New Tax Obligations for Americans Living Abroad

US Individual Taxation ForUS Citizens and Green CardHolders

Middle East Tax Services

Dennis AllenMiddle East TaxPartner

13 February 2012

Agenda/Contents

1. Tax Updates and Developments

2. US Taxation of Expatriates

3. State Taxation

4. FBAR and FATCA

5. How PwC can help

PwC13 February 2012

6. MyTaxes

US Individual Taxation For US Citizens and Green Card Holders

1. Tax Updates andDevelopmentsDevelopments


Individual Income Tax Rates 2011 and 2012 tax rates will remain the same: ranging from 10% to 35%.

Capital Gains Tax Rates Will remain the same with a maximum 15% rate applied to long-term gains andCapital Gains Tax Rates Will remain the same with a maximum 15% rate applied to long-term gains andqualifying dividends.

Social Security tax rates The Social Security rate was reduced by 2% for 2011. This reduction has so far beenextended through February 2012. The employer portion remains unchanged at 6.2%.

Alternative Minimum Tax Exemptions were temporarily increased for 2010 and 2011. If no extension to this lawis made, many individuals will find themselves subject to AMT in 2012. Currently, noincrease in exemptions for 2012 is anticipated.

American Opportunity Credit This refundable credit of $2,500 has been extended through 2012 based on expensesfor the first four-years of undergraduate education.

Child Tax Credit This refundable credit providing up to a $1,000 credit for children under 17 has also

PwC13 February 2012

Child Tax Credit This refundable credit providing up to a $1,000 credit for children under 17 has alsobeen extended to 2012.

Foreign Earned Income Exclusion The foreign earned income exclusion was increased to $95,100 for 2012 based oninflation.

Retirement Contributions The 401(k) and 403(b) contribution limit was increased to $17,000 for 2012.


Itemised Deductions & PersonalExemptions

For 2011 and 2012 the phase out for itemised deductions and exemptions for high-income earners has been temporarily extended.

Dependent & Child Care Tax Credit Has been extended and increased from $2,400 for one child to $3,000 and from


Dependent & Child Care Tax Credit Has been extended and increased from $2,400 for one child to $3,000 and from$4,800 up to $6,000 for two or more children.

Form 8938 In addition to the Foreign Bank Account Reporting form, a new Form 8938 will needto be included with the 2011 tax return to disclose foreign assets with a valueexceeding various thresholds.

Sales Tax Deduction The optional deduction in-lieu of the deduction for state income taxes expired in 2011.

Student Loan Interest Deduction Is extended for two more years. After 2012, this deduction will go back to wherestudent loan interest is only deductible for the first 60-months of repayment.

Due Date of Return The due date to file Form 1040 is Tuesday 17 April 2012 instead of 15 April due to the15th being a Sunday and a holiday in the District of Columbia.

PwC13 February 2012

15th being a Sunday and a holiday in the District of Columbia.

Roth IRAs If a taxpayer converted or rolled over an amount to a Roth IRA in 2010 and did notelect to report the taxable amount on their 2010 return, then they generally mustreport half of it on their 2011 return and the rest on their 2012 return.

Expired tax benefits • The Making Work Pay credit• Extra itemised deduction for real estate taxes


1 I don’t need to file because I don’t work for a US company

2

True or False?

2 I don’t need to file because I earn less than the exclusion

3 I don’t need to file because I am a green card holder

4 I don’t need to file because I am over age 65

5 I don’t need to report my income from foreign investment accounts

PwC13 February 2012

5

6 I don’t need to file because I live and work overseas and my wages are not reported on FormW-2


True or False?

False!You always have to file.

PwC13 February 2012US Individual Taxation For US Citizens and Green Card Holders

2. US Taxation of Expatriates

Base pay (worldwide)

2. US Taxation of expatriatesTable of Compensation

The followinglist is an

example butnot an

exhaustive listof taxable

compensation

Housing allowance or provided housing

Home leave airfare

Auto or telephone allowance

Education assistance/reimbursement

Overseas incentive allowance (foreign premium,COLA, etc.)

Settling-in/Relocation allowance

PwC13 February 2012

compensationitems

All other cash or benefits received in-kind

Settling-in/Relocation allowance

Tax reimbursement


2. US Taxation of expatriatesNon Taxable Compensation

The following list arethe main non taxableforms ofcompensation

Transportation of household goods

Travel and temporary lodging expenses

Actual storage costs paid


Purpose: To provide tax relief for US companies and/or US workers in order to be competitive

in the global market place. The US is the only major industrial country that does not completely exempt

2. US Taxation of expatriatesForeign earned income exclusion

in the global market place. The US is the only major industrial country that does not completely exemptthe foreign earned income of their citizens working abroad.

$92,900 Foreign Earned Income Exclusion for 2011

Both spouses are entitled to their own exclusion

PwC13 February 2012

Prorated in the year of arrival/departure

Indexed for inflation on an annual basis ($95,100 in 2012)


The following income Foreign source wages (sourcing is based on where

2. US Taxation of expatriatesForeign earned income exclusion

The following incomeis eligible for theexclusion

The following are

Foreign source wages (sourcing is based on wherework is performed - workdays)

Foreign allowances/benefits

Interest

PwC13 February 2012

The following areexamples of incomethat do not qualify forthe exclusion

Interest

Dividends

Pensions

Other unearned income


2. US Taxation of expatriatesHow to claim the foreign exclusions

The exclusions must be claimedby making an election

PwC13 February 2012

The election has to be made annually andmust be made on a timely filed return


How do I qualify for the exclusions?

