Foreign Earned Income Exclusion: 2011

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Under I.R.C. §911, if certain conditions are met, a qualified individual can exclude his foreign earned income from taxable gross income for the U.S. income tax purposes. This income may still be subject to U.S. Social Security taxes.

The income exclusion amount for 2011 has increased to $92,900 (in 2010, it was $91,500).

Remember, if your overseas earnings are above $92,900 for the tax year 2011, then you will be subject to U.S. income taxation on the excess amount. For example, if you earned $105,000 in 2011, then you will have to pay U.S. income taxes on $ 12,100.

It is also important to note, despite the income tax exclusion, your tax bracket will still be the same as if you were taxed on the whole amount (i.e. as if you had not claimed the foreign earned income exclusion). For most expats, this means that the tax bracket is likely to start at 25% or higher. If you are self-employed, however, your situation may differ from this description.

Contact Sherayzen Law Office For Foreign Earned Income Exclusion Legal Help

If you are a U.S. taxpayer living abroad or you are planning to accept a job overseas, contact us to discuss your tax situation. Our experienced tax firm will guide you through the complex maze of U.S. tax reporting requirements, help you make sure that you are in full compliance with U.S. tax laws, and help you take advantage of the relevant provisions of the Internal Revenue Code to reduce your tax burden.

IRS Increases Deductions and Exclusions for the Tax Year 2012

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The Internal Revenue Service recently announced that for tax year 2012, personal exemptions and standard deductions will increase, and tax bracket thresholds will rise because of inflationary effects. This article will explain some of these changes.

Personal Exemptions, Standard Deductions and Tax Bracket Changes

The increased amount of each personal and dependent exemption will be $3,800 (up $100 from 2011). The updated standard deduction will be $11,900 for married couples filing joint returns (up $300), $5,950 for single individuals and married individuals filing separately (up $150), and $8,700 for heads of household (up $200).

Tax-bracket thresholds will also increase for each filing status. For married couples filing a joint return, the 25% taxable income threshold will begin at $70,700, up from $69,000 for tax year 2011.

401(k) Contribution Changes

The IRS also announced that the maximum 401(k) contribution amount will increase by $500 to $17,000.

Foreign Earned Income Deduction

The IRS stated that the maximum foreign earned income deduction will increase by $2,200 to $95,100 for tax year 2012.

Estate and Gift Tax Exclusions

The basic estate tax exclusion will increase to $5,120,000 (up from $5,000,000 for calendar year 2011) for the estate of any decedent dying during calendar year 2012. Further, the aggregate decrease in value of an estate’s property cannot exceed $1,040,000 (an increase of $1,020,000 for 2011) for executors electing the special use valuation method for qualified real property.

The annual gift exclusion will stay at $13,000.

Conclusion

This article is intended to give a brief summary of these issues, and should not be construed as legal or tax advice. Please consult IRS materials independently for further verification. If you have further questions regarding your own tax circumstances, Sherayzen Law Office offers professional advice for all of your US and international, and estate planning tax needs. Call our office (952) 500-8159 or email [email protected] for a consultation today.

Form 5471: General Overview of the Required Information

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The individuals who fall within the four categories of U.S. persons who are required to file Form 5471 find out very fast just how incredibly complex this Form is. In addition to various problems associated with GAAP compliance, tax year adjustments, understanding very complex corporate tax and accounting rules (as well as the difference between them), and the logistical concerns with respect to obtaining the information, the sheer volume and variety of the information that Form 5471 requires the files to supply makes the Form one of the most difficult compliance requirements in the Internal Revenue Code.

In this essay, I intend to provide a very general overview of the information that needs to be disclosed on Form 5471.

1. General Information

Form 5471 generally requires you to disclose your personal information (such as Social Security Number, address, tax year, and so on), corporate information (name of the corporation, when organized, its business and so on), as well as on whose behalf Form 5471 is being filed.

Despite its apparent innocence, there are at least two pernicious issues in this seemingly basic section. First, there are detailed rules on whose behalf Form 5471 may be filed.

Second, the Form requires you to state your ownership share of the corporation at the end of the year. Sounds simple? Not so fast – there are specific attribution rules which may increase your share ownership in the corporation. Failure to apply those rules may result in choosing incorrect filing category and, ultimately, IRS penalties for non-compliance.

2. Category of Filers

There are generally four categories of filers who are required to file Form 5471 (there used to be five, but the first category was repealed by Congress).

