Maximize Your American Opportunity for Education Tax Benefits

Tax Attorneys at Ainer & Fraker, LLP Discuss how to Maximize Your American Opportunity for Education Tax Benefits.

  • American Opportunity Credit provides up to $2,500 of tax credit for the cost of post-secondary tuition in each of the first four years of attendance.
  • The credit may be partially refundable.
  • Credit is claimed on the tax return of the individual claiming the student’s tax exemption.
  • The $2,500 credit is a per-student limitation, so the credit can be higher for multiple students in a family.
  • Credit phases out for higher-income taxpayers.

The tax code provides tax credits for post-secondary (college) education tuition paid during the year for a taxpayer, spouse, or dependents. Taxpayers should make every attempt to take advantage of these benefits. The most lucrative of the credits is the American Opportunity Credit (AOTC) that provides a partially refundable tax credit for the first four years of post-secondary education.

The credit is 100% of the first $2,000 spent on post-secondary education, not including room and board, during the year and 25% of the next $2,000 for a maximum credit of $2,500. The credit does phase-out for joint filers with incomes between $160,000 and $180,000. For single taxpayers, the phase-out is between $80,000 and $90,000.

There are some interesting quirks to this credit that give rise to some tax planning options. For starters, the credit is claimed on the tax return where the student’s exemption is claimed. For example, suppose parents are divorced, the mother claims the child as a dependent on her return, and the father pays the child’s college tuition. The mother would actually be the one who gets the credit. However, don’t forget the credit phases out at higher incomes, and should the higher-income parent be claiming the student’s dependency exemption, there may not be any credit at all. Any planning strategy must take into consideration the income of the one who is qualified to claim the exemption.

Another example is grandparents paying the tuition for a grandchild. They would have no gift tax issues if the tuition is paid directly to the school, since educational gifts are exempt from the gift tax. In addition, the one who claims the child, generally the grandchild’s parents, gets the credit also free of any gift tax liability.

Another provision allows the tuition pre-paid for sessions starting in the first three months of the next year to be eligible for the credit in the year paid. This provides an opportunity to maximize the credit by pre-paying a portion of next year’s tuition. Typically, the first year of college begins in the fall. Thus, for the first year the tuition expenses might not be enough to produce the maximum credit. Pre-paying some of the expenses for the academic period starting in the first quarter of the next year could produce a higher credit the first year without reducing the credit in the second year.

If you have multiple students in the family, the AOTC is a per-student credit so you can claim up to $2,500 for each student who meets the requirements, including the half-time enrollment requirement. Up to 40% of the credit may be refundable, but the balance can only be used to offset the current year’s tax and any excess is lost.

There is also another less beneficial credit – the Lifetime Learning credit – that can be claimed when the AOTC no longer applies; rather than a per-student limitation, it has a per-family limitation and lower income levels at which phase-out of the credit starts.

Please Contact a Tax Attorney at Ainer & Fraker, LLP if you would like to learn more about the American Opportunity Credit, and other education tax benefits that can help you defray the cost of post-secondary education for yourself or your family.

IRS Form 8938 – Who is Required to File?

International Tax Attorneys at Ainer & Fraker, LLP discuss the Reporting Requirements of IRS Form 8938: Statement of Specified Foreign Financial Assets:

According to the IRS, certain U.S. taxpayers holding specified foreign financial assets with an aggregate value exceeding $50,000 will report information about those assets on new Form 8938, which must be attached to the taxpayer’s annual income tax return.  Higher asset thresholds apply to U.S. taxpayers who file a joint tax return or who reside abroad (see below).

IRS Form 8938 reporting applies for specified foreign financial assets in which the taxpayer has an interest in taxable years starting after March 18, 2010.

Upon issuance of regulations, FATCA may require reporting by specified domestic entities.  For now, only specified individuals are required to file IRS Form 8938.

  • If you do not have to file an income tax return for the tax year, you do not need to file Form 8938, even if the value of your specified foreign assets is more than the appropriate reporting threshold.
  • If you are required to file Form 8938, you do not have to report financial accounts maintained by:
    • a U.S. payer (such as a U.S. domestic financial institution),
    • the foreign branch of a U.S. financial institution, or
    • the U.S. branch of a foreign financial institution.

