# USA Tax Questions



## rtho100 (Oct 21, 2009)

I have read many a thread on US taxation but can't find anything that applies to my circumstances.

I am a UK citizen who has been working offshore for over 15 years and have legally not been paying any tax to the UK or anywhere for that matter until very recently.

I married my American wife in 2010 but only got my Green Card in October 2012 and am filing my first tax return of any kind for 2013.

For the months of October '12 to Jan '13 I was working for a non-US company and did not declare any taxes. I was paid into a UK Offshore bank account and my balance was never more than $6500 and often much, much less. This account is now closed down. 

From Jan to March '13 I was unemployed. Since March I have been working again for a US company, paid monthly into my US based bank account and I pay tax. I received my W-2 last month.

I have a bank account in the UK with basically nothing in it apart from the minimum balance required to pay off a UK credit card that I transfer from my US bank account. I hope to increase the amount to pay off the credit card quicker but you get my gist. There is never more than a couple of hundred pounds in it for more than a week.

I also own a house in the UK with my brother that we have started to rent out, but we make a loss against the mortgage. We want to sell it ASAP!

I now own a family home in the US where I live 6 months of the year with my wife and 3 step-children. I work a job where I earn a days holiday for a day worked and essentially work for only 6 months a year. It is my only form of employment.

I have a few questions...

What are my tax responsibilities in the US regarding my taxable income from the time I got my Green Card to the time I was unemployed in my former job? ie. October 2012 to Jan 6th 2013

What are my tax responsibilities in terms of reporting foreign bank accounts?

What are my tax responsibilities in the US regarding rental "income" to pay my UK mortgage and what is the best tax efficient way to sell the house without getting stung by the IRS? Could I gift the profit to my parents for instance?

I am completely new to taxation of any kind anywhere as I've never had to worry about it, and really have no idea where to go next. I'm not sure H&R Block have the expertise to help.

I hope that someone can steer me in the right direction.

Many thanks in advance.


----------



## BBCWatcher (Dec 28, 2012)

rtho100 said:


> What are my tax responsibilities in the US regarding my taxable income from the time I got my Green Card to the time I was unemployed in my former job? ie. October 2012 to Jan 6th 2013


It's a calendar year basis, so let's focus on the period through December 31, 2012, first.

In that tax year you were what's called a "dual status alien." You likely have a tax filing requirement, although if you owe no U.S. tax there's no penalty. You might also have a claim on U.S. tax credits, like the Earned Income Tax Credit.



> What are my tax responsibilities in terms of reporting foreign bank accounts?


None for 2012 since you did not have a total value of $10,000 or more at any point in time outside the U.S. It sounds like 2013 is the same.

When/if you sell that house and deposit a big check, you'll probably have reporting requirements.



> What are my tax responsibilities in the US regarding rental "income" to pay my UK mortgage and what is the best tax efficient way to sell the house without getting stung by the IRS? Could I gift the profit to my parents for instance?


Income is income and has to be declared. Whether it's taxable or not is a separate question. In the case of U.K. real estate rental income you're probably going to be able to claim a tax treaty protection on that. (I haven't looked, but that's a reasonable guess. Check the tax treaty.)

The first $250,000 in net gains on the sale of a primary residence are generally U.S. tax free, but the definition of primary residence is key. Since you haven't been living in that home you may not qualify. To qualify you need to pass a "2 out of last 5" test, but I'm oversimplifying a bit. Again, also take a look at the U.S.-U.K. tax treaty to see if you have some protection there.


----------



## rtho100 (Oct 21, 2009)

BBCWatcher said:


> It's a calendar year basis, so let's focus on the period through December 31, 2012, first. In that tax year you were what's called a "dual status alien." You likely have a tax filing requirement, although if you owe no U.S. tax there's no penalty. You might also have a claim on U.S. tax credits, like the Earned Income Tax Credit. None for 2012 since you did not have a total value of $10,000 or more at any point in time outside the U.S. It sounds like 2013 is the same. When/if you sell that house and deposit a big check, you'll probably have reporting requirements. Income is income and has to be declared. Whether it's taxable or not is a separate question. In the case of U.K. real estate rental income you're probably going to be able to claim a tax treaty protection on that. (I haven't looked, but that's a reasonable guess. Check the tax treaty.) The first $250,000 in net gains on the sale of a primary residence are generally U.S. tax free, but the definition of primary residence is key. Since you haven't been living in that home you may not qualify. To qualify you need to pass a "2 out of last 5" test, but I'm oversimplifying a bit. Again, also take a look at the U.S.-U.K. tax treaty to see if you have some protection there.


