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Tax Information With A Mother's Touch Published by Eva Rosenberg, MBA, EA |
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Volume 1, Issue #16, May 28, 1999 Please, if you like this publication, invite at least a half a dozen friends to subscribe ... Give them our Subscription Page (My Wishlist Calendar) Ask TaxMama is sent to you for FREE every Friday (And subscribers get it earlier than websurfers.) ------------------------------------------------ Dear Family, Yesterday was a frenzy of activity as my office and many IRS folk helped bring all the pieces together for next week's Insiders Series. The IRS managers, coordinators, and agents have come up with some excellent material. (You have no idea how much I learn every time I put together one a class or workshop.) And some of these senior managers are really funny. After going over the material for the Estate Tax segment, I declared that it was so good, I was ready to do my second solo Estate Tax Return. (After all, they gave me such favorable reviews on the first one.) Beware what you wish for. Last night I learned that I will have the opportunity. Death is always such a surprise. With all the time my aunt spent in and out of hospitals during her life, we had figured that she was immortal. Not so. How long does it take for the grieving to start, to end? Each of us will take a different path. It's amazing the stupid things you find yourself saying at times like this. So, I'll stop here. But if you find yourself feeling lost and rudderless when your world turns upside down like this, you can find a good shoulder at Grief Recovery ONLINE Over the next few weeks, I'll try to provide information and resources for dealing with the painful logistics of the aftermath of a loved one's death. Callous? Perhaps, but ignoring the details doesn't help. With sorrow, Eva Rosenberg, EA Your TaxMama is watching ... out for you. To:TAX PROFESSIONALS - remember to register for the Insider Series on June 3rd in Burbank, Ca. ExPat Corner -------------- Bizarre Advice? Coming from South America ... Eva, When we were married in 1995, I was living in Saudi Arabia and she in Rome, Italy. I sought the advice of a tax professional, a CPA I'd used for years, concerning the filing of my return for that year. He advised the following: As my new wife is a citizen of Italy, having no ties to the US, outside of her marriage to me, they said I should file as a single. She had no tax liability in the US, no social security number, no Tax payers ID #, nothing that would give her any tax liability in the US. We didn't even live together until I lost my job in the middle east in 1997, then I moved to Rome to be with her. I haven't worked outside the home since. The last year I made any money was 1997, and I again filed as a single last year for that tax year. When we made the move to South America, I contacted a local CPA firm specializing in American expat tax questions. They advised that I file, again, as a single, because my wife still has no tax liability in the US. When I originally wrote you, my main intent was to get another opinion as I had already talked to the "supposedly" tax professionals here. Now you have me quite confused. You seem to be saying that just because F is married to an American, she suddenly has some tax liability to Uncle Sam. I can't see why, nor can the CPA firm I've contact here. Please explain to me why you have this opinion. The question on the 401K account was one I need to look into further, and will attempt to get the CPA firm here to give me an answer. I'm pretty sure though, that if I withdraw that money I will have to pay taxes and will not recover any of them as I'm only 50. Unfortunately, I need the funds to secure some retirement property, whether or not I lose 30% by withdrawing early. Best Regards from the land of perpetual spring, Jim <TaxMama Replies> Dear Jim, As you and all of TaxMama's family knows, I am not an expert in expat tax issues. As a result, I do look into the information more carefully when I provide answers. Your reply about being advised to file as single really baffled me. I thought perhaps I was missing some special section of the Internal Revenue Code completely??? Upon more in depth research, I came up with nothing. So, yesterday, I had the opportunity to pose to the question to Chief of the IRS group that handles international issues here in Los Angeles. He was very interested to learn that CPAs are giving that kind of advice. Ed, equally baffled, said, "But it's common sense. He's married. Period. Either he files a married, filing separately or married filing jointly. Single?! Absolutely not." I can see why these CPAs are suggesting this. After all, since the U.S. Government has no information about your marriage, they would have difficulty detecting the error on your tax return. However, the advice you are getting is flat out illegal. Convenient, less costly, but illegal nonetheless. For shame! When I suggest that you see a tax professional, I mean someone ethical, as well as experienced. For some basic information, see IRS Publication 54 Tax Guide for U.S. Citizens and Resident Aliens Abroad In particular - Married Filing Jointly See the last paragraph on the page and read on ... Publication 519 U.S. Tax Guide for Aliens Moving on, your wife doesn't have a liability to Uncle Sam. You CAN file as married, filing separately and only report your own income. But since the foreign earned income exclusion is only for 'earned income' - e.g. wages and consulting income, you will pay tax on all your income and pension draws. However, with respect to your pension draws, be sure to contact the pension administrator. As I mentioned before, you can take the money over your actuarial life, in even installments, without any penalties - even if you are only 50 years of age. So, if you plan it right, you can still pull the money out for the property and use it to make the mortgage payments - and end up with little or no taxes. You can be creative about how to minimize your taxes. It's not necessary to break the law. Sheesh! Your TaxMama Home, Working at Home --------------------- Hi Tax Mama, I have a two part question regarding office/home-office tax deductions.
