Tax Implications of Retiring Overseas

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Are you approaching retirement age and wondering where you can retire to make your retirement nest egg last longer? Retiring abroad may be the answer. But first, it’s important to look at the tax implications because not all retirement country destinations are created equal. Here’s what you need to know.

Taxes on Worldwide Income

Leaving the United States does not exempt U.S. citizens from their U.S. tax obligations. While some retirees may not owe any U.S. income tax while living abroad, they must still file a return annually with the IRS. This would be the case even if all of their assets were moved to a foreign country. The bottom line is that you may still be taxed on income regardless of where it is earned.

Unlike most countries, the United States taxes individuals based on citizenship and not residency. As such, every U.S. citizens (and resident alien) must file a tax return reporting worldwide income (including income from foreign trusts and foreign bank and securities accounts) in any given taxable year that exceeds threshold limits for filing.

The filing requirement generally applies even if a taxpayer qualifies for tax benefits, such as the foreign earned income exclusion or the foreign tax credit, that substantially reduce or eliminate U.S. tax liability.

Note: These tax benefits are not automatic and are only available if an eligible taxpayer files a U.S. income tax return.

Any income received or deductible expenses paid in foreign currency must be reported on a U.S. return in U.S. dollars. Likewise, any tax payments must be made in U.S. dollars.

In addition, taxpayers who are retired may have to file tax forms in the foreign country in which they reside. You may, however, be able to take a tax credit or a deduction for income taxes you paid to a foreign country. These benefits can reduce your taxes if both countries tax the same income.

Nonresident aliens who receive income from U.S. sources must determine whether they have a U.S. tax obligation. The filing deadline for nonresident aliens is April 15 or June 15 depending on sources of income.

Income from Social Security or Pensions

If Social Security is your only income, then your benefits may not be taxable and you may not need to file a federal income tax return. If you receive Social Security you should receive a Form SSA-1099, Social Security Benefit Statement, showing the amount of your benefits. Likewise, if you have pension or annuity income, you should receive a Form 1099-R for each distribution plan.

Retirement income is generally not taxed by other countries. As a U.S. citizen retiring abroad who receives Social Security, for instance, you may owe U.S. taxes on that income, but may not be liable for tax in the country where you’re spending your retirement years.

However, if you receive income from other sources (either U.S. or country of retirement) as well, from a part-time job or self-employment, for example, you may have to pay U.S. taxes on some of your benefits. You may also be required to report and pay taxes on any income earned in the country where you retired.

Each country is different, so consult a local tax professional or one who specializes in expat tax services.

Foreign Earned Income Exclusion

If you’ve retired overseas, but take on a full-or part-time job or earn income from self-employment, the IRS allows qualifying individuals to exclude all, or part, of their incomes from U.S. income tax by using the Foreign Earned Income Exclusion (FEIE). In 2015, this amount is $100,800. This means that if you qualify, you won’t pay tax on up to $100,800 of your wages and other foreign earned income in 2015.

Note: Income earned overseas is exempt from taxation only if certain criteria are met such as residing outside of the country for at least 330 days over a 12-month period, or an entire calendar year.

Tax Treaties

The United States has income tax treaties with a number of foreign countries, but these treaties generally don’t exempt residents from their obligation to file a tax return.

Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from U.S. income taxes on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and specific items of income.

Treaty provisions are generally reciprocal; that is they apply to both treaty countries. Therefore, a U.S. citizen or resident who receives income from a treaty country and who is subject to taxes imposed by foreign countries may be entitled to certain credits, deductions, exemptions, and reductions in the rate of taxes of those foreign countries.

Affordable Care Act

Starting in 2014, the individual shared responsibility provision calls for each individual to have minimum essential coverage (MEC) for each month, qualify for an exemption, or make a payment when filing his or her federal income tax return.

All U.S. citizens are subject to the individual shared responsibility provision. If you are not yet eligible for Medicare, U.S. citizens living abroad are generally subject to the same individual shared responsibility provision as U.S. citizens living in the United States.

However, U.S. citizens or residents living abroad for at least 330 days within a 12 month period are treated as having MEC during those 12 months and thus will not owe a shared responsibility payment for any of those 12 months. Also, U.S. citizens who qualify as a bona fide resident of a foreign country for an entire taxable year are treated as having MEC for that year.

State Taxes

Many states tax resident income as well, so even if you retire abroad, you may still owe state taxes–unless you established residency in a no-tax state before you moved overseas.

Some states honor the provisions of U.S. tax treaties; however, some states do not, therefore it is prudent to consult a tax professional.

