IRS Announces 2018 Pension Plan Limitations | Tax Lawyer Update

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On October 27, 2017, the IRS announced the cost of living adjustments affecting 2018 Pension Plan limitations.

2018 Pension Plan Limitations: Summary of Main Changes

1. The first main change in 2018 Pension Plan Limitations affects all employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan. In 2018, employees can contribute up to $18,500 into these plans. This amount represents a $500 increase from the 2017 contribution limitation of $18,000.

2. The second major change in 2018 Pension Plan Limitations is the modification of income ranges concerning eligibility to make deductible contributions to traditional IRAs. Here are the new 2018 phase-out ranges:

Single Taxpayers (covered by a workplace retirement plan): $63,000 to $73,000 (up from the 2017 range of $62,000 to $72,000);
Married Filing Jointly (covered by a workplace retirement plan): $101,000 to $121,000 (up from the 2017 range of $99,000 to $119,000).
Taxpayer not covered by a workplace retirement plan, but who is married to someone who is covered: $189,000 and $199,000 (up from the 2017 range of $186,000 and $196,000).

No changes for a married individual filing a separate return, but who is covered by a workplace retirement plan. The phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

3. The third change in 2018 Pension Plan Limitations affects the modification of income ranges concerning eligibility to make contributions to Roth IRA. Here are the new 2018 phase-out ranges:

Single and Head of Household Taxpayers: $120,000 to $135,000 (up from the 2017 range of $118,000 to $133,000);
Married Couples Filing Jointly: $189,000 to $199,000 (up from the 2017 range of $186,000 to $196,000).

No change in the phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA. Such contributions are not subject to an annual cost-of-living adjustment and remain at the range of $0 to $10,000.

4. The fourth change in 2018 Pension Plan Limitations affects the modification of income range concerning eligibility for the Retirement Savings Contributions Credit. In 2018, the income limits will be:

Married Couple Filing Jointly: $63,000 (up from $62,000 in 2017);
Heads of Household: $47,250 (up from $46,500 in 2017);
Singles and Married Individuals Filing Separately: $31,500 (up from $31,000 in 2017).

2018 Pension Plan Limitations: Summary of Main Unchanged Limitations from 2017

1. IRA Annual Contribution Limit: remains unchanged at $5,500.

2. IRA additional catch-up contribution for individuals aged 50 and over: remains at $1,004.40 (not subject to annual cost-of-living adjustment).

3. 401(k), 403(b) and most 457 plans and the federal government’s Thrift Savings Plan catch up contribution limit for employees aged 50 and over: remains unchanged at $6,000.

Czech Bank Accounts: Lawyer Finds Compliance Problems With FBAR and FATCA

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For years, the Czech Republic has held a position within the top fifteen countries among our firm’s voluntary disclosure clients. At the end of May and early June of 2017, our firm’s owner, international tax attorney Eugene Sherayzen, made a trip to the Czech Republic to find out why there are so many clients with unreported Czech Bank accounts.

Ceska Narodni Banka

Ceska Narodni Banka

General Lack of Awareness of FBAR and FATCA With Respect to Czech Bank Accounts

While Mr. Sherayzen found Prague an astonishingly beautiful city, his investigation of FBAR and FATCA awareness confirmed what he already supposed for years – there are important gaps in awareness of these US tax compliance requirements. The results of his investigation also showed that while there were some signs of improvement in FATCA awareness, FBAR was still generally an unknown form.

While Mr. Sherayzen’s investigation was not done using any scientific method and his targeted sample cannot be considered as a properly representative survey, its results are nonetheless alarming.

They are particularly important for Czech citizens who are also US citizens or US permanent residents residing in the United States, especially if they opened their Czech bank accounts with Czech passports prior to moving to the United States. Mr. Sherayzen’s investigation identified this group of individuals as particularly vulnerable to failing to comply with US tax requirements, including FBAR.

Czech Bankers Often Do Not Inform Their Clients of FBAR and FATCA Obligations With Respect to Czech Bank Accounts

Additionally, Mr. Sherayzen found a general lack of awareness of the obligation of foreign bankers to inform their clients about FATCA and, especially, FBARs. Of the five banks chosen, Mr. Sherayzen was unsatisfied with level of FATCA preparedness of the Czech bankers. These results further supported Mr. Sherayzen’s original supposition that the Czech bankers’ lack of proper education about US tax requirements exacerbated and, in many instances, were directly responsible for his clients’ unawareness of their FBAR and FATCA obligations.

These results are too recent at this point and need further analysis and confirmation in the future. Yet, it is clear that all US persons with Czech bank accounts need to urgently re-evaluate their current US tax compliance, especially if it is based on advice from Czech bankers.

Contact Sherayzen Law Office for Help With US Tax Compliance Concerning Czech Bank Accounts

If you have undisclosed Czech bank accounts or any other foreign assets, contact Sherayzen Law Office as soon as possible. Failure to do it before the IRS initiates an investigation may result in imposition of draconian FBAR penalties.

We have helped hundreds of US taxpayers around the world to bring their tax affairs into fully compliance with US laws. We can help You!

