Our tax issues interconnected with the world
Moneywise answers a reader’s questions, converted for confidentiality to generic anonymity. Any resemblance to any individual, living or deceased, is completely unintentional.
Readers’ letters to Moneywise over the years have focused on retirement and pension structures, personal financial planning, tax concerns regarding financial interaction with all three of our North Atlantic neighbours (the majority United States, but UK and Canadian queries as well), as well as their perspectives and stories on achieving financial stability and most frequently of late, expressing frustration with not being able to obtain answers and help from local government bureaucracies.
I do sincerely apologise for not always answering readers promptly, but know that I am always happy to help anyone needing financial information, as well as providing assistance in finding solutions to financial issues, always with confidential answers. This has been my mission and commitment for many years; I greatly value your comments and perspectives, so please keep writing to me.
Dear readers, I think we are all agreed that we now live in a very complex financial world. Years ago, some of you complained regarding some tax content in Moneywise articles, specifically US and other country taxation, residency, investment, and citizenship issues. You felt that such information was irrelevant to local Bermuda islanders and their financial issues. You were right — in a way — as the information was premature then — but it has always been my role to inform on pending issues so that you can plan ahead.
Today, may I gently state that our country tax issues are interconnected to global countries’ taxation accountability structures far more than we realise, still. Bank account holders in Bermuda have only to remember the tedious account forms and reporting declarations demanded of our local (but considered foreign by other countries) financial institutions under our Bermuda Government Intergovernmental Agreements with other countries.
Our financial institutions have, in turn, demanded detailed personal identification, sources of funds, residency authenticity, US/UK/CDN/other connections, tax compliance verification, etc, from all of us.
The confusion and complications that arose from these global tax/anti-money laundering/financial crimes legislations were greatly frustrating to families never exposed to income tax regimes.
But, now there are situations such as career students returning home, multinational partnerships, marriages and families, multi-jurisdictional investments, retirement and relocation abroad, expatriate work permit holders in Bermuda — all possessing links and affiliations here and elsewhere.
Reader query one reflects this complexity.
“I’m a US citizen engaged to a Bermudian, and am now employed here. My grandfather was Bermudian, and I’ve recently learnt that I am one of the beneficiaries of his family trust. It’s US tax filing season. I’ve received all sorts of helpful, but confusing to me, advice — like I don’t have to file since my gross income is below the threshold?”
Where do I start?
We know very little about this individual, what income scale, interaction with Bermuda family business, trust, etc.
So, we will cover some of the most common US tax filing forms for US persons (US citizens, US Green card holders and certain US residents residing abroad, but note that the list is not at all inclusive.
Fincen 114: the so-called FBAR report (not a tax form), report of foreign bank and financial accounts, must be filed electronically with the Financial Crime Enforcement Network, a division of the US Treasury Department, if a US person has a financial interest in or signature authority over foreign financial accounts if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. Failure to file this form may result in substantial monetary penalties.
Form 1040: US Individual Income Tax Return 2019. US persons are subject to tax on their worldwide income from whatever and wherever derived and related; thus, where you may live and work is irrelevant for US tax compliance.
Form 1040 Schedule B, Part III lines 7a, 7b, and 8, whether or not you are subject to Fincen 114 reporting. You are required to check yes if you have foreign accounts, indicate the country where held, and whether you are connected to a foreign trust.
Form 2555: Foreign Earned Income and Housing Exclusion. Caution: by filing this form, you, the US taxpayer are electing to take this exclusion! If you do not file a tax return, US Internal Revenue Service can assess tax on all of your foreign earned income.
You may qualify for the tax benefits available to taxpayers who have foreign-earned income if both of the following apply.
• You meet the tax home test
• You meet either the bona fide residence test or the physical presence test
Form 1116: foreign tax credit. This credit needs to be weighed carefully against results of electing the foreign earned income exclusion — CPA advice is recommended.
Form 8938: statement of foreign financial assets.
Form 8621: information return for Passive Foreign Investment Company.
Recommend that this individual opt for a US 401K plan, if offered by Bermuda employer as the Bermuda National Pension Scheme invests in foreign mutual funds (PFICs) that present significant reporting and filing problems for US persons.
Form 3520: annual return to report transactions with foreign trusts and receipt of certain foreign gifts.
One more important item: a final US state tax return, if required. Make sure you (or your accountant) files your last and final state tax return as a US resident (if required) that declares you a non-resident going forward. You do not want to get a letter two years from now saying you owe state tax on your foreign income. California is particularly tough in this respect.
Moneywise highly recommends employing a knowledgable CPA tax practitioner with international tax experiences — at least, for your first year abroad. See IRS
Directory of Federal Tax Return Preparers with Credentials and Select Qualifications in Bermuda, https://irs.treasury.gov/rpo/rpo.jsf
Publication 54, Tax Guide for US Citizens and Resident Aliens Abroad, https://www.irs.gov/forms-pubs/about-publication-54
Next week: More reader FAQ’s:
Can our reader obtain Bermuda status through her grandfather?
A family is caught up in the US real estate sale.
A reader is looking for DIY financial planning software.
• Martha Harris Myron CPA CFP JSM: Masters of Law — international tax and financial services. Dual citizen: Bermudian/US Pondstraddler Life, financial perspectives for Bermuda islanders and their globally mobile connections on the Great Atlantic Pond. Finance columnist forThe Royal Gazette. All proceeds earned from this column go to the Bermuda Salvation Army Soup Kitchen. Contact: email@example.com
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