Happy New Year Everyone!
As is customary this time of year, we’ve been busy preparing for the upcoming tax filing season! We have seen our firm grow over the last year, with new faces and continued success for our clients. We would like to say thank you to you all for your continued support and your service to our country. We hope you all enjoyed a pleasant holiday season and we look forward to a safe and prosperous 2020!
The 2019 tax filing season begins in just a few weeks. The IRS will open the e-filing window starting January 27, 2020, but we can start on your return as soon as you have all tax documents together. 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 2019 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 2019 and a look forward to see how the major tax legislation recently passed continues to affect contractors and expats.
- 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 2019, 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 2019, 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 15, 2020.
- Cryptocurrency – The IRS remains vigilant in their scrutiny of virtual currency and cryptocurrency transactions in 2019. Please let us know if you have received, sold, sent, exchanged, or otherwise acquired an interest in any virtual currency in 2019.
- 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 this year 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 few filing seasons, 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. In addition, they sent out many identification verification letters which caused additional delays of refunds. They have not indicated that the 2020 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.
Hughes Szuberla CPAs and the Office Tools Client Portal:
Last year we saw the successful implementation of our secure Client Portal through Office Tools. There are many benefits to using the Portal but the primary purpose is increased security. The Portal includes secure document transfer so we encourage all clients filing with us to use it going forward. Many of you are already familiar with the Client Portal but we recommend logging in to update any personal information that has changed, such as address or phone number. You can log in directly with this link: https://hstaxcpas.com/portal/. You can recover your password using the “Forgot Password?” button below the login screen. Please let us know if you have any questions about the Client Portal and if you would like a recovery link, please send a request to email@example.com.
What’s New in 2019:
Tax year 2018 saw one of the most sweeping tax legislation reforms in recent history. All changes have now taken effect. There are a number of changes that have been made that will affect the 2019 tax year:
- Standard deduction has been increased to $12,200 for single filers and $24,400 for married filing jointly
- The recent tax legislation in 2017 has reduced the Affordable Care Act individual mandate penalty to zero beginning with the 2019 tax year. Please keep in mind certain states have not conformed to this recent legislation. Please ask if you have any questions about whether your state still has an individual mandate for minimum health insurance coverage.
- The floor for deductibility of medical expenses has risen to 10% from 7.5% in 2018.
- The IRA contribution limits have been increased to $6,000 for 2019 with a $1,000 additional catch up for taxpayer’s over 50. You have until April 15th,2020 to make contributions for 2019, so please let us know if you would like to discuss these options.
- For divorce decrees signed after 12/31/2018 that require alimony payments, the payer will not be allowed a deduction for payments made, nor will the payee be required to claim the alimony as income on their respective tax returns.
- March 16, 2020 – Returns for S corporations, multi member LLCs, and partnerships are due.
- April 15, 2020 – 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.
- June 15, 2020 – Returns for Individuals outside of the country on April 15, 2020, are automatically granted an extension of time to file and of time to pay until June 15, 2020. Please let us know if you intend to be out of the country on April 15, 2020.
Audits and the IRS:
IRS audits of the foreign earned income exclusion generally remained low for 2019. 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.
- As many of you are aware, the IRS announced in August 2018 that certain U.S. citizens or resident aliens working as contractors in designated combat zones may now qualify for the foreign earned income exclusion. However, the wording of the headline in their announcement has produced significant confusion. It is critically important that you understand that one must still have at least 330 days overseas or be a bonafide resident to qualify to claim the exclusion.The sole purpose of the new law was to remove the ambiguity regarding having an “abode” in the US while meeting the 330 days overseas or bonafide residency test for those working in combat zones. Prior to this change, having an abode in the US precluded one from confidently making the claim because of the IRS’ faulty interpretation of “abode”. This change eliminated the IRS’ ability to deny a legitimate claim to the exclusion.
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 our newer clients, the following information should provide clarity on the most frequently asked questions we received this year (but feel free to visit the Resources – Frequently Asked Questions at www.HSTaxCPAs.com for more information):
1) For 2019, you should be eligible to receive up to the first $105,900 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 2019 calendar year but your physical presence test period may run, as an example, from June 2019 to June 2020 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 based on this 330 day rule. This is a persistent myth that is absolutely untrue.
- You were a bona fide resident of a country other than the U.S. during 2019. 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.
2) Form 673 is a withholding form only. It only authorizes your employer to stop federal income tax withholding on the first $105,900 paid to you in 2019. It is neither required nor does it qualify you to claim the exclusion.
3) 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, no expenses are deductible as of January 1, 2018.
4) 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 $105,900 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 16th 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 2019 documents to us to prepare your return, one of us will acknowledge receipt of the information within 24 hours and will provide a link through the Client Portal 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.
- Dates overseas if you qualify for the foreign earned income exclusion
- The foreign address and city you worked in
- S. state of residence
- Phone number
- Email addresses for you and your spouse (if applicable)
- 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
- At any time during 2019, did you sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?
- Copies of your Letters of Authorizations (LOAs) for 2019 and as far forward as possible. If these are provided to us we’ll provide them to the IRS to avoid interest and penalties if applicable.
- We are now required to include the taxpayer’s and spouse’s driver’s license information in the return to avoid an IRS delay in processing your return. Here’s what we’ll need for each of you:
- 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 we 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!