Relinquishing U.S. Citizenship

Taxpayers who relinquish their U.S. citizenship or cease to be lawful permanent residents of the United States during any tax year must file a dual-status alien return and attach Form 8854, Initial and Annual Expatriation Statement. A copy of the Form 8854 must also be filed with Internal Revenue Service (Philadelphia, PA 19255-0049), by the due date of the tax return (including extensions).

Note: Giving up your U.S. citizenship doesn’t mean giving up your right to receive social security, pensions, annuities or other retirement income. However, the U.S. Internal Revenue Code (IRC) requires the Social Security Administration (SSA) to withhold nonresident alien tax from certain Social Security monthly benefits. If you are a nonresident alien receiving social security retirement income, then SSA will withhold a 30 percent flat tax from 85 percent of those benefits unless you qualify for a tax treaty benefit. This results in a withholding of 25.5 percent of your monthly benefit amount.

Before You Retire Consult a Tax Professional

Don’t wait until you’re ready to retire to consult a tax professional. Call the office today and find out what your options are.

Defer Capital Gains using Like-Kind Exchanges

If you’re a savvy investor, you probably know that you must generally report as income any mutual fund distributions whether you reinvest them or exchange shares in one fund for shares of another. In other words, you must report and pay any capital gains tax owed.

But if real estate’s your game, did you know that it’s possible to defer capital gains by taking advantage of a tax break that allows you to swap investment property on a tax-deferred basis?

Named after Section 1031 of the tax code, a like-kind exchange generally applies to real estate and were designed for people who wanted to exchange properties of equal value. If you own land in Oregon and trade it for a shopping center in Rhode Island, as long as the values of the two properties are equal, nobody pays capital gains tax even if both properties may have appreciated since they were originally purchased.

Section 1031 transactions don’t have to involve identical types of investment properties. You can swap an apartment building for a shopping center, or a piece of undeveloped, raw land for an office or building. You can even swap a second home that you rent out for a parking lot.

There’s also no limit as to how many times you can use a Section 1031 exchange. It’s entirely possible to roll over the gain from your investment swaps for many years and avoid paying capital gains tax until a property is finally sold. Keep in mind, however, that gain is deferred, but not forgiven, in a like-kind exchange and you must calculate and keep track of your basis in the new property you acquired in the exchange.

Section 1031 is not for personal use. For example, you can’t use it for stocks, bonds and other securities, or personal property (with limited exceptions such as artwork).

Properties of unequal value

Let’s say you have a small piece of property, and you want to trade up for a bigger one by exchanging it with another party. You can make the transaction without having to pay capital gains tax on the difference between the smaller property’s current market value and your lower original cost.

That’s good for you, but the other property owner doesn’t make out so well. Presumably, you will have to pay cash or assume a mortgage on the bigger property to make up the difference in value. This is referred to as “boot” in the tax trade, and your partner must pay capital gains tax on that part of the transaction.

To avoid that you could work through an intermediary who is often known as an escrow agent. Instead of a two-way deal involving a one-for-one swap, your transaction becomes a three-way deal.

Your replacement property may come from a third party through the escrow agent. Juggling numerous properties in various combinations, the escrow agent may arrange evenly valued swaps.

Under the right circumstances, you don’t even need to do an equal exchange. You can sell a property at a profit, buy a more expensive one, and defer the tax indefinitely.

You sell a property and have the cash put into an escrow account. Then the escrow agent buys another property that you want. He or she gets the title to the deed and transfers the property to you.

Mortgage and other debt

When considering a Section 1031 exchange, it’s important to take into account mortgage loans and other debt on the property you are planning to swap. Let’s say you hold a $200,000 mortgage on your existing property but your “new” property only holds a mortgage of $150,000. Even if you’re not receiving cash from the trade, your mortgage liability has decreased by $50,000. In the eyes of the IRS, this is classified as “boot” and you will still be liable for capital gains tax because it is still treated as “gain.”

Advance planning required

A Section 1031 transaction takes advance planning. You must identify your replacement property within 45 days of selling your estate. Then you must close on that within 180 days. There is no grace period. If your closing gets delayed by a storm or by other unforeseen circumstances, and you cannot close in time, you’re back to a taxable sale.

Find an escrow agent that specializes in these types of transactions and contact your accountant to set up the IRS form ahead of time. Some people just sell their property, take cash and put it in their bank account. They figure that all they have to do is find a new property within 45 days and close within 180 days. But that’s not the case. As soon as “sellers” have cash in their hands, or the paperwork isn’t done right, they’ve lost their opportunity to use this provision of the code.

Personal residences and vacation homes

Section 1031 doesn’t apply to personal residences, but the IRS lets you sell your principal residence tax-free as long as the gain is under $250,000 for individuals ($500,000 if you’re married).