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4th Quarter 2017 Underpayment, Overpayment & PFIC Interest Rates

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On September 8, 2017, the IRS announced that the 4th Quarter 2017 underpayment and overpayment interest rates will remain the same as they were in the third quarter of 2017. The IRS underpayment interests also govern the PFIC interest rates under the default Section 1291 method of calculation. PFIC interest rates are very important not only to taxpayers who currently hold PFICs, but also to the US taxpayers who are participating in the Streamlined Domestic Offshore Procedures and, to a lesser extent, the IRS Offshore Voluntary Disclosure Program (“OVDP”) now closed.

Recent History of the IRS Underpayment, Overpayment and PFIC Interest Rates

Following the global financial meltdown, the Federal Reserve quickly dropped its interest rates to almost zero. The IRS underpayment, overpayment and PFIC interest rates are set to follow the Federal Reserve short-term rates on a quarterly basis.

For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

Hence, from the 4th quarter of 2011 through the first quarter of 2016, the IRS underpayment, overpayment and PFIC interest rates remained at 3%. Once the Federal Reserve started to raise its short-term rates, however, the IRS raised the interest rates in the second quarter of 2016, from 3% to 4%. Since then, the rates remained the same.

4th Quarter 2017 IRS Underpayment, Overpayment and PFIC Interest Rates

4th quarter 2017 IRS underpayment, overpayment and PFIC interest rates will be as follows:

four (4) percent for overpayments (two (3) percent in the case of a corporation);
four (4) percent for underpayments;
six (6) percent for large corporate underpayments; and
one and one-half (1.5) percent for the portion of a corporate overpayment exceeding $10,000.

These interest rates were computed based on the federal short-term rate determined during July of 2017 to take effect on August 1, 2017, plus daily compounding. The 4th Quarter IRS underpayment, overpayment and PFIC interest rates will apply during the period of October 1, 2017, through December 31, 2017.

Specified Foreign Financial Assets | Form 8938 International Tax Lawyers

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Specified Foreign Financial Assets is one of the most important terms in contemporary US international tax law. In this article, I will explore what these Specified Foreign Financial Assets are and why they play such an important role in modern US international tax compliance.

Specified Foreign Financial Assets and FATCA

In order to understand the significance of the Specified Foreign Financial Assets, we must turn to one of the most important US tax laws called Foreign Account Tax Compliance Act or FATCA.

FATCA was signed into law in 2010 and it immediately became the most important development in international taxation since at least 1970s, if not all the way to the end of the Second World War. There are three parts of FATCA that made it such a revolutionary development in international tax law. The first part of FATCA requires all foreign financial institutions (FFIs) to report to the IRS, directly or indirectly, Specified Foreign Financial Assets (be careful, this concept can be modified by a FATCA implementation treaty to include and exclude various foreign assets) owned by US persons. In essence, it meant that the world financial community would now serve as an IRS informer, providing the third-party reporting of financial assets owned by US persons.

In order to enforce this “obligation”, the second part of FATCA imposed a 30% penalty on the gross amount of a transaction whenever the transaction is related to an institution that is not compliant with FATCA. Such a huge penalty was meant to force all FFIs to become FATCA-compliant and, to a large extent, this goal has been attained.

With the third-party reporting secured by the first two parts of FATCA, the third part of FATCA imposed a new reporting requirement, Form 8938, on certain categories of US taxpayers who would fall within the categories of Specified Individuals and (starting 2016) Specified Domestic Entities. FATCA Form 8938 forced these Specified Persons to directly report their Specified Foreign Financial Assets with their US tax returns.

Specified Foreign Financial Assets: General Definition

In general, Specified Foreign Financial Assets include: foreign financial accounts and assets that are held for investment and not held in an account maintained by a financial institution. The concept of “assets held for investment and not held in an account” covers stocks or securities issued by anyone who is not a US person, any interest in a foreign entity, any financial instrument or contract that has an issuer or counterparty that is other than a US person, stock issued by a foreign corporation, an interest in a foreign trust or foreign estate and a capital or profits interest in a foreign partnership.

In other words, definition of the Specified Foreign Financial Assets is so broad that it applies to virtually any financial instrument or security one can imagine as long as one of the counterparties and/or issuers is a foreign person. It also includes pretty much any ownership interest in a foreign business entity as well as a beneficiary interest in a foreign trust. Therefore, it is always prudent to contact an international tax attorney to confirm whether your particular investment is covered by the definition of the Specified Foreign Financial Assets.

Specified Foreign Financial Assets: Additional Non-Exclusive Lists of Assets

Additionally, the instructions to Form 8938 specifically state that Specified Foreign Financial Assets encompass an interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement with a foreign counterparty. Specified Foreign Financial Assets also include a note, bond, debenture, or other form of indebtedness issued by a foreign person. Finally, options and other derivative instructions with a foreign counterparty or issuer are also included in the definition of Specified Foreign Financial Assets.

