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January 19, 2016 …

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… has come and passed.  A new phase has just begun, and the length of its “season” is entirely up to each, individual person involved.  Are you involved?  Maybe; maybe not.  Let’s find out.

irsThe somewhat magical day cited in the title is the day that the U.S. Internal Revenue Service started accepting electronically filed individual income tax returns for the tax year 2015.  It is often considered to be the start of “tax season.”

49 Ways to Make a Living in the Philippines

For you, dear readers, who are not considered to be “U.S. Persons” for U.S. Income Tax and U.S. Foreign Bank Account Reporting (FBAR) purposes, this article may seem boring.  Still, you might want to browse it to see whether, unbeknownst to you, you may be a “U.S. Person.”  As times change, so do rules.

During this new “season,” I’ll be pumping out articles that, hopefully, assist those of you who are ensnared in the IRS’ tax trap.  This will be the first.

AM I TRAPPED? 

As I am wont to repeat, “With taxes, there are no simple answers.”  trappedWhether or not you are “trapped” is another question that earns the repetition.  Let’s cut to the chase and see who are considered to be “U.S. Persons” with U.S. income tax responsibilities.

For U.S. Income Tax purposes, a “U.S. Person” is anyone who meets one of these definitions regardless of where they physically reside in the world:

  1. Any citizen of the United States (yes, that includes dual-citizens and citizenmulti-national citizens who have U.S. citizenship as one of the citizenships they enjoy, and even “anchor babies” born in the U.S. to Non-U.S. citizens who may or may not have moved back to their parents’ homeland);
  2. Any United States Resident Alien (Non-U.S citizens who have been green cardadmitted into the U.S. for residency [aka “Green Card” holders] who have not formally surrendered their residency status – even if your “Green Card” has expired, if you did not formally surrender it to the U.S. Government, you are still considered to be a “U.S. Person” for U.S. Income Tax purposes);
  3. Any United States Nonresident Alien who receives income from a receiving moneysource within the U.S. (Non-U.S. citizens who receive compensation for labor or services performed in the U.S., who receive interest, dividends, royalties, rental income, capital or ordinary gains, and most other types of income that is derived from a source within the U.S.)

Of course, it’s prudent to mention at this point in the article that even though income tax treaties or other legal remedies in use to prevent treaty“double taxation” of a “U.S. Person’s” income by two (or more) countries do exist and are beneficial, none of them relieve the “U.S. Person’s” responsibilities for complying with the U.S. Internal Revenue Code.  The truth of the matter is:  a tax treaty doesn’t alleviate a tax burden – it merely decides on an internationally legal basis just which country gets to impose that burden.

AM I REALLY TRAPPED?

Are you?  Well, again, maybe you are and maybe you aren’t (it’s freenot simple).  Every “U.S. Person” has U.S. Income Tax responsibilities to some degree.  There are those who legally don’t file income tax returns and don’t pay income taxes.  Still, they have the responsibility to make sure that they are, indeed, a member of that “carefree group.”

So, too, it is with those “U.S. Persons,” who may not owe any taxes luckythis year or in years past, but are still required to file a U.S. Income Tax return.  These lucky “non-taxpayers” must show the IRS that the income they received during the tax year is not subject to U.S. income taxation.  This they do by a mandatory filing of their U.S. Income Tax return – that’s their responsibility.

MANDATORY THRESHOLDS

Determining whether or not you must make a mandatory tax return gross incomefiling generally depends on how much gross income you received.  The IRS publishes an annual table that lists the gross income threshold beyond which a mandatory tax return filing is triggered.  Luckily, it’s adjusted annually for inflation and other factors that tend to lessen a U.S. dollar’s purchasing power.

Remember, “not simple”!  The threshold amounts vary, and Printare set based on factors such as a taxpayer’s age (over or under 65 years old), a taxpayer’s filing status (filing Single, Married Filing Jointly, Married Filing Separately, Head of Household, &c.), and the type or source of income (income such as that exempt from taxation by statute, and Social Security benefits that are computed as being non-taxable).

To top it all off (why, oh why can’t these things be simple?), there are down the draintypes and sources of income that have the exact opposite effect as that stated above. If you are a recipient of these types and sources of income, all that threshold business goes down the drain.  These recipients must make a mandatory tax return filing regardless of any other circumstances.

THEN, THERE’S THE REST OF US 

herdEveryone else, I’m afraid, may very well be trapped.  There are any number of other circumstances that may mitigate tax return filing and the payment of taxes (NOT SIMPLE!), but generally speaking, the rest of us are members of that prestigious group of “U.S. Persons” known as U.S. Taxpayers.  It’s a fact of life.

