expatriate tax issues for 2005/2006 russell fisher [email protected] amcham-china, january...

Expatriate Tax Issues for 2005/2006Russell Fisher

[email protected]

AmCham-China, January 12, 2006

AmCham-China 01/12/06 2 PricewaterhouseCoopers

Agenda

Adjustments to income

Deductions

Exemptions

Credits

Interest and penalties

This document was not intended or written to be used, and it cannot be used, for the purpose of

avoiding tax penalties that may be imposed on the taxpayer.


401 (k) Retirement Plan

• Pre-tax contribution

• Contribute up to $14,000 for tax year 2005; $15,000 for 2006

• Age 50 “Catch-up” $4,000 for tax year 2005; $5,000 for 2006

• Employer may contribute


Roth 401 (k) Retirement 2006

• Starting 2006, 401 (k) may include a qualified Roth contribution plan

• Contributions - not deductible

• Contribute up to $15,000 for 2006

• Age 50 “Catch-up” $5,000 for 2006


Individual Retirement Accounts Deductible contributions (Modified AGI Restrictions)

• Nondeductible contributions

• Contribution is $4,000 for tax year 2005 – 2007 $5,000 for tax year 2008

• Must be made by the due date, April 15

• Age 50 “Catch-up” contributions, $500 for year 2005; $1,000 for years 2006 and later


Roth IRA• Contributions are nondeductible

• Contribution is $4,000 for tax year 2005

• Limit applies to all IRA contributions in a year

• Subject to MAGI limitation rules

• Must be kept separate from traditional IRAs

• May be established for minor children who meet compensation requirements


Roth IRA - Distributions• Nonqualified distributions subject to tax and 10% penalty

unless exceptions apply

• Distributions are deemed to come from contributions first and then from the earnings

• Earnings portion of qualified distribution is tax free

• Distribution is qualified if made after a five-year holding period and

• Taxpayer is at least 59 1/2 or distribution is due to death/disability or is made to a qualified first-time homebuyer


Adjustments to Income

Educator Expenses:

$250 Kindergarten through grade 12 teacher, counselor, principal, aide in school 900 hours.


Adjustments to Income

Student loans (MAGI $65,000 Single; 130,000 MFJ)

Tuition fees (MAGI)

Moving expenses (Foreign Storage Expense)

Penalty on early withdrawal of savings

Alimony


Standard Deduction

• $5,000 Single

• $7,300 Head of Household (HOH)

• $10,000 Married Filing Joint (MFJ)

• $5,000 Married Filing Separate (MFS)


Itemized Deductions

Medical and Dental Expenses

• Greater than 7.5% of AGI

• Includes post tax medical insurance costs

• Includes medical expense of dependent


- State Tax or State Sales Tax Deduction

• Effective for 2004 and 2005 tax years only:

• Permits deduction for state and local sales taxes in lieu of state income tax deduction

• For individuals residing in states with low or no state income tax (i.e., Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming)

• Opportunity to claim either actual sales tax or table amount


Itemized Deductions - Tax, Interest

Real estate tax

Personal property tax

Home mortgage (principal residence and second home)

Home mortgage (Form 1098 / Foreign Bank)

Points (principal residence)

Investment interest (limited to investment income)


Itemized Deductions - Gifts

Gifts to individuals

• Nondeductible on individual income tax return

• $11,000 exclusion for Gift Tax purpose 2005; $12,000 for 2006.

