CLVN's US Tax Blog

Updated Foreign Bank Account Report (FBAR) Form and Instructions Available (Revised November 2011)

If you haven't yet submitted your 2010 (or earlier) Foreign Bank Account Report (FBAR), make sure you use the latest version of Form TD F 90-22.1. The form should mention "Rev. November 2011" in the upper-left-hand corner. The latest form can be found at http://www.irs.gov/pub/irs-pdf/f90221.pdf.

David Colvin is a CPA and CFP^® based in Amsterdam, Netherlands since 1998. His niche focus is serving high-net-wealth individuals with cross-border tax and financial issues. In addition to his activities at CLVN, he is an advisor to Maxim Global Wealth Advisors.

Updated Foreign Bank Account Report (FBAR) Form and Instructions Available (Revised March 2011)

If you haven't yet submitted your 2010 Foreign Bank Account Report (FBAR), make sure you use the latest version of Form TD F 90-22.1.  The form should mention "Rev. March 2011" in the upper-left-hand corner.

If you enjoy reading very technical articles, the final regulations were also made available earlier this year.

Calendar year 2010 FBAR's must be received (not postmarked) by the Department of Treasury no later than June 30, 2011.  An FBAR must generally be filed by a United States person that has a financial interest in or signature authority over foreign financial accounts, if the aggregate value of these accounts exceeds $10,000 at any point in the year.

David Colvin is a CPA and CFP^® based in Amsterdam, Netherlands since 1998.  His niche focus is serving high-net-wealth individuals with cross-border tax and financial issues.  In addition to his activities at CLVN, he is an advisor to Maxim Global Wealth Advisors.

2011 Foreign Earned Income and Housing Exclusion Amounts

For taxable year 2011, the maximum foreign earned income exclusion amount under §911(b)(2)(D)(i) is $92,900, figured on a daily basis, times the number of days during the year that you meet the bona fide residence test or the physical presence test.

The foreign housing exclusion is calculated by deducting the "base amount" from your qualified foreign housing expenses (subject to the limits discussed below). The base amount is 16% of the maximum foreign earned income exclusion amount ($14,864 for 2011), figured on a daily basis, times the number of days during the year that you meet the bona fide residence test or the physical presence test. There is a limitation on the maximum amount of qualified housing expenses. This limit for most cities is 30% of the foreign earned income exclusion ($27,870 for 2011). However, there are numerous exceptions (cities with higher limits). These exceptions can found in IRS Notice 2011-8.

David Colvin is a CPA and CFP^® based in Amsterdam, Netherlands since 1998.  His niche focus is serving high-net-wealth individuals with cross-border tax and financial issues.  In addition to his activities at CLVN, he is an advisor to Maxim Global Wealth Advisors.

IRS Gives Taxpayers Another Chance to Disclose Foreign Bank Accounts

The IRS is offering people with undisclosed income from offshore accounts an opportunity to participate in a new, voluntary disclosure initiative in order to get current on their tax returns. The 2011 Offshore Voluntary Disclosure Initiative (OVDI) will be available only through Aug. 31, 2011.

For the 2011 initiative, there is a new penalty framework that requires individuals to pay a penalty of 25 percent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. Some taxpayers will be eligible for 5 or 12.5 percent penalties. Participants also must pay back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

For more information see: http://www.irs.gov/newsroom/article/0,,id=234900,00.html?portlet=7

David Colvin is a CPA and CFP^® based in Amsterdam, Netherlands since 1998.  His niche focus is serving high-net-wealth individuals with cross-border tax and financial issues.  In addition to his activities at CLVN, he is an advisor to Maxim Global Wealth Advisors.

How to Complete Your 2010 Foreign Bank Account Report (FBAR), Form TD F 90-22.1

Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts is due every year on June 30, with no extensions possible.  This form needs to be completed if the total combined value of all of your accounts outside of the United States exceeded $10,000 at any point in 2010. 