As I like to tease those who ask me, “Why didn’t you just retire?  And death and taxeswhy, for heaven’s sake, a Certified Public Accountant?” my response is simply “Job Security.”  I retired from the U.S. Navy at a relatively young age, and my enjoyment of food, shelter, and the other basics of life spurred me on to another career.  Knowing that the only sure things in life are death and taxes, and not wanting a career as a mortician, the choice was rather obvious.

 

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PaulK

Paul is a CPA and a retired tax accountant, having served companies and corporations of all sizes, as well as individuals, in public accounting practices. Prior to what he refers to as his "real job," he served a 24-year career in the U.S. Navy, retiring as a Master Chief Petty Officer. It was during this career that he met and married his OFW spouse of 40+ years, Emy, while stationed in London, UK. (Though he pleaded for the assignment, Paul never received orders to the Philippines.) A "Phil-phile" from an early age, Paul remembers his first introduction to the Philippines in the primary grades of a parochial elementary school where, one week each year, children donated their pennies to purchase school supplies, food and other necessities for Filipino children in need. That love for Filipinos continues to this day. Calling Pasuquin, Ilocos Norte--in the far northwestern part of Luzon--home (just about as far away from Davao as one can be while still being on one of the major islands) Paul prefers a more relaxed provincial life style, and willingly shares a different view of the Philippines from "up north"!

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Byron Watts
6 years ago

Thanks for your article! I too wish it were….just simple.

Paul
6 years ago
Reply to  Byron Watts

Hi Byron – While I have the “luxury” to complain about the complexity of the tax code as an individual taxpayer myself, I must temper that angst with the knowledge that it’s my “bread and butter.”

Without that huge mess called the Internal Revenue Code, many of us CPAs and others would be both ununemployed and unemployable. 😆

John Reyes
John Reyes
6 years ago

Hi Paul – I had a rude awakening to the potential nightmare posed by FATCA last month while in the Philippines. I attempted to open a bank account in my name into which the monthly rental deposits from our rental property in Manila will be deposited by the new property manager, a distant relative. Previously, the bank account was jointly in the name of another relative, but he was later dropped (fired) due to inconsistencies (embezzlement). As explained to me confidentially by the bank official at a certain bank I visited in Manila that if I were to open the… Read more »

Paul
6 years ago
Reply to  John Reyes

Hi John – ARGH! I believe that you were the victim of an ill-informed bank employee seeking to make additional business for the bank at your expense. As a U.S. citizen and taxpayer, all you are required to do, in addition to the routine administrative paperwork for opening a bank account with a bank in the Philippines, is to provide the bank with a completed, signed, and dated Form W-9, Request for Taxpayer Identification Number and Certification. The bank needs only to know your U.S. Tax Identification Number (SSAN for U.S. citizens). They, in turn, are required to report the… Read more »

John Reyes
John Reyes
6 years ago
Reply to  Paul

Hi Paul – Thanks so much for your explanation and well-intended suggestions. I have always had you in the back of my mind as the go-to-pro when tax-related problems get complicated. I will contact you privately, of course, when the need arises. My main concern afterall is not with FATCA, nor even FBAR. What is making me nervous now, after reading your explanation, is the required filing of Form 8938 with my income tax return when the off-shore bank account exceeds “certain thresholds specified by the IRS”. What is the amount of that threshold? Does this mean I have to… Read more »

John Reyes
John Reyes
6 years ago
Reply to  John Reyes

Hi Paul –

Regarding my question above, “what is the amount of that threshold”, I just read your comment to Randy regarding exceeding aggregate value of specified assets. I am nowhere near that amount yet.

Paul
6 years ago
Reply to  John Reyes

Hi John – I see in a later comment that you found the threshold amounts for your current situation in my response to Randy. So, I’ll just emphasize that you should keep an eye on the aggregate value of all Non-U.S. “specified” assets each year to make sure that you remain in compliance for “filing or forgetting” the Form 8938. Remember, better safe than sorry! ? As for your other question – SORRY. As with FBARs, you would be reporting “specified” assets that you own (directly or indirectly), that you have an interest in, or that you have “signature authority… Read more »

John Reyes
John Reyes
6 years ago

I should add, Paul, that even though I wrote the above comment in the past tense, the whole thing is hypothetical. It is not a done deal. I will revisit the issue again when I return to the Philippines. Still, I would like to know your opinion. Thanks.

Gary Dadds
Gary Dadds
6 years ago
Reply to  John Reyes

The only problem I see is the money ever getting as far as the account. Perhaps we could have a competition to come up with the best excuses, I’m sure your relative could win every time.