Section 1031 exchanges may be used for swapping vacation homes, but present a trickier situation. Here’s an example of how this might work. Let’s say you stop going to your condo at the ski resort and instead rent it out to a bona fide tenant for 12 months. In doing so, you’ve effectively converted the condo to an investment property, which you can then swap for another property under the Section 1031 exchange.

However, if you want to use your new property as a vacation home, there’s a catch. You’ll need to comply with a 2008 IRS safe harbor rule that states in each of the 12-month periods following the 1031 exchange you must rent the dwelling to someone for 14 days (or more) consecutively. In addition, you cannot use the dwelling more than the greater of 14 days or 10 percent of the number of days during the 12-month period that the dwelling unit is rented out for at fair rental price.

You must report a section 1031 exchange to the IRS on Form 8824, Like-Kind Exchanges and file it with your tax return for the year in which the exchange occurred. If you do not specifically follow the rules for like-kind exchanges, you may be held liable for taxes, penalties, and interest on your transactions.

While they may seem straightforward, like-kind exchanges can be complicated. There are all kinds of restrictions and pitfalls that you need to be careful of. If you’re considering a Section 1031 exchange or have any questions, don’t hesitate to call.

Tax Planning for Small Business Owners

Tax planning is the process of looking at various tax options to determine when, whether, and how to conduct business and personal transactions to reduce or eliminate tax liability.

Many small business owners ignore tax planning. They don’t even think about their taxes until it’s time to meet with their accountants, but tax planning is an ongoing process and good tax advice is a valuable commodity. It is to your benefit to review your income and expenses monthly and meet with your CPA or tax advisor quarterly to analyze how you can take full advantage of the provisions, credits and deductions that are legally available to you.

Although tax avoidance planning is legal, tax evasion – the reduction of tax through deceit, subterfuge, or concealment – is not. Frequently what sets tax evasion apart from tax avoidance is the IRS’s finding that there was fraudulent intent on the part of the business owner. The following are four of the areas the IRS examiners commonly focus on as pointing to possible fraud:

  1. Failure to report substantial amounts of income such as a shareholder’s failure to report dividends or a store owner’s failure to report a portion of the daily business receipts.
  2. Claims for fictitious or improper deductions on a return such as a sales representative’s substantial overstatement of travel expenses or a taxpayer’s claim of a large deduction for charitable contributions when no verification exists.
  3. Accounting irregularities such as a business’s failure to keep adequate records or a discrepancy between amounts reported on a corporation’s return and amounts reported on its financial statements.
  4. Improper allocation of income to a related taxpayer who is in a lower tax bracket such as where a corporation makes distributions to the controlling shareholder’s children.

Tax Planning Strategies

Countless tax planning strategies are available to small business owners. Some are aimed at the owner’s individual tax situation and some at the business itself, but regardless of how simple or how complex a tax strategy is, it will be based on structuring the strategy to accomplish one or more of these often overlapping goals:

  • Reducing the amount of taxable income
  • Lowering your tax rate
  • Controlling the time when the tax must be paid
  • Claiming any available tax credits
  • Controlling the effects of the Alternative Minimum Tax
  • Avoiding the most common tax planning mistakes

In order to plan effectively, you’ll need to estimate your personal and business income for the next few years. This is necessary because many tax planning strategies will save tax dollars at one income level, but will create a larger tax bill at other income levels. You will want to avoid having the “right” tax plan made “wrong” by erroneous income projections. Once you know what your approximate income will be, you can take the next step: estimating your tax bracket.

The effort to come up with crystal-ball estimates may be difficult and by its very nature will be inexact. On the other hand, you should already be projecting your sales revenues, income, and cash flow for general business planning purposes. The better your estimates are, the better the odds that your tax planning efforts will succeed.

Maximizing Business Entertainment Expenses

Entertainment expenses are legitimate deductions that can lower your tax bill and save you money, provided you follow certain guidelines.

In order to qualify as a deduction, business must be discussed before, during, or after the meal and the surroundings must be conducive to a business discussion. For instance, a small, quiet restaurant would be an ideal location for a business dinner. A nightclub would not. Be careful of locations that include ongoing floor shows or other distracting events that inhibit business discussions. Prime distractions are theater locations, ski trips, golf courses, sports events, and hunting trips.

The IRS allows up to a 50 percent deduction on entertainment expenses, but you must keep good records and the business meal must be arranged with the purpose of conducting specific business. Bon appetite!

Important Business Automobile Deductions

If you use your car for business such as visiting clients or going to business meetings away from your regular workplace you may be able to take certain deductions for the cost of operating and maintaining your vehicle. You can deduct car expenses by taking either the standard mileage rate or using actual expenses.

