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IRS eases Tax Compliance and FATCA Reporting Burden

Effective, July 1, 2014, US persons, that is citizens and green card holders, who live outside the US, can now avoid the onerous $10,000 penalty and the risk of criminal prosecution for breaching the reporting requirements in relation to foreign assets, by doing the following:

  1. File FBAR(Foreign Bank Account Report) forms for the last six years
  2. File tax returns or amended tax returns for the last three years
  3. Pay any outstanding taxes due
  4. Submit a signed affidavit testifying that the failure to file in the past was not a willful act

This more liberal approach by the IRS is reflective of the fact that many stakeholder groups such as IRS field agents and lobby group American Citizens Abroad, have indicated that many persons who wanted to become client were still hesitant because of the previously high cost of the penalties charged for becoming compliant.

This new program is particularly beneficial to US citizens and green card holders residing in Jamaica since very few Jamaicans end up owing taxes in the US once the benefits of the Jamaica-USA double taxation treaty are applied.  In many cases this will only involve preparing the required forms and paperwork.

The move is not purely altruistic on the part of the IRS because they are well aware of the hundreds of thousands of the estimated seven million US persons abroad, who will capitalize on the opportunity to become compliant and in the process become contributors to the US treasury, now and in the future.   Non-compliant persons, who live in the US, won’t get off as easily since they will be required to pay 5% of their foreign financial assets as a penalty in order to access the benefits of this new program.

The IRS has made it clear that non-compliant taxpayers who are discovered through bank investigations will automatically be subject to a penalty of up to 50% of their foreign financial assets as a penalty for their non-compliance in addition to the normal tax filing penalties.

This new program is genuinely beneficial to recalcitrant taxpayers and has generated much positive responses in the few days since it has been announced.

Non-compliant taxpayers are well advised to seek the assistance of a qualified accountant experienced in these matters to capitalize on the benefits of this program

US Tax Update: 2013 Tax Law Changes

This tax update summarizes important tax changes that took effect in 2013. Please contact our office if you have any questions regarding these changes.

Additional Medicare Tax – Starting in 2013, an additional 0.9% Medicare Tax will be assessed on wages and self-employment income greater than certain income levels. Wages and self-employment income greater than $125,000 if married filing separately (MFS), $250,000 if married filing jointly (MFJ) and $200,000 for any other filing statuses will attract this additional Medicare Tax.

Net Investment Income Tax – In 2013, you may be subject to this tax which is 3.8% of the lower of either your net investment income or your adjusted gross income that is greater than $125,000 if filing MFS, $250,000 if filing MFJ or $200,000 for any other filing status.

Tax Rate Changes – The tax rates for 2013 range from 10% to the highest rate of 39.6%. Your individual tax rate will vary depending on your filing status and the amount of your taxable income.

Net Capital Gain and Qualified Dividends – The maximum tax rate of 15% on net capital gains and qualified dividends has increased to 20% for certain taxpayers.

Medical and Dental Expenses – The threshold for deducting medical and dental expenses has increased from 7.5% to 10% for taxpayers that are under the age of 65. This means that for 2013, you can only deduct expenses paid that are in excess of 10% of your adjusted gross income.

Personal Exemption Amount – The personal exemption amount has increased to $3,900 for 2013. The exemption amount is reduced however, if your adjusted gross income is more than $150,000 if filing MFS, $250,000 if filing single, $275,000 if filing Head of Household and $300,000 filing any other filing status.

Itemized Deductions Limitation – There are new limits on the amounts of certain itemized deductions that are allowed as a deduction in 2013.  Your itemized deductions will be reduced if your adjusted gross income is greater than $150,000 if filing MFS, $250,000 if filing single, $275,000 if filing Head of Household and $300,000 filing any other filing status. Deductions affected by this limitation include taxes paid, interest paid, gifts to charity and other miscellaneous deductions.

Expiring Credits – There are certain credits that have expired and will not be allowed on a 2013 tax return. These credits include the “Plug-in Electric Vehicle Credit” and the “Prior Year Minimum Tax Credit”

2013 Standard Mileage Rate Increases – The 2013 standard mileage rates for business use of your car has increased to 56 ½ cents per mile. The 2013 standard mileage rate for use of your car to get medical care has increased to 24 cents per mile. The 2013 standard mileage rate for use of your car to move has increased to 24 cents per mile.

