As globalization continues to connect economies and individuals around the world, many U.S. taxpayers find themselves earning income in foreign countries. This income often comes with the obligation to pay foreign taxes, leading to a complex situation where individuals and businesses may face double taxation. Double taxation is when a taxpayer pays taxes on the same income to both the foreign country and the U.S. Fortunately, the U.S. tax system offers a solution to this scenario: the Foreign Tax Credit (FTC). This article explores the mechanics, benefits, and limitations of the FTC, providing a comprehensive understanding for taxpayers with international income.
What is the Foreign Tax Credit?
It’s important to note that when you pay foreign taxes, you can choose if you want to offset these costs as a foreign tax credit or as an itemized deduction. Here, we will discuss the foreign tax credit since it typically results in larger savings for taxpayers. The Foreign Tax Credit is a provision in the U.S. tax code that allows taxpayers to offset the amount of income tax they owe to the U.S. government by the amount of foreign taxes they have paid on the same income. The primary goal of the FTC is to mitigate double taxation and encourage U.S. citizens and residents to engage in international business activities.
Who is Eligible for the Foreign Tax Credit?
Eligibility for the FTC is primarily based on a few criteria. In general, you qualify for the Foreign Tax Credit if you’re a U.S. citizen or resident who earns foreign income and pay U.S. taxes. If you are a U.S. expat, someone who lives and works in a country other than their country of citizenship, there are a few more rules. For example, the tax must be imposed on you, and you must have paid the tax. The foreign tax must also be a legal income tax or other tax in lieu of an income tax. Be sure to check with a tax professional since there are strict IRS rules on what counts as foreign income tax.
How to Calculate the Foreign Tax Credit
The calculation of the Foreign Tax Credit involves several steps and considerations.
Determine Foreign Income and Taxes Paid
Calculate the total foreign income earned and the amount of taxes paid or accrued to a foreign country. Accurate record-keeping is essential to substantiate these figures.
Separate Income into Passive and General Categories
The IRS requires income to be categorized into passive income (such as dividends and interest) and general category income (such as wages and business profits). This categorization affects how the FTC is applied.
Calculate the Credit Limit
The Foreign Tax Credit is subject to a limitation based on the proportion of foreign income to total worldwide income. The formula is:
(Foreign Income / Total Worldwide Income) x U.S. Tax Liability
This limitation ensures that the FTC does not exceed the amount of U.S. tax liability attributable to foreign income.
Example
Let’s look at an example. Let’s say that you’re a U.S. citizen who moved to Spain for work. You earn $50,000 plus an extra $5,000 in interest income in the U.S. You also paid $10,000 in taxes to the Spanish government. At the end of the tax year, your U.S. tax liability was $9,000. Let’s calculate your FTC amount.
(Foreign Income / Total Worldwide Income) x U.S. Tax Liability
($50,000 / $55,000) x $9,000
0.91 x $9,000 = $8,182
This means you can receive up to $8,182 for the FTC. In addition, since you already paid $10,000 in Spanish taxes, you can carry over the difference of $1,818 for up to 10 years.
Foreign Tax Credit vs. Foreign Earned Income Exclusion
U.S. taxpayers with foreign income often face a choice between the Foreign Tax Credit and the Foreign Earned Income Exclusion (FEIE). The FEIE allows taxpayers to exclude a certain amount of foreign earned income from their U.S. taxable income. Here’s how they compare:
FTC: Reduces U.S. tax liability on foreign income dollar-for-dollar based on foreign taxes paid.
FEIE: Excludes foreign earned income up to a specified limit, potentially reducing taxable income but not offering credit for foreign taxes paid.
Taxpayers can use both the FTC and the FEIE, but not for the same income. Strategic planning is crucial to determine the optimal approach based on individual circumstances.
Reporting the Foreign Tax Credit
To claim the Foreign Tax Credit, taxpayers must file Form 1116 with their U.S. tax return. Corporations use Form 1118. These forms require detailed information about foreign income, taxes paid, and the calculation of the FTC limit. Accurate and complete documentation is vital to avoid audits and penalties.
Potential Challenges and Considerations
It goes without saying that the rules governing the FTC are complex. It requires careful record-keeping and a thorough understanding of both U.S. and foreign tax laws. Professional tax advice is often necessary to navigate these complexities. In addition, changes in foreign tax liabilities, such as refunds or adjustments, can impact the FTC claimed in previous years. You must report these changes and note that you may need to amend prior U.S. tax returns. Finally, tax treaties between the U.S. and other countries can affect the FTC. Treaties may provide additional benefits or limitations, and taxpayers should be aware of the specific provisions applicable to their situation.
