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Expatriation to Avoid U.S. Taxes

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Although there is a general misconception that U.S. citizens can relinquish their citizenship in order to escape high U.S. taxes, most of the time this is not true. If you are contemplating such a move, it is essential to understand the basic rules relating to expatriation for purposes of tax avoidance, as the taxes and fines can be costly. Under IRS rules, U.S. citizens who renounce their citizenship, as well as long-term lawful permanent residents (also know as “green card” holders), can still be taxed on their worldwide income provided that statutory exceptions are not met.

Expatriation Tax Rules Explained

U.S. citizens and resident aliens generally must pay income taxes on worldwide income, regardless of where individuals live. Under the Internal Revenue Code (IRC) Sections 877 and 877A, U.S. citizens who renounce their citizenship within ten-years of earning U.S.-source income are still subject to U.S. taxes on such income if citizenship was relinquished for tax avoidance purposes.

In addition, pursuant to IRC Section 877(a)(1), nonresident aliens (generally defined to be individuals who are not citizens or residents of the U.S.) who, within a ten-year period immediately preceding the close of the taxable year, lost U.S, citizenship may also be subject to taxes on their U.S.-source income if the purpose of their expatriation was to avoid U.S. taxes. It is presumed that tax avoidance was the purpose if any of the following criteria are met:

1) the average annual net income tax (as defined in IRC section 38(c)(1)) of such individual for the period of 5 taxable years ending before the date of the loss of United States citizenship is greater than $124,000 (subject to adjustments)

2) the net worth of the individual as of such date is $2,000,000 or more, or

3) such individual fails to certify under penalty of perjury that he has met the relevant requirements of IRC for the 5 preceding taxable years or fails to submit such evidence of such compliance as the Secretary may require.

The tax provisions of IRC Section 877 also apply to long-term lawful permanent residents who cease to be taxed as U.S. residents. A long-term permanent resident is defined to be any individual (other than a citizen of the United States ) who is a lawful permanent resident of the United States in a least 8 taxable years during the 15-years ending with the taxable year in which an individual ceases to be a lawful permanent resident of the U.S. However, generally, an individual shall not be treated as a lawful permanent resident for any taxable year, if such individual is treated as a resident of a foreign country for the taxable year under an income tax treaty between the U.S. and the other country, and does not waive the benefits of such treaty.

Additionally, there are exceptions for certain individuals with dual citizenship, or who are minors.

Form 8854

Individuals will continue to be treated for tax purposes as U.S. citizens or residents until Form 8854 (expatriation notification form) and other required information is filed. There are different rules noted in the form depending upon the date of expatriation. In certain specified cases, Form 8854 must also be filed on an annual basis.

There is a potential $10,000 fine for failure to file the form, if required.

Conclusion

This is a general overview of the taxation rules relating to individuals who expatriate in order to avoid U.S. taxes. There are many other complex issues that may apply, depending upon the circumstances. Are you facing taxes or possible fines relating to expatriation issues? Sherayzen Law Office can assist you with these matters. Call us to set up a consultation with an experienced international tax attorney today!

Making Work Pay Credit

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Making Work Pay Tax Credit is a refundable tax credit of available to many taxpayers in the tax year 2010.  The credit is up to $400 for individuals and up to $800 for married taxpayers filing joint returns.  Taxpayers who file Form 1040 and 1040A must use Schedule M to figure out their Making Work Pay Tax Credit (in particular, whether they have already received the full credit in their paychecks).  Taxpayers who file Form 1040-EZ should use the worksheet for Line 8 on the back of the 1040-EZ to figure their Making Work Pay Credit.

There is an income limitation on claiming the tax credit.  If a taxpayer’s modified adjusted gross income is or exceeds $95,000 (for individuals) or $190,000 (if married filing jointly), then he is not eligible to take the credit.

Additional limitations also exist.  In particular, the credit is not available for a taxpayer: who is claimed as a dependent on someone else’s tax return, has not a valid social security number, or who is a nonresident alien.

Contact Sherayzen Law Office to discuss your case with an experienced Minneapolis tax attorney!

Getting Prior Year Tax Information from the IRS

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If you need to obtain certain prior year tax return information, it is possible to a copy of the actual processed return from the IRS. Often, however, the information you need may be contained in a tax transcript, which can also be obtained directly from the IRS.

Tax Return Transcript versus Tax Account Transcript

There are two types of tax transcripts: tax return transcript and tax account transcript.

A tax return transcript shows most line items from your tax return as it was originally filed, including any accompanying forms and schedules. It does not, however, reflect any changes made after the return was filed.

On the other hand, a tax account transcript shows any later adjustments either you or the IRS made after the tax return was filed. However, a tax account transcript reveals only the most basic data, such as marital status, type of return filed, adjusted gross income and taxable income, is included in the transcript.

Obtaining Transcripts

There are three ways to order either type of transcripts: on the phone (800-908-9946), online (the IRS website), and by mail. If you choose to obtain your tax transcript by mail, you need to figure out which form you need to file.

1. 1040, 1040A, 1040EZ tax return transcript: you will need to complete and mail Form 4506T-EZ.

