site map

Barron's International Tax Service

« The TaxBarron » Serving the American Expatriate Community

TaxBarron Report
November/December 2008

With the election of Barack Obama as the next president of the United States, the American nation and indeed the world anxiously look to him to bring about change. And while not everyone is clear what change represents, most people are not satisfied with business continuing to be done as usual. So as 2008 winds down, Americans abroad, in the face of diminished portfolios and global recession, are more likely joining peoples everywhere in looking to the future with hope and trepidition rather than giving year-end tax planning much attention. For previous issues of the TaxBarron Report, click here.

In This Issue

American Expats and Year-End Tax Planning

Shorts

Protecting Assets From Deflation

Tax Quiz

Delay Mandantory Retirement Account Withdrawals

Residency Tests for Foreign Earned Income Exclusion

PONDERABLES

Recommended

American Expats and Year-End Tax Planning

Year end tax planning can be crucial for American expatriates. A self-employed person might not want that large fee paid to him in 2008. Those business supplies might need to be purchased before 31 December. Contributions to a favorite charity might make sense this year (if contributing is your primary objective). Profitable stock sales earlier in the year may require some offsetting losses now. An employed expatriate might want that year-end bonus in January. Estimated taxes may need to be boosted to avoid or reduce penalties.

Furthermore, what will be President-elect Obama's approach to taxes once in office? Given recurring financial hammer blows affecting Americans, won't he raise taxes? His main proposals are . . .

• Raise the top two personal income tax rates from 33% and 35% to 36% and 39.6% respectively.
• Restore the income phase-outs for personal exemptions and itemized deductions.
• Raise the top capital gains tax rate from 15% to 20%.
• Increase the top dividend tax rate from 15% to 20%.
• Increase taxes on oil and gas as well as multinational companies.

As these taxes are aimed at wealthier Americans, the Obama administration is also likely to take back the phase-out of the Estate Tax, due to be repealed in 2010. Since the enactment of the 2001 Economic Growth and Tax Relief Reconciliation Act, the Applicable Exclusion Amount (AEA) has been gradually increased. In 2008 AEA is $2,000,000, and next year it increases to $3,500,000. If Congress does not repeal the Estate Tax, the AEA will fall back to $1,000,000 with a top estate tax bracket of 55%. Since World War II, Americans have accumulated billions of dollars in assets just waiting to be passed on to the next generation.

 

SHORTS

A new booklet descriing the history and benefits of US Social Security and Medicare programs and how they affect Americans living abroad has just been published on the AARO website.

Leila Heron with American Citizens Abroad writes that E-Careers are quickly transforming the working environment for American professionals abroad. Her article is a must read for anyone who seeks an alternative to traditional (un) employment.

A strategic goal of IRS is to enhance enforcement of international tax laws. As American expats are obliged to report world-wide income to the taxman, the Service is aggressively seeking enforcement of this law.

New revenue provisions have been legislated that apply to expatriation. An important read that could affect you.

 

Protecting Assets From Deflation

- From the Desk of Vernon Jacobs

Equities are down, fixed income investments are down, real estate is down, gold is down from its high and oil is nearly 1/3 off its recent peak. While trying to decide what to do about my own modest investments the other day it suddenly hit me that when everything is up, we call it inflation. When everything in the investment markets is down, perhaps we are dealing with deflation.

According to the Wall Street Journal on Nov. 24, 2008:

With an estimated $4 trillion in housing wealth and $9 trillion in stock-market wealth destroyed so far in the United States, there is little doubt that we are witnessing a classic debt-deflation bust at work, characterized by falling prices, frozen credit markets and plummeting asset values.

It does make a lot of sense that when a long boom (financed by a combination of monetary inflation and enormous leverage) is followed by massive writeoffs and bankruptcies, that's deflation. Regardless of the efforts of the government and the Federal Reserve, the inflated prices for every kind of investment are being deflated like a punctured balloon. And quite a few crystal ball gazers are saying it's not over yet.

