Federal Income Tax Requirements for Foreigners

Without a doubt Miami has become an international metropolis. Anyone reading this article who lives in Miami will likely know someone who is trying to figure out what their responsibilities are for income tax filing at the end of this year. It’s critical to know that violating your income tax reporting responsibilities by someone who has been given residency may be regarded as “abandoning their resident status” by U.S. Citizen and Immigration Service. This indirectly says make sure you get good professional advice.

The application of U.S. tax law is not easy. An initial consultation with any tax professional will ask a whole variety of questions. Some of these questions will be:

(1)  What type of Visa do you have?

(2)  What is your purpose in the U.S.?

(3)  Where do you live?

(4)  How many days have you been in the U.S. in the past three years?

(5)  How do you make a living and support yourself?

(6)  What is your marital status?

(7)  Do you have a social security number or ITIN?

(8)  What is your tax home?

(9)  What country issued your Passport?

It’s very important that you be able to answer each question precisely and have documentation to support your answers. The trouble is, more often than not a foreigner’s Visa, or initial reason for coming to the U.S. and perhaps staying longer than expected becomes not only part of their journey, but now part of a tax advisor’s journey to find the right answers to tax compliance.

Are you a Resident or Non Resident?

The first question we need to address is what category of foreigner are you? Are you a “Resident” or a “Non- Resident” Please keep in mind this may not have anything to do with your Visa or intention.

Generally, “Resident” Aliens are treated as U.S. taxpayers and file form 1040.  If you have income from abroad, you are generally required to report “World Wide Income”. Good news is you get credit for taxes already paid in another country. If you are a “Non – Resident” you may need to file form 1040NR and you are generally taxed on U.S. Source Income. Even if you are deemed a “Resident Alien” there is an exception to being treated as a U.S. taxpayer if you can meet the conditions under the “Closer Connection Exception”. This generally means your true tax home is somewhere else. This is important for those foreigners who have a vacation home in the U.S., stay on average more than 183 days (discussed later), but really are on an extended vacation. (Many people in Miami these days buying nice condos who may not need to file)

Your “Residency Status” is determine by two tests. Either the (1) Green Card Test or (2) The Substantial Presence Test.

The Green Card Test is fairly simple. If you have been authorized and given the privilege to reside in the U.S., as an immigrant, by the U.S. Citizenship and Immigration Service (USCIS) then you generally meet this test. Your are in fact a resident.

The Substantial Presence Test, really is the catch all. This test states; if you have been in the United States at least 183 days in the past three years then, you are regarded as a “Resident”, if not you are a “Non-Resident” The issue lies in the calculation of the 183 days. Generally, its; All the days of the current year, plus 1/3 the days of the immediate prior year, plus 1/6 the days of the second preceding year. Get all those entry and exit Visa stamps, look through airline ticket purchases, recall your wonderful times traveling and start counting!

The important thing to note is that it does not matter if you applied for residency, have a green card or not. If you forgot to leave and stayed 183 days or more, you just vacationed your way into a new tax home.

All the tax issues, concerns and variables can be rather complicated. It’s possible “Tax Treaty” Provisions may apply for your country. Gathering your information first is key. Then call a qualified tax advisor and stay away from the tax return mills. Each person’s situation is different so every factor needs to be taken into account.

Retirement?.......Oh! That Really Long Vacation!

Let’s face it. All of us, hard working folks have so much going on that we tend to live for the here and now. When we make money, we pay our bills, we pay down debt. We leave a little aside for “disposable income” (i.e., restaurant meals, movies, vacation, hobbies, home improvement and of course the kids). Well…most of us.

When we stop and take a look back, what’s left? For many American’s their home, if they have one, is the only real savings they have, come retirement. Another chunk can come from any potential inheritance Mom & Dad might leave you.  Maybe you have a Whole Life insurance policy that has a cash surrender value. Maybe you have a little stashed in a savings account or in an IRA or employer 401K plan. Then you have some Social Security Benefits; not nearly enough to really sustain your current spending levels. Many government workers have it really good in that they get guaranteed defined benefits, typically a percentage of their ending or highest salary until death. Yep, these legacy costs make democracy very expensive. (That’s another story)

Now think of what your expenses will be. Healthcare costs are huge as you get old. Especially, if you have health problems. Insurance or Medicare will not cover it all. That wonderful house you paid off; now needs a new roof, plumbing work, a new kitchen and bathroom and new HVAC system. You need a new car. You have to pay real estate taxes and insurance for home and auto. You don’t have kids anymore but, hey now you have grandkids. Who could say no to those little rug rats? How about an occasional vacation? Have to do a few of those before you find yourself in a pair of senior Pampers!

