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Clearing up the confusion over new US tax forms

AS anticipated, the two new Forms introduced by the Internal Revenue Service in 2012, Form 8949 to report on Sales and Other Dispositions of Capital Assets and Form 8938 Statement of Foreign Financial Assets are causing significant confusion among taxpayers attempting to complete these Forms for filing.

FORM 8949 -Report On Sales And Dispositions Of Capital AssetsThe Internal Revenue Service requires a taxpayer to report whether stock sales reported by their investment broker on Form 1099-B also report the basis of the stock sold by checking either Box A or B. We have noted that many investment brokers are furnishing their clients with Form 1099-B reporting the basis of the stock sold which would require that Box A be checked, but elsewhere on Form 1099-B are issuing a disclaimer noting that the stock basis is “not covered” requiring that Box B be checked. It is doubtful that the majority of individuals attempting to prepare their own tax returns will get this right.

FORM 8938- Statement Of Foreign Financial AssetsThe confusion with correctly completing Form 8938 results from the vagueness of the instructions as well as the lack of direction as to what needs to be reported. The instructions state that income producing foreign assets must be disclosed but the Treasury has stated that foreign rental properties do not need to be disclosed. A single person living abroad must file Form 8938 if foreign assets exceed $200,000 at year end or $300,000 at any time during the year. To accomplish this you must convert local currency to US dollars. Common sense would dictate using the exchange rate in effect as of the day your foreign assets were at their highest during 2011. But the instructions state that the exchange rate as of December 31, 2011 must be used which will likely give you a different answer.

The filing of Form 8938 with the 2011 tax return does not relieve the individual of having to separately file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts with the U.S. Department of Treasury on or before June 30, 2012. Adding to the confusion is that there are assets that must be reported on Form 8938 that are not required to be reported on Form 90-22.1.

Social SecurityAn extension of the payroll tax cut, that is reducing the amount of Social Security tax that an employee must pay from 6.2% to 4.2% on the first $106,800 of income has been extended to the end of 2012.

The Social Security base is expected to increase to $114,000 in 2013, $119,100 in 2014, $121,500 in 2015 and $125,700 in 2016.

Congressional FoolishnessIf you purchased a residence in 2008 and were otherwise eligible you could qualify for a first time home owner credit of $7,500. Though much ballyhooed, this was not a credit; it was an interest free loan from the government to be paid back at $500 a year over the next 15 years. Did the Congress really expect that taxpayers would slavishly report an additional $500 in tax on their annual return for the next 15 years. Absolutely. Are taxpayers doing so? Absolutely not. Just a scant three years after this interest free loan was made, the IRS has thrown in the towel and is no longer sending out notices to taxpayers dunning them for failure to report the $500 on subsequent year’s tax returns.

Pilots, Flight Attendants and the Foreign Earned Income ExclusionThere has been a long running dispute between pilots and flight attendants who reside outside the United States and who fly international routes as to what portion of their income is considered foreign source income thus being eligible for the foreign earned income exclusion. In this particular case the Tax Court allocated income into four distinct baskets; income earned while the plane was on the ground, income earned while the plane was over foreign airspace, income earned while the plane was over international airspace and income earned while the plane was on the ground in the United States. Unfortunately, these amounts were stipulated and agreed to prior to this case reaching the Tax Court. Hence, the question as to how the allocation should be made was not addressed. The conclusion of the Tax Court was that income earned while the plane was on the ground and income earned while the plane was over foreign airspace is considered foreign earned income and eligible for the foreign earned income exclusion and that income earned while the plane was over international airspace and income earned while the plane was on the ground in the United States is considered US source income and not eligible for the foreign earned income exclusion.

Foreign Asset ReportingIt is going to get harder to keep the IRS from learning about your foreign bank or brokerage account. Current law phases in reporting by foreign banks of US owned accounts. In 2014 and 2015, banks need only to disclose the owner’s identifying information, account number and balance. In 2016, income earned on accounts must be reported. And starting in 2017, gross proceeds of securities sold in foreign brokerage accounts must be reported.

The US is setting up a special disclosure pact with France, Germany, Italy, Spain and the United Kingdom that will accelerate and expand the above timetable.

Pursuant to the requirements relating to practice before the Internal Revenue Service, any tax advice in this communication is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing or recommending to another person any tax related manner.

The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own U.S. tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.

James Paul Sabo, CPA, is the President of ETS Ltd., PO Box HM 1574, Hamilton HM GX, Bermuda. Questions should be sent to: jsabo[AT]expatriatetaxservices.com

Seeking revenue: The Internal Revenue Service headquarters

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Published March 06, 2012 at 1:00 am (Updated March 06, 2012 at 7:55 am)

Clearing up the confusion over new US tax forms

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