Many thanks BBCWatcher. That has eased my concerns somewhat especially on reporting foreign bank accounts and on the rental income.

I will look into the tax treaty for both the income and the sales when it comes around.

I did speak to a CPA off the record regarding my taxable US income with my former employer at the time and he actually recommended that I not declare as it was such a short period of time! I guess we will see. 

I am prob going to use the same tax accountant that my wife uses and I hope that he will be able to help. 

Many thanks though. Very helpful.


----------



## BBCWatcher (Dec 28, 2012)

For what it's worth I think that was bad advice.

Chances are "fairly good" you don't actually owe U.S. tax for tax year 2012, but you'll have to run the numbers to find out. One thing that's unclear to me is whether you were physically present in the U.S. from October, 2012. That's the implication from your post (since that's when you got your green card), but I think there are a very few ways to get a U.S. green card while outside the U.S., so that wasn't clear.

If you weren't actually physically in the U.S. in 2012 then it's even less likely you'd owe U.S. tax. But I would get a filing in, especially if you can legitimately claim a refundable U.S. tax credit for that year.

You won't have any U.S. self-employment tax because you weren't self employed, so that's another reason why you might be penalty free. And if you paid any foreign tax on that October to December income then you can use that either as a Foreign Tax Credit or Foreign Tax Deduction (as the rules allow) to offset any U.S. taxes.

Note that the 2012 filing threshold was $9,750 (single filers, under age 65) or $3,800 (married filing separately). That is, if your total income was less than those figures, you were not required to file a U.S. tax return (though you may still want to for tax credits). I think that's based on the period for which you were U.S. status (from the date your green card was issued), not the full tax year, but double check me on that.

Yet another option is you and your wife could file an amended 2012 return as married filing jointly. I'm assuming she filed a married filing separately (MFS) return for tax year 2012. If she didn't file at all, and you want to file a MFJ return with her for tax year 2012 (and she agrees), then the income threshold (household) was $19,500. That is, if you and she combined had less than $19,500 in income for 2012 (she for the full calendar year, plus you for your 2012 green card period -- but check that), then you/she weren't required to file. Again, it might be a good idea to file to claim refundable tax credits like the EITC if you qualify.

"Refundable tax credits" means money from the IRS. The U.S. tax system has an effective negative tax rate in certain situations. However, if your wife sponsored you, she must have had $19,800 or more in income, so it's probably the case that she filed tax returns. (And she would have had to provide copies of those tax returns anyway.) So, now that I think about it, it's less likely that you/she would qualify for refundable tax credits, and you/she are probably above filing thresholds. But "your mileage may vary."

The timing of your home sale in the U.K. is something to keep an eye on. In particular, if you're approaching the point in time when you will not meet the "2 in 5" rule for excluding the maximum $250K, then you might want to sell sooner rather than later. Alternatively, if you expect that at some point in the future you'll terminate your U.S. green card and return to the U.K. (or elsewhere), you might want to hold off selling that home until you are no longer subject to U.S. income tax. Keep in mind that $250K figure (if you qualify) is net gains, after costs. The IRS explains what that means, but it's a bigger figure than most people realize for that reason. Also, it's your pro rata share. If you are a 50-50 owner with a brother, for example, then you're only responsible for half the net gain from a U.S. tax point of view (and then only if the U.S.-U.K. tax treaty doesn't provide relief). Same with rental income.


----------



## BBCWatcher (Dec 28, 2012)

I should add one other thing now that you're starting to get familiar with the U.S. tax code.

