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Section 6013(g) Election Statement
We elect to treat ___________________, a nonresident alien, as a U.S. resident for tax purposes in accordance with IRC § 6013(g).
____________________ is a U.S. [citizen/resident] with SSN # ________________ and principal address at ________________________________________________________________________________
____________________ is a citizen of ___________ with ITIN pending (form W-7 is attached) and principal address at ________________________________________________________________________________
We are married and meet all other requirements to make the election.
Signatures:
___________________________ _________________
Primary Taxpayer Date
___________________________ _________________
Spouse Date
April 2024 Tax Workshops
We’re pleased to be offering the following virtual workshops about US tax filing from abroad.
Expat Taxes 101
Saturday, April 6, 2024
11am PDT | 12pm CST/MDT | 1pm CDT | 2pm EDT | 7pm BST | 8pm CEST
Are you struggling to understand your US tax obligations? Do you want to know how to file your tax return from abroad? If yes, this event is for you! Join us for an informative virtual event that will provide you with essential knowledge and practical tips to navigate the complex world of taxes for US citizens and green card holders living abroad.
This workshop is being offered as a fundraiser for Democrats Abroad. Suggested donation:
$12.50 general | $7.50 students/retirees/unemployed
US Tax Filing for Nonresident Aliens
Saturday, April 20, 2024
9am PDT | 10am MDT/CST | 11am CDT | 12pm EDT | 6pm BST | 7pm CEST
Are you a foreign national doing business with the US and wondering whether you have US tax obligations? This is an area of law that is super confusing, but you’re not alone. Join this webinar to learn more about common tax filing requirements for nonresident aliens, filing deadlines, how to reduce or avoid penalties if you’re behind, and how to get help with your US tax filing needs.
Suggested ticket price: $15.
RSVP here: https://buy.stripe.com/6oE17B8Mr9RneOIfZ9
*Nonresident alien = not a US citizen or green card holder
Past webinars – recording available
Last Chance for COVID Stimulus Payments
Tuesday, April 2, 2024
6:00pm PDT | 7:00pm CST/MDT | 8:00pm CDT | 9:00pm EDT
In 2020 and 2021, the U.S. government issued three COVID stimulus payments totaling $3,200 to US citizens and residents. But millions of people didn’t receive them because the government didn’t know how to get them the money.
If you (and/or your spouse, child, parent, or other dependent) were a US citizen, green card holder, or lived in the US in 2020 and/or 2021, and you didn’t receive these payments at the time, you’re likely eligible to claim them by filing or amending tax returns for those two years.
This workshop is being offered as a fundraiser for Democrats Abroad. Suggested donation:
$12.50 general | $7.50 students/retirees/unemployed
IRA contributions and the Foreign Earned Income Exclusion (FEIE)
Individual retirement accounts (IRAs) are an attractive investment vehicle for many U.S. citizens and residents. However, they have limitations that an unsuspecting American living abroad can easily run afoul of. Here’s a quick rundown of what to look out for.
Not Enough Taxable Compensation
“For 2023, the total contributions you make each year to all of your traditional IRAs and Roth IRAs can’t be more than:
• $6,500 ($7,500 if you’re age 50 or older), or
• If less, your taxable compensation for the year”
Taxable compensation is the key term here. If you use the Foreign Earned Income Exclusion (FEIE), you could have made up to $120,000 in 2023 and your taxable compensation could be $0, if all of that income was excluded.
Pro tip: the standard deduction doesn’t matter when determining your taxable compensation, so you don’t necessarily have to actually pay any tax on the income for it to be eligible.
There are two ways to be able to contribute to an IRA even if you use the FEIE:
Earn income in the U.S. Amounts you’re paid for work performed while you were physically in the U.S. are not foreign earned income and therefore can’t be excluded under the FEIE – but you can contribute those amounts to your IRA, if you meet the other IRA requirements.
Make more than the FEIE limit. If your earned income is over $127,000 for 2024, the amount above that isn’t excluded income and can be contributed without any issues.
Important note: you can’t just arbitrarily choose to report part of your foreign earned income as if it was earned in the U.S. – you have to be able to explain how the amount was calculated.
