taxation law services

2015 Inflation Adjustments to Tax Benefits

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The IRS recently announced annual inflation adjustments for more than 40 tax provisions, including the tax rate schedules, and other tax changes. Revenue Procedure 2014-61 provides details about these 2015 inflation adjustments. In this writing, I would like to highlight main 2015 inflation adjustments.

1. 2015 inflation adjustments for income tax brackets. The tax rate of 39.6 percent affects singles whose income exceeds $413,200 ($464,850 for married taxpayers filing a joint return), up from $406,750 and $457,600, respectively. The other marginal rates – 10, 15, 25, 28, 33 and 35 percent – and the related income tax thresholds are described in the revenue procedure.

2. 2015 inflation adjustments for Standard Deduction. The standard deduction rises to $6,300 for singles and married persons filing separate returns and $12,600 for married couples filing jointly, up from $6,200 and $12,400, respectively, for tax year 2014. The standard deduction for heads of household rises to $9,250, up from $9,100.

3. 2015 inflation adjustments for Itemized Deduction Limitation. The limitation for itemized deductions to be claimed on tax year 2015 returns of individuals begins with incomes of $258,250 or more ($309,900 for married couples filing jointly).

4. 2015 inflation adjustments for Personal Exemption Amounts. The personal exemption for tax year 2015 rises to $4,000, up from the 2014 exemption of $3,950. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $258,250 ($309,900 for married couples filing jointly). It phases out completely at $380,750 ($432,400 for married couples filing jointly.)

5. 2015 inflation adjustments for Alternative Minimum Tax (AMT): AMT exemption amount for tax year 2015 is $53,600 ($83,400, for married couples filing jointly). The 2014 exemption amount was $52,800 ($82,100 for married couples filing jointly).

6. 2015 inflation adjustments for Earned Income Credit (EIC) amount. The maximum EIC amount is $6,242 for taxpayers filing jointly who have 3 or more qualifying children, up from a total of $6,143 for tax year 2014. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phaseouts.

7. 2015 inflation adjustments for Estate Basic Exclusion Amounts. Estates of decedents who die during 2015 have a basic exclusion amount of $5,430,000, up from a total of $5,340,000 for estates of decedents who died in 2014.

8. 2015 inflation adjustments for Foreign Spouse Gifts. The exclusion from tax on a gift to a spouse who is not a U.S. citizen is $147,000, up from $145,000 for 2014.

9. 2015 inflation adjustments for Foreign Earned Income Exclusion (FEIE). The 2015 FEIE breaks the six-figure mark, rising to $100,800, up from $99,200 for 2014.

10. 2015 inflation adjustments for Annual Gift Exclusion Amount. The annual exclusion for gifts remains at $14,000 for 2015.

Who Must File IRS Form 1042

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Form 1042 (“Annual Withholding Tax Return for U.S. Source Income of Foreign Persons”) serves a number of important reporting purposes. In general, it is used to report the tax withheld under chapter 3 of the Internal Revenue Code (“IRC”) on certain income of foreign persons (such as nonresident aliens, foreign partnerships, foreign corporations, foreign estates, and foreign trusts), as well as to report the tax withheld under chapter 4 of the IRC on payments subject to tax withholding. It also utilized to report tax withheld pursuant to IRC Section 5000C (“Imposition of tax on certain foreign procurement”), and reportable payments from Form 1042-S under chapters 3 or 4.

In this article, we will cover who is responsible for filing Form 1042. US individuals involved with cross-border businesses or living overseas should be aware of this form as they may be subject to the form’s filing requirements for a variety of common reasons, without even knowing it. For instance, US-source alimony paid to a nonresident alien former spouse may be reportable by a withholding agent on Form 1042 (in addition to 1042-S), even if the entire amount is exempt under a tax treaty.

This article provides general information and is not intended to convey tax or legal advice. Please contact Mr. Eugene Sherayzen, an experienced tax attorney at Sherayzen Law Office, Ltd. if you have any questions about filing this form, or any other US-international tax questions.

Who is Responsible for Filing Form 1042?