All is not lost. Plan for that retirement as early as possible. Like right out of college. Forego some modest luxuries if you must today so that tomorrow you will have a little more. Count on the fact that we will have various economic cycles and that IRA’s and 401K plans as well as savings invested in mutual funds could loose significant values. (Like they did starting in 2008. A 40% loss in value was common) If you have a windfall year, try not to spend more, put some in reserve. Retirement accounts, and employer plans are a huge benefit during your working years. Not only will you save for your retirement but you will also save on income taxes at rates higher than they might be when you retire. It’s possible a $10K savings in one year really feels more like $7.5K when you consider tax savings. Then you have the employer match of many employer sponsored retirement plans. THAT’S FREE MONEY! Take it and run, you earned it. Over a 40 year period (if you start at age 25) saving $2,000 a year and increasing this amount by $500, every 5 years at 4.85% avg. ROI, will yield a savings of about $359K, not taking into account tax savings.  The stock market and hence mutual funds have a better rate of return on average for a balanced portfolio. Of course no one can really predict a down cycle.

There are options and choices to make now that can make a big difference in the long run. You do have to be mindful. You do have to make those choices. But the real key is start as early as possible. Talk to your tax advisor, your CPA. Put it all out and come up with a clear plan and a goal. Need help, call me.

Retirement, is a very ugly word. It suggests that you are disposed of. It says you are put aside. It says you are no longer useful. Nonsense!……me I’m going for a Really Long Vacation!

So you have an LLC with revenues:

LLC's, a.k.a.: "Limited Liability Companies"; have gained enormous popularity in the past 15 years. They are a creative legal entity that has tax characteristics of a chameleon. They are adaptive and can be taxed as S-Corps, C-Corps, Partnerships or disregarded as its own entity. So from a tax standpoint saying you have an LLC really tells your tax advisor next to nothing. What this also means is that you have to plan ahead. Our tax system has lots of alternative choices. But most importantly, now is the time of year you want to really see were you are at. Sit with a tax advisor and get a hold of your tax exposure. See what you can do to reduce your and perhaps your partners tax liability "before year end". What options and choices do you have? In some cases it's not just the income tax in your bracket. It is also the additional self employment tax which is another 15.3%. So, spending a little now on a good tax advisor can pay for itself in tax savings.

The overwhelming popularity of LLC's has a great following from small to mid sized enterprises and professional service and investment firms. Sometimes, small companies fear spending money on a qualified tax advisor. I know this is self serving, but really , you're doing yourself a dis-service. Small enterprises should steer clear from, "tax return mill companies", and hire a dedicated professional with the knowledge and the tools to educate you and get you on a defined path. In some cases a large tax law or accounting firm, with hefty fees may not be the way to go. A good relationship is however, a tremendous resource. It's a smart investment in your entrepreneurial development and there is no reason to go it alone or to try and imitate what your friends are telling you.

If you like this posting, or if you have other areas of interest, please feel free to comment or simply reach out.

A Decent Human Is Good For Business!

I once worked for someone who told me. "The Hardest Thing You Will Ever Do In Your Life Is To Do The Right Thing". He continued to add, "That's Why you Should Do It. It Will Always Set You Apart From The Rest". He wasn't wrong and for all of my adult life I have always tried to do it right. Or at least as best as I can. I thanked my parents and my up bringing as my back bone to morality and ethics. Truth is, being a veteran of this dog eat dog world, I do it because it's good business, for profit and because I fear not to make my own path to my own peace of mind and my own happiness. It's my Brand!

Adam Smith, the Economist knew this Before he wrote his famous book "The Wealth of Nations". Russ Roberts interprets his writing and the hidden meaning of his thoughts as it applied back then, and still does in our modern day.

Economics is the not really math or business. It's about the psychology and philosophy of how and why you make choices and the outcome of those choices. If you are like me you have plenty of choices to make in life. For your own sake, for your clients, your children and your spouses and the people you really care about.

Turns out that there is a hidden hand that motivates us and rewards us for being kind and wanting to be loved. In turn it makes the world bearable and liveable even under the most difficult of market (Uh...life) conditions.

Read the book. It's an interesting read and believe me it's not sleeper economics at all. The book will reinforce what you might already know. Or it will shed a new light as to why things are the way they are and why you just need to do your part. You just might realize, being a decent human being has value in this selfish, narcissist world.