US Tax Update: Child Tax Credit 2013

Child-Related Tax Changes

In this update, we discuss certain child-related tax changes that may impact your 2013 tax return.

Child’s Investment Income – The amount of taxable investment income a child can have without it being subject to tax at the parent’s rate for 2013 remains the same ($1,900) as 2012.

Earned Income for Additional Child Tax Credit – For 2013, the amount your earned income must exceed to claim the additional child tax credit is $3,000. The additional child tax credit is available to taxpayers with qualifying children. A qualifying child must be under the age of 17 before the end of the tax year and be a resident or citizen of the United States. You must also be able to claim this child as a dependent on your return.

You may receive a refund through the additional child tax credit which could be up to 15% of your total earned income over $11,750 and under the income limitations. The income limitations are as follows:

  • Married filing jointly- $110,000
  • Single, Head of household or qualifying widow(er)-$75,000
  • Married filing separately-$55,000

The personal exemption for each child in 2013 is $3,900. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $254,200 ($305,050 for married couples filing jointly). It phases out completely at $376,700 ($427,550 for married couples filing jointly).

The $1,000 Child Tax Credit, which was created by the Bush tax cuts, was set to expire at the end of 2012. However, the fiscal cliff deal signed on January 3, 2013 extended the current Child Tax Credit for the next five years.

US Tax Update: Earned Income Tax Credits 2013

In this tax update, we highlight the changes to the Earned Income Tax Credit for 2013.

The Earned Income Tax Credit (EITC) is a refundable credit which means that you could still receive a refund even if you had no tax due.

In general, if you have earned income and your filing status is not married, filing separately, you may qualify for the EITC subject to certain income limitations.  See the related income limits listed below.

2013 Tax Year

Earned income and adjusted gross income (AGI) must each be less than:

  • $46,227 ($51,567 married filing jointly) with three or more qualifying children
  • $43,038 ($48,378 married filing jointly) with two qualifying children
  • $37,870 ($43,210 married filing jointly) with one qualifying child
  • $14,340 ($19,680 married filing jointly) with no qualifying children

Tax Year 2013 maximum EITC:

  • $6,044 with three or more qualifying children
  • $5,372 with two qualifying children
  • $3,250 with one qualifying child
  • $487 with no qualifying children

Any related investment income must be $3,300 or less for the year to qualify for the credit.

The American Recovery and Reinvestment Act (ARRA) provides a temporary increase to the EITC and expands the credit for workers with three or more qualifying children. These changes are temporary and apply to the 2013 tax year.

US Tax Update: FBAR Reporting Requirements

CM Tax Update

January 28, 2014

In this update, we outline the reporting requirements of US persons that have a financial interest in or signature authority over a foreign financial account.

Report of Foreign Bank and Financial Accounts (FBAR)

If you have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, the Bank Secrecy Act may require you to report the account yearly to the Internal Revenue Service by filing Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR).

 Recent FBAR Guidance

On February 24, 2011, the Treasury Department published final regulations amending the FBAR regulations. These regulations became effective on March 28, 2011, and apply to FBARs required to be filed with respect to foreign financial accounts maintained in calendar year 2010 and for FBARs required to be filed with respect to all subsequent calendar years.

 Who Must File an FBAR

United States persons are required to file an FBAR if:

  1. The United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and
  2. The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.

United States person means United States citizens; United States residents; entities, including but not limited to, corporations, partnerships, or limited liability companies created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.

FBAR Filing Deadline

The deadline for filing the FBAR for calendar year 2013 is June 30th, 2014. Please contact us at your earliest convenience, if you have any questions on the information above.

Sincerely,

CrichtonMullings & Associates, PA

Tax Implications of Renouncing your US Citizenship

Certain US citizens or long time permanent residents who renounce their citizenship or residence with the United States after June 17, 2008, may be liable for an expatriation tax. The expatriation tax applies to individuals who are deemed to be “Covered Expatriates” at the time of expatriation.

A Covered Expatriate is a person that meets any one of the following criteria: (1) A person who has an average annual net income tax liability for the five preceding taxable years ending before the expatriation date and adjusted annually for inflation that exceeds a specified amount ($145,000 in 2009), (2) A person who has a net worth of $2 million or more as of the expatriation date, or (3) A person who fails to certify under penalties or perjury that they are in compliance with all US federal tax obligations for the five years preceding the taxable year that includes the expatriation date.

