Article
2016 Tax Filings - Important Reminders for US Citizens Living Abroad
2 February 2017
1) Due Dates for 2016 Tax Filings:
U.S. Income Tax Return - Form 1040
The U.S. Form 1040 tax return for tax year 2016 is due by April 18, 2017. Overseas filers receive an automatic two month extension and have until June 15, 2017 to file. All taxpayers can file an extension to delay the filing deadline until October 15, 2017. We will automatically file the extension request for all of our clients that are unable to file by the initial due date. If you would like for us to not automatically file the extension request please contact us as soon as possible. Please note that the extension provides additional time to file the tax return but not for the payment of tax due. Any tax paid afterApril 18, 2017 will likely be subject to interest and late payment penalties.
Foreign Bank and Financial Account Reporting – FinCEN (FBAR)
The 2016 FBAR report is due by April 15, 2017 with a maximum extension for a 6-month period ending on October 15. The FBAR reports all your financial accounts that are held overseas with foreign financial institutions. In order to prepare the report, we will need highest balances or as a close estimate - the year end balances for all bank, pension, and investment accounts.
2) Estimated Tax Payments:
Individuals are required to make estimated tax payments during the course of the year in order to pay the tax liability on income that is not subject to withholdings such as income from self employment, interest, dividends, and gains from the sale of stocks, real estate or other assets. Individuals may also have to pay estimated tax if the amount withheld from US source wages or other income is not enough. Estimated tax payments are made on a quarterly basis. For tax year 2016, the estimated tax payments were/are due on the following dates: April 15, 2016, June 15, 2016, September 15, 2016, and January 15, 2017.
To avoid incurring any penalties, the taxes paid through withholdings (if there were any) plus the estimated tax payments should equal the lesser of:
90 percent of the tax liability for the current year.
100 percent of the tax liability for the prior year.
From a practical standpoint if you owed any taxes on your 2015 tax return and there was no significant change in your income in 2016, you should have made (in 2016) quarterly estimated tax payments that together with tax withheld (if any) equaled your 2015 total tax liability. If you owed taxes on your 2015 tax return and did not make estimated tax payments in 2016 you should make the tax payment now. For 2016, you can start making quarterly payments based on 2015 figures and adjust these payments to 2016 figures as soon as your 2016 tax return is filed or when the 2016 tax liability is known to you.
To make the estimated tax payments, you can do one of the following:
Utilize the one of the approved IRS payment websites listed on the following link(http://www.irs.gov/uac/Pay-Taxes-by-Credit-or-Debit-Card),
Utilize the EFTPS (Electronic Federal Tax Payment System) website, which can be accessed using the following link: https://www.eftps.com/eftps/
Send in a check along with the payment voucher (Form 1040-ES). Normally, the current vouchers are included in the tax return package from the prior tax year.
3) Our recommendation: Do not Invest in PFICs – Passive Foreign Investment Companies
The U.S. government wishes to discourage U.S. citizens from making investments in foreign investment companies (i.e. foreign mutual funds). Consequently, they created the PFIC - "Passive foreign investment companies" tax regime that subjects the income from investments in passive foreign investment companies to very high and punitive taxation. Practically all Israeli mutual funds and ETFs (קרנות נאמנות, תעודות סל) fall under this category. Therefore, we strongly recommend that you do not hold such investments. While these investments are very popular in Israel and are subject to lower Israeli taxation, the PFIC taxation in the US is very high and more than cancels out those benefits. Please contact us if you would like to get more information on this important issue. If you already have invested in PFIC investments, we strongly recommend that you sell them as soon as possible to avoid this harsh U.S. taxing regime.
4) Additional 3.8% Tax On Investment Income For High Income Taxpayers
Beginning in tax year 2014, an additional 3.8% tax was imposed on certain investment income. This tax applies to income items such as interest, dividends, stock sales, and net rental income (rental income less deductible related expenses). The tax affects single taxpayers with gross income above $200,000, married filing jointly taxpayers with gross income above $250,000 and married filing separately taxpayers with gross income above $125,000.
The tax is calculated by applying the 3.8% tax rate to the lesser of:
Taxpayers net investment income, or
The excess of gross income above the threshold amount
Please be aware that this additional tax cannot be offset by any taxes that you paid in Israel. Therefore, from a Unites States tax liability perspective, it may be preferable to choose, when possible, to receive additional income in the form of salary with corresponding foreign tax credits rather than to receive compensation in the form of dividends (which are subject to the investment income tax).
5) You are Required to Report Gifts that You Make of Receive
You are required to report any gifts in excess of $14,000 that you make to any person other than your spouse.
For gifts made to a spouse who is not a US citizen, the annual exclusion amount for 2016 is $148,000. Payments to charity, political organizations, and payments for qualified tuition are not subject to gift tax.