Paul
6 years ago
Reply to  Gary Dadds

Hi Gari – you’d be surprised at the number of potential “mishaps” that could occur in getting that revenue safely deposited and accurately posted to a bank account. They’re not limited to the involvement of the “principals” in the scenario. The number of hands that could “put the touch” on those funds are roughly equal to twice the number of persons having knowledge of, or “getting wind of” the existence of those funds. 😆

Paul
6 years ago
Reply to  John Reyes

Whoa! Heart be still.

Hypothetical = Hope! If you have not engaged a bank account with someone other than yourself being the sole owner (outside of your loving and trustworthy Asawa, of course) Then my suggestions are simple: DON’T DO IT.

Follow the volume I wrote in response earlier, and you can’t go too far wrong.

If you need a little “pro” assistance with this matter, I’m available via private message.

PapaDuck
PapaDuck
6 years ago

John,
You would only have to pay taxes if the account was over $50,000.00 at the end of the tax year or more than $75,000.00 anytime during the tax year. I think i would be more worried about him keeping more money than needed for Maintenance/Repairs. Are you planning on coming back again soon? Take care.

Paul
6 years ago
Reply to  PapaDuck

Hi PD – While what you say is basically true for a “specified U.S. Person” (in this case, a U.S. citizen) whose residence and “tax home” is located within the U.S. and who’s filing an individual income tax return using the filing status of “Single,” the permutations of those three variables in the scenario result in differing threshold amounts. In John’s case, he holds U.S. citizenship, resides and has his tax home within the U.S., and would most likely file his income tax return employing the filing status of “Married Filing Jointly.” In this event, the threshold amounts that trigger… Read more »

John Reyes
John Reyes
6 years ago
Reply to  PapaDuck

Hi Randy –

For me, returning to the Philippines is the plan, pretty much like the swallows coming back to Capistrano every year. 🙂

https://www.youtube.com/watch?v=BXyKe43pE2Y

Rusty Bowers
Rusty Bowers
6 years ago

Paul,

I may have missed your reply but did you say someone does your taxes? If so who does your taxes? How much do they charge?

Do they just do high profile taxes like yours and Trumps?

Paul
6 years ago
Reply to  Rusty Bowers

Hi Rusty – My personal income tax returns are prepared by what I consider to be the leading U.S. Income Tax authority for those residing outside of the U.S., who focus on domestic and international tax issues and serving U.S. expatriates and residents alike:

Keating & Chillingsworth, Ltd.

Of course, being the managing member of K&C, Ltd., I am a little biased. 😆

John Reyes
John Reyes
6 years ago
Reply to  Paul

Hi Paul –

For some unfathomable reason, the name, “Keating & Chillingsworth”, particularly with its use of the ampersand symbol, somehow evokes for me a quaint English trading post of a bygone era of British raj, where men in heavily-starched khakis and riding boots congregate at a mahogany paneled bar tended by a refined, turbaned Indian man.

You’ve come a long way, baby! LOL

Paul
6 years ago
Reply to  John Reyes

Hi John – All we have to do is grow and export tea, then the picture would be complete! 😆

Rusty Bowers
Rusty Bowers
6 years ago
Reply to  Paul

Keating? I’ve heard of that name before. Isn’t that a huge billion dollar corporation? Aren’t they involved in a multibillion dollar international scandal? Something to do with writing off pink doilies.

Paul
6 years ago
Reply to  Rusty Bowers

Hi Rusty – Maybe your thinking of John McCain’s friends, the “Keating Five” incident, and of the Lincoln Savings and Loan Association’s Chairman, Charles H. Keating, Jr. No friend, no association, and no relation. We trust banks and S&Ls less than we do the IRS, and trust competent money managers more than bankers. Afterall, it was the $3B+ failure of Lincoln that triggered off the big S&L scandal of the late ’80s – early 90’s. All professional interaction with banks, credit unions, and S&Ls by Keating & Chillingsworth, Ltd., to date, has been of a depository nature alone, at arm’s… Read more »

John Reyes
John Reyes
6 years ago

Hi Paul –

Thanks again for the advice. However, renouncing U.S. citizenship to avoid paying taxes is the farthest thing in my mind.

I will file Form 8938 with my tax return when I hit that threshold and pay my taxes accordingly.

GaryM
GaryM
6 years ago

I just started getting all of our stuff together for our tax filing. I will have to add a W-9 to my income requirements. I will also have to file a FBAR because we transferred money to buy our second car here. I do not see it being that much more difficult filing here as to filing in the states, at least in my case.

Paul
6 years ago
Reply to  GaryM

Hi Gary – The Form W-9 is provided directly to the requesting party (e.g., a Philippine bank) only, and at their request alone. Otherwise, it’s a forgotten form that taxpayers never file with the IRS or include with their income tax returns.