Do you have medical insurance provided either via your U.S. employer or your wife's employer (if she's employed)? If so, no problem.

If not, or if you don't have _qualified_ medical insurance, you'll want to make sure you get properly insured this year (2014) before March 31. You can investigate options at the official government health insurance portal Healthcare.gov. The reason is that, starting in tax year 2014, you'll typically (though not always) have to pay a higher tax rate if you don't have adequate health insurance. In tax year 2014 it's not a big tax increase, but it's something, and that non-coverage penalty goes up in tax year 2015 and beyond. This is a new, significant facet of the U.S. tax code starting this year (2014). There are also subsidies, administered through the tax code, to help you pay medical insurance premiums if your income is limited.

But if you've got U.S. employer-provided medical insurance, directly or via your wife's employer, no problem, you're good.


----------



## Davis1 (Feb 20, 2009)

US - UK Tax Preparation and Advice | BritishExpatsTax.Com


----------



## rtho100 (Oct 21, 2009)

Thanks BBCWatcher for the added info.

I got my Green Card whilst in the US, and was working at the time. However, as I was working on a yacht, we left US waters at the beginning of December for Christmas and when I flew back at the beginning of January I was no longer employed. I received no salary until the end of March which was from my new employer. I would have had no tax credits from the UK as I legally had no responsibility to pay UK tax due being out of the UK for more than 186 days of the year.

So, can I assume that I should file with my current tax accountant for October and November 2012? If so, how can I prove that I was working? I have no pay stubs and the bank account that I used to pay into is now closed. It has been in fact for over a year now. It's only because I'm trying to figure out the practicalities and obviously do not want to be fined thousands in tax avoidance when I might owe less than a tenth of that in actual tax!

I do indeed own my flat 50:50 with my brother, but given that I have been a UK non-resident for tax purposes probably doesn't mean that I qualify for any tax credits of any sort. I have no real idea what I will do with any net gains and/or whether it makes more monetary sense to keep it in the UK or to transfer it over to the US. I guess the latter may depend on the exchange rate at the time! Ultimately I'd like to reinvest in property somewhere in Europe.

So many questions! I really need a tax accountant and financial planning specialist that knows international law!


----------



## BBCWatcher (Dec 28, 2012)

OK, let's go slowly here. I'll describe the core principles as I understand them, but you'll have to run some numbers to see what you owe (if anything).

In 2012 you were a "dual status" alien. Prior to obtaining your green card you would only owe U.S. tax on U.S. source income. From the day you received your green card, you would be subject to tax on your worldwide income because you became a "U.S. person." So the fact the boat you were on left port and sailed into international waters for a month doesn't really mean anything from a tax point of view UNLESS you can qualify for the Foreign Earned Income Exclusion (FEIE) for all of tax year 2012. But I don't think you can pass either of the FEIE tests for that October to December period. The FEIE's physical presence test, for example, requires you to be out of the U.S. for 330 out of 365 days. I think you fail that test due to October and November.

Note that if you received a bonus for working on that yacht, and that bonus was received in 2013, you may be able to shift it into 2013's income. Read the rules carefully on that. Of course any wages relating to your work on that yacht during 2013 would fall into tax year 2013. Also, provision of room and board aboard that yacht would generally not be counted as income (and not even reportable), because it's part of your workplace. But again, check the rules on that. (Pretty sure about that one, though.) If you had business-related expenses -- like having to pay for visas out of pocket -- then those can usually be deducted as business expenses.

If it was a foreign flagged vessel then maybe some tax treaty or tax rule gives that income special consideration. I know there are certain tax quirks for air crews, for example.

Another interesting question is whether you worked for an employer or were self-employed. It sounds like an employer -- a yacht generally has a corporate structure to it, and you presumably didn't own any of that corporate structure -- but do read the rules on that. It's a mixed blessing if you do end up owing self-employment tax. If you owe it, that means 2012 will go into the record books as a U.S. Social Security year for you -- probably a full 4 credit year. And that's good because it means you'd need only 36 more work credits (8 and some fraction more years -- 2013 would be year 2) to qualify for U.S. Social Security retirement benefits.