As noted by the IRS, unless an exception applies, “every withholding agent or intermediary who receives, controls, has custody of, disposes of, or pays a withholdable payment, including any fixed or determinable annual or periodical income, must file an annual return for the preceding calendar year” on Form 1042. The IRS defines “withholding agent” to mean any person who is required to withhold tax. This definition is expansive and can include, in general, any individual, trust, estate, partnership, corporation, nominee, government agency, association, or tax-exempt foundation (both domestic and foreign) that is required to withhold tax. Withholding agents are personally liable for any tax required to be withheld, as well as interest and applicable penalties.

An “intermediary” means, “a person who acts as a custodian, broker, nominee, or otherwise as an agent for another person, regardless of whether that other person is the beneficial owner of the amount paid, a flow-through entity, or another intermediary.”

When Must Form 1042 Be Filed?

Form 1042 must be filed in a number of different circumstances. As stated by the IRS, an individual or entity must file the form if, “you are required to file or otherwise file Form(s) 1042-S for purposes of either chapter 3 or 4 (whether or not any tax was withheld or was required to be withheld to the extent reporting is required)…; You file Form(s) 1042-S to report to a recipient tax withheld by your withholding agent; You pay gross investment income to foreign private foundations that are subject to tax under section 4948(a); You pay any foreign person specified federal procurement payments that are subject to withholding under section 5000C; You are a qualified intermediary (QI), withholding foreign partnership (WP), withholding foreign trust (WT), participating foreign financial institution (FFI), or reporting Model 1 FFI making a claim for a collective refund under your respective agreement with the IRS.” Note, that the FFI classification may also require other extensive reporting under FATCA.

2014 Form 1042: Due Date and Place of Filing

The 2014 Form 1042 must be filed by March 16, 2015, to the IRS’ Ogden (UT) Service Center, and an extension of time to file may be granted by submitting Form 7004, (“Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns”).

Contact Sherayzen Law Office for Help With International Tax Compliance

US-International tax reporting and planning can involve many complex areas, and you are advised to seek the advice of attorneys practicing in this area. If you have any questions, please contact Sherayzen Law Office, Ltd. for all of your tax and legal needs.

IRS 2014 Final and Proposed Regulations Regarding Form 5472

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In 2014, the IRS issued both final (T.D. 9667), and proposed (REG-114942-14) regulations amending the rules for filing Form 5472, (“Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business”). Form 5472 is used to provide the information required under Internal Revenue Code (“IRC”) Sections 6038A and 6038C when reportable transactions occur during the taxable year of a reporting corporation with a foreign or domestic related party.

This article will briefly explain the final and proposed regulations affecting Form 5472; it is not intended to convey tax or legal advice. If you have questions regarding filing of Form 5472 or any international tax matters, please contact owner Eugene Sherayzen, an experienced tax attorney at Sherayzen Law Office, Ltd.

Form 5472 Final Regulation (T.D. 9667)

On June 10, 2011, under the above-mentioned IRC Sections, the IRS had previously published temporary regulations and a notice of proposed rulemaking by cross-reference to the temporary regulations in the Federal Register (76 FR 33997, TD 9529, 2011–30 IRB 57; REG–101352–11, 76 FR 34019) (2011 regulations), amending final regulations to provide that a duplicate filing of Form 5472 generally (previously required in Regulation Section 1.6038A-2(d)) would no longer be required, regardless of whether the filer files a paper or an electronic income tax return. This was determined because of advances in IRS electronic processing and data collections.

The 2014 final regulation, T.D. 9667, adopts the 2011 regulations without substantive change as final regulations, and removes the previous temporary regulations. The regulation became effective as of June 6, 2014.

Form 5472 Proposed Regulation (REG-114942-14)

On the same date as the final regulation was issued, the IRS concurrently issued proposed regulation (REG-114942-14). At issue was a provision (Treas. Reg. Section 1.6038A-2(e)), allowing for timely filing of Form 5472 separately from an income tax return that is untimely filed.

Because of the significant penalties involved for failing to file a timely and accurate Form 5472 (as noted in the proposed regulation and subject to reasonable cause exception, “an initial penalty of $10,000 (with possible additional penalties for continued failure) shall be assessed for each taxable year and for each related party with respect to which the failure occurs”), this process could be utilized by filers in such circumstances.

