Merry Christmas and Happy Holidays Everyone!
As is customary this time of year, we’ve been busy preparing for the upcoming tax filing season! And with the flurry of tax changes coming for 2018, there has been more than enough to do. But this is also the time of year when I enjoy looking back and giving thanks for the many blessings we have received throughout. With great sincerity, thank you for your service to our country. I hope you enjoy a warm holiday season and a safe and prosperous 2018!
The 2017 tax filing season begins in just a few weeks. A list of the information we’ll need to prepare your taxes can be found at the end of this letter. For returning clients, we already have most of your personal information so we will just need your 2017 documents and an update of any important changes. As a reminder, we are frequently asked if we do tax work for those who have moved back to the U.S. or left the contracting world. We do! Regardless of where you are living or working in the world, we will do our best to minimize your tax bill and provide you with relevant advice. Please feel free to forward this to anyone you know who could use some tax assistance.
What follows are reminders, tax highlights and observations from 2017 and a look forward to how the recent major tax legislation applies to contractors and expats. Keep in mind that these new changes are almost entirely effective for 2018 and beyond so the 2017 tax filings will be unaffected in almost all cases. If you believe you received this email by mistake and you wish to be removed from our list, please just let me know.
Hughes Szuberla CPAs:
As I mentioned in the email I sent to you yesterday, Mason Szuberla and I have formed a new partnership called Hughes Szuberla CPAs. Other than the change of name and some new email addresses, you can still expect:
- The same high-quality service we have delivered in the past
- The same fee structure
- The same office location and phone numbers
- Our website is a good starting place for new clients to familiarize themselves with taxes for expats and contractors. It can be found here: www.HSTaxCPAs.com.
- FATCA (Foreign Account Tax Compliance Act) and FinCen Form 114 – If, in 2017, you had foreign bank accounts with a combined value in excess of $10k at any time or foreign financial holdings (or signature authority) in excess of $50k, you may have a separate filing requirement. Also if, in 2017, you received a gift or other transfer of funds or assets from a non-US person or entity (like a trust or corporation, etc.) you may have a reporting requirement. If any of these cases apply to you please let us know prior to the filing deadline of April 17, 2018.
- ACA (Affordable Care Act) – Absent any exemption, the ACA requires those individuals who did not carry minimum healthcare insurance coverage during the year to pay a penalty (this is referred to as the “individual mandate”). In 2017 the penalty climbs to 2.5% of taxable income (unless the minimum is larger). There are many exemptions for the penalty. The biggest two affecting most of you will be whether or not you get care through the VA in which case you are exempt, or if were overseas long enough to claim the foreign earned income exclusion. Importantly, the recent tax legislation reduces the individual mandate penalty to zero beginning with the 2019 tax year. In 2016 the IRS allowed individuals to not disclose their health insurance coverage, but the IRS announced in October that they will no longer accept tax returns if coverage is not disclosed. This may change again so we will keep you updated.
- IRS notices – If we file your return and you get a notice, please send it to us. In most cases the IRS just needs some additional information from your employer to remove the charges and we don’t charge for this service.
- Identity theft and filing false tax returns – As in years past, the frequency of this abuse increases each year and 2018 will be no exception. Thieves steal personal info online or obtain it from taxpayers themselves and use it to file false refund claims. During the last filing season, the IRS delayed issuing many early claims and larger refunds to double check them in an effort to minimize the number of false refund claims. They have not indicated that the 2018 filing season will include the same delay but the IRS can make such a change at any time. As tax preparers, there is nothing we can do to avoid decisions like this but I would advise you to file as soon as you get all of your tax information together.
- To minimize the threat of ID theft, always use best practices by never clicking on any unsolicited emails from people you don’t know or strange ones from people you do. Also, the IRS will never call you or send you an email. Anyone who calls you and says they are from the IRS is running a scam. Do not provide any personal information to anyone who has reached out to you.
Updates for 2017:
Aegis/Gardaworld and Afghan Taxes – This company will discontinue paying Afghan tax on its employees starting January 1, 2018. Aegis/Garda will begin withholding Afghan tax from your net paycheck at the rate of 23%. Previously, the Afghan tax was reported on your paycheck but not actually withheld from you. Absent any offset, this equates to a 23% pay cut if your daily rate remains the same. You will still receive a credit for any Afghan tax withheld which in general will result in a refund of most US federal income tax withholding. Importantly, if your pay rate and income tax withholding in 2018 remains the same as 2017 (unless already adjusted to reduce withholdings), your net check is going to decrease by the 23% Afghan tax.
