CLVN's US Tax Blog

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.

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.

How To Confirm Receipt Of Your Foreign Bank Account Report (FBAR), Form TD F 90-22.1

Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (also known as FBAR) must be received (not mailed or postmarked) by June 30 each year.  If you have not yet completed the form, see my post on March 1, 2010 for how to complete this form and where to send it (also by courier).

In order to confirm that the report was received on time, you can use a courier (EUR 40-60 or more) or send by registered mail (in NL, "aangetekend met toeslag handtekening retour" which currently costs EUR 8.15), both of which can be tracked and require a signature at the other end.  I would recommend sending registered, but keep in mind that it can take 2-3 weeks (or more) for aangetend post to be "received" in the US, so send as early as possible.

If you send your FBAR by regular mail (or any other method for that matter), you can get verification of filing by sending a check for $5.00 (for up to 10 accounts), made payable to Internal Revenue Service, to:

IRS Detroit Computing Center
Compliance Review Team
Attn:  Verification
P.O. Box 32063
Detroit, MI  48232-0063

You should include your name, address and Social Security Number (or ITIN) with the request.

This sounds great, but unless you are really early, you won't find out if they have not received your form until after June 30, since it takes a few weeks to process and another few weeks to get back to you in Europe, potentially exposing you to severe penalties. 

To summarize:  If you still have enough time, I'd invest the EUR 8.15 for sending "aangetekend" and send at least three, preferably four or more, weeks before the June 30 deadline.

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.

Is a Foreign Mortgage Worth the Risk?

Anyone who has asked me knows I am no fan of investing in real estate in (Western) Europe at the moment.  One of the biggest risks I see (aside from the fact that real estate prices have not "corrected" yet in many cities) is a little-known IRS law concerning taking out a mortgage in foreign currency. 

Sec. 985(a) of the Internal Revenue Code generally requires all income tax determinations to be made in the taxpayer's "Functional Currency", which for US citizens and greencard holders is always the USD, regardless of where they reside or how they are paid.  Sec. 988 of the Code covers "988 transaction", which includes the acquisition of debt in a non-functional currency such as becoming an obligor under a mortgage, and requires you to use your functional currency when determining a gain or loss on the mortgage. 

What does this actually mean for you?  It means that you need to convert the amount of the loan into USD at the time you borrow the money and again at the time you pay off the loan.  If there is a gain, this is taxable as ordinary income (not capital gain and not eligible for the $250K/$500K exclusion under IRC Sec. 121).  If you have a loss, this is considered a "personal", non-deductible loss (so basically the IRS gets the upside but not the downside).

This hasn't been much of an issue for the past several years, because the weakening dollar has created losses, which are not deductible.  Also, most taxpayers didn't even know they had a loss (because this law is pretty obscure) so they didn't feel like they missed out.  In addition, rising home prices have created gains (in both Euro and dollar terms) on most sales, so everyone's happy. 

So why is this a dangerous time to take out a foreign mortgage?  I can't predict the future, but my money is on the dollar strengthening over the next few years.  If this happens, you will start to see the ugly side of this law.  For example, if you borrowed EUR 1M today, you would be borrowing approx. $1,550,000.  Now assume you pay off this mortgage 10 years from now, and the dollar has strengthened significantly, back to 1:1 with the Euro (hey, it could happen!).  This means you only need to pay back $1,000,000 (in the eyes of the IRS).  In this case you have a $550,000 gain from paying off your foreign mortgage, taxable as ordinary income, so as high as 35% (or whatever higher rate may be in place at the time).  This means a potential tax of almost $200K, even if you actually lost money on the home sale, which I think is a "real" risk at the moment. 

Sound too bad to be true?  These rules are clearly laid out in Rev. Ruling 90-79, 1990-2 CB 187, and also in the 1996 court case "Quijano v. the United States" (96-2 USTC P 50,441), and don't leave much room for interpretation.

I'm not a fan of letting taxes rule your "life" decisions, but this one is definitely something to take into account if you are currently considering buying a property in Europe and don't have the cash to purchase without a mortgage.



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 a major shareholder of Taxpat BV and an advisor to Maxim Global Wealth Advisors.

How is the Sale of a Foreign Personal Residence Taxed in the US?

One of the most common issues I see (and probably the one with the most impact) is the taxation on the sale of a foreign personal residence. 

US citizens (and greencard holders) are required to use the US Dollar as their "functional currency" for all "personal" transactions, including the purchase and sale of a foreign residence.  For most US expats, there are actually two separate taxable transactions that occur when you sell a foreign residence - "Capital Gain" from selling the residence, and "Exchange Rate Gain" from paying off a mortgage denominated in a foreign currency.