Refer to IRS Form 8938 instructions for more information on assets that do not have to be reported.

You must file Form 8938 if:

1. You are a specified individual. 

A specified individual is:

  • A U.S. citizen
  • A resident alien of the United States for any part of the tax year (see Pub. 519 for more information)
  • A nonresident alien who makes an election to be treated as resident alien for purposes of filing a joint income tax return
  • A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico (See Pub. 570 for definition of a bona fide resident)

AND

2. You have an interest in specified foreign financial assets required to be reported. 

A specified foreign financial asset is:

  • Any financial account maintained by a foreign financial institution, except as indicated above
  • Other foreign financial assets held for investment that are not in an account maintained by a US or foreign financial institution, namely:
    • Stock or securities issued by someone other than a U.S. person
    • Any interest in a foreign entity, and
    • Any financial instrument or contract that has as an issuer or counterparty that is other than a U.S. person.

Refer to the Form 8938 instructions for more information on the definition of a specified foreign financial assets and when you have an interest in such an asset.

AND

3. The aggregate value of your specified foreign financial assets is more than the reporting thresholds that applies to you:

  • Unmarried taxpayers living in the US: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year
  • Married taxpayers filing a joint income tax return and living in the US: The total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year
  • Married taxpayers filing separate income tax returns and living in the US: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
  • Taxpayers living abroad.  You are a taxpayer living abroad if:
    • You are a U.S. citizen whose tax home is in a foreign country and you are either a bona fide resident of a foreign country or countries for an uninterrupted period that includes the entire tax year, or
    • You are a US citizen or resident, who during a period of 12 consecutive months ending in the tax year is physically present in a foreign country or countries at least 330 days.

If you are a taxpayer living abroad you must file if:

  • You are filing a return other than a joint return and the total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year; or
  • You are filing a joint return and the value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

Refer to the Form 8938 instructions for information on how to determine the total value of your specified foreign financial assets.

Reporting specified foreign financial assets on other forms filed with the IRS.

If you are required to file a Form 8938 and you have a specified foreign financial asset reported on Form 3520, Form 3520-A, Form 5471, Form 8621, Form 8865, or Form 8891, you do not need to report the asset on Form 8938.  However, you must identify on Part IV of your Form 8938 which and how many of these form(s) report the specified foreign financial assets.

Even if a specified foreign financial asset is reported on a form listed above, you must still include the value of the asset in determining whether the aggregate value of your specified foreign financial assets is more than the reporting threshold that applies to you.

Please Contact an International Tax Attorney at Ainer & Fraker, LLP if you have questions about the IRS Form 8938 Statement of Specified Foreign Financial Assets and its reporting requirements.

Don’t Overlook Form 8594 When Buying or Selling a Business

Tax Attorneys at Ainer & Fraker, LLP Discuss the Use of IRS Form 8594 When Buying or Selling a Business:

Most businesses are made up of different types of assets, and those assets get different treatment for tax purposes. How those items are identified at the time of the sale/purchase can have a significant tax impact on both the buyer and the seller. A seller will, of course, want to designate items into classes that will yield a long-term capital gain on sale and thus provide the best tax result from the sale, whereas the buyer will generally want to designate the purchased items into classes that provide the biggest up-front write-offs.

The IRS generally does not care how the class allocations are made so long as both the buyer and the seller use consistent treatment. That is where IRS Form 8594 comes in. The form allocates the entire purchase/sale price of the business into the various classes of assets; both the buyer and the seller are required to file the form with their tax returns. It is also very important that allocations be spelled out in the sale/purchase agreement and that the treatment between the buyer and seller is consistent.

Generally, assets are divided into the seven categories very briefly described below:

Class I – Cash and Bank Deposits
Class IIActively Traded Personal Property & Certificates of Deposit
Class IIIDebt Instruments
Class IVStock in Trade (Inventory)
Class VFurniture, Fixtures, Vehicles, etc.
Class VIIntangibles (Including Covenant Not to Compete)
Class VIIGoodwill of a Going Concern

A seller would prefer to designate the major portion of the sales price to goodwill and minimize any allocation to furnishings and equipment.