Gathering Information:  In order to complete the form for 2010 you will need the following information for every bank and financial account located outside of the United States in 2010 (even for one day in 2010) for which you were the owner and/or had signature authority, even if the balance of the account did not ever exceed $10,000:

1)  Name and address of the Financial Institution
2)  Type of Account (e.g. Bank (generally checking or savings accounts) or Securities (generally accounts holding stocks and bonds))
3)  Account Number
4)  Account Owner (e.g. you, your spouse, joint, your child(ren), your parent)
5)  Maximum Value in local currency shown on any quarterly or more frequent statement in 2010 (see Part II, Item 15 on Page 7 of the form and instructions)

Types of Accounts:  There are four "types" of accounts possible on this form, but only three apply to individuals.  Make sure to report each account in the correct "Part":

Part II:  Accounts held by you separately
Part III:  Accounts held by you and another person(s) jointly
Part IV:  Accounts for which you had signature authority but no financial interest (e.g. company accounts)

Exchange Rate(s):  Convert the "Maximum Value" to USD using the exchange rate on December 31, 2010, regardless of the date that the highest balance actually occurred during the year.  For EUR-USD, the December 31, 2010 exchange rate was EUR 1 = $1.32515.  For other currencies, you can find the exchange rate at www.oanda.com.

Joint Accounts with Spouse:  If your spouse only had joint accounts (together with you), and no separate accounts, he/she does not need to file a separate form, but they do need to sign in Box 44 (indicate "spouse" after the signature).  In Part III, where you list the joint owner, indicate "Spouse" after their name on each account.  However, if your spouse had any separate accounts, they need to complete a separate form, including the joint accounts also.

Common mistakes:
1)  Don't forget to put the year in the top-right corner of the first page.
2)  Don't forget to tick the box for "Individual" in Box 2.
3)  If you have a US SSN ot ITIN, include this in Box 3.  In this case you do not need to complete Box 4.
4)  Include your birthdate in Box 5.
5)  Make sure the "Maximum Value" for each account is in USD.
6)  Don't forget to sign (and your spouse if applicable) and date the form.

Due Date:  Form TD F 90-22.1 must be received by June 30.  No extensions are possible.  This is different than your tax return, which must be mailed/postmarked by April (or June) 15, and extensions are possible.  We advise sending no later than June 15 to make sure it arrives on time. 

Mailing:  Once you have completed the form, mail it to the address shown on the first page:

U.S. Department of the Treasury
P.O. Box 32621
Detroit, MI  48232-0621

The street address for mailing Form TD F 90-22.1 by courier:

IRS Enterprise Computing Center
Attn: CTR Operations Mailroom, 4th Floor
985 Michigan Avenue
Detroit, MI  48226
(313) 234-1062 (for delivery personnel only)

This form looks deceptively simple, so beware!  These are only the basic rules.  If you have a "non-standard" situation, you may want to consult with your tax advisor, and/or buy the 180 page E-Book Guide to Reporting Foreign Financial Accounts, which can be purchased for $49 at www.offshorepress.com.

David Colvin is a CPA and CFP^® based in Amsterdam, Netherlands since 1998.  His niche focus is serving high-net-wealth individuals with cross-border tax and financial issues.  In addition to his activities at CLVN, he is an advisor to Maxim Global Wealth Advisors.

Reminder: Q4 2010 Estimated Tax Payments Due January 18, 2011

Just a short reminder that the final 2010 Estimated Tax Payment is due January 18, 2011 (since January 15 falls on a Saturday and Monday, January 17 is a public holiday in the US).  To avoid (further) penalties for underpayment of estimated tax, in general, by January 18, 2011 you should have paid (in combination with 2010 US taxes withheld and all other 2010 Estimated Tax Payments) the lower of:

1)  90% of your (eventual) 2010 tax liability, or
2)  100% of your 2009 tax liability (110% if your 2009 Adjusted Gross Income exceeded $150,000 or $75,000 if Married Filing Separately)

Note:  You do not need to make estimated tax payments if your final 2010 tax liability does not exceed $1,000.

You can find the form and instructions at: http://www.irs.gov/pub/irs-pdf/f1040es.pdf

David Colvin is a CPA and CFP^® based in Amsterdam, Netherlands since 1998.  His niche focus is serving high-net-wealth individuals with cross-border tax and financial issues.  In addition to his activities at CLVN, he is an advisor to Maxim Global Wealth Advisors.

2010 Year End Tax Planning for Dutch Residents: Tax Loss Harvesting

A fairly common tax planning tip is to try to net out your capital gains and losses at the end of the year, so that (ideally) you do not have a "net" taxable gain, especially not a net short-term capital gain since this would be taxed as ordinary income (as high as 35% for federal tax).

So the idea is that you take a look at your "realized" gains and losses for 2010 (taking into account any capital loss carryover from 2009) and if you have a net gain you then see if you have "unrealized" losses that you can use to offset this net gain. 