Taxation of Capital Gain:

The current tax rate on the gain from selling a personal residence is 15% (as long as you have held the property for at least a year).  The gain is calculated by translating the purchase price using the exchange rate at the time of the purchase, the cost of capital improvements using the exchange rate at the time the improvements were made and the exchange rate at the time of the sale, rather than by using the exchange rates at the time of sale in all three cases (C.J. Quijano v. US; 96-2 USTC P 50,441).  If you meet the requirements of IRC Sec. 121 (you owned and used the property for 2 of the 5 years prior to the sale or meet one of the exceptions), you are allowed to use the $250,000 ($500,000 if MFJ) exclusion available to properties located in the US.  If the result is a capital loss, this is considered a personal, non-deductible loss.

Taxation of Exchange Rate Gain:

The Exchange Rate Gain from paying off a mortgage denominated in a foreign currency is treated a separate transaction and is calculated by translating the amount of the loan using the exchange rate at the time the loan was originated and the exchange rate at the time of the loan was paid off.  The resulting "gain" is taxable as "ordinary income" using your marginal tax rate (maximum 35% for 2008).  Again, if the result is a capital loss, this is considered a personal, non-deductible loss.

Note that you cannot use the loss from the mortgage payoff (which is what most people have these days) to offset the capital gain from the sale of the home (Revenue Ruling 90-79, 1990-2 CB 187).

These rules may look harmless enough, but the results can be devastating and should be taken into account if you are considering selling (or before buying) a foreign residence.

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 a major shareholder of Taxpat BV and an advisor to Maxim Global Wealth Advisors.

 

Should you "revoke" the Foreign Earned Income Exclusion?

Based on the current US tax laws for expats, many taxpayers (mainly those in high tax countries) may be better off if they "revoke" one of the main benefits for expats, the Foreign Earned Income and Housing Exclusions.

Some background - the Foreign Earned Income and Housing Exclusions are not "optional".  If you don't want to claim the Foreign Earned Income and/or Housing Exclusions (after you have once claimed them on a prior tax return), you need to "revoke" them by attaching a statement to your tax return (see IRC Sec. 911(e)(2) for those of you who like to read the Internal Revenue Code).

Why the change now?  The Tax Increase Prevention and Reconciliation Act of 2005 (ironically) changed (by increasing) the way expats calculate the US tax on "non-excluded" income.  Prior to the 2006 tax year, expats would deduct the exclusions and then calculate the tax on the remaining income, so you got to use the lowest marginal tax rates.  As of 2006, you need to add back the exclusions before calculating tax, which means you generally "start" at a much higher marginal tax rate (the IRS calls this the "stacking rule"). 

Since Foreign Tax Credits are calculated based on average tax rates, but the income gets taxed at the higher "marginal" tax rates, you "lose out" when calculating you foreign tax credits  if you use the exclusion (and have sufficient foreign tax credits).

For example, a taxpayer in the Netherlands (without the 30% ruling) earning $200K might pay $75K in Dutch income tax.  If they use the exclusion, their US tax would be (roughly) based on $200K - $80K = $120K (less deductions and exemptions).  Let's say the "marginal" US tax rate is 30%, or $36K of tax before credits.  The tax after credits would be zero and the Foreign Tax Credit Carryover would be $9K ($75K Dutch tax paid less $30K allocated to excluded income less $36K used as a Foreign Tax Credit).

If the taxpayer did not claim the exclusion, the Dutch tax would remain the same, but the US tax would be based on $200K.  In this case the "average" tax rate might be (again very roughly) around 25%, or $50K (this is lower than the first example because you get to use the lower tax brackets to calculate the average rate).  After applying Foreign Tax Credits, the US tax would still be zero, but the Foreign Tax Credit Carryover would now be $25K ($75K less the $50K used as a Foreign Tax Credit).

Since "excess" tax credits carry over for 10 years, the taxpayer would be leaving $16K "on the table" by taking the exclusion (since the tax due in both cases is zero, but the carryover with the exclusion was $9K and without it was $25K).  In the event the taxpayer then moved back to the US (and continued to have foreign travel days), or to a no tax country such as Dubai, or a very low tax country such as many in Asia, they may have missed out on a huge benefit by unnecessarily using foreign tax credits. 

Sound complicated?  It is.  It turns out this decision is very complex for many taxpayers, not least because you need to know what you are doing for the next several years, because if you do choose to revoke the exclusion, you cannot claim it again until the sixth taxable year after the exclusion was revoked. 

Note:  If you have the "30% ruling" in the Netherlands, it probably doesn't make sense to revoke, but it doesn't hurt to do a quick analysis just in case (we currently do this analysis for all of our clients).

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 a major shareholder of Taxpat BV and an advisor to Maxim Global Wealth Advisors.

What is the US Tax Return Due Date for Expats?

The initial due date for filing your US tax return for all US citizens, greencard holder and other residents is April 15, regardless of where you reside. 