Using The Cloud for Travel and Emergencies

          Hopping on a plane and taking a trip is as common as stepping into an elevator. In just a few short hours you can be thousands of miles away.  For most trips many of us now take very little cash. Depending instead on debit cards and credit cards. Need cash, just step up to an ATM. Our wallets and of course for the ladies your purses are stores of financial resources and information. Credit Cards, Debit Cards, Drivers Licenses, Insurance Cards, Auto Registrations, your little cheat sheets for passwords. But what happens if you lose that purse or wallet? What if you get mugged? What if you are in a bad car accident and you are separated from that wallet or purse? What if you lose that credit card or leave it behind and need to cancel it right away? What number do you call? What was the credit card number? Here’s an idea that can give you some piece of mind.

Take a scan of Credit and Debit Cards (front and back), a scan of Passports (including any Visa’s), a scan of your driver license, auto insurance card, auto or boat registration, a scan of your health insurance documents. Scan your airline, cruise and other travel documents. If you are traveling with a minor and you have written authorization to provide medical treatment. If you are traveling with a domestic partner and have documentation that allows you to authorize medical services to your loved one, you should scan these legal documents as well. You may want to include addresses and telephone numbers of people you are visiting or people close to where you will be going. In an emergency, these people can be a resource to you.

Once Scanned create either one master document, or separate documents, password protect them and upload them to Google Docs or any other cloud storage medium.

Now, as long as you can get access to the Internet, you have access as well as a copy to all that critical information should you need it when you are away from home. All you need is one login and the password for the files. It’s also a great idea as part of a hurricane preparedness plan, or any natural disaster. Even if you lose your smartphone or laptop, you can access this file from any hotel computer or internet café anywhere in the world.

Communication Apps for Travel

If you have ever traveled outside of the United States you will surely encounter the need if not the urge to reach out and talk or communicate with friends, family and co-workers. Even if you do not travel often you may have friends and contacts and like me business in other countries. So you really want affordable and easy to use mediums to communicate and stay in touch with your VIP’s. Here is a round-up of some cool apps that require web access and keep you in touch. Best of all the apps and the services are free or at very deep discounts!

Skype: Okay I am sure you have heard of this app. Telephone calls for free to anyone that has an account. Or discount calls to land lines almost anywhere in the world. Works on Wifi or 3G. Sends texts, Pics, Videos, and you can transmit attachments. Really good for very large attachments. You can use this on your iPad, computer or iPhone. I use it all the time for those international calls at pennies for the minute. On a smartphone, Skype will use cell phone minutes but if you have a computer or a tablet its Wifi only.

Talkatone: Nice app that requires you’re a gmail account user. Essentially uses your google voice account and the contacts already on your phone. The telephone pad looks just like the iPhone pad. All you need is Wifi access and voila, you’re talking away with your VIP’s; for free.  It does not use your cell phone minutes where google voice does. You can call or SMS text the US and Canada for free and international calls are at a discount.

Whatsapp: You’re on vacation and suddenly feel your thumbs are becoming weak from lack of texting. Or maybe you just want that intermittent interjection of how wonderful your vacation is and how rude the waiter was in Paris. No problem. Whatsapp uses your smartphone contacts and allows you to text other cell phone users anywhere in the world for free. Send Pics, audio notes or videos. Switch from SMS to exchange messages.

            So you say you don’t like being that connected. No worries, turn the phone off. On my next newsletter I will provide the top 10 excuses for not staying in touch during your vacation.

A Late Tax Season for 2013

        For the past few years congress has enacted numerous tax law changes that require new forms, new rules and a host of new calculations. For each change that congress makes the IRS has to first make or adjust the forms, update their computer processing systems, test the results and then release the final versions to the public. Just about every tax preparer today uses some kind of tax software and as soon as the final form version is released by the IRS and in many cases even before then the programmers are updating the tax software so that tax preparers can service the public. This year it just got worse.

Firstly, the IRS would not accept personal tax returns until after January 30^th, 2013. To make matters worse as of the present date 29 forms have not been finalized by the IRS. In particular, according to the IRS certain forms for partnerships, S-corporations, C-corporations will not be made available until a week before the March 15^th filing deadline. It depends if any of these forms pertain to your particular tax return.

For those taxpayers that need a K-1 from a pass through entity, to prepare your personal return, you may have no alternative than to file an extension and wait until all the updates are issued and then file at a later date.

At this juncture, everyone just needs to be patient and in time we can all get through this.