Why, you ask?

Because goodwill is a capital asset, the sale of which for Federal purposes will be taxed at a maximum rate of 20% in 2013, while furnishings and equipment can be taxed as high as 39.6 percent. On the other hand, the buyer would prefer to have as much as possible designated as furnishings and equipment, since they can be expensed or written off over a short period of time (usually 5 or 7 years) as opposed to a 15-year amortized write-off of the goodwill.

Whether you are the buyer or the seller, don’t leave the asset allocations to chance. Negotiate the allocation as part of the sales agreement. If you don’t, you could easily end up with inconsistent treatment and potential adjustments by the IRS.

Please Contact a Tax Attorney at Ainer & Fraker, LLP if you are anticipating a sale or purchase so the transaction can be structured to your best benefit.

ACA Employer Letter Requirement

Tax Attorneys at Ainer & Fraker, LLP Discuss the Affordable Care Act’s Employer Letter Requirement

• Employers must give employees health care notification.
• Affects employers with one or more employees and a gross income of $500,000 or more.
• Notices due October 1, 2013.
• New Employees must be notified within 14 days.

Beginning Oct. 1, any business with at least one employee and $500,000 in annual revenue must notify all employees by letter about the Affordable Care Act’s health care exchanges. The requirement applies to any business regulated under the Fair Labor Standards Act (FLSA), regardless of size. Going forward, letters are to be distributed to any new hires within 14 days of their starting date, according to the Department of Labor.

The Patient Protection and Affordable Care Act has a general $100-per-day penalty for non-compliance. Since this requirement is in the FLSA, concerns were raised in the business community that the $100-per-day penalty would apply to businesses that did not comply with the notification requirements.

On September 12, 2013, the Small Business Administration (sba.gov) posted a blog called “Myth #3: Business Owners Will Be Fined if They Don’t Notify Their Employees about the New Health Insurance Marketplace.”

The article clarifies the policy, stating: “If your company is covered by the FLSA, you must provide a written notice to your employees about the Health Insurance Marketplace by October 1, 2013. However, there is no fine or penalty under the law for failing to provide the notice.”

The Department of Labor provides model notices for employers:
• Employers with plans: http://www.dol.gov/ebsa/pdf/FLSAwithplans.pdf
• Employers without plans: http://www.dol.gov/ebsa/pdf/FLSAwithoutplans.pdf

Please Contact a Tax Attorney at Ainer & Fraker, LLP to help ensure you are in compliance with this law.

VIDEO: Understanding the Medicare Surtax

Tax Attorneys at Ainer & Fraker, LLP Discuss  the Unearned Income Medicare Contribution Tax

As part of the Affordable Care Act (the new health care legislation), a new tax kicks in this year. The official name of this tax is the Unearned Income Medicare Contribution Tax, and even though the name implies it is a contribution, don’t get the idea that it is voluntary or that you can deduct it as a charitable contribution. It is actually a surtax levied on the net investment income of taxpayers in the higher income brackets. And although it is perceived as an additional tax on higher-income taxpayers, it can affect even those who normally don’t have higher income if they have a large income from the sale of real estate, stocks, or other investments.

The surtax is 3.8% on whichever is less: your net investment income or the excess of your modified adjusted gross income (MAGI) over a threshold based on your filing status. Net investment income is your investment income reduced by investment expenses; MAGI is your regular AGI increased by income excluded for working out of the country.

The filing status threshold amounts are:

$250,000 for married taxpayers filing jointly and surviving spouses.
$125,000 for married taxpayers filing separately.
$200,000 for single and head-of-household filers.

Example: A single taxpayer has net investment income of $100,000 and MAGI of $220,000. The taxpayer would pay a Medicare contribution tax only on the $20,000 amount by which his MAGI exceeds his threshold amount of $200,000, because that is less than his net investment income of $100,000. Thus, the taxpayer’s Medicare contribution tax would be $760 ($20,000 × 3.8%).