Foreign Spouses
Since Roth IRAs are such an attractive investment vehicle, the IRS has restrictions to avoid people circumventing the income limitations. The one that we’re concerned with is a sharp restriction on taxpayers who file separately and live with their spouses.
“If your filing status is married filing separately and you lived with your spouse at any time during the year, and your modified AGI is ≥ $10,000, then you can contribute zero [dollars to a Roth IRA].”
This rule is designed to prevent couples with significantly different incomes from filing separately to allow the lower-earning spouse to circumvent the income limit, but it has the unintended side effect of essentially prohibiting Roth IRA contributions if you’re married to a nonresident alien.
There are two ways around this:
The “Backdoor Roth.” This widely known loophole – which also works for people who exceed the income limits – involves contributing to a traditional IRA first, then rolling over the funds into a Roth IRA. (Note that this is a frequent target of tax reform proposals and there’s a good chance it gets eliminated at some point).
Electing to treat your spouse as a resident alien for tax purposes. This can be a complicated decision, because it requires your spouse to file taxes just like you do – reporting their worldwide income, and using the foreign earned income exclusion and/or foreign tax credit to avoid double taxation. If your spouse doesn’t have a SSN, they’ll also need to apply for an Individual Taxpayer Identification Number (ITIN). You can read more about this option here.
Income Limitations
This usually isn’t an issue for most people who use the FEIE, but it does affect a lot of people who use the foreign tax credit. Here’s how your adjusted gross income affects your ability to make Roth IRA contributions:
For traditional IRAs, there are income limits for being able to take a deduction for contributions, but not on the ability to contribute. If you don’t qualify (or need) to take a deduction, you can make a nondeductible contribution, which will then reduce the tax you have to pay on distributions in the future. As mentioned earlier, you can also roll amounts over from a traditional IRA to a Roth IRA; if the amount in your traditional IRA was nondeductible, then at the time of rollover you only have to pay tax on the account’s earnings.
How do I qualify for an ITIN?
The IRS says “[t]he ITIN is for federal tax purposes only.” This doesn’t actually mean you can’t use it for anything else, but it does mean that you need to demonstrate a federal tax purpose when applying or renewing. In other words, you can’t get an ITIN just to open a bank account.
The most common method (and easiest) is to submit your ITIN application attached to a federal tax return (form 1040 for US citizens and residents, or 1040NR for nonresident aliens), with the SSN/ITIN field(s) blank. (If you’re applying for a dependent, like a child or parent, the tax return also must claim that person for an allowable tax benefit – claiming them has to make a difference in the amount of taxes you owe.
Cases in which you may need to (or be able to) file a US tax return include:
If you are married to a U.S. citizen or resident
If you had income in the US, including e.g. from working remotely for a foreign employer or client while you were on vacation in the US
If you had gambling winnings from a US casino
If you don’t need to file a federal tax return, you can still obtain an ITIN if you meet one of the following exceptions:
Passive income—third-party withholding or tax treaty benefits. Income from a partnership, interest, annuities, rental income, or other passive income that are subject to third-party withholding or benefits of a tax treaty.
Other income. This may apply if you:
Are claiming benefits under a tax treaty between your country and the US, and you receive any of the following:
Wages, salary, compensation, and honoraria payments;
Scholarships, fellowships, and grants; and/or
Gambling income, or
You’re receiving taxable scholarship, fellowship, or grant income, but not claiming the benefits of an income tax treaty.
Mortgage interest—third-party reporting. This exception may apply if you have a home mortgage loan on real property you own in the United States that’s subject to third-party reporting of mortgage interest.
Dispositions by a foreign person of U.S. real property interest—third-party withholding. This exception may apply if you’re a party to a disposition of a U.S. real property interest by a foreign person, which is generally subject to withholding by the transferee or buyer (withholding agent). This exception may also apply if you have a notice of non-recognition under Regulations section 1.1445-2(d)(2).
Treasury Decision (T.D.) 9363. This exception may apply if you have an IRS reporting requirement as a non-U.S. representative of a foreign corporation who needs to obtain an ITIN for the purpose of meeting their e-filing requirement under T.D. 9363.
