EP 11: The IRC Code: A Course Map to Navigate U.S Taxes.
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Filing taxes in the U.S. is generally a stressful process. It's extra stressful for those who are new in the US, especially since filing taxes in the U.S. is very different from other countries.
In this episode, we discuss different aspects of filing taxes for both U.S. tax residents and tax nonresidents. We start by discussing dates and different deadlines. We then move on to information gathering - what are the key pieces crucial for completing U.S. taxes?
Tax forms that you provide the info - most of these forms have already been provided to the IRS.
We then move on to refunds and some of the cultural issues that come through.
Other items we discuss include
Withholding/underholding and the consequences of that.
Ways of mitigating paying high taxes
Foreign assets reporting, foreign income, tax treaties, foreign tax credits
How and where to file taxes (self-software, tax-filing firms, CPAs/EAs, etc)
We end with a call to be proactive, including self-education, as the more you understand, the easier it will be to plan for the long term.
The speakers' views and opinions discussed in this episode, should not be considered financial, tax, or legal advice. Consult your advisor for any legal, cross-border tax, and financial advice.
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Speaker 1 (00:06):
Welcome to the International Money Cafe Podcast, the show where we filter out the noise on cross-border taxes, finances, and life in the us. I'm your host, Jen Hams, certified financial planner, founder and owner of Elgon Financial Advisors,
Speaker 2 (00:21):
And I'm your host, man Nadi, enrolled agent, owner and founder of Amman Tax and Business Services. Join us on this journey as we explore the unique challenges faced by inbound outbound families and businesses on taxes, compliance, and financial planning. Let's
Tax Filing in the U.S.
Speaker 1 (00:41):
Get to the show. We are back today with another episode and we are going to talk about this being tax filing season, what goes into tax filing in the United States or in the us. You may be a long time tax resident of the US or you may be new here, and this might be the first year you are filing this year. Now remember, there's a whole idea of being a US non-resident or a US resident. If you're a US resident, it means you will have to include all your worldwide assets. So with that, let's jump into some important aspects of filing taxes in the US as an immigrant.
Filing Taxes in the U.S. as an Immigrant
Speaker 2 (01:32):
Absolutely. Jane, taxes in the US are one of the most complex codes as compared to many other countries. On the one hand, the whole system is based on trust and that you will voluntarily report your income according to the stipulations of the internal revenue code. On the other hand, there are many possible ways of reducing your tax burden, so to speak, by using deductions, exemptions, and making certain tax advantaged contributions that any person who wants to make sure they are on the right side of the law, they can do this in a legal way using legal loopholes and make sure that they're not overpaying taxes. So definitely a difficult path to navigate, I think. What do you say?
Tax-Filing Deadlines
Speaker 1 (02:27):
Absolutely, and I think maybe the best way to kind of break this down, let's just throw in, start with some key points. Every time I chat with folks, I like to start with the deadlines just so we can be ready. Okay, so for example, if you are an scorp, you are doing taxes as partnership. Your deadline is March 15th. Okay? Moving along, if you're doing taxes as an individual, which is probably where most of us are going to fall into, your deadline is April 15th if abroad, so you're a US tax resident, so probably a green cardholder or a citizen, but you don't live in the us, you have a little more time in your deadline is June 15th. Now, extensions are available but not automatic. And when you ask for an extension, most of this will apply to your international form. So for example, form 35 20, which is the gift reporting form.
Extension Deadlines
Speaker 1 (03:39):
Once you apply and a few others, of course, once you apply for an extension, this is included. Okay? Now here's the other thing. When you do these extended deadlines, normally you'll get it for six months. So most likely you end up going to, let's say if it's an individual tax return, you're going to October 15th, of course back to S-corp partnerships and those kind of things, you're going back to nine 15 and in certain cases they won't let you go back to December 15th. So again, you get the idea. It all depends on the kind of tax return that you are doing. Now, one thing I do want to call out is that your taxes are due even if the return is not due. And so let's say you're doing the individual tax filing and it turns out you owe, I dunno, 5,000. You can get an extension to file your taxes or your return in October, but the taxes that are due are still due April 15th. So keep that in mind. And what happens is IRS does not really like you not filing and it doesn't like not getting their money on time. So if you don't file on time, if you don't request for an extension, you are likely to face some penalties and some interests.