Gifts to US based charities(Charitable Contribution Deductions)(Katrina Emergency Tax Relief Act of 2005)

• Receipt / acknowledgement letter needed for gifts of $250 or more


Itemized Deductions- Charitable Contribution Deductions

Increased reporting responsibilities for noncash contributions exceeding $500

Deduction for contribution cars, boats, or airplanes, restricted to amount charity receives upon sale (often at auction) if charity does not retain item for its own use

• Previously, taxpayers deducted ‘blue book value’ of item, which was presumably often inflated by overstating condition of item to determine value

• Increased substantiation of contribution by charity required to be provided to donee seeking deduction


Itemized Deductions

Casualty and theft (>10% of AGI)

Unreimbursed employee expenses (>2% of AGI)

Tax preparation fees (>2% of AGI)

Gambling losses up to gambling winnings

Reduction of itemized deductions begins when AGI reaches $145,950 ($72,975 MFS)• Taxes• Interest (except Investment Interest)• Gifts to charities• Miscellaneous deductions (>2% of AGI)• Other expenses (except Gambling Losses)


Itemized Deductions 2006

Reduction of certain itemize deductions for high-income taxpayers starts to phase out in 2006.• Taxes• Interest (except Investment Interest)• Gifts to charities• Miscellaneous deductions (>2% of AGI)• Other expenses (except Gambling Losses)

For 2006 and 2007, one third of the reduction amount is phased out.

For 2008 and 2009, two thirds of the reduction amount is phased out.

For 2010, no reduction of certain itemized deductions.


Personal Exemptions

• $3,200 each person for year 2005

• Phase-out begins when AGI exceeds:$145,950 Single$182,450 HOH$218,950 MFJ$109,475 MFS

For 2006 and 2007, phase out reduced by 1/3For 2008 and 2009, phase out reduced by 2/3For 2010, no phase out of personal exemptions


Credits

Foreign tax credits

Child and dependent care credit

Education credits ($51,000 single; $103,000 MFJ)

Retirement savings ($25,000 single; $50,000 MFJ)

Child tax credit ($55,000 single; $110,000 MFJ)

Adoption credit ($199,450 Modified AGI)


Credits 2006

• Starting 2006, two new residency energy credits

• Credit up to $500 for 10% cost of energy-efficient property (exterior doors, heat pumps, water heaters, central air conditioners, etc.)

• Non-business energy property credit 30% cost of qualified property (solar electricity, solar water heating, fuel cell) limited to $2,000


Filing Dates

• Normal due date is 04/15. For 2006 Monday 04/17 (after date interest starts)

• Auto extension of time to 06/15 (after date penalty starts)

• Auto extension of time to 10/15 with Form 4868

• Additional extensions to 12/15 with Form 2688

• First year overseas filers to 01/30 with Form 2350


Foreign Investment Income

Penalties for failure to report foreign financial accounts (Form TDF 90-22.1). File by 06/30.

• Crack down on failure to comply

• Increased civil penalties

– Currently $25,000 to $100,000 for willful violation

– Increase of an additional $10,000 without regard to whether conduct was willful

• Penalty can be waived as long as income was properly declared and there was reason for failure to report.


Other

IRS Refund “Direct Deposit”

IRS Payment “Electronic Federal Tax Payment System” (EFTPS)

Educational IRA (Coverdell)

529 Savings Plans (avoid tuition plans)

Savings – live under your means

Tax equalization Program – know your program

Not tax equalized – get foreign & US tax advise


Resources

IRS

• irs.gov (Forms 1040, 2555, 1116, 6251, TDF 90-22.1)

• “Where’s My Refund?” “AMT Assistance”

• IRS Publications 17, 54, etc.

Taxsites.com (Fed & State and more)

Your company

Your tax service provider


Expatriate Tax Issues for 2005/2006

Wrap-up and Questions


NOTICE

This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer.

This document is provided by PricewaterhouseCoopers LLP for general guidance only, and does not constitute the provision of legal advise, accounting services, investment advise, or professional consultation of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decisions or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. The information is provided ‘as is,’ with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.

PricewaterhouseCoopers refers to the U.S. firm of PricewaterhouseCoopers L.L.P. and other members of the worldwide PricewaterhouseCoopers organization.

All rights of use and reproduction reserved.

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expatriate tax issues for 2005/2006 russell fisher [email protected] amcham-china, january...

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