To figure out your income back in 2012 you'll have to do the best you can to recover whatever records you have. If you can get bank statements from 2012, great. (Should be possible.) If you really don't have any records, take your best, reasonable guess. You probably have a pretty good idea what you were paid per week or per month based on at least a verbal agreement, so take a look at the calendar, estimate how long you were on the boat in 2012, and take your best guess. If you have stamps in your passport that might give a clue when you departed, that'd help. Just keep any records you used to estimate your income in your personal files.

One easy solution to your U.K. real estate is simply not to sell it while you're a U.S. person. No sale, no gain. If your brother wants to sell then one option is to buy him out at fair market value. That's still not a sale, it's a purchase. (He's selling, and he'd pay U.K. tax on that sale, if any.)

The IRS does a pretty good job explaining all the rules relating to U.S. taxability of home sales in IRS Publication 523, so take a look at that. But bear in mind those are the general rules, so you then have to refer to the U.S.-U.K. tax treaty as well. It's not unprecedented that the tax treaties the U.S. signs exclude that particular country's real estate from U.S. taxation, even if held by U.S. persons. But it just depends on that specific tax treaty whether that's true or not. I should also point out that, since you're married, your wife can generally inherit an unlimited estate from you with zero U.S. tax owed. Whether the U.K. taxes your U.K. portion of your estate is up to the U.K. So if you imagine you'd want that U.K. property to go to your wife when you depart this planet (hopefully at age 130+), you can hang onto it. If she ever then sells the house she might have a U.S. tax liability or might not, but very long term tax deferral is very nearly as good as never paying, especially if you're no longer on the planet.


----------



## BBCWatcher (Dec 28, 2012)

Oh, while we're on the "Introduction to the U.S. Tax Code" theme, I should note that you have until April 15, 2014, to make a U.S. retirement account contribution for tax year 2013. You can contribute up to $5,500 if you're under age 50, or up to $6,500 if you're 50 or older. You must have at least that amount of earned income (from work) in 2013, but that seems like a safe bet. Regardless of whether your wife worked or not, you can contribute up to the same limits for her, as long as your earned income (or your combined earned incomes) in tax year 2013 are equal to or greater than the amount you contribute to your retirement account.

There are some income limits to making contributions to an individual retirement account (IRA), so if your earnings were relatively high you have some extra work to do. Or if you don't file a joint return for tax year 2013. (The extra work is something called a "Backdoor Roth IRA," if you're curious. It's not much extra work.)

So, why would you want to contribute to a U.S. IRA? Well, there are a couple types of IRAs, but let's focus on the Roth IRA since that's often the better one, and it's pretty simple. You put your after-tax money into a Roth IRA and invest it. If you leave the money in that account for at least 5 years and you don't withdraw it until you reach at least age 59 1/2, all the gains on that money are 100% U.S. tax free -- and sometimes foreign tax free even if you are living outside the U.S. at the time you withdraw. That's the deal, and it's a simple one.

In my opinion the very best deal in Roth IRAs is with Vanguard. You open an IRA with them (which you can do online) and put the money in one of their Target Retirement mutual funds depending on the approximate year when you expect to retire. For example, if you expect to retire about the year 2040, you'd pick the Target Retirement 2040 Fund. Simple. And then do nothing except keep contributing every year (if you can). Just let it ride and don't even look at it. (It will go up and down, but over the long run up, hopefully.) Those "Target" funds will automatically and gradually shift from stocks to bonds as you approach your target year, and you don't have to worry about that. Also, Vanguard funds are cheap. Vanguard only collects 0.18% per annum to manage your investment, which may be the lowest rate in the world for an investment fund like that.

If your employer also offers retirement savings, usually a so-called 401(k) plan, then that's generally a good deal, too. If you can do both, super.

For more information on U.S. IRAs, have a look at IRS Publication 590. After reading that, if you don't think you qualify to make contributions due to income limits, use your favorite Internet search engine to look up "Backdoor Roth IRA."