Tax Help for Those with Foreign Income
The Foreign Tax Credit is a valuable tool for U.S. taxpayers with foreign income, providing relief from double taxation. By understanding the eligibility criteria, calculation methods, and reporting requirements, taxpayers can effectively use the FTC to optimize their tax situations. As international tax laws continue to evolve, staying informed and seeking professional advice remain essential for claiming the Foreign Tax Credit. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
When filing U.S. federal income tax, taxpayers often encounter several forms and schedules that must be completed to accurately report their financial activities. One such form is Schedule B, which is used to report interest and ordinary dividends. Understanding this form is crucial for taxpayers with investment income to ensure compliance with tax laws and avoid potential penalties. Here’s an overview of Schedule B, including who needs to file it, the different components, and common mistakes to avoid.
What is Schedule B?
Schedule B is a tax form attached to Form 1040, 1040-SR, or 1040-NR to report interest income and ordinary dividends received during the tax year. This form is typically required for individuals with significant income from investments and other financial instruments.
Who Needs to File Schedule B?
You need to file Schedule B if you meet one of the following criteria:
Your total taxable interest income is more than $1,500 during the tax year
Your ordinary dividends exceed $1,500 during the tax year
You have any of the following less common situations:
Part 1 of Schedule B requires you to list all the information received via Form 1099-INT, 1099-OID, or another substitute statement from a financial institution. On Line 1, you should enter the name of each payer and the amount of interest received. This includes interest from savings accounts, bonds, certificates of deposit (CDs), and other financial instruments. Line 2 requires you to total your interest income. You should report any interest excluded, such as tax-exempt interest on Line 3. Line 4 will calculate your total taxable interest income.
Part II: Ordinary Dividends
Part II of Schedule B collects information about your ordinary dividends for the tax year. Remember, ordinary dividends differ from qualified dividends, which are taxed at a lower rate. This information is found on Form 1099-DIV or another substitute statement from your financial institution. On Line 5, you should enter the name of each payer and the amount of ordinary dividends received. Use Line 6 to total your ordinary dividend income.
Part III: Foreign Accounts and Trusts
Part III of Schedule B is for less common scenarios since it is used to report any financial interest in or authority over a foreign account, such as a bank account. It’s also used if you are involved with certain foreign trusts. If so, additional reporting may be necessary under the Foreign Account Tax Compliance Act (FATCA). If you have foreign financial accounts with a combined value exceeding $10,000 at any time during the year, you must file the Report of Foreign Bank and Financial Accounts (FBAR), in addition to Schedule B.
Common Mistakes to Avoid
The biggest mistake you can make with Schedule B is failing to report small amounts. Even if interest or dividends are minimal, they must be reported if they exceed the $1,500 threshold. Another mistake is not filing at all. If you are required to file Schedule B and fail to do so, you may face penalties, including fines and interest on unpaid taxes. Finally, do not overlook foreign income. Neglecting to report foreign accounts or income can lead to severe penalties.
Tax Help for Those Who File Schedule B
Schedule B is a vital component of the U.S. tax filing process for individuals with interest and ordinary dividend income. By accurately reporting these amounts, taxpayers can ensure compliance with IRS regulations and avoid potential penalties. Understanding when and how to use Schedule B, along with avoiding common mistakes, can help streamline the tax filing process and ensure that all investment income is appropriately accounted for. Optima Tax Relief is the nation’s leading tax resolution firm with over $3 billion in resolved tax liabilities.
The Federal Disaster Tax Relief Act is a legislative measure proposed by the U.S. Congress to provide tax relief and assistance to individuals and businesses affected by natural disasters. This Act is part of a broader effort by the federal government to alleviate the financial burden on those impacted by disasters such as hurricanes, wildfires, floods, and other catastrophic events. Here’s an overview of the Federal Disaster Tax Relief Act that has the potential to offer a range of tax benefits designed to help disaster victims recover and rebuild in the aftermath of such events.
Background
The Federal Disaster Tax Relief Act (HR 5863) was introduced by Representative Greg Steube (R-FL). It advanced by the Ways and Means Committee in 2023. The Federal Disaster Tax Relief Act would exclude income received for casualty and theft losses, damages, and expenses from individual income for tax purposes if these were incurred due to a federally declared disaster. It would also exclude any income received by taxpayers affected by the February 2023 train derailment that took place in East Palestine, Ohio, where 38 train cars carrying hazardous materials derailed.
The bill was passed in the House of Representatives, but the Senate has yet to vote on it. The situation has become tricky since the bill was included in the bipartisan tax package, the Tax Relief for American Families and Workers Act (HR 7024).