Investment income includes:

Interest, dividends, annuities (but not distributions from IRAs or qualified retirement plans), and royalties,
Rents (other than derived from a trade or business),
Capital gains (other than derived from a trade or business),
Home-sale gain in excess of the allowable home-gain exclusion,
A child’s investment income in excess of the excludable threshold if, when eligible, the parent elects to include the child’s investment income on the parent’s return,
Trade or business income that is a passive activity with respect to the taxpayer, and
Trade or business income with respect to trading financial instruments or commodities.

Planning Note: For surtax purposes, gross income doesn’t include interest on tax-exempt bonds. Thus, one can avoid or reduce the net investment income surtax by investing in tax-exempt bonds.

Investment expenses include:

Investment interest expense,
Investment advisory and brokerage fees,
Expenses related to rental and royalty income, and
State and local income taxes properly allocable to items included in Net Investment Income.

Do you think you will never get hit with this tax because your income is way under the threshold amounts? Don’t be so sure. When you sell your home, the gain is a capital gain, and to the extent that the gain is not excludable using the home-gain exclusion, it will add to your income and possibly push you above the taxation thresholds. And, since capital gains are investment income, you might be in for a surprise. The same holds true for gains from selling stock, a second home, or a rental. So when planning to sell a capital asset, be sure to consider the impact of this new surtax.

The surtax also applies to the undistributed net investment income of trusts and estates, and there are special rules applying to the sale of partnership and Sub-S Corporation interests.

Example: A taxpayer has owned a residential rental property for a number of years, planning to use the rental’s increased value to help fund his retirement. The taxpayer normally has income well below the threshold for this new tax. The taxpayer sells the rental and has a substantial gain. The gain from the rental sale gives the taxpayer a one-time windfall that pushes his income above the threshold for the new tax, and he ends up having to pay the regular capital gains tax plus an additional 3.8% tax on the appreciation that is attributable to the increase in value that occurred over several years.

If this surtax will apply to you in 2013, you may need to increase your income tax withholding or estimated tax payments to cover the additional tax so you can avoid or minimize an underpayment of estimated tax penalty when you file your 2013 return.

Example: A taxpayer has owned a residential rental property for a number of years, planning to use the rental’s increased value to help fund his retirement. The taxpayer normally has income well below the threshold for this new tax. The taxpayer sells the rental and has a substantial gain. The gain from the rental sale gives the taxpayer a one-time windfall that pushes his income above the threshold for the new tax, and he ends up having to pay the regular capital gains tax plus an additional 3.8% tax on the appreciation that is attributable to the increase in value that occurred over several years.

Please Contact a Tax Attorney at Ainer & Fraker, LLP to explore your options to mitigate the impact of the tax.

Introduction to Taxation of Aliens

International Tax Attorneys Ainer & Fraker, LLP (800) 775-7612 discuss the Special Rules pertaining to the Taxation of Aliens

Resident Aliens

A resident alien’s income is generally subject to tax in the same manner as a U.S. citizen. If you are a resident alien, you must report all interest, dividends, wages, or other compensation for services, income from rental property or royalties, and other types of income on your U.S. tax return. You must report these amounts whether from sources within or outside the United States.

Nonresident Aliens

A nonresident alien is usually subject to U.S. income tax only on U.S. source income. Under limited circumstances, certain foreign source income is subject to U.S. tax.

Dual-Status Aliens

You are a dual status alien when you have been both a resident alien and a nonresident alien in the same tax year.

Source of Income

A nonresident alien (NRA) usually is subject to U.S. income tax only on U.S. source income.

Income Types

In general, all income of a nonresident alien is Fixed, Determinable, Annual, Periodical (FDAP) income. However, certain kinds of FDAP income are considered to be effectively connected with a U.S. trade or business. These two types of income are taxed in different ways.

Reporting your Income in U.S. Currency

You must express the amounts you report on your U.S. tax return in U.S. dollars. If you receive all or part of your income, or pay some or all of your expenses in foreign currency, you must translate the foreign currency into U.S. dollars.