Major tax legislation was passed on December 20th. All changes will take effect starting in 2018 so your 2017 return will not be impacted. Additionally, most of the changes that affect individuals are temporary and will automatically expire after 2025. Here are a few highlights from the bill that may affect you:
- Doubles standard deduction ($12,000 for single filers and $24,000 for married), eliminates personal exemptions and increases the child tax credit to $2k per child.
- Changes income tax brackets and tax rates.
- Repeal of deduction for moving expenses other than Members of the Armed Forces.
- Limitation of state and local income taxes and property tax deduction to $10k.
- Repeal of deduction for tax preparation fees and unreimbursed employee expenses.
- It appears that S Corporation and Partnerships (LLCs) will be allowed a 20% deduction of business profits subject to certain limitations. However, because this law is so new, and because certain terms in the law have to be defined more clearly, we will be sending out a more detailed analysis in January for those of you who have S Corporations or are thinking about establishing one.
- March 15, 2018 – Returns for S corporations, multi member LLCs, and partnerships are due.
- April 17, 2018 – Returns for Individuals, FinCen Form 114 and C corporations are due. Remember that an extension of time to file is not an extension of time to pay your taxes. Keep this in mind if you plan to extend and you think you might owe.
Audits and the IRS:
Unfortunately, tax reform did not include abolishing the IRS. Regarding IRS audits of the foreign earned income exclusion, volume generally remained low for 2017 again. We don’t know if or when they will be back so it is always a good idea to make sure you are able to substantiate the claims made on your return. Here are some best practices and reminders:
- It is critically important that you retain copies of your diplomatic passport and regular passport, overseas orders, travel itinerary confirmations, LOAs, overseas expense receipts or credit card statements, visas and anything else that can prove you were overseas and/or in a combat zone. Keep these for at least 5 years. Do not turn in your passports without making a scanned, color copy of them. Further, time spent in Canada and Mexico counts as foreign time but unless you fly into either country, you won’t get a passport stamp which will leave you unable to prove time spent in those countries without other evidence.
- Should they choose to do so under audit, the IRS has the ability to obtain an entry report from DHS to verify your time in the U.S. It is not always accurate. This is why you must keep your own evidence of travel dates/locations.
- Regarding the exclusion using the physical presence test, in the past the IRS simply counted the days outside of the U.S. to determine if the exclusion was met based on a taxpayer being outside of the US for at least 330 full days within a 365 day period that included at least part of the tax year in question. Auditors have occasionally required that the taxpayer’s “abode” also be outside of the U.S. in order to sustain the claim even when the 330 days can be proven. Abode is not defined in the Internal Revenue Code or Treasury Regulations. Tax court rulings indicate that a rough definition of abode focuses on the place where the majority of an individual’s domestic (familial) and economic ties are the strongest. For individuals with a spouse, children, houses, apartments and/or other substantial economic and/or domestic ties located in the U.S., the IRS may determine that their abode is in the U.S. which would make it difficult to successfully defend a claim to the exclusion. We believe there are some relevant issues related to certain arguments made (or not made) in court which weaken the government’s position in some cases because they disregard the intent of the law. However, unless or until a taxpayer successfully challenges the IRS’ claim in court, it is possible that the IRS will continue its current course of action.
Foreign Tax Credit (Afghanistan, Iraq and Other Foreign Withholding Taxes)
- Tax paid to a foreign country can be claimed as a credit on your U.S. tax return (Form 1116).
- The credit can be combined with the exclusion if you qualify, but the foreign tax credit is partially reduced when both are used.
- Claiming both the foreign tax credit and the exclusion generally maximizes the tax benefit of working overseas. However, if you are not sure you can support the exclusion claim, you shouldn’t report it.
Answers to Frequently Asked Questions
This section will look familiar to many of you but for my newer clients, the following information should provide clarity on the most frequently asked questions I received this year (but feel free to visit the learning center tab at www.HSTaxCPAs.com for more information):
- For 2017, you should be eligible to receive up to the first $102,100 of your foreign earned income free of income tax provided that one of the following scenarios applies:
- You were physically present in a country other than the U.S. for at least 330 full days during a 365 day period. This 365-day period does not have to be the same as the calendar year. When it is not, a prorated exclusion can be obtained by extending your tax return until the 330 day period lapses. Your income tax return will report all the income you received during the 2017 calendar year but your physical presence test period may run, as an example, from June 2017 to June 2018 or any other dates inside 365 days. You CANNOT have less than 330 days overseas during a 365 day period and still take a prorated exclusion; this is a persistent myth that is absolutely untrue. Keep in mind that the IRS requires that your “abode” can’t be in the U.S. in order to sustain the exclusion claim.