The mileage reimbursement rates for 2015 are 57.5 cents per business mile (56 cents per mile in 2014), 14 cents per charitable mile (unchanged from 2014) and 23 cents for moving and medical miles (down from 23.5 cents per mile in 2014).

If you own two cars, another way to increase deductions is to include both cars in your deductions. This works because business miles driven is determined by business use. To figure business use, divide the business miles driven by the total miles driven. This strategy can result in significant deductions.

Whichever method you decide to use to take the deduction, always be sure to keep accurate records such as a mileage log and receipts. If you need assistance figuring out which method is best for your business, don’t hesitate to contact the office.

Increase Your Bottom Line When You Work At Home

The home office deduction is quite possibly one of the most difficult deductions ever to come around the block. Yet, there are so many tax advantages it becomes worth the navigational trouble. Here are a few common tips for home office deductions that can make tax season significantly less traumatic for those of you with a home office.

Try prominently displaying your home business phone number and address on business cards, have business guests sign a guest log book when they visit your office, deduct long-distance phone charges, keep a time and work activity log, retain receipts and paid invoices. Keeping these receipts makes it so much easier to determine percentages of deductions later on in the year.

Section 179 expensing for tax year 2015 allows you to immediately deduct, rather than depreciate over time, up to $25,000, with a cap of $200,000 (down from $500,000 and $2,000,000, respectively, in 2014) worth of qualified business property that you purchase during the year. The key word is “purchase”. Equipment can be new or used and includes certain software. All home office depreciable equipment meets the qualification.

Some deductions can be taken whether or not you qualify for the home office deduction itself. It’s never too early to meet with a tax professional to learn more about home office deductions. Call today to schedule a consultation.

Hillary and Bill Clinton Release 8 Years of Tax Returns

Hillary and Bill Clinton paid $43.9 million in federal taxes from 2007 through 2014 on adjusted gross income totaling $139,097,232, according to tax returns released by the former secretary of state’s presidential campaign on Friday.

That put the Clintons near the very, very top of the American economic scale. Their 2012 adjusted gross income of $19.7 million put them in the top 0.01 percent, a level reached by fewer than 14,000 households, and represents a meteoric rise for a couple that once depended on Hillary Clinton’s law firm salary.  She was the prime family breadwinner when Bill Clinton was making $35,000 a year as governor of Arkansas.

The Clintons average federal tax rate during that eight-year period works out to 31.6 percent. In 2014, with both Clintons on the paid-speech circuit and Hillary Clinton on tour to promote her most recent memoir, the couple brought in more income than in any previous year: $27,946,490. They reported paying a federal tax rate of 35.7 percent in 2014 and donating 10.8 percent of their income to charity. Clinton’s campaign chose to release the tax returns along with a letter from her doctor giving her a clean bill of health on an unusually busy summer Friday when the State Department released some of her e-mails from her time as secretary of state and the Federal Election Commission released super PAC donation records.

Taken together, the voluntary and involuntary disclosures amounted to “the most expansive, transparent release of documents ever,” Clinton senior strategist Joel Benenson said on Bloomberg’s With All Due Respect, about the same hour as the super PAC supporting Clinton, Priorities USA, made its filing with the FEC. With the latest release of tax documents, Benenson said, the Clintons will have made public 38 years of tax returns.

That puts Hillary Clinton ahead of one of her chief Republican rivals, Jeb Bush. The former Florida governor last month made 33 years of his taxes public. Another one of the 2016 presidential field’s wealthier candidates, Carly Fiorina, was the first to release details on her taxes, providing two years of reports.

The Clinton campaign moved quickly to exploit the advantage. “If @JebBush wants to call himself the most transparent candidate in the race about his finances, he is going to have some catching up to do,” Brian Fallon, the campaign press secretary, said on Twitter.

“Looking forward to seeing the itemized income sources for Jeb Bush and Associates. On any day of the week,” Fallon added. This came after Bush communications director Tim Miller accused the Clinton team of engaging in a Friday news dump timed to overshadow the court-ordered release of Clinton’s State Department e-mails.

On With All Due Respect, Benenson argued that Bush has failed to detail the source of some $19 million in business fees and dismissed the theory that the campaign was engaging in obfuscation by information. “The campaign releases documents when they have them ready,” he said. “Why not do it all at once?”

Among the nuggets in the Clintons’ tax forms: The couple has his-and-her LLCs, a corporate entity created by independent earners for tax advantages. Hillary Clinton’s post-State Department income from speeches and her book, Hard Choices, was paid to ZFS Holdings LLC, established in Delaware a week after she left the job. Her husband uses a similar entity, WJC LLC, to take in speech and consulting income. The Clintons listed WJC but not ZFS in financial disclosures released earlier this year, and the Clinton campaign did not respond to questions about why the candidate’s LLC was not disclosed.