Specified Foreign Financial Assets: Influence of FATCA Implementation Treaties

Despite the broad general definition of Specified Foreign Financial Assets and despite the “laundry” list of assets specifically identified above, one should always look at a specific FATCA implementation treaty in order to verify whether an asset is considered to fall within the definition of Specified Foreign Financial Assets. In particular, one must have extra care with foreign retirement accounts. During the negotiation of FATCA Implementation Treaties, countries often insisted that particular types of retirement accounts should be excluded from FATCA reporting (the United Kingdom was particularly successful in this respect).

A word of caution: even if an asset is excluded from FATCA reporting, it does not automatically mean that it would also be excluded from FBAR reporting. It is possible to have a financial asset reportable exclusively on FBAR, but not Form 8938.

Contact Sherayzen Law Office for Professional Help with Reporting of Specified Foreign Financial Assets on Form 8938

If you have any of the Specified Foreign Financial Assets listed above, contact Sherayzen Law Office for professional help. In addition to annual tax compliance, our firm can help you with the offshore voluntary disclosure with respect to any delinquent Forms 8938 which you have not timely filed in any of the prior years.

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Specified Domestic Entity Definition | FATCA Form 8938 Tax Lawyers Update

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The recent introduction of the new concept of Specified Domestic Entity by the IRS represents a major expansion of the application of FATCA to US businesses and US trusts. For tax years beginning after December 31, 2015, a domestic corporation, partnership or trust classified as a Specified Domestic Entity must file FATCA Form 8938 with respect to its Specified Foreign Financial Assets (SFFA) as long as the total value of those assets meets the filing threshold. With this article, I begin a series of articles with respect to the definition of the Specified Domestic Entity and the affect of this new FATCA concept on US businesses and trusts. Today, I will introduce the general definition of a Specified Domestic Entity.

Specified Domestic Entity Definition: FATCA Background

Before we approach the Specified Domestic Entity Definition, we first need to make sure that we understand what FATCA is. The Foreign Account Tax Compliance Act or FATCA was signed into law in 2010 and codified in Sections 1471 through 1474 of the Internal Revenue Code. The law was enacted in order to reduce offshore tax evasion by US persons with undisclosed foreign accounts.

There are three main parts of FATCA (one can identify even more, but this type of analysis is most useful for the purposes of introducing the Specified Domestic Entity Definition). The first part is the obligation of foreign financial institutions (FFIs) to report to the IRS all foreign financial accounts held, directly or indirectly, by US persons. The second part of FATCA is a 30% withholding tax imposed on the gross amount of each transaction if the transaction involves a non-compliant FFI (these are the “teeth” of FATCA that force FFIs around the world to accept the first part of FATCA).

Finally, the third part of FATCA is the part most relevant to the Specified Domestic Entity Definition – the imposition of a new reporting requirement on US taxpayers with respect to Specified Foreign Financial Assets. This new requirement is called Form 8938.

Specified Domestic Entity Definition: Form 8938 Applied to Specified Individuals Only Prior to 2016

Prior to January 1, 2016, only certain categories of individuals were required to file Form 8938. These individuals were grouped under the term of a “specified individual”. In general, the term “specified individual” included US citizens, all resident aliens and certain categories of nonresident aliens. No business entities or trusts were required to file Form 8938 prior to 2016.

Specified Domestic Entity Definition: New Filing Category Starting 2016

This situation changed dramatically on January 1, 2016 with the introduction of a new category of Form 8938 filers. Starting tax years that began after December 31, 2015, business entities and trusts that are classified as Specified Domestic Entities must file Form 8938 as long as they meet the Form 8938 filing threshold.

Specified Domestic Entity Definition: General Definition

Now that we understand the context in which the Specified Domestic Entity Definition appeared, let’s state this definition.

Treas. Reg. §1.6038D-6(a) defines a Specified Domestic Entity as “a domestic corporation, a domestic partnership, or a trust described in 26 U.S.C. §7701(a)(30)(E), if such corporation, partnership, or trust is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets.” As it is often the case with US international tax law, this general definition is pregnant with terms of art that require specific understanding and further analysis. In particular, we will need to explore the terms “domestic”, “formed or availed of for purposes of holding”, “holding directly or indirectly”, and “specified foreign financial assets.”

In the future articles concerning the analysis of the Specified Domestic Entity Definition, I will explore all of these terms. Without a doubt, the focus of our analysis will be on “formed or availed of for purposes of holding” clause, because this is the heart of the Specified Domestic Entity Definition.

Contact Sherayzen Law Office for Professional Help With the Specified Domestic Entity Definition, FATCA Form 8938 Filing and Other International Tax Compliance Issues

If you need to determine whether your business entity or your trust falls under the definition of a Specified Domestic Entity, contact Sherayzen Law Office for help. Our professional team, headed by international tax attorney Eugene Sherayzen, Esq., will thoroughly analyze your case, determine whether you need to file Form 8938 and/or any other US international information returns, and prepare these forms for you. We can also help you with the voluntary disclosure of any of your offshore assets if you did not timely comply with your US tax obligation with respect to these assets.

Contact Us Today to Schedule Your Confidential Consultation!