In any of these cases, you must provide written documentation to verify your eligibility. Typically this is a copy of official documents (for example, an operating agreement for a partnership/corporation/LLC) or an original signed letter from the corporation, bank, or other entity that requires your ITIN. For details on acceptable documentation, see the Form W-7 instructions.
Ready to start your application? Click here to begin.
I live abroad, why do I still owe taxes?
There are many reasons that US citizens living abroad may still owe taxes to the IRS. Here are a few of the most common ones.
Self employment income
If you are an independent contractor or otherwise run your own business, you generally have to pay self-employment tax – that’s taxes for Social Security and Medicare – on your net business profit (income remaining after expenses).
Self-employment tax is 15.3% on 92.35% of your net profit. So if your profit was $50,000, you pay tax on $46,175, which comes out to $7,065. (This calculation will change if your net profit plus wages from US employers is greater than $160,200, since above that threshold you’re only paying Medicare and not Social Security).
If you live in one of the 30 countries that has a totalization agreement with the U.S. Social Security Administration, you may be exempt from paying this tax, generally because you are contributing to that country’s social security system instead. (Mexico is not one of those countries).
Investment income
Investment income – which includes interest, dividends, and net profit from selling property stocks – is not considered earned income and therefore cannot be excluded using the foreign earned income exclusion. (If the income is foreign and you paid taxes in another country, you may be able to use the foreign tax credit to offset US tax liability.)
Rental income
Like investment income, rental income is generally not considered earned income and therefore cannot be excluded with the FEIE.
US source income
Any income for work earned while physically in the US (even on a short business trip), or income from property located in the US, is generally considered US source income and subject to US taxes. If you also owe taxes on that income in your country of residence, you may be able to claim a credit for taxes paid to the US.
Questions? Feel free to reach out.
Motivos aceptables para obtener un ITIN
El IRS dice “el ITIN se usa exclusivamente para propósitos tributarios federales,” entonces para obtener uno es obligitorio que proporcionar evidencia que va a usarlo para este tipo de propósito. No es posible que obtener un ITIN solo para abrir una cuenta bancaria.
Lo más común, y más fácil, es enviar el solicitud adjunto a un declaración de impuestos estadounidenses (formulario 1040 o 1040NR), con espacios donde el IRS debe poner el ITIN. (Si el solicitud es para un dependiente, como un niño o padre, el declaración de impuestos necesita demostrar “un beneficio tributario permisible” que va a obtener si tiene un ITIN para el dependiente).
Casos en que tal vez necesitas (o puedes) hacer un declaración de impuestos incluye:
Si estás casado a una persona con ciudadania o residencia estadounidense
Si teníaste ingresos en el EEUU, incluso de trabajando a distancia cuando estaba en vacaciones en el EEUU
Si tiene ganancias de juego de un casino en el EEUU
Si no necesita hacer declaraciones de impuestos en el EEUU, todavía puede obtener un ITIN si uno de 4 excepciones aplica a su situación:
Ingresos de actividades pasivas —retención del impuesto por terceros o beneficios de un tratado tributario. Esta excepción puede corresponderle si recibe ingresos de una sociedad colectiva, ingresos de interés, ingresos de una anualidad, ingresos de alquiler u otros ingresos pasivos que estén sujetos a la retención por terceros o a los beneficios de un tratado tributario.
Otros ingresos. Esta excepción puede corresponderle si:
Reclama beneficios de un tratado tributario que aplica al impuesto estadounidense sobre los ingresos acordado con un país extranjero y usted recibe cualquiera de los siguientes:
Salarios, sueldos, compensación y pagos de honorarios;
Becas de estudio (scholarships), becas de investigación (fellowships) y subvenciones (grants); y/o
Ganancias de juegos de azar; o
Recibe ingresos de una beca de estudios, de investigación o subvención sujetos a impuestos, pero no reclama beneficios de un tratado tributario.
Interés hipotecario —declaración por terceros. Esta excepción puede corresponderle si ha obtenido un préstamo hipotecario residencial sobre bienes raíces que tiene en los Estados Unidos y el mismo está sujeto a la declaración de interés hipotecario por terceros.
