Adjusted Gross Income (MAGI) is used to determine eligibility for various tax benefits and government programs.

Some examples include:

Roth IRA Contributions: Your eligibility to contribute to a Roth IRA is based on your MAGI. If your MAGI exceeds certain limits, you may not be able to contribute.
Premium Tax Credits: These credits help lower the cost of health insurance purchased through the Health Insurance Marketplace and are based on your MAGI.
Education Credits: Credits such as the American Opportunity Credit and the Lifetime Learning Credit have MAGI limits.
Medicare Part B and D Premiums: Higher-income individuals with a higher MAGI may have to pay higher premiums for Medicare Part B and Part D.

Why is it important to understand the difference between AGI and MAGI?

Understanding the difference between AGI and MAGI is crucial because they are used in different aspects of the tax system.

AGI is the starting point for determining your taxable income and your eligibility for various deductions and credits. On the other hand, MAGI is used to determine eligibility for specific tax benefits and government programs that AGI alone does not cover.

For example:

AGI: Affects your eligibility for deductions like student loan interest, IRA contributions, and medical expenses.
MAGI: Determines if you can contribute to a Roth IRA, qualify for premium tax credits for health insurance, and more.

Getting assistance from a tax professional is highly recommended. They can help you identify all possible deductions and credits you qualify for, maximizing your tax savings. Errors in calculating AGI or MAGI can lead to incorrect tax filings, penalties, and missed tax-saving opportunities; a professional can help you avoid these issues.

July 4 2024

Is the Sharesies a tax trap for US citizens in New Zealand?

Published on July 04, 2024
by Jonathan Rose, EA

Jonathan Rose, an IRS Enrolled Agent with 13 years of expat tax experience, specializes in US tax preparation, tax planning, and tax advice for US citizens and Green Card holders living and working in Australia.

Jonathan also talked about family tax benefits in Australia.

Is Sharesies a tax trap for US citizens living in New Zealand?

Yes, investing in Sharesies can be a tax trap for US citizens living in New Zealand because many of its investment options fall under the category of Passive Foreign Investment Companies (PFICs). This classification leads to complex US tax reporting requirements, resulting in higher taxes and potential penalties if not managed correctly.

Why does the US tax code complicate foreign investments?

The US tax code is designed to discourage citizens from investing outside the United States. Foreign investments, particularly in stock market funds, come with significant US tax compliance obligations.

Any gains from these investments are heavily taxed, even if the investments haven’t been sold and no profits have been realized.

What is Sharesies?

Sharesies is an investment platform that has become very popular in New Zealand due to its easy-to-use interface and wide range of investment options. It allows users to invest in various assets, including stocks, ETFs, and managed funds, with the flexibility to start with minimal amounts of money.

What types of investments are available through Sharesies?

Sharesies offers a diverse range of investment options, such as:

Individual Stocks: Buying shares in companies listed on various stock exchanges.
ETFs (Exchange-Traded Funds): Funds that track specific indexes and are traded on stock exchanges.
Managed Funds: Professionally managed funds that pool money from multiple investors to invest in a diversified portfolio.

I want to know more about US taxes abroad

Are investments in Sharesies considered PFICs?

A Passive Foreign Investment Company (PFIC) is defined by the IRS as a foreign corporation that meets one of the following criteria:

At least 75% of its gross income is passive income, which includes dividends, interest, rents, royalties, and capital gains.
At least 50% of its assets produce or are held to produce passive income.

How do Sharesies investments qualify as PFICs?

Many investment options available through Sharesies, such as stocks, ETFs, and managed funds, are classified as PFICs because they generate passive income and are managed by foreign entities, meeting the IRS criteria.

Are all foreign companies classified as PFICs?

No, not all foreign companies are classified as PFICs. Companies that earn their income through active business operations are not considered PFICs.

Why is it important for US taxpayers to identify PFIC investments?

PFICs are subject to stringent US tax rules designed to prevent tax deferral and ensure transparency. Holding PFICs can result in:

Higher taxes due to interest charges on deferred tax.
Complicated reporting requirements, necessitating the filing of additional forms and maintaining detailed records.
Significant penalties if reporting requirements are not met.