However, the IRS stated in the proposed regulation that, “with the benefit of experience”, it determined that the untimely-filed return provision was not conducive to efficient tax administration and that filing Form 5472 should not differ significantly from the methods and penalties applicable to similar information returns, such as Form 5471, (“Information Return of U.S. Persons With Respect to Certain Foreign Corporations”) and Form 8865 (“Return of U.S. Persons With Respect to Certain Foreign Partnerships”). As noted in the proposed regulation, “those forms must be filed with the filer’s income tax return for the taxable year by the due date (including extensions) of the return, and there is no provision equivalent to the untimely filed return provision under § 1.6038A-2T(e) of the 2011 temporary regulations that would require or permit separate filing of those forms. See §§ 1.6038-2(i) and 1.6038-3(i)(1). Accordingly, it is proposed that the untimely-filed return provision contained in § 1.6038A-2(e) be removed.”

Contact Sherayzen Law Office for Help With Form 5472 Compliance

If you have any questions regarding the filing of your Form 5472 or you just need complex tax planning for cross-border business entities, please contact our experienced international tax team at Sherayzen Law Office, Ltd.

Brazil FATCA IGA Signed

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The long-awaited Brazil FATCA IGA (Intergovernmental Agreement) was finally signed on September 23, 2014. This is an event of high importance and, in this article, I would like to explore Brazil FATCA IGA in more detail.

FATCA & Model Treaties

FATCA (“Foreign Account Tax Compliance Act”) was signed into law in 2010. This is a grand piece of US legislation that has already made a huge impact on international tax compliance landscape, and US taxpayers with undisclosed foreign accounts are feeling the pressure of this law more than anyone else.

In essence, FATCA directs foreign financial institutions (FFIs) to identify and report to the IRS all of their US customers with the account balances of $50,000 or more. How this reporting is done will depend on the tax treaty that is signed by the relevant foreign country.

There are two Model treaties that IRS created for the foreign countries to sign. Model I treaty that requires FFIs to send the reporting information regarding US-held accounts to their national tax authority which will report this information to the IRS. Model II treaty skips the national authority – it requires FFIs to directly turn over the US-owned account information directly to the IRS.

Brazil FATCA IGA is a reciprocal Model I treaty.

Brazil FATCA IGA

Since Brazil FATCA IGA is a Model I treaty, under the Brazil FATCA IGA, Brazilian FFIs will turn over the information regarding US accountholders to Receita Federal Brasileira (the national tax authority in Brazil). Receita Federal Brasileira will then turn over all of this information to the IRS. A Brazilian FFI that complies Brazil FATCA IGA due diligence and reporting requirements will be eligible to be treated as a registered deemed-compliant FFI for FATCA purposes.

Remember that Brazil FATCA IGA is a reciprocal treaty. This means that the United States will also have to share information with the Receita Federal Brasileira regarding accounts held by Brazilian residents with certain US financial institutions.

Impact of Brazil FATCA IGA on US Taxpayers with Undisclosed Accounts in Brazil

The signing of Brazil FATCA IGA suddenly raised the stakes for US taxpayers with undisclosed bank and financial accounts in Brazil, because there is almost a certainty that these accounts will now be reported to the IRS. This, in turn, means nothing else than full exposure of undisclosed US-held accounts to a potential IRS investigation with potential criminal and willful FBAR penalties as well as additional penalties (including criminal) with respect to US tax returns.

Moreover, the implementation of Brazil FATCA IGA means that this exposure to the IRS investigation is likely to occur very soon, perhaps as soon as December 31, 2014 or (more likely) March 31, 2015. If the IRS learns about the existence of these undisclosed accounts from Receita Federal Brasileira before the US taxpayer with undisclosed Brazilian accounts attempts his voluntary disclosure, it is very likely that this taxpayer will not be able to enter the 2014 Offshore Voluntary Disclosure Program.

Contact Sherayzen Law Office for Professional Help With Undisclosed Bank and Financial Accounts in Brazil

If you have undisclosed foreign and financial accounts in Brazil, you should contact Sherayzen Law Office for legal and tax help as soon as possible. Our international tax law office is highly experienced in the matters related to the Offshore Voluntary Disclosures and has helped hundreds of US taxpayers worldwide to bring their tax affairs into full compliance with US tax laws.

Contact Sherayzen Law Office to Schedule Your Confidential Consultation Now.