The expatriation tax is determined based on a covered expatriates worldwide assets and is calculated under a mark-to market rule where the assets are treated as sold on the day prior to the expatriation date. The tax is calculated by taking the difference between the fair market value of the covered expatriate’s worldwide assets as of the date prior to expatriation and his adjusted basis in those assets. The covered expatriate is allowed to exclude $627,000 of any taxable gain in determining the amount of income that would be subject to the expatriation tax.

Once a person is deemed to be a Covered Expatriate, they retain such designation indefinitely and would be subject to a transfer tax on the transfer of any assets to a US beneficiary.

There may be significant tax consequences for persons who are classified as Covered Expatriates and the decision to expatriate should be carefully evaluated.

US Citizens and Residents living in Jamaica liable for US Taxes

Information released during the last US general elections, indicated that up to twenty thousand US citizens and Green Card Holders reside in Jamaica. Many are Jamaican citizens who have acquired US residency or citizenship status but have chosen to continue living and working in Jamaica. Others commute between Jamaica and the US, often operating businesses in both jurisdictions.

Most of these individuals either work or do business in Jamaica and pay their taxes to the Jamaican government by way of PAYE or through annual returns to Inland Revenue.

What some may not know is under US tax law, they are also required to file a United States tax return. The US requires that all its citizens and residents file a tax return irrespective of their place of actual residency. The same tax requirements that apply to US citizens and residents living in the US, apply to those living outside the US. Specifically, US tax filers are required to report their “worldwide income” which would include any income earned in Jamaica. The income is reportable whether or not it has been taxed in Jamaica. Jamaican resident US tax filers are subject to the same penalties and interest for late filing, under reporting of income and underpayment of taxes.

Fortunately, Jamaica, like it does with several countries, has a bilateral double taxation treaty with the US. Under the treaty, citizens of both countries are relieved from double taxation on income earned in either country. The net effect of this treaty allowance is that the taxpayer pays taxes at the higher of the tax rates prevailing in the two countries but does not pay taxes on the same income in both countries. Tax rates in the US, unlike in Jamaica where it is a flat percentage, depends on the individuals level of income, so whether or not a US citizen or resident living in Jamaica pays at the US rate or the Jamaican rate will depend on the level of their worldwide income.

Us tax filers who reside in Jamaica and do spend more than 35 days in a one year period are allowed to exclude up to US$87,600 per person from income for the 2008 fiscal year. The return must still be filed and the exclusion claimed even where income is less than this figure.

In addition to income tax, US tax filers may be subject to social security, capital gains, gift, estate or alternative minimum taxes. The double taxation relief is applicable to all of these taxes except for social security taxes.

US tax filers, whether residing in Jamaica or in the US must be aware of several benefits from filing US tax returns. Often, there are several cash credits to taxpayers as in the case of the 2008 economic stimulus payments. Some credits have a US residency requirement and the 2008-2009 first-time homebuyer US$7,500 credit requires the purchase of a house in the US. Taxpayers who have contributed to social security and are eligible for benefits will receive substantially larger benefits than NIS benefits, irrespective of where they reside. Several years of tax returns are usually a prerequisite for mortgages and loans in the US.

It is also important to note that immigration authorities will also frequently request several years of tax returns for green card holders applying for their citizenship in the US.

US taxes are quite complex and persons should always consult an accountant or tax professional either in Jamaica or the US. Visit http://www.crichtonmullings.com for more information.

Foreign Account Tax Compliance Act (FATCA)

Foreign Account Tax Compliance Act (FATCA)

Procedurally, the regulations are issued in proposed form and subject to comment prior to finalization.
The U.S. Treasury Department has requested comments by April 30, 2012; a public hearing will be held
at the Internal Revenue Service on May 15, 2012. Thus, there is continuing opportunity for interested
parties to comment.

Background: FATCA’s ultimate goal

FATCA was enacted in 2010 as the legislative response to high-profile U.S. tax evasion cases, at a time when the G-20 countries were continuing to pressure offshore financial centers and tax havens to end bank secrecy and become more transparent. FATCA requires foreign (i.e., non-U.S.) financial institutions (FFIs) and non-U.S. non-financial entities (NFFEs) to identify and disclose their direct and indirect U.S. financial account holders or become subject to a new 30 percent U.S. withholding tax on “withholdable
payments” – U.S. source income and gross proceeds (not gains) from the sale of equity or debt instruments of U.S. issuers.