Tax Withholding on Foreign Persons

Payments of income to foreign persons are subject to special withholding rules. In particular, foreign athletes and entertainers are subject to substantial withholding on their U.S. source gross income. This withholding can be reduced by entering into a Central Withholding Agreement with the Internal Revenue Service.

Foreign Students and Scholars

Special rules apply to the taxation of foreign students and scholars which do not apply to other kinds of aliens.

Taxpayer Identification Numbers (TIN)

Anyone (including aliens) who files a U.S. federal tax return must have a Taxpayer Identification Number (TIN). In addition, aliens who request tax treaty exemptions or other exemptions from withholding must also have a TIN.

Tax Treaties

The U.S. tax liability of aliens is determined primarily by the provisions of the U.S. Internal Revenue Code. However, the United States has entered into certain agreements known as tax treaties with several foreign countries which oftentimes override or modify the provisions of the Internal Revenue Code.

U.S. Person

IRC 7701(a)(30) and Treas.Reg. 1.1441-1(c)(2)

The term ‘United States person’ means:

  1. A citizen or resident of the United States,
  2. A partnership created or organized in the United States or under the law of the United States or of any State,
  3. A corporation created or organized in the United States or under the law of the United States or of any State,
  4. Any estate or trust other than a foreign estate or foreign trust.
    See Internal Revenue Code section 7701(a)(31) for the definition of a
    foreign estate and a foreign trust, or
  5. Any other person that is not a foreign person.

Foreign Person

Treas.Reg. 1.1441-1(c)(2)

The term “foreign person” means:

  1. A nonresident alien individual;
  2. A corporation created or organized in a foreign country or under the laws of a foreign country;
  3. A partnership created or organized in a foreign country or under the laws of a foreign country;
  4. A foreign trust;
  5. A foreign estate, or
  6. Any other person that is not a U.S. person.

See Internal Revenue Code section 7701(a)(31) for the definition of a foreign estate and a foreign trust.

Contact International Tax Attorneys Ainer & Fraker, LLP (800) 775-7612 to discuss your International Tax needs.

IRS Form 5741 Who Must File?

International Tax Attorneys Ainer & Fraker, LLP (800) 775-7612 discuss Which Taxpayers Related to Foreign Corporations Are Required to File Form 5471

U.S. citizens and U.S. residents who are officers, directors, or shareholders in certain foreign corporations are responsible for filing Form 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations (PDF). The form and attached schedules are used to satisfy the reporting requirements of transactions between foreign corporations and U.S. persons under sections 6038 and 6046 of the Internal Revenue Code. Substantial penalties exist for U.S. citizens and U.S. residents who are liable for filing Form 5471 and who failed to do so.

The categories of U.S. persons potentially liable for filing Form 5471 include:

  • U.S. citizen and resident alien individuals,
  • U.S. domestic corporations,
  • U.S. domestic partnerships, and
  • U.S. domestic trusts.

The filing requirements for Form 5471 relate to persons who have a certain level of control in certain foreign corporations as described on pages 1-3 of the Instructions for Form 5471 (PDF). Please refer to those instructions for the details about who is liable for filing Form 5471.

Form 5471 should be filed as an attachment to the taxpayer’s federal income tax return. Form 5471 may be filed electronically.

References/Related Topics

Contact International Tax Attorneys Ainer & Fraker, LLP (800) 775-7612 to discuss your International Tax needs.

IRS Form 1040NR Resources and Links

Publication 501, Exemptions, Standard Deduction, and Filing Information
This publication discusses some tax rules that affect every person who may have to file a federal income tax return.

Publication 519, U.S. Tax Guide for Aliens
For tax purposes, an alien is an individual who is not a U.S. citizen. Aliens are classified as nonresident aliens and resident aliens. This publication will help to determine an individual’s status and gives information needed to file returns.

Publication 525, Taxable and Nontaxable Income 
This publication discusses many kinds of income and explains whether they are taxable or nontaxable.

