The Totalization Conundrum: Tax Tips for Employees Abroad

Ben Jonard | October 31st, 2014

Taxes are confusing enough when geography isn’t a factor. Now imagine that you are accepting a short-term opportunity as an independent contractor overseas. Do you have any tax obligations while you are away? If so, how should these obligations be managed? Is there a difference between working as an independent contractor overseas versus working as an independent contractor in the United States?

Someone recently reached out to us to find answers to these questions. We researched her question a little further to arrive at the following conclusion: yes – on all counts.

As an independent contractor working overseas for a short period of time you will:

  • Owe self-employment tax
  • Have to pay advanced taxes (i.e. make estimated payments)

In fact, if you are an American citizen, it does not matter if the work you complete is inside or outside the United States, your tax obligations are universal regardless of where in the world you are staying.

That said, the bigger question becomes, will the income you generate be taxed more than once. The answer to this question is: maybe.

For example, if you are working in India, you may be expected to pay into India’s social security program. The good news is that the U.S. has made agreements with many nations to prohibit multiple tax practices from occurring. For income tax purposes, these agreements are called Tax Treaties. When the issue pertains to Social Security purposes, they are called Totalization Agreements.

Why Are Totalization Agreements Important?

A Totalization Agreement is meant to improve Social Security protection for those who have worked (or are working) in multiple countries. The agreement essentially provides a way to manage how taxes are distributed and how workers are credited for the progress made toward their Social Security benefits (or similar programs abroad) between the two or more countries in which the employee has worked.

Again, using India as the example, because no Totalization Agreement exists, a U.S. citizen working in India should be prepared to pay in to each country’s social security program. This isn’t the case in countries where Totalization Agreements are in place.

A U.S. citizen working in the Canadian Province of Quebec, as an independent contractor, for example, would only be obligated to pay U.S. Social Security taxes. In this example, a Totalization Agreement between Quebec and America would also mean:

  • A self-employed American citizen working in Quebec would not have to pay in to Quebec’s social security program.
  • The taxes and Social Security accumulated by an employee of an American company working in Quebec would be distributed by the American company to the U.S. government.

You can learn more about the Totalization Agreement between the United States and Quebec here. Or you can view a list of countries with Totalization Agreements in place with the U.S. here.

Additional Deductions Are Available

Even though Americans working in India may be required to pay into social security programs in both countries, a Tax Treaty protects U.S. citizens from paying income taxes to both countries. Additionally, there are other ways to find tax savings as an employee working overseas.

  • Even though you may be required to pay into the county’s social security program, this cost can likely be deducted per the foreign tax credit, which was established to assist American taxpayers who find themselves working from countries where Totalization Agreements are not in place – such as India.
  • If you are planning a temporary absence from your tax home in the U.S. for business, your away-from-home expenses may also be deductible. So keep track of your travel, meal and lodging costs.

If you are an American working overseas who is struggling with the tax obligations between your country of residence and your country of employment, email Rea & Associates today. Our tax professionals will help you identify your tax obligations while you are abroad and can help you successfully deduct business-related expenses on your next tax return.

Author: Ben Jonard (Dublin office)

 

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Are You Prepared To Pay?: Obamacare’s Shared Responsibility Provision

Joe Popp | October 21st, 2014

American businesses have been feeling the push and pull of Obamacare on their bottom lines for a while. Now, it’s time for individuals who chose to forego health insurance coverage to see what the individual shared responsibility provision has in store for them. If you did not have insurance coverage in 2014, you may need to send a little more money to the IRS when you go to file your 2014 federal tax return.

The individual shared responsibility provision became active in 2014 and, absent an exemption, requires individuals to pay a fee into the system if they choose not to carry health care insurance.

An exemption may be granted if:

  • The minimum cost for your premiums totals over 8 percent of your household’s total income.
  • You have had a gap in your health insurance coverage for less than three consecutive months.
  • You have a hardship that prevented you from obtaining coverage.
  • You are a member of certain religious groups (e.g. Amish) and you have Supplemental Security Income (SSI) exemption on file.
  • There are several other criteria and fine print you can see here.

