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March 17, 2017 - Phil Hodgen

U.S. Citizens Married to Noncitizens Who Own Foreign Corporations

This week I am going to highlight the “constructive ownership” rules in U.S. tax law. This means that the IRS can pretend that you own something — we will talk about stock of foreign corporations — even though you don’t really own it.

We will talk about U.S. citizens married to noncitizens. First, a simple example, then a more complicated (and realistic) example. The realistic example — one I have seen many times — yields a “Who knows what the answer is!” conclusion.

Here is the practical advice:

If you are a U.S. citizen living abroad, married to a noncitizen, look out for the combination of foreign corporations owned by trusts.

... continue reading
Friday Edition
March 3, 2017 - Phil Hodgen

Real Life: Get Married, File Form 5471

Here is a real life problem we1 are solving right now for a real life couple: an American citizen married to a noncitizen, living abroad.

  • H formed a corporation in his country of residence, and started a business. It is a “foreign corporation” to the IRS.
  • H met W, an American citizen. They married.
  • W has never been an officer, director, or employee of the corporation. H continues to be the sole shareholder of the corporation to this day. There are no community property rules that give W a shared ownership in the corporation.

Would it surprise you to learn that W should have filed Form 5471 because she is a “100% shareholder”2 of H’s corporation?... continue reading

Friday Edition
February 17, 2017 - Phil Hodgen

Children, Investment accounts, and PFICs. It’s a Mess.

Americans living abroad will frequently do a sensible thing, and invest in foreign mutual funds. That’s a good investment strategy.

But when that American is a kid? Foreign mutual funds make trouble. They may require the child to file a U.S. tax return, even if the child has trivial amounts of income:

  • Usually, a minor (who can be claimed as a dependent on someone’s tax return) doesn’t file a U.S. tax return until his or her investment income exceeds $1,050.
  • But if that minor owns foreign mutual funds, the requirement to file Form 8621 will likely kick in and force the filing of a tax return, if there is as little as a dollar of dividends from the mutual funds.
... continue reading
Friday Edition
February 3, 2017 - Phil Hodgen

The Foreign Earned Income Exclusion and Self-Employed Americans Abroad

This is for the self-employed Americans living abroad who want to enjoy some of that tax-free goodness that comes from the foreign earned income exclusion.

Perhaps you are a digital nomad — an American abroad earning a living online by building websites. You have not organized your business as a corporation. You are a sole proprietor.

You live at the intersection of Schedule C (PDF) and Form 2555 (PDF).

The Answer

Watch out for “gross” and “net” income. It is easy to assume (because it is logical) that the foreign earned income exclusion applies to net income. Not so.

As soon as a self-employed person grosses more than the exclusion amount for the year, there is an assurance of income tax and self-employment tax no matter what the net profit really is — unless you are in rounding error territory.... continue reading

Friday Edition
January 20, 2017 - Phil Hodgen

Immigrants and Estate Tax: Four Choices

The Estate Tax

The United States has a wealth tax that is imposed at the time of death, called the “estate tax”. In round numbers, the first $5,500,000 of a person’s wealth (measured at the time of death) is tax-free, but everything above that is taxable. The top tax bracket is 40%.

You might have accumulated significant wealth before becoming a U.S. resident. You might wonder why the U.S. government should be entitled to take 40% of that away from your spouse, children, and grandchildren when you die.

It is not polite to say this out loud, but the estate tax is largely optional.... continue reading

Friday Edition