Ireland to End Double Irish Tax Loophole used by many US Companies

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Less than a month ago, Irish Finance Minister Michael Noonan announced in an address introducing the 2015 budget to the Irish parliament that the country will be changing its tax code to require all companies registered in Ireland to be tax residents, thereby ending the so-called Double Irish loophole utilized by many US companies and multinationals to reduce their tax liabilities. Noonan was quoted in one recent article as stating, “Aggressive tax planning by the multinational companies has been criticized by governments across the globe, and has damaged the reputation of many countries.”

This article will briefly examine the Double Irish structure used by US companies and others, and the new changes that will affect this structure; this article is not intended to convey tax or legal advice under either US or Irish laws.

The changes to the Double Irish loophole, combined with the recent Department of the Treasury and Internal Revenue Service Notice 2014-52, “Rules Regarding Inversions and Related Transactions” will significantly affect many US companies. Tax planning and compliance will become even more important the days ahead. Please contact Mr. Eugene Sherayzen, an experienced international tax attorney at Sherayzen Law Office, PLLC for questions about your tax and legal needs.

The Double Irish Loophole

Before the new changes, multinationals could utilize a structure commonly referred to as the “Double Irish”. In general, under the Double Irish structure, companies would take advantage of Irish territorial taxation laws, meaning that the income of an Irish subsidiary operating outside of Ireland would not be subject to taxation. Prior to the new change, an entity in Ireland would be considered to be a tax resident not where it was incorporated, but rather where its controlling managers were located; thus, an entity registered in Ireland with its managers located in a tax haven would be considered to be a tax resident of the tax haven, and not Ireland, if properly structured.

US companies would often take advantage of this structure by forming offshore subsidiary entities that would own the rights to intellectual property located outside the United States, typically without paying US tax, through a cost sharing agreement between US parents and offshore companies. The non-US intellectual property rights would then be licensed to a second Irish subsidiary (hence the “Double Irish” phrase), which would be an Irish tax resident, generally in return for royalty payments, or similar fees. The second Irish subsidiary would additionally be able to deduct the royalties or other fees paid to the entity in the tax haven, thereby reducing its taxable profits (and subjecting any remaining profits to Ireland’s competitive 12.5% rate). Until such profits were remitted to the US, they would typically not be subject to US taxation.

Many US companies, such as LinkedIn, Facebook, Google, Twitter and others successfully used the Double Irish loophole to reduce their overall tax liabilities.

Ending the Double Irish Loophole

Under the new changes to the Double Irish loophole, beginning in January of 2015, all newly Irish-registered entities will automatically be deemed to be Irish tax residents. The new rules will not apply to companies currently utilizing the Double Irish structure; however, such companies will need to be compliant with the new rules by the end of 2020. Ireland will still retain its favorable 12.5% corporate tax rate.

The changes to the Double Irish loophole were made as a result of intense international criticism and potentially adverse consequences for Ireland. This year, the European Commission announced that it would conduct a formal investigation into the practices of various companies with Irish subsidiaries, including the Double Irish loophole. According to various news reports, European Union officials have expressed preliminary support for the new changes.

To address the possible loss of jobs resulting from the new changes (one news report puts the number of jobs created by foreign firms registering in Ireland to be 160,000 jobs, or approximately one in ten workers in the country – a lot of these jobs were created as a result of the Double Irish loophole), Noonan announced that he intended to create a new taxable rate for income derived from intellectual property in the form of a “Knowledge Development Box”. However, the EU is currently investigating so-called “patent boxes” (which could likely be similar to Noonan’s future proposal) utilized by various other European countries, such as the U.K. and the Netherlands.

Contact Sherayzen Law Office for Professional Help With International Tax Planning

Since 2008, the world has experienced an almost unprecedented surge in the international tax enforcement, reflecting the desire (and the great economic need) of many countries to be able to obtain what these countries consider their fair share of tax revenues from international companies. The recent change to Irish tax laws with respect to the Double Irish loophole is just the latest example of this growing trend.

As tax enforcement rises, many US companies operating overseas and foreign companies operating in the United States are facing increasing risks of over-taxation with a direct threat to their profitability. For a number of reasons, the mid-size and small companies that operate internationally face a disproportionate increase in these risks than large multinational companies.

Sherayzen Law Office has successfully helped companies around the world to successfully operate internationally while reducing the risks of being subject to unfair tax treatment. If you have a small or mid-size business that operates internationally, you should contact our international tax team for professional legal and tax help.