Since 2010, Bill Clinton brought in just short of $16.5 million for his role as honorary chancellor of Laureate Education, a for-profit college company. He left the position earlier this year weeks after his wife launched her campaign.

In 2014, Bill Clinton made $9 million off of paid speeches and $6.4 million in consulting fees. Of that, $4.3 million came from Laureate and another $2.1 million from GEMS Education, a Dubai-based company that runs preschool and K-12 programs. He made less from those two gigs in previous years—$5.6 million in 2013 and $4.7 million in 2012. In 2011, the former president was paid $2.5 million by Laureate, $500,000 by GEMS and $100,000 by Teneo Holdings, a firm co-founded by former Clinton aide Doug Band.

The Clintons disclosed $3,022,700 in charitable contributions last year, including $3 million to the Clinton Family Foundation and $200 to Hot Springs High School’s class of 1964, for which the former president attended his 50th reunion last fall. In all, the Clintons gave $14,959,450 in charitable contributions between 2007 and 2014, though nearly all—$14,769,000—went to the Clinton Family Foundation, which disburses donations to other charities, including the Clinton Foundation.

Clinton used the release of her tax returns as an opportunity to call for higher tax rates on high-income Americans. “Families like mine that reap rewards from our economy have a responsibility to pay our fair share,” she said in a statement.

In her statement, Clinton emphasized that her family has not always been so wealthy. She and her husband “have come a long way from my days going door-to-door for the Children’s Defense Fund and earning $16,450 as a young law professor in Arkansas—and we owe it to the opportunities America provides,” she said.

Friday’s release covers the years during which Clinton first ran for president, served as secretary of state and then made millions of dollars giving speeches. During the same time, Bill Clinton was making money through speeches and consulting. The Clintons have previously released tax returns going back to 1977 during earlier campaigns and while in the White House.

710,000 Affordable Care Act Tax Credit Recipients Didn’t File Tax Returns

Approximately 710,000 taxpayers who received the Advanced Premium Tax Credit for buying health insurance last year have not filed their tax returns or filed for an extension.

In a letter to Senate Finance Committee chairman Orrin Hatch, R-Utah, IRS commissioner John Koskinen said the IRS is contacting the taxpayers to remind them of their obligation.

“Approximately 710,000 of the taxpayers with APTC have not yet filed a tax return and have not filed an extension, as required,” he wrote last Friday. “As one part of our post-compliance strategy, we are sending letters to taxpayers who had APTC paid on their behalf who have not yet reconciled and who did not file an extension to remind them of their obligation to file a tax return. Under regulations issued by the Department of Health and Human Services, taxpayers must meet this obligation in order to maintain their eligibility for APTC to help pay for Marketplace coverage in 2016. We are urging these taxpayers to file an electronic tax return to reconcile their APTC within 30 days. We will follow up with these taxpayers as appropriate.”

In response to the letter, Hatch called on the Treasury Inspector General for Tax Administration, J. Russell George, to examine the use of the tax credits, noting that the 710,000 people had probably received more than $2.4 billion in Advanced Premium Tax Credit payments.

In a letter to Inspector General George, Hatch reiterated his ongoing concern regarding the integrity of APTC payments and outlined his request for an examination of a large sample of individuals who received a government subsidy and failed to submit a tax return.

“A critical element in safeguarding the integrity of insurance subsidies is the reconciliation process that occurs when taxpayers file their tax returns and reconcile subsidies received versus the amount they were in fact due,” Hatch wrote Monday in a letter to George. “While it is likely that not all of these are fraudulent, because of the Marketplace’s lax integrity controls there is reason to believe that a significant portion could be.”

Hatch’s letter comes on the heels of a Senate Finance Committee hearing that included testimony from an official with the Government Accountability Office who found as part of an undercover investigation that the federal exchange approved 11 out of 12 telephone and online applications for fictitious applicants (see Fake Applicants Received Tax Credits for Health Insurance). As a result, the federal government paid $2,500 per month, or $30,000 per year, in credits for insurance policies for these fictitious individuals.

IRS Phone Scam Ringleader Gets 14-Year Sentence

A scammer who organized a scheme in which taxpayers were threatened with calls purporting to come from the Internal Revenue Service and the FBI demanding payment has been sentenced to 14 years in prison.

Sahil Patel was sentenced to 175 months in prison and $1 million in forfeiture for his role in organizing the U.S. side of a massive fraud and extortion ring run through various “call centers” located in India, through which Patel and his co-conspirators impersonated American law enforcement officials and threatened victims with arrest and financial penalties unless those victims made payments to avoid purported charges.

In addition to the prison sentence, Patel, 36, of Tatamy, Pa., was sentenced to three years of supervised release.