Current Disaster-Related Tax Relief
Currently, there are several provisions that offer financial relief to disaster-affected individuals and businesses. One of the primary benefits is the ability for taxpayers to claim deductions for casualty losses. These losses are defined as damage, destruction, or loss of property resulting from a disaster. Taxpayers can claim deductions for uninsured or unreimbursed losses, thereby reducing their taxable income and lowering their overall tax liability. The IRS also typically extends the tax filing and payment deadlines for individuals and businesses in affected areas. This extension provides taxpayers with additional time to complete their tax obligations without facing late fees or penalties.
How the Federal Disaster Tax Relief Act Could Impact Taxpayers
If passed by the Senate, the Federal Disaster Tax Relief Act will exempt wildfire relief payments from federal income taxes. It will also exempt relief payments for losses stemming from the 2023 East Palestine, Ohio train derailment. In addition, it will designate certain hurricanes as eligible for disaster-related tax treatments. If enacted, this act could simplify the process of writing off losses from other natural disasters. This includes provisions to exempt legal fees, emotional distress, lost wages, and other expenses from taxation in cases of wildfire losses. Once the bill becomes law, any taxes already paid on wildfire settlement funds since 2020 will be eligible for a retroactive refund. Taxpayers can claim this by filing an amended return or claiming the change in the next tax year.
Tax Help for Those Affected by Federal Disasters
The Federal Disaster Tax Relief Act could be an essential tool in the federal government’s response to natural disasters. By providing tax relief and financial assistance, the Act can play a crucial role in helping individuals and businesses recover and rebuild in the aftermath of catastrophic events. Understanding the provisions and benefits of the Act can empower taxpayers to make informed decisions. It can also maximize the available relief options in times of need. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers.
Today, Optima Tax Relief Lead Tax Attorney, Phil, discusses OIC mills, including what they are and how to avoid being victimized by them.
What is an OIC?
An Offer in Compromise (OIC) is a program offered by the IRS that allows taxpayers to settle their tax debt for less than the full amount owed. This program is intended for individuals who cannot pay their full tax liability or doing so would create a financial hardship.
What is an OIC Mill?
An “OIC mill” refers to a business or organization that aggressively markets and promotes OIC services to taxpayers, often making exaggerated claims about their ability to settle tax debts for pennies on the dollar. These companies typically charge high fees and may not deliver on their promises, sometimes providing subpar or even fraudulent services.
How to Avoid OIC Mills
Thoroughly research any company or service offering OIC assistance. Look for reviews, complaints, and ratings from reputable sources such as the Better Business Bureau (BBB). Ensure the tax professional you’re working with is qualified, such as a licensed attorney, CPA, or Enrolled Agent who specializes in tax resolution. Consider contacting the IRS directly or using the IRS’s online resources to understand the OIC program and determine eligibility before seeking outside help. If an offer sounds too good to be true, seek a second opinion from a trusted tax professional. Familiarize yourself with the IRS OIC process and the realistic chances of success. The IRS provides detailed information and forms on their Offer in Compromise page.
If you’ve been victimized by an OIC mill, consider asking for help from the experts at Optima Tax Relief. With over a decade of experience and over $3 billion in resolved tax liabilities, we can help with your tax situation.
If you’ve been hit with an assessment from the IRS and you disagree with the results, you are entitled to present your case in Tax Court. However, an IRS administrative appeal may produce desirable results without the need to go to court. As a taxpayer, you are entitled to dispute the results of an IRS assessment through the administrative appeal process for any reason other than religious, moral or political, conscientious objections. The professionals at Optima Tax Relief can determine whether an administrative appeal is the right course for your situation. The IRS administrative appeals process can be an effective way to handle disagreements over tax assessments, penalties, or other IRS decisions, offering a less formal and often less costly alternative to litigation. Here’s an overview of IRS administrative appeals, including the types, how each works, and important things to note before requesting one.
IRS Administrative Appeal Categories
The IRS Appeals division operates as a separate entity from IRS offices that conduct investigations. The two types of administrative appeals available are Collections Appeal Process (CAP) or Collections Due Process (CDP) hearings. Administrative appeal hearings may be conducted by mail, telephone or in person. You may represent yourself or be represented by a CPA, attorney or enrolled agent authorized to practice before the IRS. If your tax return was prepared by a third party not enrolled with the IRS, they may be a witness but may not represent you.
Collection Appeals
Collection Appeals involve disputes over IRS collection actions. These actions can include levies, liens, seizures, and other methods the IRS uses to collect outstanding taxes. To break this down even further, there are two main programs under Collection Appeals: Collection Due Process (CDP) and the Collection Appeals Program (CAP).