Additionally you are required to report any gifts or inheritance that you receive from a foreign person during the year with a value in excess of $100,000.
Please be sure to retain the relevant documents and advise us regarding any reportable gift which you made or received during the year, as the penalties for the non-reporting of gifts are very high.
6) Form 5471 - Information Return of U.S. Persons With Respect to Certain Foreign
Corporations and Form 8865 - Return of U.S. Persons with Respect to Certain Foreign Partnerships.
Form 5471 is filed by U.S. persons who are officers, directors, or shareholders in certain foreign corporations. Form 8865 is filed by certain U.S. persons who are partners in foreign partnerships. There is a $10,000 penalty for the late filing of Form 5471 or Form 8865. If either of the forms are relevant to you, please contact us for additional details regarding this important filing requirement.
7) Individual Income Tax Rates For 2016 and 2017
A new top rate of 39.6% was implemented in 2013. This highest rate applies to taxpayers with income levels above the following amounts:
Filing Status
2016
2017
Married Filing Jointly
$466,950
$470,700
Head of Household
$441,000
$418,400
Single
$444,550
$233,475
Married Filing Separately
$415,050
$235,350
Filing Status20162017
Married Filing Jointly$466,950$470,700
Head of Household$441,000$418,400
Single$444,550$233,475
Married Filing Separately$415,050$235,350
The other individual marginal tax rates for 2016 remain the same as in prior years (10%, 15%, 25%, 28%, 33% and 35%) with some minor changes in the brackets.
8) Foreign Earned Income Exclusion Amount
The maximum amount of foreign earned income (foreign wages) that one can exclude in the 2016 tax return is $101,300.
9) 20% Tax Rate for Qualified Dividends and Long-Term Capital Gains:
Beginning in tax year 2013, a new 20% tax rate applied to qualified dividends and long-term capital gains for individuals in the highest tax bracket (39.6%). For individuals in the other marginal tax brackets, the preferential tax rate for qualified dividends and long-term capital gains remains unchanged (at 15%). A special 0% tax rate applies to individuals in the 2 lowest marginal tax brackets (10% and 15%). Note: The new 3.8% Net Investment Income Tax discussed in #4 above applies to both qualified dividends and long-term capital gains as well, meaning a potential effective tax of 23.8%.
10) Additional 0.9% Medicare Tax On "Excess" Wage Income For High Wage Earners
Beginning in tax year 2013, an additional 0.9% "excess" tax was imposed on taxpayers who receive a high salary. For Single or Head of Household taxpayers, the wage income threshold is $200,000; for Married Filing Joint taxpayers, the wage income threshold is $250,000; and for Married Filing Separately taxpayers, the wage income threshold is $125,000.
11) Self-employment tax (Social Security):
U.S. citizens living in Israel and operating an unincorporated business (i.e., working as an (עצמאי are subject to U.S. self-employment tax on net business income, in addition to Israeli Bituach Leumi payments. The reason for that is that although there is an income tax treaty between the US and Israel there is no similar agreement between the two countries regarding social security payments. One way to resolve this problem is to operate your business through an Israeli company. Please contact us if you would like more information.
12) Additional Child Tax Credit:
U.S. taxpayers are entitled to receive a $1,000 tax credit for each qualifying child under the age of 17 (subject to adjusted gross income limitations). The credit is at least partially refundable if the taxpayer has earned income of more than $3,000. The credit begins to phase out at the following adjusted gross income levels: :
$110,000 for married filing jointly.
$75,000 for single, head of household.
$55,000 for married filing separately.
13) Deduction and Credits for qualified tuition:
The 2012 American Taxpayers Relief Act extended the tax deduction for qualified education expenses through December 31, 2013. As such, this deduction is due to expire at the end of this year. The American Opportunity tax credit (one of the credits available for qualified higher education expenses) has been extended through 2018.
14) Estate & Gift Tax:
The estate and gift tax exclusion has been retained, and is indexed for inflation ($5.45 million in 2016 and $5.49 million in 2017). The top estate tax rate had increased from 35% to 40% effective January 1, 2013.
15) Taxpayer's individual responsibility for health care:
A taxpayer, under changes enacted though health care legislation, must either: indicate that he, his spouse and his dependents had health care coverage throughout 2015; claim an exemption from the health care coverage requirement; or make a payment if he, his spouse and his dependents did not have coverage for any month in 2015 and did not qualify for a coverage exemption. U.S. citizens living in a foreign country for at least 330 days of a 12-month period are not required to get health insurance coverage for that 12-month period. In addition, U.S. citizens who are bona fide residents of a foreign country (or countries) for an entire taxable year are treated as having minimum essential coverage for that year.
Regards,
Ehud Kisch CPA (U.S./Isr)
Partner, Head of US Tax Compliance Dept.
BDO Ziv Haft
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