Patel pleaded guilty in January 2015 before U.S. District Judge Alvin Hellerstein, who imposed the sentence Wednesday. “The nature of this crime robbed people of their identities and their money in a way that causes people to feel they have been almost destroyed,” said Hellerstein.

According to prosecutors, from Dec. 2011 through the day of his arrest on Dec. 18, 2013, Patel participated as a leader in a sophisticated scheme to intimidate and defraud hundreds of innocent victims of hundreds of dollars apiece. Throughout the course of the fraud, telephone call centers located in India hired English-speaking employees to place telephone calls to individuals living in the U.S.

Armed with long lists of potential victims, referred to by Patel and his co-conspirators as “lead sheets,” those India-based callers systematically placed thousands of calls to individuals in the U.S. in the hopes of intimidating the call recipients into providing a payment to the co-conspirators. To extort these victims, the India-based callers impersonated law enforcement officials of the FBI and IRS and threatened their victims with financial penalties and arrest in connection with fabricated financial crimes.

“Sahil Patel’s elaborate scheme involved impersonating law enforcement officers and using intimidation and fear to bilk over a million dollars from hundreds of unsuspecting victims,” said Manhattan U.S. Attorney Preet Bharara in a statement.

In order to receive funds in a manner that would mask the identity of Patel and his co-conspirators, the ring undertook several measures to anonymize itself, including by using anonymized voice-over-internet technology, which was subscribed under fraudulent names in order to give the appearance of being related to U.S. law enforcement agencies.

Patel and his co-conspirators also used several layers of wire transactions in order to conceal the destination and nature of the extorted payments, which totaled at least $1.2 million.

The scam has been continuing and on the rise this year despite Patel’s arrest. Taxpayers who have been targeted by the scam can report the incident to the Treasury Inspector General for Tax Administration at www.tigta.gov and clicking on the IRS Impersonation Scam Reporting tab in the upper right corner, or call the TIGTA hotline at 1-800-366-4484 FREE.

The Facts: Medical and Dental Expenses

If you, your spouse or dependents had significant medical or dental costs in 2015, you may be able to deduct those expenses when you file your tax return. Here are eight things you should know about medical and dental expenses and other benefits.

1. You must itemize. You can only claim medical expenses that you paid for in 2015, and only if you itemize on Schedule A on Form 1040. If you take the standard deduction, you can’t claim these expenses.

2. Deduction is limited. You can deduct all the qualified medical costs that you paid for during the year. However, you can only deduct the amount that is more than 10 percent of your adjusted gross income. The AGI threshold is still 7.5 percent of your AGI if you or your spouse is age 65 or older. This exception will apply through December 31, 2016.

3. Expenses must have been paid in 2015. You can include medical and dental expenses you paid during the year, regardless of when the services were provided. Be sure to save your receipts and keep good records to substantiate your expenses.

4. You can’t deduct reimbursed expenses. Your total medical expenses for the year must be reduced by any reimbursement. Costs reimbursed by insurance or other sources do not qualify for a deduction. Normally, it makes no difference if you receive the reimbursement or if it is paid directly to the doctor or hospital.

5. Whose expenses qualify. You may include qualified medical expenses you pay for yourself, your spouse and your dependents. Some exceptions and special rules apply to divorced or separated parents, taxpayers with a multiple support agreement, or those with a qualifying relative who is not your child.

6. Types of expenses that qualify. You can deduct expenses primarily paid for the diagnosis, cure, mitigation, treatment or prevention of disease, or treatment affecting any structure or function of the body. For drugs, you can only deduct prescription medication and insulin. You can also include premiums for medical, dental and certain long-term care insurance in your expenses. And, you can also include lactation supplies.

7. Transportation costs may qualify. You may deduct transportation costs primarily for and essential to medical care that qualifies as a medical expense, including fares for a taxi, bus, train, plane or ambulance as well as tolls and parking fees. If you use your car for medical transportation, you can deduct actual out-of-pocket expenses such as gas and oil, or you can deduct the standard mileage rate for medical expenses, which is 23 cents per mile for 2015.

8. No double benefit. You can’t claim a tax deduction for medical and dental expenses you paid for with funds from your Health Savings Accounts (HAS) or Flexible Spending Arrangements (FSA). Amounts paid with funds from those plans are usually tax-free. This rule prevents two tax benefits for the same expense.

Please call if you need help figuring out what qualifies as a medical or dental expense.

Changes Affecting your 2015 Premium Tax Credit

If you have enrolled for health coverage through the Health Insurance Marketplace and receive advance payments of the premium tax credit in 2015, it is important that you report changes in circumstances, such as changes in your income or family size, to your Marketplace.

