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Year-end tips for U.S. taxpayers living abroad

With 2017 coming to a close, U.S. taxpayers living abroad should make sure they are well-positioned to benefit from current and proposed regulatory changes, says Oakville-based U.S. tax attorney Alex Manasuev.

“As we near year-end it’s good to connect with your U.S. tax advisor and evaluate where you stand,” Manasuev, principal of U.S. Tax IQ, tells AdvocateDaily.com.

“Stay on top of developments to make sure that you don’t miss anything.” 

Manasuev and U.S. tax accountant Brandon Vucen, a fellow U.S. Tax IQ principal, offer some tips and considerations for individuals and businesses subject to American taxes in light of recent regulatory changes and proposed 2018 reforms.  

Key filing deadlines:

  • American citizens or green card holders living abroad who earn more than $10,400 (all dollars U.S.) a year must file a U.S. tax return (note that a lower threshold applies for self-employed taxpayers). Unlike most American taxpayers who have an April 17, 2018, filing deadline, they can file by June 15 unless they have wage income subject to withholding in the United States. People exempt from filing a tax return may still have to file a Report of Foreign Bank and Financial Accounts (FBAR) or other foreign reporting form.
  • The new deadline for filing FBAR reports is April 17, instead of the previous June 30 due date. There is an automatic extension to Oct. 15. Failure to file a timely report could result in a minimum penalty of $10,000 per foreign financial account that was not disclosed.
  • Corporations are now required to file their income tax returns by April 17, which can be extended to October 15.  
  • Partnerships and S corporations, however, should file by March 15, instead of the previous mid-April deadline. However, the due date can be extended.

Key tax developments:

  • Under recent changes, U.S. domestic corporations formed to hold, indirectly or directly, specified foreign financial assets that meet certain thresholds must file Form 8938, (Statement of Specified Foreign Financial Assets), also known as a FATCA form. Previously, only individuals needed to file the form. Failure to file on time could result in a $10,000 penalty.
  • Effective Jan. 1, 2017, a U.S. limited liability company (LLC) that is treated as a “disregarded entity” (not recognized as being separate from its owner) and whose sole owner is a foreign person must file Form 5472 (Information Return of a 25 per cent Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business). Failure to file will result in a $10,000 penalty. The LLC must now also obtain its own Employer Identification Number.
  • Nonresident aliens who are required to file a U.S. tax return must, before filing, renew their IRS Individual Taxpayer Identification Number (ITIN) if its middle digits are 70, 71, 72, 78, 79 or 80. Manasuev advises them to renew early to avoid backlogs.

Tips on estate and gift tax planning:

  • Taxpayers should consider maximizing any possible gifts, Manasuev says. For example, U.S. citizens can give their nonresident alien spouses up to $149,000 tax-free (this amount is indexed for inflation every year). For anybody else, the tax-free gift exclusion is $14,000, or a combined $28,000 for married couples (this exclusion applies per donee).
  • Many U.S. citizens forget to report gifts or distributions from nonresident alien individuals, foreign entities or foreign trusts, Manasuev says. Any such funds in excess of US$100,000 when received from nonresident alien individuals (a lower threshold applies to funds received from foreign corporations or foreign partnerships — $15,797) are reportable on Form 3520. Penalties for non-reporting are either $10,000 or 35 per cent of the fair market value of the received amount, whichever is higher.

U.S. citizens and green card holders who have investments in Canadian mutual funds or Tax-Free Savings Accounts (TFSAs) may want to re-evaluate whether they are worth keeping in view of increased compliance burdens and costs, Manasuev says.

With tax reforms under consideration by the U.S. Congress, taxpayers should consider structuring their finances to benefit in 2018, adds Vucen.

“Some year-end tax planning is really the push-and-pull between accelerating or deferring one’s income and deductions,” he says.

Personal and corporate taxes are likely to be lower next year if the reforms are passed, Vucen says. So it may make sense to reduce one’s income in 2017 and defer it to 2018 when you could be in a lower tax bracket, he adds.

There are several ways to do that, Manasuev and Vucen say.

If you’re holding investments or stocks with unrealized losses you might want to crystallize those losses this year to reduce your 2017 income, Vucen explains. You can always reacquire the stock next year after a 31-day waiting period, he points out.

If you’re an employee due to receive a bonus this year, you might want to ask your employer if you can defer it to 2018 when it may be taxed at a lower rate, Vucen says.

Also consider maximizing your itemized deductions, for example by paying your U.S. state or local taxes this year instead of next to reduce your 2017 income, he says.

Corporations that are considering acquiring capital assets in 2017 may want to delay the purchases until 2018 when, under proposed shortened depreciation periods, they may be able to write them off in just one year, Vucen adds.

“Make sure that you are not paying more tax than otherwise you are required to,” Manasuev says. “It’s all a matter of talking to a qualified U.S. tax advisor. Now is a good time to connect the U.S. tax advisor with your other trusted advisors, be they Canadian accountants or investment advisors, so that U.S. tax is part of the overall strategy for your financial freedom.”

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