Gather all Information Necessary for Your Tax Return
Speaker 2 (04:57):
Cool, those are great points Jane, and definitely we must remember those deadlines. And going off of what you said, remembering that you have a limited time to do all of this. From the time when your ear ends to the time you have to file your tax returns, it's really important to gather all the information that you need to file your tax return. And what is it that you need to gather? You need to gather information about your income, you need to do that with your deductions, your credits. And remember that in the US the tax filing is based on the calendar year, which actually kind of makes things simple. So all you have to remember is January to December is when the calendar year is off of which the taxes are filed, and then the return is due for all those due dates that you just said.
List of Income
Speaker 2 (06:02):
So you have a list of income, what are all the sources of your income? You could have your wages or salaries, you could have interest in dividends, you could have capital gains, you could have rental income, you could have income from freelancing or self-employment activities. And some of these income can be categorized as passive and some of it can be categorized as active. And some passive activity could be your investments, your interest, dividends, capital gains or even rental income. And some active income could be your wages, salaries, income from self-employment, et cetera. Now that's kind of a broad overview of your income sources. There could be many other sources of income as well that you might have from your investments in partnerships and other S corporations or overseas investments, et cetera.
Deductions
Now coming to deductions, the information that you need to gather about deductions are above the line deductions, which are your contributions into an individual retirement account, a health savings account, and also any self-employed health insurance deductions that you made, et cetera.
Speaker 2 (07:27):
So those are the above the line deductions. Below the line deductions are either a standard deduction or an itemized deduction. So let me pause here and quickly give you an overview of what a standard deduction is and what an itemized deduction is. If you didn't know that or if this is your first year filing as a US tax resident, so depending on your filing status, you get a certain amount as a standard deduction that you can claim against your income every year. Now this standard deduction is like it says a standard amount. Now you might have other deductions that you can itemize, so to speak and write those off. Some examples of those are some medical expenses, your property taxes, the taxes that you pay to the state where you reside, the mortgage interest, charitable contributions. So these can be itemized and if the total itemized deductions are more than the standard deduction that you get for your filing status, it's obviously more beneficial for you to claim the total of the itemized deductions.
Speaker 2 (08:50):
There's more that goes into those calculations. Like I said, this is a broad overview and the other information that you need to gather is what taxes you paid that you could have paid taxes of course with your wages and salaries, which are withheld at source, but there might have been other taxes that you might have paid during the year estimated taxes, or if you had retirement distributions, which is also a source of income, you might have had taxes withheld at source on those.
Tax Credits
So those are some of the taxes and there are also information that you need to gather about what credits you can claim against these taxes. And the most common of credits that people claim are dependent care credit. That is amount of money that you pay to daycare, et cetera, or education credits if you qualify. And if your income is below certain amount, you could write off some credits that you have for paying tuition to universities or even K to 12.
Speaker 2 (09:57):
And some of these tax credits are refundable and some of them are non-refundable. And once you have a list of all of this information that you have gathered, you'll calculate your taxes and file a return. And based on this calculation, you might either have overpaid your taxes and therefore the government now owes you money, which is your due refund or your calculation might be a little short of what you would've actually owed and you have to now pay the government. That means you have a tax due. So like I was saying earlier, this is a voluntary process, but you need to gather all this information and quite a lot of this information has been already transmitted to the Internal Revenue Service by the payers, and a lot of this information gets matched on your tax return. And if it was not, that is if your record keeping was not good or for some reason you missed some of these information, then the IRS will send you a letter saying that hey, this was reported to us but it was not on your tax return. That's quite a lot, isn't it?
Speaker 1 (11:19):
It is, and that's okay because that's what the tax code is. Now, one thing you mentioned is all the deductions that you get, but occasionally you and I will work with folks who are filing as us non-resident and sadly, depending on how you look at it, they don't really get as much of the deductions like what we discussed. But every situation is of course different. So when it comes now to the tax due or the tax refund, I've seen a whole lot of different cases and ways of looking at this. So when you get a refund, it basically means the government's been holding money for you without giving you any interest. When you get a tax due where you have to pay the government, they will occasionally, depending on how much it is end up charging you for under withholding. But again, there's a lot of cultural issues around, and so when people ask me, is it better to get a refund or to have to pay the government, I'm sometimes almost tempted to say It all depends on your situation.
Speaker 1 (12:35):
Some people have told me that for them this is forced saving. It's like, okay, I know the government is holding my money, but I know at the end of the year I'm going to get 5,000. I prefer to get that and that's okay. So when it comes to that, I will talk to you about the numbers and the reasoning, but I can go either way. Okay?