Mark <TaxMama Replies> Dear Mark, To answer your first question, Yes, you can do an amended return. First, you will need to completely refigure your tax return for last year. You can deduct the business percentage of your utilities, homeowners insurance, housekeeping, perhaps even gardener if you have customers coming to the house. You will have to depreciate your house. There are some other considerations when you chose to report an Office in Home. Please see Ask TaxMama and Issues #1 & Issues #6 Once you've redone your tax return, you will put a copy of the new one, marked "Amended Return" and a copy of the original return, marked, "As Originally Filed" to the back of the Form 1040X, which is a two-page summary comparing the old and new returns. You can find a copy at Retrieve Forms and Instructions Have a tax professional look it over. As to your second question, basically, anything you buy for business, you should be able to take as a deduction. However, if you could submit an expense report to the company for reimbursement and don't - you won't be able to deduct it either. Since you say that your company would reimburse you were you to submit the receipts, go for it. Besides folks, I don't know where people get the idea that it's a good thing to have lots of tax deductions. Anytime I can get a boss or a client to cover my costs, I am much better off. Best wishes TaxMama Response to: I Want My Windfall, Too! Ask TaxMama. Issue #15, May 21, 1999 -------------------------------------- As an investment advisor, this stock market is too crazy for words. After 30 years in my business I have seen 7 corrections, some minor, but some pretty big ones. The trouble is, all the lemmings who are currently running towards the cliff haven't been really badly burnt. (as were many of the others before the last couple of corrections.) You should read my recent article, the Baby Boomer Phenomenon. In this article, I put forward an argument why this market is defying gravity (for now!) I suggest that it is these new Baby Boomer E-Traders who are distorting the market (over 17% of all stock- market trades are done via the Net.) These people will suffer soon, next week, next month, ... who knows? (someone has predicted Nov. 8th as the day). In the meantime, there are certainly vast profits being made. Therein lies the dilemma. Stay out, no profits, stay in, get hurt in the crash. (minus 25%?) I have been counselling anyone who has listened to me about the probability of a major crash looming on the horizon. But what if I am wrong? Suppose the investment cycle of boom and bust experienced over the last 200 years is now redundant and not part of this new techno-economy? What is your insurance policy? Many savvy investors are looking at Capital Protected Funds. What are these? You can stay with the stockmarket, say the S&P500, or the London FTSE100, but through investing in the index of each market. It's quite a simple concept. Your money is put on deposit, a small premium buys an option in the index. If the daily average of the index goes up over 3 months, you make a profit. If there is a crash, your capital has 100% protection. Some of these funds on offer cannot be accessed by US investors, but there is a way of doing it legitimately using existing IRS insurance law. Am I just an old worn out cynic? I'm not all doom and gloom, I'm just being realistically cautious. You can't mess with history, and history says be careful. Iain Williams -------------------------------------------- Subscribe to the Iain Williams INVESTMENT UPDATE. This examines world economic, political and financial current affairs in a brief readable format. Ideal for the person with the busy schedule. --------------------------------------------- MONEY FUNNIES --------------- TWENTY WAYS INVESTMENT BANKERS ARE LIKE PROSTITUTES
IRS NEWS ------------ Stay Away From Abusive Trusts Editor's Note: Martha Sullivan, an attorney in the Regional Counsel Office in San Francisco wrote the following article. It appeared in the January/February issue of the California Society of Enrolled Agents magazine. ***Anatomy of an Abusive Trust*** In the past, promoters of tax-avoidance trust schemes touted the benefits of tax shelters known as "family estate" or "pure equity" trusts. Those trusts involved shifting the reporting of wages from the worker to the trust, and the deduction of family expenses as trust expenses. The types of trust arrangements more commonly used today feature the supposed transfer of the taxpayer's active business to a purported trust entity. They represent similar transparent attempts to hide income and to transmute non-deductible personal expenses into deductible business expenses. In other words, they are abusive trusts - trust arrangements that purport to reduce or eliminate federal taxes in ways that are not permitted by federal tax law. In the most common scenario, the taxpayer transfers an operating business into a "business trust," "common law business trust," or "unincorporated business organization," in exchange for certificates or "units of beneficial interest." After this purported transfer, the taxpayer continues to run the business, but stops reporting the income from the business on his or her individual return. Depreciable business assets may also be transferred or will appear as assets of an additional trust(s), generating a tiering effect. Sometimes, the taxpayer will transfer the equipment used in the business into a trust which then leases the equipment back to the business trust at inflated rates, in order to offset income. The net profit, less expenses, is distributed to a family trust (often termed a "holding trust") that now holds the taxpayer's residence and personal assets. At this level, much, if not all, of the income is offset with home and family expenses, under the pretext that personal expenses are now expenses of trust administration. Any remaining income may be split between the taxpayers and their children. Another form of abusive trust is the so-called family trust, or "Asset Protection Trust," in which the taxpayer transfers his residence and furnishings into a trust which ostensibly has as its business purpose the conservation of those assets. Then, all personal living expenses of the taxpayer are claimed as deductible business expenses. Other examples are certain charitable trusts, used for transferring assets that are claimed to be charitable contributions or for paying personal expenses that are then claimed as charitable contribution deductions, and "final trusts," which are frequently offshore, formed as the holder of the units of beneficial interest in the other trusts and as the final distributee of the other trusts. The IRS has specifically identified these five examples of abusive trust vehicles that have come to the agency's attention in more detail in Notice 97-24, Internal Revenue Bulletin (IRB) 1997-16, April 3, 1997. Tooting Her Own Horn --------------------- TaxMama's goal is to help you break the code that is the U.S. Income Tax System. We will gladly entertain your questions. Please feel free to submit them to Now`s Your Chance to Ask TaxMama There's no guarantee that we'll have room for all your questions, so we'll try to address those issues that will help the most people. Some of your questions may have already been answered in the past year or so. There are a wealth of articles already in place at The Directory of TaxMama's Articles TaxMama On the WWW ------------------------------------ You can find weekly tax tips at: Robert Sullivan's Small Business Advisor Visit Deb Nyberg's Women in Business - Cyberspace Field of Dreams, BizWomen And for all you ExPats out there ... there's Iain William's site for overseas investing. Overseas Investing Critical Dates:
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