The ultimate goal of FATCA is for the United States to obtain information with respect to the investment activities of certain U.S. taxpayers – not to collect the new 30 percent withholding tax. FATCA extends the third-party information reporting regime that is currently imposed on third-party U.S. payers to FFIs that maintain U.S. financial accounts and on certain NFFEs that present a high risk of U.S. tax avoidance. The rationale, as expressed in the Preamble to the Proposed Regulations, for the expansion of the third party reporting regime to offshore accounts is that in today’s globalized economy, FFIs (and certain NFFEs) are generally in the best position to identify and report with respect to their U.S. account holders or members. This rationale does not explain how non-U.S. reporting entities are to rationalize local law conflicts with FATCA reporting and U.S. withholding obligations.

Grandfathered obligations time period extended

The Proposed Regulations extend the grandfathering date for obligations from March 18, 2012 to January 1, 2013. The Proposed Regulations exclude from the definition of withholdable payment and pass thru payment any payment under an obligation outstanding on January 1, 2013 and any gross proceeds from the disposition of such an obligation. The new effective date of grandfathered obligations was inserted to facilitate implementation of FATCA withholding by withholding agents and FFIs. Note that the exclusion from FATCA withholding does not negate information reporting by FFIs under the phased in reporting rules.

The term “obligation” for purposes of the grandfathering provision means any legal agreement that produces or could produce withholdable payments other than any instrument treated as equity for U.S. tax purposes or any legal agreement that lacks a definitive expiration term. Thus, in order to be grandfathered, the obligation must be outstanding on January 1, 2013 and not materially modified thereafter. In that regard, “revolvers” entered into prior to the new effective date are covered, provided that on the agreement’s issue date the agreement fixes the material terms (including a stated maturity
date) under which the credit will be provided.

Withholding transitional rules

January 1, 2014. Withholding on FDAP income payments. This withholding obligation encompasses not only U.S. withholding agents but also FFIs, who will be required to withhold on passthru payments that are withholdable payments.

January 1, 2015. Withholding on gross proceed payments. “Gross proceed payments” are any gross proceeds (not gains) from the sale or other disposition of any property of a type which can produce interest or dividends from U.S. sources (e.g., from the sale of disposition of U.S. stocks or securities or the repayment of principal on a debt).

January 1, 2017. Withholding on foreign passthru payments. The Proposed Regulations reserve on the definition of a foreign passthru payment; the term essentially refers to a payment that would be foreign source under U.S. source of income rules but attributable to a withholdable payment. Participating FFIs will be required to report annually on the aggregate amount of foreign passthru payments to each nonparticipating FFI for the 2015 and 2016 calendar years.

Due diligence on existing accounts relaxed

Overview. The Proposed Regulations modify and relax the due diligence requirements with respect to the identification of pre-existing U.S. accounts by establishing a higher dollar threshold, allowing FFIs to rely primarily on electronic reviews of preexisting accounts and limiting the scope for manual review, particularly of individual accounts.
For pre-existing entity accounts, the due diligence procedures focus on passive investment entities with significant account balances, permit substantial reliance on documentation previously collected during account opening procedures and raise the threshold for further investigation into potential U.S. ownership. The modifications were made to reduce the administrative burden on FFIs and better focus on circumstances that present higher risks of tax evasion. Significantly, FFIs that adhere to the diligence

Pre-existing individual accounts

· Accounts (both deposit and other accounts) with a balance or value that does not exceed
U.S.$50,000 are exempt from review, unless the FFI elects otherwise.
· Certain cash value insurance and annuity contracts held by individual account holders that are Pre-existing accounts with a value or balance of U.S. $250,000 or less are exempt from review, unless the FFI elects otherwise. Accounts with a balance or value over U.S.$50,000 (U.S.$250,000 for a cash value insurance or annuity contract) but no more than U.S. $1 million are subject only to review of electronically searchable data for indicia of U.S. status. · U.S. indicia include: (i) identification of an account holder as a U.S. person; (ii) a U.S. place of birth; (iii) a U.S. address; (iv) a U.S. telephone number (a new requirement from prior Notices); (v) standing instructions to transfer funds to an account maintained in the United States; (vi) a power of attorney or signatory authority granted to a person with a U.S. address; or (vii) an “in-care-of” or “hold mail” address that is the sole address the FFI has identified for the account holder. No further search of records or contact with the account holder is required unless U.S. indicia are found through the electronic search. The U.S.$1 million threshold replaces the U.S.$500,000 threshold and, significantly, the private banking test proposed in the prior Notices.