There is a common misconception that the due date is June 15 for expats.  This is partially true - if you are living outside of the US on April 15, you have an "automatic extension" to June 15 for filing your US tax return.  This automatic extension means you can temporarily avoid both the late filing and the late payment penalties (but not interest) even if you do not file an extension.  However, if you take advantage of the automatic extension, it is important that you attach a statement to your tax return explaining that you have done so.  Note that the automatic extension may not be valid for your state tax return, if applicable.

If you need additional time (i.e. you cannot file by June 15), you need to file Form 4868 by June 15 (www.irs.gov/pub/irs-pdf/f4868.pdf).  There is a box to tick on this form when you were living outside of the US on April 15.  This form gives you until October 15 to file your tax return. 

As an expatriate, you can even get an additional extension until December 15.  There is no special form for this (in the past you used the now-obsolete Form 2688).  In order to obtain the additional two month extension you need to write a letter to the IRS explaining your situation and why you need the additional two months.  If they approve your letter, you won't hear anything.  It is a good idea to send this letter by registered mail or courier so that you can show proof of mailing if necessary.

Finally, in case this wasn't all confusing enough, there is a special extension possible for expatriates who moved out of the US during the tax year and require additional time to qualify for the "Foreign Earned Income Exclusion" using either the "Bona Fide Residence Test" or the "Physical Presence Test".  You apply for this extension using Form 2350 (www.irs.gov/pub/irs-pdf/f2350.pdf).  With this form, you are able to request an extension until 30 days after you qualify for the Foreign Earned Income Exclusion.  If you are using the Bona Fide Residence Test, this means you have until January 30 of the following year (e.g. for 2007 tax return, you get an extension to January 30, 2009).

Additional information can be found in Publication 54, Tax Guide for US Citizens and Resident Aliens Abroad (www.irs.gov/pub/irs-pdf/p54.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 a major shareholder of Taxpat BV and an advisor to Maxim Global Wealth Advisors.

Do you pay double tax if your income exceeds the Foreign Earned Income Exclusion?

I frequently get questions about what happens when your wages exceed the amount of the Foreign Earned Income Exclusion ($91,400 for 2009).  A common misconception is that you will then need to pay "double" tax - to the US and also to the Netherlands. 

This is incorrect.  The tax laws and tax treaties are specifically designed so that you only pay tax once on each item of income (either to the US or to the Netherlands).  If your wages exceed the exclusion amount, the remaining income is eligible for Foreign Tax Credits (to the extent that it was earned outside of the US).  What this means is that you are allowed to use the Dutch tax that you pay to offset the US tax on the same income.  As long as the Dutch taxes you paid are higher than the US taxes, you should not owe any additional US tax.

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 a major shareholder of Taxpat BV and an advisor to Maxim Global Wealth Advisors.

Does a "Stamrecht BV" make sense for US citizens?

Question:  I am a US citizen and have been "let go" by my company (in The Netherlands).  I will receive a severance payment of EUR 100,000.  I have been told that the best thing to do with this is to put it into something called a "Stamrecht BV" to avoid paying 52% tax on this amount.  Is this a good idea?

Answer:  In short, no.  The issue is fairly complex, but the problem comes from the fact that the US does not recognize a Stamrecht BV as a legal income deferral method, so you will likely end up paying double tax.  For example, let's say you receive EUR 100K this year and defer it for 10 years, then withdraw it.  Let's also assume that during that 10 year of deferral you earn EUR 10K per year, so the total in year 11 is EUR 200K.  Here is what happens (I've assumed the highest tax rates in both countries):

Year 1:  Receive EUR 100K and defer to a Stamrecht BV.  No NL tax.  US Tax EUR 35K.
Year 2-11:  Earn EUR 10K per year.  No NL tax. US tax EUR 3.5K per year.
Year 11:  Withdraw EUR 200K from account.  NL tax EUR 104K.  No US tax.
Total tax cost:  EUR 174K

This is a bit oversimplified, but you probably get the picture by now.  You also need to take into account the fact that you need to pay to set up a Stamrecht BV (probably EUR 3-5K in total) and you need to prepare annual statements and file an annual Dutch tax return (around EUR 2K/yr if you do it cheaply).  You also need to file Form 5471 (Report of Foreign Corporation) as part of your US tax filings, which many firms charge EUR 1,500 or more to prepare.  If you add all this up, you've probably ended up with little or nothing for all your trouble. 

As harsh as it sounds, the "best" solution I am aware of is to bite the bullet and pay the tax when you receive the payment. This will match the foreign tax credits (so no US tax) and save a lot of administration costs.  It also means you have free access to your hard earned cash and can buy that new bakfiets you've had your eye on!

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 a major shareholder of Taxpat BV and an advisor to Maxim Global Wealth Advisors.