How does the IRS tax PFIC investments?

PFICs are taxed on their unrealized gains each year, meaning you are taxed on the increase in value of the investment, even if you haven’t sold it. For example, if your PFIC investment increases from US$2,000 to US$3,500 over a year, you may owe taxes on the US$1,500 gain, despite not having sold the investment.

What are the reporting requirements for PFICs?

Each PFIC investment requires its own Form 8621 to be filed annually. Completing Form 8621 can take around 20-32 hours per PFIC, making the process complex and costly, especially if you hold multiple PFIC investments.

When must you report PFIC investments?

You must report PFIC investments if your combined PFIC holdings exceed US$25,000. For instance, if you have US$20,000 in one PFIC investment and US$6,000 in another, you have exceeded the reporting threshold and must file Form 8621 for each PFIC.

Why is PFIC reporting such a big deal?

Investors often spread their money across multiple funds, leading to numerous low-value PFIC investments. Each investment requires separate reporting, so having multiple PFICs, even if they are of low value individually, can result in a significant reporting burden.

For example, having 20 PFIC investments, each worth US$120, would require filing 20 forms, greatly increasing the complexity and cost of compliance.

June 13 2024

What’s causing fewer people to receive tax refunds this year?

Published on January 03, 2024
by Jonathan Rose, EA

Jonathan also talked about family tax benefits in Australia.

Several factors contribute to fewer people receiving tax refunds this year. These include tax bracket adjustments, tax law changes, and broader economic shifts such as inflation rates and changes in the labor market.

How have tax refund trends changed over recent years?

Year	Number of Refunds Issued (Millions)	Total Refunds Amount (Billions)	Average Refund	Source
2021	48.5	144.6	US$2,815	IRS 2021
2022	49.2	173.3	US$3,536	IRS 2022
2023	43.3	130.7	US$3,028	IRS 2023
2024	40.5	116.6	US$2,878	IRS 2024

I want to know more about US taxes abroad

What legislative changes might be influencing tax refunds?

Several legislative changes could be influencing the decline in tax refund sizes:

Adjustment of Tax Brackets and Rates: The Tax Cuts and Jobs Act (TCJA) of 2017 adjusted tax brackets and rates, which continues to influence tax filings.
Increase in the Standard Deduction: The TCJA nearly doubled the standard deduction, meaning fewer taxpayers itemize deductions, which affects the size of their tax refunds.
Cap on State and Local Tax (SALT) Deductions: The $10,000 cap on deductions for state and local taxes came into effect with the TCJA.
Changes to Child Tax Credit and Earned Income Tax Credit: During the pandemic, credits like the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC) were temporarily expanded. As these expansions phase out or revert to pre-pandemic levels, the size of refunds may decrease.
COVID-19 Related Legislation: Various COVID-19 relief measures, including stimulus payments and adjustments to unemployment benefits taxation, temporarily affected tax refunds. As these measures expire, taxpayers may notice differences in their refunds.

How are reduced refunds affecting household budgeting and financial planning?

Reduced refunds are significantly impacting household budgeting and financial planning. Households may need to revise their financial strategies, which could involve adjusting monthly budgets to accommodate lower-than-expected funds, delaying large purchases, or revising savings goals.

What do experts say about future tax seasons?

Experts from economics and tax planning fields predict that tax policies may continue to evolve in response to the economic impacts of the pandemic. This could involve more changes in tax laws to stimulate economic growth or address deficits. Additionally, increasing globalization may cause international economic trends to have a greater impact on domestic tax policies.

Should I hire a tax professional to help me with my refunds?

Yes, hiring a tax professional can be very beneficial. A skilled tax advisor can help identify deductions and credits that expats might not be aware of, which can significantly reduce taxable income and potentially increase the size of your refund.

Additionally, if there are errors in previous years’ tax returns or unfiled taxes, a tax professional can help address these issues, assist in filing amended returns, and negotiate with the IRS to resolve any potential disputes or penalties.

Always get professional advice from a US international tax specialist.