Enajenaciones de los derechos de propiedad que tenga un extranjero en bienes raíces ubicados en los Estados Unidos —retención por terceros. Esta excepción puede corresponderle si usted es parte de una enajenación de derechos de propiedad que tenga un extranjero en bienes raíces localizados en los Estados Unidos, la cual está sujeta, por lo general, a retención por el cesionario o comprador (agente de retención). Esta excepción también podría corresponderle si usted recibe un aviso en el cual se establece que no se reconoce ganancia o pérdida conforme a la sección 1.1445-2(d)(2) de los Reglamentos del Tesoro.
Decisión del Tesoro 9363 (Treasury Decision 9363 o T.D. 9363). Esta excepción puede corresponderle si tiene una obligación como representante que no es estadounidense de una sociedad anónima extranjera que necesita obtener un ITIN para propósitos de cumplir con su requisito de presentar declaraciones electrónicas ante el IRS conforme a la T.D. 9363 y usted presenta el Formulario W-7(SP).
En algunos de estos casos, necesita proporcionar documentación para verificar el situación. Típicamente este es una copia de documentos oficiales (por ejemplo, el contrato de organización de una sociedad colectiva o anónima/LLC) o una carta original firmada del corporativo, banco, u otro entidad que necesita usar tu ITIN. Puedes revisar los tipos de documentación aceptables para cada de estos excepciones en los instrucciones de Formulario W-7 aquí.
Está usted listo para hacer tu solicitud? Inicia aquí.
Benefits and Drawbacks of obtaining an ITIN for a spouse or dependent
As a Certifying Acceptance Agent, I work with a lot of clients who want to obtain an Individual Taxpayer Identification Number for their spouse and/or children. Here are some things to consider before starting that process.
What is an ITIN?
An ITIN, or Individual Taxpayer Identification Number, is a number issued by the IRS to individuals who are not eligible for a Social Security Number (SSN) and need to be identifiable by the IRS. Typically this is because they need to file a tax return or because someone who is paying them – like a bank – needs to report the payment to the IRS and the IRS needs to be able to match that information to the individual.
Why would I get an ITIN for my spouse?
If you are a U.S. citizen or resident, obtaining an ITIN for your spouse allows you to file a joint tax return with them, which doubles your standard deduction; this can reduces your income tax bill or increase your refund by as much as several thousand dollars.
The Married Filing Separately filing status makes you ineligible for certain tax credits and makes it difficult to contribute to a Roth IRA. If you receive Social Security benefits, filing separately automatically makes up to 85% of those benefits taxable if you lived with your spouse during the year. Filing jointly eliminates these problems.
Having an ITIN may also make it easier to add your spouse as a joint owner or authorized user on US bank accounts, or in some cases even make it possible for them to open their own.
What are the downsides?
Simply getting an ITIN doesn’t have any downsides, but filing a joint tax return does. You’re ‘electing to treat your spouse as a resident alien for tax purposes’, which means the IRS will treat them just like any other US citizen or resident: they have to file a tax return every year declaring their worldwide income.
In most cases, they won’t owe any US taxes, but there are circumstances where they might.
If they have foreign financial accounts, they won’t need to file a Report of Foreign Bank and Financial Accounts (FBAR), but they might have to report assets on Form 8938 (on a joint return for taxpayers abroad, the threshold for needing to file this is $400,000 or $600,000 USD in foreign accounts).
This election is a once-in-a-lifetime choice: the nonresident alien can revoke it, but if revoked they can never make it again, even if they marry a different US citizen or resident in the future.
Why would I get an ITIN for a dependent?
If you are unmarried, or married to a nonresident alien who doesn’t want to get an ITIN, getting an ITIN for your dependent may allow you to claim Head of Household filing status. Head of Household increases your standard deduction by 50% compared to Single or Married Filing Separately.
If (and only if) your dependent is a ‘resident alien’ living in the United States, you may be eligible to claim a $500 Other Dependents Credit if you obtain an ITIN for them.
Obtaining an ITIN for a dependent does not incur the kind of filing requirements for your dependent imposed on spouses who choose to file jointly – that’s related to the joint filing, not the ITIN itself.
How do I apply for an ITIN?