FFIs no longer will be required to distinguish between private banking accounts and other accounts. Accounts with a balance of more than U.S.$1 million are subject to review of electronic and non-electronic files for U.S. indicia, including an inquiry of the actual knowledge of any relationship manager associated with the account. The review of non-electronic files is limited to the current customer files and certain other documents, and is required only to the extent that the electronically searchable files do not contain sufficient information about the account holder.

Preexisting entity accounts

· Preexisting entity accounts with account balances of U.S.$250,000 or less are exempt from review until the account balance exceeds U.S.$1 million.
· For remaining preexisting entity accounts, FFIs can generally rely on AML/KYC records and other existing account information to determine whether the entity is an FFI, a U.S. person, excepted from the requirement to document its substantial U.S. owners (i.e., because entity is engaged in a nonfinancial trade or business), or a “passive investment entity” (i.e., a “passive NFFE”). A passive NFFE is an NFFE that is not an “excepted” NFFE;e.g., a publicly traded entity or affiliate, an exempt beneficial owner, or an active NFFE (i.e., less than 50 percent of its gross income or assets for the preceding calendar year are passive).
· Where a passive NFFE has an account balance of U.S.$1 million or less, an FFI may generally rely on information collected for AML/KYC due diligence purposes to identify substantial U.S. owners.
· Where a passive NFFE has an account balance in excess of U.S.$1 million, the FFI must
obtain information regarding all substantial U.S. owners or a certification that the entity does not have substantial U.S. owners.

Reporting rules phased in

To facilitate the implementation of FATCA, the Proposed Regulations phase in the reporting rules for U.S. accounts and accounts held by recalcitrant account holders. Additionally, the Proposed Regulations allow FFIs to elect to report financial information either in the currency in which the account is maintained or in U.S. dollars.

Reporting during 2014-2015:

For calendar years 2013 and 2014, participating FFIs are required to report only name, address, taxpayer identification number and account number.

· For calendar year 2013, FFIs must report by September 30, 2014 those accounts identified as U.S. accounts or held by recalcitrant account holders as of June 30, 2014.
· For calendar year 2014, FFIs must report by September 30, 2015.

Reporting during 2016:
For calendar year 2015, participating FFIs are required to report income associated with U.S. accounts, in addition to the aforementioned information.
· Commencing in 2015, FFI reporting is generally required to be made by March 31st of each year.

Reporting during 2017 and thereafter:

For calendar year 2016, full reporting, including gross proceeds from broker transactions, will be required.

FFI agreement and other forms

FFI agreement and forms. The Proposed Regulations state that the IRS will make available an online process for registering FFIs as Participating FFIs or Deemed-Compliant FFIs no later than January 1, 2013. The online process will allow each FFI to: (i) register for participating, “limited”4, or Registered Deemed-Compliant FFI status; (ii) enter into an FFI Agreement; (iii) complete a required certification; and (iv) obtain an FFI-EIN, if applicable.
In addition, the IRS will modify the qualified intermediary (QI) agreement, the foreign withholding partnership and foreign withholding trust agreement to incorporate FATCA. Further, the IRS will also have to amend other forms, including the W-8 forms, Form 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons) and Form 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding). These modifications are anticipated to be done within the next few months

FFI registration process. Special online registration procedures must be followed by FFIs that are members of an FFI Group. Each member of an FFI Group must designate a “Lead FFI” to initiate and manage the online registration process for the FFI Group. The Lead FFI that assumes this role must enter the system to register itself and, as part of that process, identify each FFI that is a member of the FFI Group that will register for participating, limited, or Registered Deemed-Compliant FFI status. An FFI, subject to the transitional rule for FFI affiliates with legal prohibitions on compliance with FATCA, will not be permitted to become a participating FFI unless every FFI that is a member of the FFI Group is either a
participating FFI or a Deemed-Compliant FFI.