According to the IRS, your shared responsibility payment for 2014 will either be “the greater of one percent of the household’s income above the income filing threshold for your tax filing status, or a flat dollar amount of $95 per adult and $47.50 per child (under the age of 18) – but no more than $285 per family. The individual shared responsibility payment is also capped at the cost of the national average premium for bronze level health plans available through the health insurance marketplace that would cover everyone in your family who does not have minimum essential coverage and does not qualify for an exemption – for example, $12,240 for a family of five.”  This fee will increase in future years.

As you prepare to file your 2014 federal tax return, here are a few things to keep in mind:

  • You must make the IRS aware of whether your household had minimum essential coverage for each month in 2014. This can be done by checking a box identified on your tax return document.
  • If your household qualified for an exemption in 2014, an additional form must be attached to your tax return, which will provide the IRS with the information needed to approve the exemption claim.
  • Those required to make an individual shared responsibility payment, must make the payment when you submit your federal tax return to the IRS.

If you’re unsure whether you qualify for an exemption or need help calculating how much you will owe to the government when making your shared responsibility payment, email Rea & Associates. We can help you determine how the shared responsibility provision will affect you.

Author: Joe Popp, JD, LLM (Dublin)

 

Interested in other Obamacare-related posts? Check these out:

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With The Affordable Care Act ‘Pay Or Play’ Provision Delayed, I Don’t Have To Do Anything Until 2015, Right? Wrong!

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Ready, Set, Download: IRS2Go Mobile App 2014

Kelly Leslie | October 20th, 2014

In June, the Internal Revenue Service (IRS) made the 2014 version of IRS2Go available to mobile users. This free app can help you stay on top of your federal income tax refund. You can also request your tax return or account transcript or receive tips and updates from the IRS via the app.

Benefits of IRS2GO App

Compatible with Apple and Android devices, the IRS2Go mobile app has been redesigned and includes several new and updated features, such as:

  • IRS2Go makes it easier for individuals to check their refunds at a time that’s convenient for them. To get there, just click on “Refund Status,” enter your Social Security Number (which is masked for security purposes), then select your filing status and the amount of your anticipated refund. The new “status tracker” allows users to identify where their return is in the tax return process. NOTE: Returns filed electronically can be viewed 24 hours after the return was received by the IRS. Paper returns take longer to process and can take up to four weeks before their status is available to view.
  • Another helpful feature is your ability to request your tax records or your account transcript. While, for security reasons, the records cannot be viewed immediately on your Smartphone or device, the request will be processed and your records will be delivered promptly to the address on record.
  • If you need help preparing your tax return, IRS2Go helps users find IRS Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE) programs by simply entering a ZIP code and mileage range.
  • Users also have the opportunity to stay connected, view more content and interact directly with IRS on Twitter, YouTube, Facebook or by signing up for email updates.

To download the IRS2Go app on your Apple iPhone, iPad or iPod Touch device, visit the iTunes app store. To download IRS2Go on your Android devise, visit the Google Play store.

 
By Kelly Leslie, CPA (Cambridge office)

 

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‘Ghost Assets’ Haunting Your Business?

Christopher Axene | October 7th, 2014

The IRS recently issued taxpayer-friendly guidance regarding the disposition of a component of real or personal property.

Under the Internal Revenue Code, taxpayers are required to capitalize certain amounts paid to acquire, produce or improve real or tangible personal property during the year and that is used for a trade, business or for the production of income. However, prior to the issuance of new regulations in 2013 taxpayers were unable to write-off the remaining cost of a component of a larger asset or building that was repaired or replaced (e.g. a roof). In fact, under the old rules, it was not uncommon for business owners to be required to depreciate “ghost assets” – assets that were removed or replaced by the taxpayer and are no longer in service.