- You were a bona fide resident of a country other than the U.S. during 2017. As in the past, many of you received residency visas from Iraq and Afghanistan this year, but this is not enough to qualify you as a bona fide resident under IRS guidelines. To file as a bona fide resident, you must be a foreign resident for the full year beginning Jan 1st. Based on our audit experience, this claim has attracted more scrutiny for those claiming a combat zone as their residence. Bona fide residency outside of a combat zone is not a high audit risk provided you otherwise qualify.
- Form 673 is a withholding form only. It only authorizes your employer to stop federal income tax withholding on the first $102,100 paid to you in 2017. It is neither required nor does it qualify you to claim the exclusion. A better option to regulate tax withholding is to file Form W-4 with your payroll department and claim a large number of allowances on Line 5. Claiming between 9 and 15 allowances generally results in enough tax withholding to satisfy your tax bill if you’ll be able to claim the exclusion, although everyone’s situation varies.
- Expenses – Many of you may have changed your work status either from an IC to an IE or vice versa. There is a vast difference in what can be deducted. As an IC, most work related expenses are deductible. As an IE, only unreimbursed expenses required by your employer are deductible (and remember, only for 2017 as this deduction has been eliminated for 2018 and going forward). Should you be audited, the IRS will request a letter from your company detailing their policy on unreimbursed expenses. This letter is impossible to obtain from many of the companies so if you deduct work related expenses as an IE, be aware of the risk.
- If you’re working overseas for a long period of time and claim residency in a state with a high tax, you may want to consider becoming a resident of a state with either low or no tax to save money. The tax-free states are TX, FL, AK, NV, WA, SD, WY and TN. Changing state residency is more problematic if you have a house and family in a different state. The exclusion isn’t allowed at all in CA, AL, MA, NJ, PA and HI, so, if you otherwise qualify to claim the exclusion, live in one of these states and have the option to be a resident elsewhere, you may want to do so.
Independent Contractors (1099’s)
For those of you working as independent contractors, be reminded that the IRS will take 15.3% right off the top of your net income to fulfill your self-employment tax liability (Social Security and Medicare). You will also pay regular income tax on your earnings. In addition, the exclusion of $102,100 is not deductible when computing self-employment tax even though it is included in the income tax calculation. This may result in a very large and surprising tax bill. Be aware of this and plan accordingly. If you’re in this situation, controlling self-employment tax may be possible using an S corporation. If you don’t already have one set up and you’re interested in learning about this option, let us know. As noted above, please remember that S corporation and LLC/partnership returns are due March 15th which is a full month earlier than the individual filing deadline. If you own either type of entity please send your info to us with enough time to prepare the return before this deadline or let us know you would like to extend.
Tax Preparation Fee
Continuing the same method of fee collection from last year, when you send your 2017 documents to us to prepare your return, one of us will acknowledge receipt of the information within 24 hours and will provide a link to pay our tax preparation fee in advance using a credit card, debit card or e-check. PayPal is also an option if requested.
Information we will need to Prepare Your Taxes
Those of you for whom we have previously prepared a return don’t need to provide the personal information unless there are any changes. Here is a general list of the info we require:
- W-2s / 1099s / 1098s /1095s and other tax documents
- If you are a new client please provide your prior year tax return.
- Indicate whether or not you (and everyone included on your return) maintained minimum healthcare insurance coverage during 2017.
- Dates overseas if you qualify for the foreign earned income exclusion
- The foreign address and city you worked in
- List of unreimbursed work-related expenses (totals only, don’t provide receipts)
- U. S. state of residence
- Phone number
- Email addresses for you and your spouse
- Date of birth (for every person on the return including dependents)
- Indicate whether you’ve ever filed form 2555 before to take the exclusion and if so, what the last year was that you filed it
- Any other tax related info you have: marital status, dependent(s) (SS#’s, full names, dates of birth), house expenses (property taxes, interest, indicate if you recently purchased), interest/dividend/rental income, capital gains from investments, charitable contributions (list the amounts, the organization they were contributed to, and state whether cash or property) car registration fees, etc.
As I say every year, THANK YOU FOR THE COUNTLESS REFERRALS! We know it is difficult to obtain reliable tax advice and preparation services when working overseas, and your referrals tell us that we are doing a good job. If you know anyone who needs tax assistance, we will gladly assist.
We look forward to serving each of you this coming tax season!