Some investment gurus are saying this is a great buying opportunity - which clearly implies that they believe we have hit a bottom of some kind. Other gurus argue that the carnage is far from being over and things will get a lot worse before they get better.

But how can investors protect their asset values in a deflationary economy? Perhaps it's too late, if we have really hit bottom. But for those who think the writeoffs and bankruptcies are just starting, are there ways to avoid further losses? Go to Offshore Press.

Tax Quiz

 

ANSWER TO LAST MONTH'S QUIZ: Yes. Under Section 357(a), liabilities assumed by a corporation and/or the liabilities to which the property is subject are not considered money or property from which gain or loss will result. However, Section 357(c) provides an exception to this rule when the liabilities exceed the adjusted basis of the propoerty transferred. Such excess is considered gain to the transferor from the sale or exchange of an asset.

THIS MONTH'S QUIZ: John purchased a life insurance policy on the life of his brother Jack, naming himself as the beneficiary. A legal obligation was imposed upon John making his rights secondary to those of an assignee who was a creditor of Jack. Upon Jack's death, the proceeds of the life insurance were used to pay his creditor. Even though Jack did not pay for the policy, are the proceeds included in his estate for estate tax purposes? (NATP)

Delay Mandantory Retirement Account Withdrawals

As a consequence of the stock market creating swiss cheese out of financial portfolios, government officials are looking into changing the rules that require retired Americans to make minimum withdrawals from age 70.5. Minimum withdrawals are based on the value of a retirement account. Suppose an account worth $500,000 in 2007 has lost 40% of its value. The withdrawal based on $500,000 would be $19,531 rather than $11,719 at today's $300,000 value. And here is the rub: the penalty for failure to withdraw the minimum is 50% of the withdrawal amount.

The government is considering new rulings that could delay or reduce the withdrawal amounts. Or possibly tax relief for those who have already made the required payments this year.

Bill Novelli, chief executive for the American Association of Retired Persons (AARP) recently wrote in a letter to Treasury Secretary Henry Paulson: 'The sudden decline in the economy and plunging stock markets has jeopardized the retirement savings of millions of retired workers. In addition to steps that are already being taken to stabilize the financial markets, we believe it is also critical to help stabilize individual finances.' AARP represents nearly 40m Americans aged 50 and older. - From Accounting WEB

Residency Tests for Foreign Earned Income Exclusion

To take advantage of the Foreign Earned Income Exclusion ($87,600 in 2008), an American expatriate must qualify for foreign residency. Under the bona fide residency test, he or she would need to be a foreign resident for one tax year. For most people, a tax year is a calendar year. In addition, though, an expat must show intention to be a foreign resident. Evidence of intent includes family presence, renting or buying a place of residence rather than staying in a hotel room, participating in community activities, maintaining a permanent foreign address, and opening charge accounts.

While these criteria may appear extravagant, other criteria definitely kill qualifying: taking inconsistent positions toward foreign residency such as filing a statement with the foreign authorities that one is not a resident there nor held subject to income taxes.

Qualifying under the physical presence test means staying in a foreign country for 330 days in any 12 month period. The time period is not attached to tax year. Nor must the days be consecutive. The 330 day period begins and ends with travel to or from the United States. Days traveling over international waters or in the U.S. do not count.

Periodic trips home for vacation or business do not disqualify one from the bona fide test. But they reduce FEIE under the physical presence test. Bona fide is jeopardized when at the end of the first tax year the expat returns stateside for Christmas holidays and then does not return to the foreign country.

PONDERABLE

How much of the energy employed in the business world of today is expended simply in canceling and neutralizing the efforts of other people. ... Were all work, whether of brain or hand, of a nature profitable to mankind, ... then the supplies of everything necessary for a healthy, comfortable and noble life would amply suffice for all. - Dr. John E. Esslemont

Recommended

Personal Income Tax Brackets Falling Worldwide

IRS Phishing Scams

Economic News

On Government Spending