It is important to remember the ordering rules for capital gains:
1)  First offset short-term gains with short-term losses
2)  Then offset long-term gains with long-term losses
3)  Then offset short-term losses against long-term gains or vice versa, for a net gain or loss.  Note:  It is considered inefficient to use a net short-term loss to offset a net long-term gain since you are using an "ordinary" loss (max 35% benefit) to offset a long-term capital gain (maximum 15% tax).

Note that you need to be careful of the "wash sale" rules, that disallow any loss if you have purchased the same security within 31 days before or after a sale.  So you can't just take the loss and repurchase the same security, which potentially leaves you out of the market for at least 31 days.

So far, this is the standard advice for all US citizens.  However, Dutch resident taxpayers (individuals subject to "Box 3" tax in the Netherlands) are able to take a credit for the Dutch taxes they pay to offset the US tax on capital gains.  Therefore, there may be no additional "net" tax in the US after taking this credit, so the tax loss harvesting may not be necessary.  In fact, foreign tax credits expire if unused for 10 years, so it may be beneficial to use them while you can.  However, it is still preferable to not have a net short-term gain, since this would probably use more of your credits than necessary.

Example:
$100,000 of Net Long-Term Capital Gains
    X  15% Tax Rate in the US
$  15,000 of US tax before credits
-  15,000 Foreign Tax Credit (passive basket)
$         0  Net US Tax

If you are unsure whether or not you have sufficient tax credits, of if you have credits that will expire in 2010, ask your tax advisor (or check your 2009 tax return, Form 1116 and related statements).  Most individuals living in the Netherlands have plenty of "excess" credits at the moment, because they have been paying the 1.2% annual Box 3 tax since 2001, but their investment returns have been too low to utilize all of the tax credits generated.  Note:  Prior to 2001, there was no Dutch tax on capital gains.

David Colvin is a CPA and CFP^® based in Amsterdam, Netherlands since 1998.  His niche focus is serving high-net-wealth individuals with cross-border tax and financial issues.  In addition to his activities at CLVN, he is an advisor to Maxim Global Wealth Advisors.

2010 Year End Tax Planning for Dutch Residents: Roth IRA Conversions

It's getting close to the end of the year and the final deadline for Roth IRS conversions.  The rules have been relaxed quite a bit so that pretty much anyone can convert their "Traditional" IRA to a "Roth" IRA. 

The cost of doing this for US purposes is that you need to include the amount converted in your income in the year of conversion, with a maximum tax rate of 35% for federal tax.  The benefit is that you never need to pay taxes again on this account, so you take the tax hit now hoping the account will grow much larger by the time you retire.  Roth IRA distributions are tax-free for US tax purposes, which can be a huge benefit for many people, and there are also other benefits which I won't go into.  There are plenty of articles on the web that discuss the pluses and minuses of Roth IRA conversions for a standard US taxpayer.

Unfortunately, Dutch tax residents have an additional set of rules, so you need to be cautious about IRA conversions.  For Dutch tax purposes, the conversion will likely also be included in your "Box 1" income in the year of conversion, potentially with a 52% tax hit (you will get a credit for the Dutch tax against your federal tax in the US, likely bringing the US tax to zero).  After the conversion, a Roth IRA is considered a "Box 3" asset, so you will pay a 1.2% tax on the current value of the account (which may now be only 48% of where you started) every year.

In general, a Roth IRA conversion doesn't make sense for most Dutch tax residents.  I wrote a detailed article on this subject earlier this year if you would like more information about this, click on this link. 

David Colvin is a CPA and CFP^® based in Amsterdam, Netherlands since 1998.  His niche focus is serving high-net-wealth individuals with cross-border tax and financial issues.  In addition to his activities at CLVN, he is an advisor to Maxim Global Wealth Advisors.

2010 Year End Tax Planning for Dutch Residents: Annual Gifting

If you are like many Americans, you may be gifting amounts to your children, grandchildren, friends, etc. each year.  Or perhaps you are the lucky recipient of such a gift.  If so, you are probably familiar with the US rules that allow you to gift up to $13,000 in 2010 (or $26,000 if combined with your spouse) to as many related or unrelated individuals as you choose, without having to file a US gift tax return or pay gift tax in the US.

However for Dutch residents, there is a different (additional) set of rules that present a potentially costly trap for the unaware!

Receiving a Gift:
In the Netherlands, the recipient of a gift is the one who needs to pay gift tax (in the US it is the person giving the gift).  So it is no problem for you to receive gifts of any amounts from anyone in the world, except for someone who is domiciled in the Netherlands.  In the event you do receive a gift from a Dutch resident you may need to pay gift tax (see the next section).