I’m a Certifying Acceptance Agent for ITIN applications, so I can help prepare and submit an ITIN application for you, including verifying your IDs so you don’t have to mail them to the IRS. Click here for more information.
What are the tax implications of buying property abroad?
I recently connected with a U.S. citizen who is looking to buy property in Mexico and wanted to know what the tax implications of that purchase would be. Here’s what I told her:
The purchase itself is not a taxable event. Just like in the U.S., simply buying property doesn’t trigger any tax obligations or reporting requirements.
The purchase process might trigger an FBAR filing requirement. U.S. citizens are required to file an annual report with the Financial Crimes Enforcement Network (FINCEN) if they have more than $10,000 USD (or the equivalent in foreign currency) in foreign financial accounts they control at any point during the year. If funds for the purchase pass through a foreign account that you control during the purchase process, that would trigger the FBAR filing requirement for the year.
There may be taxes due when the property is sold. The difference between the value in dollars when you sell the property vs. its value when you bought it may result in a “capital gain” that is taxable in the U.S. If you lived in the property as your primary residence, however, you may be able to exclude all or part of that gain from taxation.
If you rent out the property, you’ll owe U.S. taxes on your profits. You may be able to claim a credit for taxes paid to Mexico.
If you buy the property through a trust or other legal entity that you control, you may have to file extra tax forms for the entity. U.S. persons with ownership stakes in foreign entities may have to file Form 5471 with their personal tax return for as long as they own the foreign entity.
If you have a mortgage, you may be able to deduct the interest on your tax return. Mortgage interest on loans is deductible for your primary or second home (up to certain limits), regardless of where it is located, as long as the loan is secured by the property.
This is only helpful if your itemized deductions are larger than the standard deduction – for 2023 that’s $13,850 for single taxpayers and $27,700 for married couples filing jointly.
Foreign real estate taxes are not eligible itemized deductions. However, if you’re renting the property, you can deduct all or a portion of those taxes from your rental income.
Also be sure to look into the tax laws in the country where you’re buying the property. In Mexico for example, value added tax (IVA) is due on the purchase price for investment properties (but not for your primary residence), and there may be capital gains taxes due at the time of sale (though like the U.S., you may be able to avoid those taxes if the property is your personal residence and you have legal residency in Mexico and a Mexican tax ID number (RFC).
Thinking about buying or selling property abroad and wondering about the tax implications? Let’s talk.
Filing Form 5472 for Foreign-Owned US Single Member LLCs
Did you know that if you have a LLC in the US, you may need to file a tax return for it?
For US citizens and residents, single-member LLCs are considered “disregarded entities” and don’t need to file a separate tax return – all activity for the LLC is reported on the owner’s tax return. However, if you’re a foreign national who doesn’t file a resident tax return, under IRS regulations your LLC is treated as a corporation for reporting purposes.
A foreign-owned U.S. [disregarded entity] is a domestic DE that is wholly owned by a foreign person. For tax years beginning on or after January 1, 2017, and ending on or after December 13, 2017, a foreign-owned U.S. DE is treated as an entity separate from its owner and classified as a corporation for the limited purposes of the requirements under section 6038A that apply to 25% foreign-owned domestic corporations. See the final regulations at IRS.gov/irb/2017-03_IRB#TD-9796.
This means that every year, you need to file Form 5472 to report any transactions between yourself and your LLC, as well as a “pro forma” corporate tax return, form 1120. (The 1120 is essentially only filed so that the IRS has a record to attach the 5472 to – you only have to fill in the name and address of the LLC and items B and E on the first page.
These forms must be filed by mail or fax (they cannot be filed electronically) – see the Form 5472 Instructions for submission details.
The penalties for failing to file these forms are extraordinarily steep:
Penalties for failure to file Form 5472.
A penalty of $25,000 will be assessed on any reporting corporation that fails to file Form 5472 when due and in the manner prescribed. The penalty also applies for failure to maintain records as required by Regulations section 1.6038A-3.…Criminal penalties under sections 7203, 7206, and 7207 may also apply for failure to submit information or for filing false or fraudulent information.
Need help filing your LLC’s tax returns? Contact us today.