Newsletter 21 Jan 2020

IRS News

The IRS has announced that the 2020 Annual Tax Filing Season (ATFS) will open on January 27, 2020. The IRS strongly encourages electronic filing and preparers are required to electronically file returns they prepare for compensation.

The IRS is currently implementing the Taxpayer First Act, an Act signed into law on July 1, 2019. The Act introduced the most significant changes to IRS administrative procedures since the 1998 IRS Restructuring and Reform Act[1]. Many, if not most of these improvements have been spearheaded by the National Taxpayer Advocate through her Annual Report to Congress.
The hallmarks of the Taxpayer First Act are, according to the IRS:

1. Improvement in taxpayer experience.
2. Modernisation of IRS information systems.
3. Improvements to the IRS organization.
4. Cybersecurity and identity protections.
5. Enforcement to ensure a fair and just tax system.

[1] Source: Taxpayer Advocate Service NTA Blog: Highlights of the Taxpayer First Act and Its Impact on TAS and Taxpayer Rights, November 21, 2019

Q. What if I don’t file?

A. Depending on the tax or information return that the taxpayer has failed to file, and the surrounding circumstances arising to the transgression, a number of outcomes could arise. The IRS usually considers whether the taxpayer had reasonable cause for the failure to file the return, and whether the taxpayer acted wilfully or non-wilfully.

If the IRS has reason to believe that a violation of the Internal Revenue Code has occurred it can initiate a primary investigation. This investigation may be escalated to a subject criminal investigation upon approval by a frontline supervisor. Should the investigation lead to a criminal investigation, IRS Chief Counsel Criminal Tax Attorneys will be involved. Prosecution can lead to a conviction and possible incarceration.

Q. I haven’t filed IRS forms to report my trust. What should I do?

A: The delinquent international information return submission procedures are available for outstanding international information return Forms including 5471, 3520, 3520-a, 8865, 8938[1] but excluding Form FinCen114[2] The procedures are used where there is ‘reasonable cause’ for not having filed. Principles underpinning what constitutes ‘reasonable cause’ are longstanding, as are procedures concerning establishing ‘reasonable cause’.

Q. What if I haven’t filed a Foreign Bank Account Report (FBAR)?

A: The Delinquent FBAR Submission Procedures can be used to file delinquent FBARs under the following circumstances:

1. The taxpayer has not previously filed an FBAR for the year concerned,
2. The taxpayer is not under civil examination or criminal investigation by the IRS and
3. The taxpayer hasn’t already been contacted by the IRS about delinquent FBARs.

Q. How can I pay the IRS?

A. Here are some of the ways you can make a payment to the IRS:

1. Using a Debit or Credit Card if you have a NZ based bank account.
2. Via Wire Transfer by completing a Same-Day Taxpayer Worksheet and using IRS wire instructions.
3. Via a US bank account for taxpayers with US based bank accounts.

Q. Can I claim the Qualified Business Income Deduction for business income I have earned in New Zealand?

A: No. Qualified Business Income (QBI) must be income earned from US sources. Foreign income is not income earned from US sources and therefore doesn’t constitute QBI. Accordingly, the deduction is not available.

[1] We strongly recommend professional advice be sought from us prior to filing outstanding international information returns.

[2] Form FinCen114 is not available for filing under the Delinquent International Information Return Submission Procedures.
 

IRD News

On December 24, 2019 Inland Revenue released QB19/15 and QB 19/16 – Property held in trust and rented for short-term accommodation to cover the scenarios where:

1. Property held by a New Zealand trust is rented by a beneficiary and
2. Property held by a New Zealand trust is rented out by a trustee.

Should property, for example a residence, be rented out by a beneficiary of a trust then the beneficiary is the one that derives the income.

A common example of this occurring is where a family residence is held in a NZ family trust. The trustees of the trust are the legal owners of the trust property. Frequently this is the husband and wife. However, the beneficiaries of the trust might be their adult children for whom the residence is being held in trust for.  
The beneficiaries might rent out the property and in this case the beneficiaries are deemed to derive the income. Otherwise, if the trustees rent it out it is the trustees who must return the income.

On 9 January 2020 Inland Revenue released Determination EE001 ‘Employee Use of Telecommunications Tools and Usage’ simplifying the rules for New Zealand taxation on tools provided to employees including laptops and mobile phones.

Under the determination there are three classes:
Class A – principally business use
Class B – principally private use
De Minimis Class – a reimbursement payment of up to $5 per week per employee.

These classes will apply when:

1. The employer and the employee have entered into an arrangement for the employee to provide their own telecommunications, and;
2. The employee pays for the equipment and the plan, or the plan alone, and the employer provides reimbursement.
3. The reimbursement is a reasonable estimate of the expense the employee has incurred.

Did You Know?

You can carry back foreign tax credits one year, and if you qualify to do so, you must carry these back to the earlier year, before applying the tax credits to the class of income to which they would otherwise attach in the current year.
US citizens and residents are generally subject to tax in the US on their worldwide income. They may also be subject to tax on the same income in other countries which they are residents of for tax purposes. This situation leads to double taxation of income and puts additional tax burden on taxpayers.
In order to do away with this tax situation, the US allows its citizens and residents to take a credit on their US tax return for the taxes paid in foreign countries. The amount of foreign tax credit is limited to the smaller of actual foreign tax paid or accrued or the amount of US tax attributable to the foreign source income. If you live in and pay taxes to a high tax country, you are most likely continuing to accumulate unused foreign taxes.