Advance payments of the premium tax credit provide financial assistance to help you pay for the insurance you buy through the Marketplace. Having at least some of your credit paid in advance directly to your insurance company will reduce the out-of-pocket cost of the health insurance premiums you’ll pay each month.

However, it is important to notify the Marketplace about changes in circumstances to allow the Marketplace to adjust your advance payment amount. This adjustment will decrease the likelihood of a significant difference between your advance credit payments and your actual premium tax credit. Changes in circumstances that you should report to the Marketplace include, but are not limited to:

  • An increase or decrease in your income
  • Marriage or divorce
  • The birth or adoption of a child
  • Starting a job with health insurance
  • Gaining or losing your eligibility for other health care coverage
  • Changing your residence

For the full list of changes you should report, visit HealthCare.gov or call the office. If you report changes in your income or family size to the Marketplace when they happen in 2015, the advance payments will more closely match the credit amount on your 2015 federal tax return. This will help you avoid getting a smaller refund than you expected or even owing money that you did not expect to owe.

Please contact the office if you have any questions about how the healthcare premium affects you and your taxes.

Claiming an Elderly Parent as a Dependent

Are you taking care of an elderly parent or relative? According to the U.S. Census Bureau, there were 44.7 million people age 65 and older in the United States in 2013, more than 15 percent of the total population.

Whether it’s driving to doctor appointments, paying for nursing home care or medical expenses, or handling their personal finances, dealing with an elderly parent or relative can be emotionally and financially draining, especially when you are taking care of your own family as well.

Fortunately, there is some good news: You may be able to claim your elderly relative as a dependent come tax time, as long as you meet certain criteria. Here’s what you should know about claiming an elderly parent or relative as a dependent:

Who Qualifies as a Dependent?

The IRS defines a dependent as a qualifying child or relative. A qualifying relative can be your mother, father, grandparent, stepmother, stepfather, mother-in-law, or father-in-law, for example, and can be any age.

There are four tests that must be met in order for a person to be your qualifying relative: not a qualifying child test, member of household or relationship test, gross income test, and support test.

Not a Qualifying Child

Your parent (or relative) cannot be claimed as a qualifying child on anyone else’s tax return.

Residency

He or she must be U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico; however, a parent or relative doesn’t have to live with you in order to qualify as a dependent.

If your qualifying parent or relative does live with you however, you may be able to deduct a percentage of your mortgage, utilities and other expenses when you figure out the amount of money you contribute to his or her support.

Income

To qualify as a dependent, income cannot exceed the personal exemption amount, which in 2015 is $4,000. In addition, your parent or relative, if married, cannot file a joint tax return with his or her spouse unless that joint return is filed only to claim a refund of withheld income tax or estimated tax paid.

Support

You must provide more than half of a parent’s total support for the year such as costs for food, housing, medical care, transportation and other necessities.

Claiming the Dependent Care Credit

You may be able to claim the child and dependent care credit if you paid work-related expenses for the care of a qualifying individual. The credit is generally a percentage of the amount of work-related expenses you paid to a care provider for the care of a qualifying individual. The percentage depends on your adjusted gross income. Work-related expenses qualifying for the credit are those paid for the care of a qualifying individual to enable you to work or actively look for work.

In addition, expenses you paid for the care of a disabled dependent may also qualify for a medical deduction (see next section). If this is the case, you must choose to take either the itemized deduction or the dependent care credit. You cannot take both.

Claiming the Medical Deduction

If you claim the deduction for medical expenses, you still must provide more than half your parent’s support; however, your parent doesn’t have to meet the income test.

The deduction is limited to medical expenses that exceed 10 percent of your adjusted gross income (7.5 percent if either you or your spouse was born before January 2, 1949), and you can include your own unreimbursed medical expenses when calculating the total amount. If, for example, your parent is in a nursing home or assisted-living facility. Any medical expenses you paid on behalf of your parent are counted toward the 10 percent figure. Food or other amenities, however, are not considered medical expenses.

What if you share caregiving responsibilities?

If you share caregiving responsibilities with a sibling or other relative, only one of you–the one proving more than 50 percent of the support–can claim the dependent. Be sure to discuss who is going to claim the dependent in advance to avoid running into trouble with the IRS if both of you claim the dependent on your respective tax returns.

Sometimes, however, neither caregiver pays more than 50 percent. In that case, you’ll need to fill out IRS Form 2120, Multiple Support Declaration, as long as you and your sibling both provide at least 10 percent of the support towards taking care of your parent.

The tax rules for claiming an elderly parent or relative are complex. If you have any questions, help is just a phone call away.

Filing an Amended Tax Return

What should you do if you already filed your federal tax return and then discover a mistake? First of all, don’t worry. In most cases, all you have to do is file an amended tax return. But before you do that, here is what you should be aware of when filing an amended tax return.

