Income Tax Return Preparation
Our tax preparation services include:
- Income Tax Returns for Individuals, Businesses, Trusts and Estates
- Estate Tax Returns
- Gift Tax Returns
- Returns for Non-Filers (taxpayers who owe tax returns for more than one year)
Our tax return preparation service focuses on expatriate Americans, non-resident aliens and foreign transactions. Some of our more typical tax preparation services follow. They are listed in alphabetical order. The rules and computations are sometime mind-numbingly complex and what follows is a partial outline of some of some of the important rules for some of our clients. If you require a tax preparation service we do not list below, please call to discuss. Typical services follow:
- Expatriate Americans (U.S. Citizens and Green Card Holders Living Abroad)
- Foreign Tax Credit: United States and Massachusetts
- Foreign Students
- Foreign Grantor Trust/Australian Superannuation Fund
- H1-b Visa Holders and Other Foreign Nationals Residing the United States
- Interspousal Transfers Where One Spouse is Not a U.S. Citizen
- Income (and Foreign Tax Credits) in Respect of a Decedent
- Installment Tax Accounting Treatment
- Moving to a New State/Abandoning and Old Domicile and Establishing an New Domicile
- Professors on Sabbatical
- Real Estate Businesses and Utilization of Passive Rental Losses
- Section 1031 Exchanges
- Tax Accounting for Transactions in Foreign Currencies
For details, click on one or more the above hyperlinks. Our Foreign Financial Disclosure Services and our services for non-filers (taxpayers who owe tax returns for more than one year) are separately listed. See, also, Why Our Clients Use Our Tax Preparation Services. In each case click on the appropriate hyperlink.
(1) Expatriate Americans
- Income Tax Disclosures
Millions of United States citizens and Green Card holders live and work outside the geographical boundaries of the United States. These expatriate taxpayers are required to report their world-wide income. They are also entitled to the United States earned income exclusion and the United State foreign tax credit. The earned income exclusion excludes certain income and certain housing costs from income. The United States foreign tax credit allows taxpayers to offset United States income taxes against foreign income taxes paid or accrued on the same amount and category of income. The purpose of both the exclusion and the credit is to minimize double taxation of the same income. To achieve this goal, the foreign tax credit must be coordinated the earned income exclusion.
- Foreign Asset Disclosures
Expatriates also have to disclose foreign assets typically have to declare foreign financial resources under both the United States Bank Secrecy Act (FinCEN Form 114) and the Foreign Accounts Tax Compliance Act: FATCA (IRS Form 8938). Finally, they, along with other taxpayers, may have to disclosure of interests in foreign controlled corporations, foreign partnerships and foreign trusts.
(2) Foreign Tax Credit – United States and State
It is important to master the complexities, however, because the effective utilization of the foreign tax credit will result in a dollar-for-dollar offset of foreign income taxes paid against the United States tax on the same amount and category of income. States have similar rules.
- The United States Foreign Tax Credit offers a dollar-for-dollar credit of foreign taxes paid against United States income taxes paid on the same amount and category of income. The purpose of this credit is the avoidance of double taxation. There are several categories of income, such as passive income (generally, rents, dividends and interest); and general category income (such as salary and wages). The determination of the foreign tax to be credited depends on whether the tax was paid or accrued during the taxable year. Unused foreign tax credits may be carried back one year and carried forward for up to 10 years. Separate carryforward records must be maintained for the regular tax and the alternative minimum tax. Foreign tax credits unused by a decedent may be used by his or her estate or beneficiaries as foreign tax credits in respect of a decedent. The foreign tax credit must be coordinated with the exclusion for income earned abroad.
- State Foreign Tax Credits offer a dollar-for-dollar credit of foreign state taxes paid on the same amount of income to a state other than the taxpayer’s state of domicile or residence. The purpose of this credit is the avoidance of double taxation at the state level. In addition, Massachusetts permits a foreign tax credit against Canadian and provincial income taxes to the extent these taxes have not been utilized as foreign tax credits against United States income. (See Paragraph 1, immediately above.)
(3) Foreign Students
Generally, foreign students temporarily present in the United States under an “F,” “J,” “M,” or “Q” visa, who substantially complies with the requirements of their visa are permitted to exclude their time in the United States for purposes of determining whether they are U.S. residents. In all other respects, they are generally treated like H1-b visa holders. See H1-b visa holders, immediately above. Foreign students holding student visas might also claim benefit from tax treaties (if they exist) between the United States and the visa holder's country of citizenship.
(4) Foreign Grantor Trusts/Australian Superannuation Fund.