2. Business Forms and Other Individual Forms: you will need to complete and mail Form Form 4506T, Request for Transcript of Tax Return.

If you order online or by phone, you should receive your tax return transcript within 5 to 10 days from the time the IRS receives your request. Allow 30 calendar days for delivery of a tax account transcript if you order by mail using Form 4506T or Form 4506T-EZ.

The IRS does not charge a fee for transcripts, which are presently available for the current tax year as well as the past three tax years.

Obtaining Actual Copy of a Previously-Processed Tax Return

If you need an actual copy of a previously processed tax return, it will cost $57 for each tax year that you order. You need to complete and mail (to appropriate address) Form 4506, Request for Copy of Tax Return. Copies are generally available for the current year as well as the past six years. The general wait period is about 60 days.

Contact Us

If you have any tax questions, contact Sherayzen Law Office to discuss your case with an experienced Minneapolis tax attorney.

Higher Education Tax Credits

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This is an education tax credit update from a Minneapolis tax lawyer.  American Opportunity Tax Credit and the Lifetime Learning Tax Credit are two federal tax credits designed to help eligible taxpayers offset their higher education expenses.

To qualify for either credit, a taxpayer must pay postsecondary tuition and fees for himself, spouse or dependent. The credit may be claimed by the parent or the student, but not by both. If the student was claimed as a dependent, the student cannot file for the credit.

Only one of the credits is available in a single tax year per each student. This means that, in a given tax year, a taxpayer cannot claim both credits for the same student’s college expenses. If a taxpayer pays college expenses for two or more students in the same year, then he can choose to take credits on a per-student, per-year basis. For example, the taxpayer can claim the American Opportunity Credit for a sophomore daughter and the Lifetime Learning Credit for a senior son.

Let’s look closer at some of the key facts about American Opportunity Tax Credit and Lifetime Learning Tax Credit.

The American Opportunity Credit

The credit is available for students enrolled in a post-secondary education program in pursuit of an undergraduate degree or other recognized educational credential, but only for the first four years. The student must be enrolled at least half time for at least one academic period. Qualified expenses include tuition and fees, coursed related books supplies and equipment.

The credit can be up to $2,500 per eligible student. The full credit is generally available to eligible taxpayers who make less than $80,000 or $160,000 for married couples filing a joint return. Moreover the credit is refundable; this means that a taxpayer may be able to receive up to $1,000 in refund even if he owes no taxes.

Lifetime Learning Credit

Unlike the American Opportunity Credit, the Lifetime Learning Tax Credit is available for all years of postsecondary education and for courses to acquire or improve job skills. This also means that the student does not need to be studying in pursuit of a degree or other recognized education credential. Qualified expenses include tuition and fees, course related books, supplies and equipment.

The credit can be up to $2,000 per eligible student. The full credit is generally available to eligible taxpayers who make less than $60,000 or $120,000 for married couples filing a joint return. This tax credit, however, is not refundable and is limited to the amount of tax a taxpayer must pay on his return.

If you have questions with respect to any tax credits, contract us NOW to discuss your case with an experienced Minneapolis tax attorney.

Tax Lawyers Minneapolis | 7 Reasons To File Tax Return Even if You Do Not Have to Do It

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In some case, you may want to file a tax return even though you do not have to. Here are the top seven reasons for this course of action for the tax year 2010.

1. Tax Refund. If federal income tax was withheld from your paycheck, you made estimated tax payments, or had a prior year overpayment applied to this year’s tax, you may be entitled to a tax refund. You will only be able to get it if you file a tax return.

2. Making Work Pay Tax Credit. You may be able to take this credit if you had earned income from work. The maximum credit for a married couple filing a joint return is $800 and $400 for other taxpayers.

3. Earned Income Tax Credit (“EITC”). You may qualify for EITC if you worked, but did not earn a lot of money. Remember, EITC is a refundable tax credit; this means you could qualify for a tax refund.

4. Additional Child Tax Credit. This is also a refundable tax credit. It may be available to you if you have at least one qualifying child and you did not get the full amount of the Child Tax Credit.

5. American Opportunity Tax Credit. The maximum credit per student is $2,500 and the first four years of post-secondary education qualify.

6. First-Time Homebuyer Tax Credit. In order too qualify for the credit, you must have bought – or entered into a binding contract to buy – a principal residence located in the United States on or before April 30, 2010. If you entered into a binding contract by April 30, 2010, you must have closed on the home on or before September 30, 2010. The credit is a maximum of $8,000 or $4,000 if your filing status is married filing separately. If you bought a home as your principle residence in 2010, you may be able to qualify and claim the credit even if you already owned a home. In this case, the maximum credit for long-time residents is $6,500, or $3,250 if your filing status is married filing separately.

7. Health Coverage Tax Credit. Certain individuals, who are receiving Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, or pension benefit payments from the Pension Benefit Guaranty Corporation, may be eligible for a Health Coverage Tax Credit. The credit is worth 80% of monthly health insurance premiums when you file your 2010 tax return.

If you have questions with respect to whether you should file your tax return, contact Sherayzen Law Office NOW and discuss your case with an experienced Minneapolis tax attorney!