The good news is that the IRS has changed its mind on these, so-called, “partial dispositions.”

So, What’s Changing?

Beginning Jan. 1, 2014, taxpayers were able to deduct the remaining cost of such components in the year they were replaced/repaired by making an election on their tax return.

Additionally, the IRS allowed taxpayers to apply the regulations to dispositions that had already happened in prior years as long as the ghost assets were still being depreciated.

What was unclear until recently was how a taxpayer could effectively make the election on a retroactive basis given that businesses were required to file their 2013 year tax returns before the IRS had issued definitive guidance.

The IRS’ Response

The IRS officially announced a specific revenue procedure that provides a limited opportunity for taxpayers to write-off assets that were disposed of during a prior year. The guidance outlines the procedures necessary for taxpayers to secure the write-off, as well as what documents they should include when filing their request. If you do plan to write off a ghost asset from a previous year, you must make plans do so now as this retroactive election opportunity is time sensitive. Taxpayers who miss this opportunity will be required to continue depreciating these ghost assets. For some, this means that you could be depreciating ghost assets for another 15-20 years.

Are you a business owner who is still paying the IRS for assets that you no longer have or that have been replaced? Do you want to learn more about the IRS’s new rules on ghost assets and how they can impact your business? Email Rea & Associates to find out if you can write off ghost assets that continue to haunt your business.

Author: Chris Axene, CPA (Dublin office)

 

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To Shred Or Not To Shred: That Is The Question … Ask Your Financial Advisor

Joe Popp | October 6th, 2014

Are you wondering what to do with all those tax documents and records you have piling up around your office or in your computer files? Are you thinking about wiping them from your company’s hard drive or sending them to the shredder? Not so fast. The IRS has several rules when it comes to how long your business should keep its records. Make sure you are up to date on the current records retention schedule before you permanently delete something important.

Generally speaking, records that support your income or deduction claims for tax return purposes should be kept until the period of limitations for a particular tax return expires. The “period of limitations” is defined as the period of time the IRS gives you to change information on your return, particularly when the information relates to a refund or credit you have claimed. Also, just because you aren’t planning to make any changes to your tax return doesn’t mean the IRS won’t. Therefore it’s in your best interest to keep your documents until the IRS can no longer assess additional taxes or request additional information from you.

Below is a quick reference guide pertaining to some common records your office has been collecting over the years and how long you should keep them.

Records You Should Keep Permanently:

  • Copyright registration
  • Correspondence (legal and important matters)
  • Deeds, mortgages, bills of sale
  • Depreciation schedules
  • Financial statements (end-of-year)
  • General and private ledgers (and end-of-year trial balances)
  • Insurance records, current accident reports, claims, policies, etc.
  • Minute books for director and stockholder (including bylaws and charter)
  • Property appraisals by outside appraisers
  • Retirement and pension records
  • Tax returns and worksheets, revenue agent’s reports and other documents relating to determination of income tax, sales tax, or payroll tax liability

Records That Should Be Retained For At Least Seven Years:

  • Accident reports and claims (settled cases)
  • Accounts payable/receivable ledgers and schedules
  • Expense analyses and expense distribution schedules
  • Garnishments
  • Inventories of products, materials and supplies
  • Plant cost ledgers
  • Telephone logs/message books
  • Time books/cards
  • Withholding tax statements
  • Employee payroll records (W-2, W-4, annual earnings, etc.)

Records That Can Be Destroyed After Three Years:

  • Bank deposit slips
  • Employment records
  • General correspondence
  • Internal work orders
  • Production and sales reports
  • Sales commission reports

If the records you are looking for aren’t listed above, you can find additional record retention recommendations in our current record retention schedule.

IMPORTANT: The actual amount of time you are required to keep a specific document may be longer depending on your business or what is contained in the document. If you have questions about specific documents or would like some advice on your current record retention practices, email Rea & Associates.

Author: Joe Popp, JD, LLM (Dublin office)

 

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