From the outset, Form 5471 requires you to choose the category of filers that apply to you. This is not a simple process as each category has specific requirements. Moreover, you may (and most taxpayers actually do) fit into more than one category. If this is the case, then you may have to file additional schedules that require more disclosures to the IRS.

3. Stock of the Foreign Corporation

In this Schedule A of Form 5471, you are required to describe the stock of the corporation – number and class of stocks. Usually, this is one of the most benign sections of Form 5471. Nevertheless, some of my clients have had problems with Schedule A because they never properly documented all of the classes of stocks and their attributes. This resulted in substantial delays and proactive business planning.

4. U.S. Shareholders of the Foreign Corporation

In Schedule B, you will need to provide the name of each shareholder according to Form 5471 instructions. For each listed shareholder, you will need to provide the name, address, identifying number (for example, social security number), number of shares held (at the beginning and the end of the annual accounting period), and the class of shares. Moreover, for each shareholder, you will need to supply the pro rata share of Subpart F income (which, in itself, is a complex matter).

5. Schedule C: Income Statement

Schedule C is one of the most important and time-consuming parts of Form 5471. The complications are numerous.

First, the Income Statement should be prepared and reported on the Form in accordance with U.S. GAAP. If the foreign company used GAAP to prepare the original statements, the task is not very hard. If, however, the foreign company did not initially use GAAP, the conversion of financial statements to the GAAP standard can be incredibly complex, especially in a foreign context.

Second, the Income Statement should be reported in the Functional Currency and US dollars. The currency translation issues (especially according to GAAP) may become very difficult.

Third, the Net Income part of the Income Statement on Form 5471 presents its separate challenges with its separation of net income from current income per books according to the GAAP standard.

Finally, you need to make sure that the Income Statement corresponds to the Balance Sheet, especially given all of the currency translation issues.

Remember, various items on the income statement must be supported by attached schedules.

6. Schedule E: Taxes

The first common challenge in this section is to correctly identify the taxes that need to be reported. The second common issue is that you need to consult the instructions to make sure that the currency translation rate is correctly identified and presented on the form. I have seen even experienced international tax accountants make mistakes in this area.

7. Schedule F: Balance Sheet

Schedule F may be the most difficult part of Form 5471 (although schedules H and I are very close in this dubious contest).

The problems are so numerous that I will not even attempt to list them in this essay. Rather, I want to point out several common themes that you are likely to deal with in preparing Form 5471.

First, the Balance Sheet should be prepared according to GAAP and all amounts should be reported in U.S. dollars.

Do not be surprised if this means using as many as three or four different currency translation rates according to GAAP. The end result will be that your Balance Sheet does not appear to balance out, forcing you to engage in highly complex accounting.

Second, there will be a shortage of available space to properly reflect all of the Balance Sheet issues.

Third, Retained Earnings may become your best friend and your worst enemy. In the hands of a sophisticated tax professional (accountant or attorney), Retained Earnings may be used to resolve outstanding issues. A novice, however, may spend long hours trying to figure out how to use Retained Earnings and still fail in this task.

Finally, remember that certain items on the Balance Sheet must be supported by attached statements.

8. Schedule G Questions

There are various types of questions listed in Schedule G. In some situations, they may easily be answered, whereas other situations will require a more detailed analysis.

9. Schedule H: Current Earnings and Profits

You should be prepared to spend a significant amount of time on this section. This is another highly complex part of Form 5471. Earnings and Profits is an esoteric part of accounting which has a complex relationship with taxation. When it comes to Form 5471, the foreign context and GAAP rules greatly exacerbate the difficulty of the issues involved.

At the end of Schedule H, you will need to translate the amounts into US dollars and provide the translation rate.

10. Schedule I: Subpart F Income

Another challenging section of Form 5471. Treaties have been written on Subpart F income. I will just mention here that this is a highly complex section on which you should prepared to spend some time.

11. Schedule J: Accumulated Earnings and Profits

Although this part of Form 5471 maybe time-consuming, it is not very complex. One common difficulty that I have encountered in my practice is a practical one – lack of properly prepared records. If the foreign corporation has not been subject to 5471 requirements in the prior years or not for all years of its existence, it may not have the records to calculate the accumulated earnings and profits. This may result a “snowball” effect that it is more and more difficult to comply with Schedule J requirements unless one goes back many years to calculated the accumulated Earnings and Profits.