United States citizens and green card holders will sometimes invest in tax-favored foreign investment programs, such as Australian Superannuation Funds. Typically, there is no recognition of current income for foreign income tax purposes. Under United States tax law, however, the income build-up will sometimes have to be reported as income earned by a foreign grantor trust.
(5) H1-b Visa Holders and Other Foreign Nationals Residing in the United States.
The taxation of income for H-1B employees and other foreign nationals depends on whether they are categorized as non-resident aliens or resident aliens for tax purposes. A non-resident alien is only taxed on income from sources in the United States, while a resident alien for tax purposes is taxed on world-wide income from sources both inside and outside the United States. The classification is determined based on the "substantial presence test,” a weighted average to determine whether a taxpayers has spent 183 days in the United States. If the substantial presence test indicates that the H-1B visa holder is a resident, then income taxation is like any other U.S. person and may be filed using Form 1040 and the necessary schedules; otherwise, the visa-holder must file as a non-resident alien using tax form 1040NR. An H1-B visa holder may also claim benefit from tax treaties (if they exist) between the United States and the visa holder's country of citizenship.
(6) Interspousal Transfers Where One Spouse is Not a U.S. Citizen, Etc.
In cases where spouses transfer assets among themselves, there are typically no income or gift tax consequence. There may be, however, income and gift tax consequences where one spouse is not subject to United States income and gift taxes at the time of the transfer but the other spouse is subject to the United States income and gift tax laws.
(7) Income (and Foreign Tax Credits) In Respect of a Decedent.
Decedents are sometimes owed money and the decedent has not yet been required to report the income under his or her method of accounting. Such deferred income is sometimes called income in respect of a decedent. This income typically retains the same character (for example, capital gain or ordinary income; “passive” or “general category”) in the hands of the ultimate recipient as it had in the hands of the decedent. Foreign taxes paid on this income are treated as foreign tax credits in respect of a decedent and are typically credited against the income tax liability of the person or entity (such as an estate or trust) that ultimately receives the income.
(8) Installment Tax Accounting Treatment.
Where the proceeds of sale are received in installments, taxpayers may defer the recognition of gain and report gain as the income is received. There are special rules where the property sold is located outside the geographical boundaries of the United States and the proceeds of sale are received in a functional currency such as the Euro or the Canadian dollar.
(9) Moving to a New State/Abandoning and Establishing Domicile.
When taxpayers move from one state to another, they need to sort out their tax obligations to the state they are leaving and their tax obligations to the state they are entering. The tax issues include: (1) the possible abandonment of an old domicile; (2) the possible establishment of a new domicile; (3) the apportionment of income based on days worked in both the old and new states; (4) the reporting of world-wide income based on domicile and residency considerations coupled with a state foreign tax credit. Typically, these issues are reflected in part-year income tax returns with both the old states and the new states.
- Note: The move to the new states may also trigger estate planning issues that we will point out to the taxpayer’s estate planner.
(10) Professors on Sabbatical.
- United States Citizens on Sabbatical. All professors on sabbatical are permitted to deduct their living expenses as “travel expenses” provided that their appointment lasts for no more than one year. Professors who are posted outside the United States may also exclude income earned abroad if they meet one of two residency tests. Often tax treaties are also involved. The interaction of the earned income credit and the United States foreign tax credit adds an additional layer of complication. For details, see Foreign Tax Credit, above.
- Foreign Nationals on Sabbatical in the United States. The taxation of foreign nationals depends, among other things, on their citizenship, green card and visa status, the length of their stay (up to a year or over a year); tax treaties; and the interaction of United States tax law with the tax law of the foreign national’s home country.
(11) Real Estate Businesses.
Many taxpayers own small real estate businesses which generate passive gains and losses. Passive losses can only offset passive gains. Unused passive losses can be carried forward and utilized in subsequent years against passive income specified passive income, such as rents (but not interest and dividends). In our experience, some taxpayers use tax return preparers who do not account for passive losses accurately. In addition, taxpayers who live in a property with rental units must allocate the expenses of ownership. Only the expenses reasonably allocable against rental income can be deducted to arrive at net rental income.
(12) Section 1031 Exchanges.
Section 1031 prevents the recognition of income on the exchange of property held for investment for similar property held for investment. Examples include the exchange of real estate held for the production of rental income and the exchange of one functional currency for another functional currency.
(13) Tax Accounting for Transactions in Foreign Currency.
Many U.S. citizens and Green Card holders have financial interests in businesses and property located outside the United States. The functional currency used to account for income and loss is typically a foreign currency, and not the United States dollar. Under the United States Internal Revenue Code, it is typically required that the income or loss be determined in the foreign functional currency and then translated to United States dollars. Similarly, the recognition of foreign gains and losses under the installment method if tax accounting utilizes gain or loss are determined in the foreign currency.