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December 8, 2017 - Phil Hodgen

How an Income Tax Treaty’s Saving Clause Works

I received a question from a reader, and it is a good way to explain the saving clause of an income tax treaty.

The question, from reader E.C., is simple:

Are U.S. Social Security benefit payments to a U.S. citizen who is a resident of Italy taxable in Italy or in the U.S.?

Tax Treaties

Income tax treaties are agreements between two countries. Treaties attempt to make live easier for residents of one country who have income from the other country.

So, for instance, a U.S. citizen living in Italy is:

  • taxable by the United States (because he is a U.S.
... continue reading
Friday Edition
November 13, 2017 - Phil Hodgen

Foreign Trust Distributions and How They’re Taxed

Congress Hates Foreign Trusts

Congress hates foreign trusts.1 We know this because:

  • Distributions to U.S. beneficiaries from some foreign trusts (foreign nongrantor trusts, to be precise) can face a tax rate of up to 100%. You receive $100 and must pay $100 in tax? Yes.
  • Penalties are staggering if you don’t file the right paperwork2 on time: 35% of contributions and 35% of distributions not reported.

I like to convert foreign trusts to domestic trusts in order to eliminate these problems. Beneficiaries of domestic trusts do not have to file the offending forms (eliminating the penalty risk), and do not face the horrific tax cost imposed on distributions.... continue reading

Friday Edition
October 13, 2017 - Phil Hodgen

How Should I Own My U.S. Real Estate?

How I Think About Real Estate Holding Structures

Foreign investors in U.S. real estate always have the same question:

How should I own the real estate that I am buying in the United States?

This is how I think when I think about that question. If you sit down in my conference room and talk to me, our conversation will follow this outline.

The Primary Risk: Estate Tax

For human investors, the primary risk is estate tax. (Ignore corporate investors and pension plans).

Estate tax is imposed on the value of U.S. assets owned by nonresidents when they die. The tax rate is 40%, and for all practical purposes the real estate asset is fully taxable.... continue reading

Friday Edition
September 29, 2017 - Phil Hodgen

What “Abode” Means for the Foreign Earned Income Exclusion

The foreign earned income exclusion is a marvelous thing for Americans abroad. It eliminates income tax entirely on a fairly large chunk of income.

Americans pay tax to the USA on all of their income, no matter where they are on the planet, and where they earn their income.

The United States is unlike (almost) every other country by having this method of taxation. Other countries have an immensely practical and sane approach to income tax: “If you live here, you pay tax here. If you don’t live here, you don’t pay tax here.”

To soften the blow, the foreign earned income exclusion says Americans living abroad will not pay income tax on up to $102,100 of earned income (salary, self-employment) in 2017.... continue reading

Friday Edition
September 1, 2017 - Phil Hodgen

When a Foreign Trust Files FinCEN Form 114

The Problem

This week, I want to highlight a risk: when an unanticipated FinCEN Form 114 filing requirement might apply to a trust.

There is a weird situation where a foreign trust (as defined for income tax purposes) may be required to file FinCEN Form 114. (FinCEN Form 114 is how you tell the U.S. government about your foreign financial accounts).

It’s weird, but intentional.

Short Attention Span Summary

Does the trust look like a normal domestic trust but get taxed as a foreign trust? Watch out. You have a potential FinCEN Form 114 filing requirement.

Look Domestic, Taxed Foreign

There are good reasons to create trusts that look like domestic trusts but are taxed as foreign trusts.... continue reading

Friday Edition