Collection Due Process
The CDP program allows taxpayers to appeal collection actions before they occur, providing a forum to address issues related to the collection process. Taxpayers who receive certain IRS notices can request a CDP hearing. These include the Notice of Federal Tax Lien Filing, Final Notice of Intent to Levy, Notice of Jeopardy Levy, Notice of Levy on a State Tax Refund, or Post Levy Collection Due Process Notice
Taxpayers generally have 30 days from the date of the notice to request a CDP hearing. They can do so via Form 12153, Request for a Collection Due Process or Equivalent Hearing. If the taxpayer disagrees with the CDP determination, they have the right to seek judicial review in the U.S. Tax Court. After 30 days, you may request an Equivalent Hearing within one year. However, collection activities will not be suspended. In addition, you cannot appeal the results in Tax Court.
Collection Appeals Program
The CAP provides a faster and more streamlined process than CDP, but it does not offer the same judicial review rights. Taxpayers can request a CAP hearing at any time, even before or after a collection action has been taken. For example, a CAP filed to protest a wrongful levy may be filed either before or after property has been seized. However, it must be filed before the property is sold. A CAP can be used to address the following IRS actions:
Prior to or after the filing of a Notice of Federal Tax Lien
Prior to or after levy or seizure of property by the IRS
Rejection or modification of an installment agreement
Rejected taxpayer request to return to levied property
Seizure
It’s crucial to note that you will not be able to take your case to Tax Court if you disagree with the conclusions of the CAP. You must file Form 9423, Collection Appeal Request to initiate a CAP review.
Submitting Your Request for Administrative Review
If you’re audited and your auditor finds that you owe less than $2,500, you may approach them about an appeal directly or submit your request through the appeals system. If you owe between $2,500 and $25,000, you should submit a Small Case Request. Alternatively, you can use Form 12203, Request for Appeals Review, which can be found on the IRS website. Assessments of $25,000 or more require a Formal Written Protest using Form 12202, including the following items.
Your name, address, and a daytime telephone number.
A statement of intent to appeal the IRS findings to the Office of Appeals.
A copy of the letter showing the proposed assessment.
The tax period(s) or year(s) involved.
A detailed description of each item with which you disagree.
The reason(s) for your disagreement for each item.
Facts supporting your position for each item.
Any law or legal authority that supports your position on each item.
The following penalties of perjury statement stated exactly: “Under the penalties of perjury, I declare that the facts stated in this protest and any accompanying documents are true, correct, and complete to the best of my knowledge and belief.”
Your signature beneath the penalties of perjury statement.
If your request for appeal is prepared by your representative, he or she must substitute the declaration for penalties of perjury statement for individual taxpayers with a statement that includes each of the following elements:
An affirmation that he or she submitted the protest and any accompanying documents, AND
A statement of personal knowledge of stated facts in the protest and accompanying documents and a declaration that the facts are true and correct.
The Administrative Hearing Process
After submitting your request for administrative review, you generally have at least 60 days to prepare for the hearing. Draft a rough outline of the information you wish to include in your presentation. Categorize any other relevant information in spreadsheets or in visual displays, with separate folders for each item.
It’s wise to request a copy of the auditor’s file under the Freedom of Information Act (FOIA) immediately. FOIA requests can take at least a month to process. The letter should cover all relevant tax years and provide an offer to cover copying costs. Send the letter by certified mail or other traceable means.
The hearing itself will be fairly informal. You are entitled to take notes or record the hearing if you wish. Be prepared for requests for further information. If that happens, don’t hesitate to ask for more time.
If you reach a verbal settlement during the hearing, the settlement will be transcribed onto IRS Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment. Keep in mind, however, that this form can take months to arrive in the mail. Double check all the figures and do not sign the form unless you understand and agree with everything contained within it. Likewise, do not sign the form if you’ve found other mistakes from the auditor or appeals officer. Once you sign the form, you are barred from making further appeal to the Tax Court.
Tax Help for Those Who Owe
The IRS Administrative Appeal process is a valuable tool for taxpayers seeking to resolve disputes in a fair, impartial, and cost-effective manner. By understanding the steps involved and preparing adequately, taxpayers can go through the appeal process and potentially reach a resolution without the need for tax court. If you find yourself in disagreement with an IRS decision, considering an administrative appeal can be a prudent first step. If you’re unsure, consulting a tax professional can be helpful. Optima Tax Relief is the nation’s leading tax resolution firm with over $3 billion in resolved tax liabilities.