Mitigating Taxes
Now there are different ways of mitigating where you end up being taxed on, and a couple of the ways would be, for example, if you do tax deferred investments. So for example, if you do a 401k, that actually reduces the amount of money or what your taxable amount is going to be. There obviously other investments that we can talk about, but you have to look at the difference between the two. If it's a Roth IRA that's after taxes. If it's a traditional IRA, you may be able to get a deduction based on some very special circumstances, which we can talk about at some point. Again, when it comes to investment and taxes, because this is a question we get a lot, we've actually done a whole episode on investing in the US when you are on a non-immigrant work visa and the consequences of that, again, it looks like or it seems like everything we do, this always, always some tax question or some tax aspect of it.
Internal Revenue Code
Speaker 2 (14:07):
Coming back to the US tax code, the internal Revenue Code, if you've been listening to us for the past few episodes, you know that your US tax return, if you are a US tax resident, a citizen or a green card holder includes worldwide income and asset reporting. Now, what is part of foreign reporting, and let's just go into that briefly because we are talking taxes today. Your foreign reporting includes your bank and financial assets abroad. The income that you have from any of these holdings and or other foreign sources, any stakehold you have in any foreign entities, whether they're foreign corporations, foreign partnerships or disregarded entities, all of this has to be reported in some form or the other on your US tax return.
Penalties
And the penalties for not reporting any of this or even reporting it, but not substantially completing these forms carry heavy penalties.
Speaker 2 (15:24):
And these penalties are all listed on the IRS's website and they are pretty substantive. So you must make sure that if you have any of these, you must bring it to the attention of your tax professional if you're working with one or know what these thresholds are and make sure that that's included on your US tax return. And for some reason, if you have not reported these assets or not substantially completed these forms, then there are amnesty programs available where you can come into compliance and some of these have some penalties that you have to pay off the bat to come into those amnesty programs, but they are available. So this is something that we keep talking about, but you should not forget, right?
Speaker 1 (16:24):
And I actually posted something on LinkedIn the other day where I kind of pointed out that every time now I chat with somebody, even the first conversation, I kind of make sure that we get around to just mentioning their overseas assets. And when I ask them if they've been including that in their US taxes, access filing, like I said, the answers I get are typically, oh, I do know I'm supposed to do that or something like, you got to be kidding me, or why don't they teach us this stuff? And so I'm glad you've pointed out about the amnesty programs if you haven't been compiling. So it is key and we are seeing a lot of people not including it mainly because they don't know or because it's not really talked about a lot. But anyway, moving on with this, I want to talk about how to prepare your taxes.
How to Prepare Your Taxes
Speaker 1 (17:20):
Okay, so one, you can prepare the taxes yourself. It's an option. I'm just going to give you all the different options of doing it. You can also use a tax pro who could be an EA enrolled agent or A CPA or you can go to one of the big box farms like h and r Block or a few others that are out there. You can also just use DIY software. So Tableau tax comes to mind in sprint Tax comes to mind if you are filing as a US non-resident, obviously the pros and cons, but if you do have a component of outside assets, it's probably not a bad idea to work with a cross-border CPA. Can you think of any other ways of doing taxes, man, or have I covered everything?
Speaker 2 (18:16):
The cross-border enrolled agent.
Speaker 1 (18:19):
Okay, yes, I did mention that. Yeah, so back to you. Can you think of other ways of just mitigating taxes for example, that you want to just point out?
Strategies to Mitigate Your Taxes
Speaker 2 (18:33):
Absolutely, absolutely. This is something that we talk about with our clients quite a bit and involves a little bit of tax planning. In fact, if you know that these situations might apply to you, it's a good idea to plan for it because there are ways to mitigate taxes, especially if you live abroad and you think that there might be an aspect of double taxation. So there are various tax strategies and a couple of them really quickly, which are the ones that we use are a foreign tax credit, which means that if you are going to be reciting in a country where you are going to pay taxes to that government for income earned, but of course you have to also file a US tax return, then there is a way that you can claim the credit paid to the government on your US tax return.
Speaker 2 (19:33):
That might just come down to where you don't owe any US tax at all because all of your income is covered by the taxes you pay to the other government or you may end up just having to pay US taxes for your US source income. So just going by that claiming a foreign tax credit for your foreign source income and having US taxes for your US source income is one way to go, and that involves some planning in aspects of the timing as far as when are your foreign taxes due and when is your US tax due, and that needs a little bit of coordination. Another popular tax saving strategy is the FEIE, basically an acronym which stands for a foreign earned income exclusion. So by its very meaning you can see that it only applies to foreign earned income, which means that you either have a salary abroad or self-employment income abroad, and every year there is an amount that you can exclude from your US taxation, and if you do that, then that amount is not subject to US taxes at all.