12. Schedule M

This form only applies in the context of a controlled foreign corporation (CFC). This is another time-consuming part of Form 5471 which concentrates on the transactions between the CFC and the shareholders and other related persons. It may take awhile before you figure out just what exactly should go on this form, especially if there are outstanding loans from and/or to shareholders.

13. Schedules O: Parts I and II

This part of Form 5471 allows the IRS to keep track of any corporate re-organizations, acquisition and disposition of the corporation’s stock, and other organization and asset related matters. Relatively speaking, this is not a complex part of the Form, but it has its own issues that may arise during its preparation.

Conclusion: Contact Sherayzen Law Office NOW for Help With Drafting Form 5471

Based on the very general overview of 5471 requirements, it becomes clear that you should not attempt to complete Form 5471 on your own. Nor should you expect any help from the IRS. There is not a single department that you can call to have your questions answered. Form 5471 specialists are limited to examiners to whom you will not have direct telephone access.

Therefore, if you fall within one of the categories of taxpayers who are required to file Form 5471, please contact Sherayzen Law Office. Our experienced international tax firm will help you prepare the necessary documentation, complete Form 5471 and file it on your behalf. If you have not filed your Forms 5471 for prior years, we will help you deal with this situation and guide you through the IRS voluntary disclosure process.

Incoterms 2010: Most Prominent New Features

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The new Incoterms 2010 replace and update a number of various features of Incoterms 2000. The new rules took effect on January 1, 2011. The following is a very brief description of some of the most prominent changes.

1. Reduced Number of Incoterms

The number of Incoterms rules has been reduced from 13 to 11.  This reduction resulted from replacing four Incoterms 2000 rules with just two (see below).

2. New Incoterm Rules: DAT and DAP

Two new Incoterms rules – DAT and DAP – have replaced the Incoterms 2000 rules DAF, DES, DEQ and DDU

Under both new rules, DAT (Delivered at Terminal) and DAP (Delivered at Place), delivery occurs at a named destination.  In DAT,  at the buyer’s disposal unloaded from the arriving vehicle (as under the former DEQ rule); in DAP, also at the buyer’s disposal, but ready for unloading (as under the former DAF, DES and DDU rules).

The new rules makes DES and DEQ superfluous.  First, the named terminal in DAT may be a port, and, hence, DAT can be used in cases were DEQ once was.  Second, the arriving “vehicle” under DAP may be a ship and the named place of designation may be a port.  Therefore, DAP can be used in place where DES once was.

These new rules, like their predecessors, are “delivered”, with the seller bearing all the costs (with the exception of import clearance, where applicable) and risks involved in bringing the goods to the named place of destination.

3.    New Classification of the Incoterms 2010 rules

The eleven Incoterms 2010 rules are divided into two distinct classes.

a).  Rules of Any Mode(s) of Transport

The first class contains rules for any mode or modes of transport.  These are:

EXW – EX WORKS

FCA – FREE CARRIER

CPT – CARRIAGE PAID TO

CIP – CARRIAGE AND INSURANCE PAID TO

DAT – DELIVERED AT TERMINAL

DAP – DELIVERED AT PLACE

DDP – DELIVERED DUTY PAID

The first class rules can be used irrespective of the mode of transport selected and irrespective of whether one or more than one mode of transport is employed.  They can be used even when there is no maritime transport at all. It is important to remember, however, that these rules can be used in cases where a ship is used for part of the carriage.

b).  Rules for Sea and Inland Waterway transport

The second class contains only rules for sea and inland waterway transport.  These are:

FAS – FREE ALONGSIDE SHIP

FOB – FREE ON BOARD

CFR – COST AND FREIGHT

CIF – COST INSURANCE AND FREIGHT

In the second class of Incoterms 2010 rules, the point of delivery and the place to which the goods are carried to the buyer are both ports (hence the label “sea and inland waterway” rules). Under the FOB, CFR, and CIF, all mention of the ship’s rail as the point of delivery has been omitted in preference for the goods being delivered when they are “on board” the vessel. This more closely reflects modern commercial reality and avoids the rather dated image of the risk swinging to and fro across an imaginary perpendicular line.

3     Rules for domestic and international trade

Incoterms rules have traditionally been used in international sale contracts where goods pass across national borders. In various areas of the world, however, trade blocs, like the European Union, have made border formalities between different countries less significant. Consequently, the subtitle of the Incoterms 2010 rules formally recognizes that they are available for application to both international and domestic sale contracts. Therefore, the Incoterms 2010 rules clearly state in a number of places that the obligation to comply with export/import formalities exists only where applicable.