FBAR filing is all electronic now, performed on the BSA (Bank Secrecy Act) website of the U.S. Department of the Treasury. It’s very straightforward, and you should not have any difficulties e-filing your report. Just remember to e-file it on or before June 30, 2016, and you won’t go wrong.

Rusty
Rusty
6 years ago
Reply to  Paul

Talking about form w9 can you answer the following. I asked the AZ retirement system to send me a form so I could adjust my withholding tax. They semt me form w-9. Is that the right form to reduce my tax percentage? They say it is. Is it?

Also instead of getting a 1099R from Arizona retirement they’ve sent me form 1042-S. Which I’m not sure is meant for me in my case.

Paul
6 years ago
Reply to  Rusty

Hi Rusty – Ah, taxes! How simple they are – NOT! 😆 Here is my recommendation for helping make the problems go away: 1) File Form W-9: This form will certify to the ASRS that you are a U.S. citizen and will provide the ASRS with your valid tax identification number (your SSAN). It should remove any doubt about your citizenship status that ASRS may have. 2) File Form W-4: This form is used by Section 401(a) retirement plan beneficiaries to change income tax withholding amounts. ASRS is a Section 401(a) plan. 3) Inform the ASRS that, as a U.S.… Read more »

Paul
6 years ago
Reply to  GaryM

Gary – I should add that an FBAR filing would be required only if you transferred the second car purchase funds into a Philippine (or other Non-U.S.) financial account that you either own, have an interest in, or have signature authority over. Transferring those funds directly from a U.S. financial institution to the car seller’s account, or delivering cash at the point of sale without those funds ever being posted in your personal Non-U.S. financial account, will not trigger the required FBAR filing.

(You are most likely aware of this, but other readers ……)

GaryM
GaryM
6 years ago
Reply to  Paul

Yes, I transferred into our BPI account. We did it the same way we transfer all of our money from the states. We write checks to ourselves and wait the 21 days for it to clear. Call me cheap, but it’s a free money transfer this way.

Paul
6 years ago
Reply to  GaryM

You’re not cheap, Gary. You’re economically minded, and knows how to use those tools called “money.”

Besides, “free” is good.

(After all, one doesn’t give the hardware store owner a 5/16″ socket as a fee when purchasing a metric spline wrench set. Why give a banker or currency transfer agency a handful of Pesos just so you can receive some Dollars? 😆 )

Rusty Bowers
Rusty Bowers
6 years ago
Reply to  Paul

We do the same at BPI. Except we have to wait 25 days. The check actually clears after 7 days but the bank has us wait 25 days.

Rusty

GaryM
GaryM
6 years ago
Reply to  Rusty Bowers

The good thing is that BPI credits your account immediately but it is just not available. You will earn interest on the same money in both accounts until the check clears back in the states. It is not much but I like to think that they are paying me.

Rusty Bowers
Rusty Bowers
6 years ago
Reply to  GaryM

Thanks, GaryM I didn’t know that. It may not be much but that’s OK.

Jeda
Jeda
6 years ago

Hey Paul, I’m probably screwed reading about FBAR and FATCA after getting an email from BPI two days ago regarding FATCA compliance. You see, I have never reported my foreign accounts since I started working here in the US since mid-2010 (still on H1B); I had been using TurboTax to prepare and file my taxes and the only question the application asked is about having a foreign financial account exceeding $10k. I assumed those were only bank accounts, and total balances of all my PH bank accounts never reached even half of $10k. Now I’m getting nightmares thinking about “aggregate… Read more »

Paul
6 years ago
Reply to  Jeda

Hi Jeda – Firstly, DON’T PANIC! Your concerns and situation are much more common that you can imagine. Your position is not unique and you are among many thousands of taxpayers with similar concerns. To make things a little easier to digest, let’s break things down to separate issues (we’ll take them in the order that they appear in your comment). 1. “Aggregate of maximum value of accounts” – Quite a confusing concept. In simpler terms, this phrase means the maximum total value of all accounts at one point in time. Not all accounts reach their “maximum value” on the… Read more »

Rusty
Rusty
6 years ago

Paul, Thanks for the information. I now know that I was at least partially correct. The last time I contacted AZRS I felt like saying can you please have a custodian contact me. Perhaps he/she knows what is going on. Instead I was polite and said something like ; “Oh, Thanks for all your help.” I’ll fill out the W-9 as you said to do. I’d told the AZRS that I wasn’t applying for a TIN. So did I just need to sign the form and include my SS number. They responded by saying; “The ASRS can not provide assistance… Read more »

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