Taxpayers should use Form 1040X, Amended U.S. Individual Income Tax Return, to file an amended (corrected) tax return. You must file the corrected tax return on paper. An amended return cannot be e-filed. Please call if you need assistance or have any questions about Form 1040X.

If you need to file another schedule or form, don’t forget to attach it to the amended return.

An amended tax return should only be filed to correct errors or make changes to your original tax return. For example, you should amend your return if you need to change your filing status, or correct your income, deductions or credits.

You normally do not need to file an amended return to correct math errors because the IRS automatically makes those changes for you. Also, do not file an amended return because you forgot to attach tax forms, such as W-2s or schedules. The IRS normally will mail you a request asking for those.

Note: Eligible taxpayers who filed a 2014 tax return and claimed a premium tax credit using incorrect information from either the federally facilitated or a state-based Health Insurance Marketplace, generally do not have to file an amended return regardless of the nature of the error, even if additional taxes would be owed. The IRS may contact you to ask for a copy of your corrected Form 1095-A to verify the information.

Nonetheless, you may choose to file an amended return because some taxpayers may find that filing an amended return may reduce their tax owed or give them a larger refund (see below for additional information).

If you are amending more than one tax return, prepare a 1040X for each return and mail them to the IRS in separate envelopes. Note the tax year of the return you are amending at the top of Form 1040X. You will find the appropriate IRS address to mail your return to in the Form 1040X instructions.

If you are filing an amended tax return to claim an additional refund, wait until you have received your original tax refund before filing Form 1040X. Amended returns take up to 16 weeks to process. You may cash your original refund check while waiting for the additional refund.

If you owe additional taxes with Form 1040X, file it and pay the tax as soon as possible to minimize interest and penalties. You can use IRS Direct Pay to pay your tax directly from your checking or savings account.

Generally, you must file Form 1040X within three years from the date you filed your original tax return or within two years of the date you paid the tax, whichever is later. For example, the last day for most people to file a 2012 claim for a refund is April 15, 2016. Special rules may apply to certain claims. For more information see the instructions for Form 1040X or call the office.

You can track the status of your amended tax return for the current year three weeks after you file. You can also check the status of amended returns for up to three prior years. To use the “Where’s My Amended Return” tool on the IRS website, just enter your taxpayer identification number (usually your Social Security number), date of birth and zip code. If you have filed amended returns for more than one year, you can select each year individually to check the status of each.

Filing an amended return after receiving a corrected Form 1095-A

If you enrolled in qualifying Marketplace health coverage, then you have probably filed a tax return based on a Form 1095-A that you received from the Marketplace. Your Marketplace may have subsequently told you that your original Form 1095-A contained an error and sent a corrected Form 1095-A. Comparing the forms can help you determine whether you are likely to benefit from filing an amended tax return.

Specifically, you are likely to receive a larger refund or owe a smaller tax payment using the corrected Form 1095-A if the two Forms 1095-A generally show the same information, but any one of the five scenarios below is true on the corrected form.

1. Second Lowest Cost Silver Plan Premium is Larger: The monthly premium amounts of the second lowest cost silver plan, shown in Part III, column B, lines 21-32, are greater on the corrected form than on the original form.

2. Monthly Premium Amounts are Larger: The monthly premium amounts of the plan in which you enrolled, shown in Part III, column A, lines 21-32, are greater on the corrected form than on the original form.

3. Advance Payment of the Premium Tax Credit Amounts are Lower: The monthly amounts of advance payment of the premium tax credit shown in Part III, column C, lines 21-32 are smaller on the corrected form than on the original form.

4. More Months of Coverage: Your corrected Form 1095-A lists more months of coverage and your situation meets all the following conditions:

  • The corrected form shows more months of coverage than the original form. This means that the corrected form shows positive values in more of the rows under Part III than the original form.
  • The values are the same on the corrected form for the months that the original form showed coverage.
  • On your original tax return, you claimed a net premium tax credit, meaning you entered a value on line 26 of the Form 8962 you filed.

5. Fewer Months of Coverage: Your corrected From 1095-A lists fewer months of coverage and your situation meets all the following conditions:

  • The corrected form shows fewer months of coverage than the original form. This means that the corrected form shows positive values in fewer of the rows under Part III than the original form.
  • The values are the same on the original form for the months that the corrected form shows coverage.
  • On your original tax return, you reported owing a repayment of excess APTC, meaning you entered a value on line 29 of the Form 8962 you filed.

If there were multiple differences between your original and the corrected forms or you are not sure if you would benefit from amending, you may want to consult with a tax professional.

If you have any questions or need help filing an amended return please call.