4     Guidance Notes

A “Guidance Note”has now been attached to each Incoterms 2010 rule. The Guidance Notes explain the fundamentals of each Incoterms rule, such as when it should be used, when risk passes, and how costs are allocated between seller and buyer. Remember – the Guidance Notes are not part of the actual Incoterms 2010 rules, but are intended to help the user accurately and efficiently steer towards the appropriate Incoterms rule for a particular transaction.

5    Electronic communication

Incoterms 2010 seeks to stand in line with the developments in the international commercial reality.  Articles A1/B1 of the Incoterms 2010 rules now give electronic means of communication the same effect as paper communication, as long as the parties so agree or where customary. This formulation facilitates the evolution of new electronic procedures throughout the lifetime of the Incoterms 2010 rules.

6      Insurance

The new Incoterms emphasizes the importance of the insurance coverage by moving the relevant provisions of carriage and insurance from more generic articles A10/B10 (Incoterms 2000) to articles A3/B3 (which deal directly with contracts of carriage and insurance). Furthermore, the language in articles A3/B3 relating to insurance has been altered with a view to clarifying the parties’ obligations in this regard.

7     Security-Related Clearances

In the modern world, the security concerns are ubiquitous.  Therefore, Incoterms 2010 rules have allocated obligations between the buyer and seller to obtain or to render assistance in obtaining security-related clearances, such as chain-of-custody information, in articles A2/B2 and A10/B10 of various Incoterm rules.

8     Terminal Handling Charges

Under Incoterms rules CPT, CIP, CFR, CIF, DAT, DAP, and DDP, the seller must make arrangements for the carriage of the goods to the agreed destination. Usually, while the freight is nominally paid by the seller, it is actually paid for by the buyer as freight costs are normally included by the seller in the total selling price.

Sometimes, the carriage costs will include the costs of handling and moving the goods within port or container terminal facilities and the carrier or terminal operator may well charge these costs to the buyer who receives the goods. In such cases, the buyer will want to avoid paying for the same service twice: once to the seller as part of the total selling price and once independently to the carrier or the terminal operator. The Incoterms 2010 rules seek to avoid this happening by clearly allocating such costs in articles A6/B6 of the relevant Incoterms rules.

9     String sales

String sales may arise in situation where there is a sale of commodities (as opposed to the sale of manufactured goods).  In these cases, the cargo sold several times during transit “down a string”. When this happens, a seller in the middle of the string does not “ship” the goods because these have already been shipped by the first seller in the string. Rather, the seller in the middle of the string performs its obligations towards its buyer by “procuring” goods that have been shipped. Incoterms 2010 rules clarify this situation and specifically state the obligation of the seller to “procure goods shipped” as an alternative to the obligation to ship goods in the relevant Incoterms rules.

Contact Sherayzen Law Office for Legal Help with International Contracts

If you are selling and/or buying goods overseas, you should contact Sherayzen Law Office immediately to get legal help in negotiating and drafting your international contacts.  Our experienced international contract firm will guide you every step of the way in the complex process of international trade, including tax consequences of your international business transactions.

Minnesota Department of Revenue Launches New e-Services System

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On October 3, 2011, the Minnesota Department of Revenue announced the launch of its new e-Services online system. This new system is replacing e-File Minnesota and will offer a wider variety of services to 400,000 business taxpayers. The new system was the product of at least four years of diligent work by the Department.

The new E-Services not only provides the ability for business taxpayers to file and pay their taxes, it also allows taxpayers to update their contact information, register new accounts, and send the department secured messages. In addition, business taxpayers will have the ability to view all account information in one location. They can now view their payment history, returns they have filed and all correspondence sent to them by the Department of Revenue.

The functionality being added provides more security flexibility to the business taxpayer. Businesses can create unique user ID’s and passwords which grant online access to tax practitioners and accounts they partner with.

Finally, e-Services will also allow self-service activities 24 hours a day, seven days a week. Business taxpayers now have the ability to handle their tax needs online when it is convenient for them.

The transition to the new system will begin on October 17, 2011 and is currently projected to finish by mid-January of 2012. During the transition, groups of taxpayers will be added each Monday, until all 400,000 business taxpayers have access to e-Services.