Rules and Regulations
Speaker 2 (20:59):
Of course, there are rules and regulations the most important being that you should have been out of the country for at least 330 days, or you must be permanently kind of semi permanently living in the other country where you pay taxes, et cetera. So there are certain tests called the bonafide tests or the physical presence tests that you may have to look at which one you can apply to be able to claim the FEIE or the foreign earned income exclusion. There is also the tax treaty that you have to look at so that you can see if there are ways to mitigate double taxation because there are some tax treaties between the US and the other country that would have special aspects of certain income that may not even be included on your US tax return or certain income from the US that maybe the country where you reside in doesn't consider to be taxable income or vice versa.
Speaker 2 (22:06):
You may have something in the US that could be considered tax deferred, but because now you live in a country that does not recognize the tax deferred status of it, you may have to pay taxes in that country. So taking into account the tax treaty is also very important when you're filing your tax return. And of course, all of these options have to keep in mind what your financial planning aspect of it is and where your long-term goal is to reside. So if your plan is you're temporarily abroad, but you're going to come to the US and you are going to come back here and retire, then the foreign earned income exclusion might not be right for you because you may want to continue to have earned income to be able to contribute into certain tax deferred investments and tax advantaged accounts. So this is where tax planning comes into the picture, especially when you have a footprint in more than one country. Right, Jane?
Speaker 1 (23:10):
Yeah. And Ashley, let me go back to something you just said. Could you clarify if you're living in x, Y, Z country and a US tax resident, obviously you need to file taxes in both countries. I know you talked about the timing, but is there a preference to do the foreign countries taxes first or the US taxes or how do you approach that when you have submitting that situation?
Foreign Taxes First or U.S. Taxes First?
Speaker 2 (23:33):
That's a very good question, Jane, and thank you for bringing it up. Yes, so the timing aspect of this is really important and it really depends on where you live for the most part. Filing the other country's return first is usually a good way, and then filing your US tax return after the other countries filed is better sometimes, and this can differ case by case. Obviously it depends on the country where you live. Say for example, if we look at Germany, in Germany, you have a tax return that is filed and you have a certain refund or tax due, but the actual return itself takes time to be processed. So the actual process of the return and the actual amount of the tax due or the refund, you may not even know that for maybe a year after the US tax returns file. So you may have to go back a year to amend your previous year's US taxes.
Speaker 2 (24:47):
So the timing aspect is important in that sense. And also the due dates of the returns themselves, say the couple of countries that come to my mind immediately that have different due dates are the uk, Australia, India, their due dates are their year of taxation are different than the calendar year, so their return due dates fall on a different date. So usually filing an extension like we spoke about earlier, would be a good idea and get that extra six months and just do kind of like a rough back of the envelope, check on your US taxes and make sure that you've paid in something, and then get your foreign accountant to also do the same thing and give you a rough idea about what your foreign tax might be and file an extension by April 15th, taking into account all of these aspects and then file the foreign country return and then come back before October 15th and finalize everything. As you can see, this could be a pretty complicated case. It may not be something that, it could be a standard thing that you do every year. It might be something that depends on what your income is, and you may have to kind of take that decision as you go, but in most cases, this is what I would recommend.
Speaker 1 (26:18):
Okay. No, that's a great answer. And so it really sounds like what we want to do is be proactive on both your tax planning and your financial planning land as much as you can. Things like know your tax bracket, know where your options are to save, so be educated, be prepared, and you be able to get through this tax season. So anything else you want to add minus to this or we could to wrap it up?
Speaker 2 (26:46):
Oh yeah, great. To wrap it up, I think that this is great that we are starting the tax season 2024 with an episode about filing taxes, and it's a great way to start, I think. And like you said, we have given our listeners a key to the mint about being knowledgeable, about being proactive, and have a professional team on your side. So dear listener, follow us on any leading platform that you listen to your podcasts on. Please go to our website, the i cafe.com and subscribe to our newsletter so that you get, as soon as our episode drops, you get an email and you can go and share that information with your friends and colleagues and whoever you think might benefit from this information. Thanks for listening. Bye bye.
Speaker 3 (27:44):
Thank you for listening to the International Money Cafe podcast. The content is for informational and educational purposes only, and should not be used as a substitute for professional advice. Seek the advice of your qualified service provider with any questions you may have regarding your cross order finances and tax needs.