On the contrary, you will be able to claim the entire foreign taxes on your tax return for the year in which you paid or accrued taxes if you paid taxes to a low tax country. If you have any unused foreign taxes for a year, you can carry these back to the immediate prior year to claim against the excess foreign tax credit limitation for that year, if any and can carry forward the remaining foreign taxes for 10 years.

This means that the unused foreign taxes of a tax year can be treated as though the taxes were paid in the first preceding and 10 succeeding tax years up to the amount of any excess limit in those years. If you cannot use up the foreign taxes within this 10-year period, you simply lose the credit.
 
For claiming the foreign tax credit carryback, you would need to amend your prior year tax return.
 
Here’s an example:

You are a US citizen and were living in the UK in 2019. You received wages in the amount of $100,000 from a UK employer and paid UK taxes in the amount of $40,000 on it assuming the UK tax rate of 40% as UK is a high tax country.

Your income from the UK is taxable in the US as well by virtue of your citizenship. Assume that the US tax rate is 30% of $100,000 i.e., $30,000. In this case, the amount of foreign tax credit on your US return is limited to the US tax on foreign source income that is, $30,000. You can carry back the excess $10,000 to your 2018 tax return, provided there was an excess foreign tax credit limitation on it.

If the carryback is impossible, you can carry the taxes forward for 10 years until 2029 tax year.

If the carryback is possible, you would need to amend the 2018 US return to include the 2019 excess foreign taxes to calculate the foreign tax credit and to claim the tax refund of excess US taxes paid.

New Legislation 

The Consolidated Appropriations Act 2020 (the CA Act) was signed into law in Washington on 23 December 2019.
These most recent changes in terms of US tax reform introduce a number of significant changes.

• Some of the changes repeal provisions introduced under the Tax Cuts and Jobs Act of 2017 (TCJA),
• other changes extend what are known as the “tax extenders[4]”
• retirement plan provisions also have been changed.  

Non-tax extender-related provisions

• Repeal of the 2017 TCJA provisions applicable to the taxation of children’s unearned income[5].
• Reinstatement of the mortgage insurance premium deduction through 2020[6].
• The employer credit for paid family and medical leave and the work opportunity credit are extended.
• An automatic 60-day filing extension for taxpayers affected by federally declared disasters.

Expired tax provisions to be reinstated

• The medical expenses deduction floor is reduced to 7.5% for 2019 and 2020. Previously this was set at 10% of Adjusted Gross Income. This most recent change affords taxpayers greater opportunity to deduct medical expenses, as the threshold over which medical expenses will be available for a deduction[7] is lowered.  
• Cancelled debt which was acquired by a taxpayer in relation to a qualified principal residence is again able to be excluded from income. This provision expired in 2017 but has been reinstated for tax years beginning 1 January 2018.
• The above-the-line deduction for qualified tuition and related expenses has been reinstated through 2020.
• Some environmental tax credits have been extended.

Retirement plan provisions

• Individuals aged more than 70.5 who derive earned income can contribute to a traditional IRA.
• Beneficiaries of inherited IRAs have a ten-year time frame during which distributions need to be taken from inherited IRAs[8].
• Certain part-time workers are now able to contribute to 401-k plans[9].
• Increase in the age at which required minimum distributions[10] are required to be taken from 70.5 years to 72 years.
• Provisions for new parents to withdraw from a qualified retirement plan within one year of birth or adoption of a child.

[4] Some US tax rules are temporary and expire at a specific date (usually the 31^st of December in a given year), unless extended. Extension is frequently retroactive. Tax extenders are not a new practise and tend to occur habitually in US tax law.

[5] Under the TCJA, children’s unearned income was taxed at the applicable trust income tax rate relevant to the class of income.  The repeal of these provisions means that children’s unearned income is again taxable as per the taxpayer’s highest marginal income tax rate.

[6] If itemizing deductions

[7] A taxpayer needs to itemize using Schedule A to claim medical expenses of more than 7.5% of AGI; most taxpayers will get greater benefit from taking the Standard Deduction rather than itemized deductions.

[8] Previously a beneficiary of an inherited IRA had their own lifetime over which to make withdrawals from an inherited IRA.

[9] Prior to the introduction of this provision, part time workers who worked less than 1000 hours per year didn’t qualify to participate in an employer’s 401-k plan.

[10] A ‘required minimum distribution’ is the minimum amount a taxpayer must withdraw from a traditional IRA once the taxpayer reaches a certain age – previously 70.5 years. The RMD is derived from actuarial tables.

Our Services

We are highly experienced in the areas of New Zealand and United States taxation specifically for people who have relocated from the United States to New Zealand or vice-versa. 
 
Our experts can help you with:  

• Individual, company and trust tax residency including advising and planning for the end of the temporary tax exemption. 
• New Zealand income tax including the treatment of foreign retirement plans. 
• Planning to minimize the effects of double taxation including interpretation and application of the income tax treaty. 
• Migration planning from the United States to New Zealand and vice-versa. 
• Information reporting for the United States including FBAR, 8938, 5471, 3520, 3520-a, 8854.
• Expatriation planning and IRS reporting. 
• Income tax return preparation and electronic filing (New Zealand and United States). 
• Streamlined Filing Programme. 
• Assistance with Form W-8BEN and other types of withholding tax issues including claims of overpaid withholding tax. 

In addition we provide the following services: 

• Company formation (New Zealand).
• Preparation of financial statements for all types of entities. 
• Monthly accounting advice, support and reporting. 
• Handling of IRD risk reviews and audits. 
• Business development, management and advisory services. 

Call our Client Relationship Manager to make an appointment: +64 27 512 0365.