Must have established a foreign tax home1

2. US Taxation of expatriatesQualifying for the exclusions

Must have established a foreign tax home- assignment expected to last longer than one year

Physical Presence Test (PPT)Must be physically present in a foreigncountry or countries for 330 full daysduring any consecutive 12-month period

Mustmeet one

OR

1

2

+

PwC13 February 2012

Bona Fide Residence Test (BFR)Must maintain a foreign residence for afull calendar year (e.g. for a 2011 arrival- a tax home abroad beginning before1 January 2012 and ending after31 December 2012)

meet onetest

OR2


Bona Fide Residence (BFR) example:

Arrival Date


Arrival Date

1 Sept 2011 31 Dec 2011 1 Sept 2012 31 Dec 2012

Full year resident overseas

PwC13 February 2012

Qualifying period begins: 1 September 2011

2011 exclusion: 122/365 x $92,900 = $31,029


Physical Presence Test (PPT) example:

Arrival Date


Arrival Date

27 July 2011 1 Sept 2011 31 Dec 2011 26 July 2012 31 Dec 2012

330 Full days outside US

One Year

PwC13 February 2012

Qualifying period begins: 27 July 2011

2011 exclusion: 158/365 x $92,900 = $40,226

Additional exclusion: 36/365 x $92,900 = $9,197

One Year



Benefits of PhysicalPresence Test (PPT)

Possible additional exclusion in year of arrival anddeparture

For arrival year, tax return can be filed earlier thanunder BFR (receive refund sooner!)

In case PPT is not met then you can fall back on BFR


$34,823 Foreign Housing Exclusion for Abu Dhabi

2. US Taxation of expatriatesForeign housing exclusion (2011 maximum)

$34,823 Foreign Housing Exclusion for Abu Dhabi$42,310 Foreign Housing Exclusion for Dubai

There are different housing limits depending on your location

Worldwide housing survey to be conducted annually should increase (but maydecrease) the housing exclusion

Housing expenses include – rent, utilities (excluding phone), insurance, household

PwC13 February 2012

Housing expenses include – rent, utilities (excluding phone), insurance, householdrepairs & parking


3. Tax Return FilingRequirementsRequirements

PwC13 February 2012US Individual Taxation For US Citizens and Green Card Holders •

Automatic two month extension to 15 June

3. What are the requirements for filing tax returns?

Automatic two month extension to 15 June

Additional, discretionary extensions can be requested to 15 December

Special extension to qualify for exclusions - applicable for new arrivals (BFR)

Foreign bank account reporting required when accounts > $10,000


4. State Taxation

Non-residentreturn may be

required forBasis for

4. State Taxation: The Facts

State taxation

required forrental or

business income

taxation:•Residency•Domicile

Spouse living inthe US may

present issues

Not all Statesallow foreign

exclusions

PwC13 February 2012

Attending aconference or

working in the USmay trigger a

state income taxliability


5. FBAR and FATCA

All US citizens, residents and business travellers to the US mustreport their foreign bank or securities accounts to the US

Department of Treasury if the combined value of all accounts

5. Foreign Bank Account Reporting

Department of Treasury if the combined value of all accountsexceed $10,000 at any time during the year.

The report is due 30 June and there are no extensions.

Report requires

PwC13 February 2012

The maximum value in each accountThe name and address of the bank/institutionThe account numberThe identity of joint holders (if any)


• All US citizens, residents and resident aliens must report the value of theirspecified foreign financial assets if they exceed thresholds.

5. Foreign Account Tax Compliance Act

Living in the US

$100,000 MFJ

$50,000 other

Living outside the US

$400,000 MFJ

$200,000 other

PwC13 February 2012

• The asset details and value are reported on Form 8938 which is attachedto the annual tax return, e.g. Form 1040.

• The penalties for not filing this form could be up to $50,000.


• Bank account

• Custodial account

• Broker account

5. Types of Foreign Accounts

• Broker account

• Stocks

• Mutual Funds

• Deferred compensation Accounts

• Corporate Holdings

• Partnerships

• Trust

• Debt Instruments

PwC13 February 2012

• Insurance contract

• Pensions, Annuities or Retirement Plans

• Puts, calls, straddles and others


6. How PwC can help

Our value to you

6. How PwC can help

Over 20 years of US expatriate taxation experience

US tax professionals based throughout the Middle East

E-filing of returns means quicker refunds

We simplify tax return preparation


7. MyTaxes

https://MyTaxes.pwc.com (MyTaxes)

7. My Taxes

MyTaxes is a web basedtool provided by PwC

https://MyTaxes.pwc.com (MyTaxes)

Secure website – requires username and password to access it

Method of communication between PwC and the assignee

Tax questionnaire will be issued via MyTaxes

Tax returns can be uploaded onto MyTaxes

Access to a calendar tool – assists PwC in calculating PhysicalPresent Test

PwC13 February 2012

MyTaxes is used by PwC all over the world


Questions?


Dennis Allen Stephen DrakePartner Director+974 4419 2830 +974 4419 [email protected] [email protected]

Contacts

[email protected] [email protected]

Leo Zimny Nabih DaaboulSenior Manager Manager+974 4419 2844 +974 4419 [email protected] [email protected]

This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer.

PwC13 February 2012

© 2011 PricewaterhouseCoopers. All rights reserved. "PricewaterhouseCoopers" and “PwC” refer to the network ofmember firms of PricewaterhouseCoopers International Limited (PwCIL). Each member firm is a separate legalentity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services toclients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it controlthe exercise of their professional judgment or bind them in any way. No member firm is responsible or liable forthe acts or omissions of any other member firm nor can it control the exercise of another member firm’sprofessional judgment or bind another member firm or PwCIL in any way.


New Tax Obligations for Americans Living Abroad

Economy & Finance

Transcript of New Tax Obligations for Americans Living Abroad