Giving a Gift:

As of 2010, the rules in the Netherlands were simplified quite a bit. 

Tax-Free Gifts
There are two categories of recipients with regards to the annual tax free gifts:
1) Children: EUR 5,000 (one time gifts of EUR 24K or EUR 50K allowed for children 18-35, with restrictions and filing requirements)
2) Others:  EUR 2,000
Note that for Dutch tax purposes, you only get one amount each recipient if you are married, not double the amount as you do in the US.

Taxable Gifts
If you exceed these amounts, the recipient is subject to gift tax (whether Dutch tax resident or not).  There are three categories of gift recipients and two tax brackets for each.

Gift Tax Due on Gifts in Excess of Tax-Free Amounts:
1) Partners & Children: 10% tax on the first EUR 118,000; 20% for amounts above EUR 118,000
2) Grandchildren:  18% tax on the first EUR 118,000; 36% for amounts above EUR 118,000
3) Others:  20% tax on the first EUR 118,000; 40% for amounts above EUR 118,000

Planning tip:  If you are very wealthy and plan to live in the Netherlands until your death, it may make sense to gift amounts up to EUR 118,000 (per recipient) each year to take advantage of the 50% lower tax (as compared to the tax on amounts remaining in your estate).

David Colvin is a CPA and CFP^® based in Amsterdam, Netherlands since 1998.  His niche focus is serving high-net-wealth individuals with cross-border tax and financial issues.  In addition to his activities at CLVN, he is an advisor to Maxim Global Wealth Advisors.



 

Are You Subject to Dutch Inheritance Tax?

One of my most shocking discoveries in working with US clients in the Netherlands is how few of them realize that they are potentially subject to Dutch Inheritance Tax (Successiebelasting). Many US citizens living in the Netherlands (actually their heirs) would in fact owe this tax if they passed away.  In contrast, relatively few individuals in the US exceed the tax-free estate limits (note: there is currently no US estate tax for individuals who pass away in 2010). 

Who is subject to Dutch Inheritance Tax?  As a US citizen, you are potentially subject to Dutch Inheritance Tax on worldwide assets if any of the following conditions are met:

1)  You had a “tax domicile” in the Netherlands for 7 of the 10 years prior to your death (i.e. you have lived in the Netherlands for 7 years or more);
2)  You lived in the Netherlands for fewer than 7 years but were not in the Netherlands for business, professional, educational, training, tourism or similar purpose (e.g. retiree or non-working spouse married to a Dutch national);
3)  You lived in the Netherlands for fewer than 7 years but you had a clear intention to remain indefinitely in the Netherlands; and/or
4)  You are a US-Netherlands dual citizen who is a Dutch resident and/or was a resident of the Netherlands at any point in the 10 years prior to passing away.

In addition, even if you are not considered a Dutch resident, real estate located in the Netherlands will be subject to Dutch Inheritance Tax.

What is "Inheritance" Tax?  It is a very different concept from the US "Estate" Tax.  In the US, Estate Tax is paid in its entirety by the estate of the individual who passed away, and the remainder is then distributed to the person's heirs.  In the Netherlands, the individual who receives the inheritance is responsible for paying the Inheritance Tax (whether the recipient is resident in the Netherlands or not). 

There are currently three Dutch Inheritance Tax rate categories, depending who the recipient is in relation to the person that passed away.
Category 1:  Spouses (incl. registered partners) and children (Maximum rate = 20%)
Category 2:  Grandchildren (Maximum rate = 36%)
Category 3:  Others (Maximum rate = 40%)

The tax-free amounts (2010) are also very limited:
Spouse/Partner: EUR 600,000
Children:  EUR 19,000
Grandchildren:  EUR 19,000
Chronically Ill or Handicapped Children:  EUR 57,000
Parents:  EUR 45,000
Others:  EUR 2,000

Are you subject to Dutch Inheritance Tax?   If so, it probably makes sense to meet with an expert in this field to discuss planning opportunities.  In general, most people can focus on the Dutch aspects since the US tax kicks in at a much higher level.  However, I would still recommend reviewing any Dutch estate tax planning for the US tax implications.

Thanks to Robert Bosma of Finsens Planning (www.finsens.nl) for his review and input for this post.

David Colvin is a CPA and CFP^® based in Amsterdam, Netherlands since 1998.  His niche focus is serving high-net-wealth individuals with cross-border tax and financial issues.  In addition to his activities at CLVN, he is an advisor to Maxim Global Wealth Advisors.