Publication 529, Miscellaneous Deductions 
This publication explains which expenses you can claim as miscellaneous itemized deductions on Schedule A (Form 1040 or Form 1040NR).

Publication 597, Information on the United States – Canada Income Tax Treaty
This publication provides information on the income tax treaty between the United States and Canada. It discusses a number of treaty provisions that often apply to U.S. citizens or residents who may be liable for Canadian tax.

Publication 901, U.S. Tax Treaties
This publication will tell you whether a tax treaty between the United States and a particular country offers a reduced rate of, or possibly a complete exemption from, U.S. income tax for residents of that particular country.

U.S. Owners of a Foreign Trust Requirements and Deadlines

International Tax Attorneys Ainer & Fraker, LLP (800) 775-7612 discuss Requirements and Deadlines for U.S. Owners of a Foreign Trust

The Internal Revenue Service (IRS) would like to remind all U.S. Owners, U.S. Agents, and Preparers of the filing requirements applicable to Form 3520-A, “Annual Information Return of Foreign Trust with a U.S. Owner (Under section 6048(b)).”

  • A Form 3520-A reporting information on Foreign Trust activities is required to be filed by the 15th day of the third month following the end of the trust’s tax year. As a result, Form 3520-A for a foreign trust with a tax year ending December 31, 2011 is due on March 15, 2012. Each U.S. person treated as an owner of the Foreign Trust is responsible for ensuring that the foreign trust files the Form 3520-A and that the trust annually furnishes copies of the Foreign Grantor Trust Owner Statement and the Foreign Grantor Trust Beneficiary Statement to the U.S. owners and U.S. beneficiaries.
  • If an extension of time to file is needed, a Form 2758, “Application for Extension of Time to File Certain Excise, Income, Information, and Other Returns,” must be filed with the IRS by the due date of Form 3520-A in order for it to be considered for approval.
  • Every foreign trust is required to have its own Employer Identification Number (EIN) to place in Part 1, Line 1b of Form 3520-A. You can obtain an EIN by filing Form SS-4, “Application for Employer Identification Number”, with the IRS. To receive an EIN by telephone, complete Form SS-4, then call the Tele-TIN unit at 267-941-1099 (not toll free).
  • Forms SS-4, 3520-A and 2758 are to be mailed to the following address. Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409
  • In addition, a filing requirement may exist for Form 3520 “Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts”.

Contact International Tax Attorneys Ainer & Fraker, LLP (800) 775-7612 to discuss your International Tax needs.

Requirement for US Transferors of Property to a Foreign Corporation

International Tax Attorneys Ainer & Fraker, LLP (800) 775-7612 discuss the Filing Requirements for U.S. Transferors of Property to a Foreign Corporation – IRS Form 926

U.S. persons, domestic corporations or domestic estates or trusts must file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, to report any exchanges or transfers of property (as described in section 6038B(a)(1)(A) of the Internal Revenue Code) to a foreign corporation.The U.S. transferor must file the Form 926 – and the additional information required under Regulations section 1.6038B-1(c) and Temporary Regulations sections 1. 6038B-1T(c) (1) through (5) and 1.6038B-1T(d) – with their income tax return for the tax year that includes the date of the transfer.

The person could be subject to a penalty for failure to file equaling 10% of the fair market value of the property at the time of the exchange/transfer if the taxpayer fails to comply with the filing requirement. The penalty will not apply if the failure to comply is due to reasonable cause and not willful neglect. The penalty is limited to $100,000 unless the failure to comply was due to intentional disregard. Moreover, the period of limitations for assessment of tax upon the exchange/transfer of that property is extended to the date that is 3 years after the date on which the information required to be reported is provided.

Persons filing Form 926 may also be required to file a FinCEN Report 114, Report of Foreign Bank and Financial Accounts (“FBAR”) (formerly TD F 90-22.1), if they have $10,000 or more in a financial account held in a foreign country during the year.

The forms and instructions are available as follows:

Note: Financial institutions are reminded that they must begin using the new FinCEN reports, which are available only electronically through the BSA E-Filing System, by April 1, 2013. For more information, see Notice on E-Filing Mandate.