----------



## Bevdeforges (Nov 16, 2007)

From what you're saying, I take it that your wife has been filing as married, filing separately these last couple of years. Now that you have your green card, you will be able to file jointly, which is a big advantage all around. 

I'd concentrate for the moment on filing for 2013, for which you will be obliged to declare all your worldwide income - and better to declare jointly with your wife (and the step children) than on your own.

I wouldn't worry about the IRA just at the moment - though for the longer term it's a good idea to look into.

As far as the sale of the house in the UK, it's not your primary residence by any stretch of the imagination, so you will owe taxes on the gain on the sale (or your half, at least) - but your primary tax obligation will be to the UK. Pay them off, and then use the tax credit to offset the tax generated by the sale on your US return. (Though the difference in the tax years may mean that you have to pay up in one year and then take the tax credit in the next.)

There is no reason, however, not to use the same tax accountant your wife uses, particularly if you're filing jointly. There are quite a few advantages to filing jointly (such as the exemptions for the step children).
Cheers,
Bev


----------



## BBCWatcher (Dec 28, 2012)

Bevdeforges said:


> I wouldn't worry about the IRA just at the moment - though for the longer term it's a good idea to look into.


I disagree. It's February 20, and there are a few weeks to think about it. That's plenty of thinking time. The deadline for tax year 2013 is April 15, 2014. Once April 15th passes, that year's $5500 (or $11000) opportunity, with tax free gains, is gone forever.

The only real question is whether you can afford to save for retirement or not. If you can, take that tax free deal first -- absolutely no question. Any other way you save will be taxed on the gains. This is not a hard decision.


----------



## Bevdeforges (Nov 16, 2007)

My main point was that many of the institutions that will allow you to set up an IRA now require that you show up in person to open the account (and sign the necessary paperwork). And most of those institutions are located in the US. I honestly don't remember precisely what was required back when I set up my IRA "many" years ago - but I know the criteria have changed a bit with all the "know your customer" rules for both banks and investment firms.

If push comes to shove, it's the taxes that need to be filed in a timely manner. Setting up an IRA is a good idea, but I wouldn't delay filing the tax return too long if you need to investigate and understand how these IRA things work.
Cheers,
Bev


----------



## rtho100 (Oct 21, 2009)

Thank you both for your input here.

I have been looking at IRA's but have not delved particularly deeply. It's something that I am going to have to do next year unfortunately. I will certainly look up Vanguard though and go from there.

In terms of filing, I have sent everything off to my wife's CPA for 2013. He will decide whether or not it makes sense to file together or separately. He has not asked me about 2012 and I guess I wonder why I should be forthcoming? How will the IRS know about my 3 months of post GC income and how can I prove what I did or didn't make? I want to be clear that I do want to play by the book, but just don't understand how the US can know what I own in other countries or indeed how much I got paid in a job which I never legally paid tax on in the first place. 

When it comes to the sale of the house, it seems that paying tax in the UK first would be best. I cannot afford to buy my brother out and do want to keep the gains in the UK. I assume that if it sells after April I would need to divulge the gains if over $10,000 in my 2014 return? If I were to open say 2 bank accounts with 5k in each would I still have to report?

I have medical insurance that I pay for myself. My current employer only covers me for my time onboard, but I have a proper policy with one of the big insurers and I don't qualify for the Obamacare because I get paid too much.


----------



## BBCWatcher (Dec 28, 2012)

You'll have to report the bank accounts regardless. It's $10,000 or more in total value at any moment in time that triggers FBAR reporting. But it's reporting only, not (necessarily) a tax liability. That's a separate question.

Note that your wife can make her own and your IRA contributions if she has earned income and can afford it. Spouses can contribute for each other. If she can do 2013, you do 2014.... Whatever works for you both. Or if neither of you can afford tax year 2013 contributions, so be it, but try to start doing that in tax year 2014 if you can.


----------



## Bevdeforges (Nov 16, 2007)

> When it comes to the sale of the house, it seems that paying tax in the UK first would be best. I cannot afford to buy my brother out and do want to keep the gains in the UK. I assume that if it sells after April I would need to divulge the gains if over $10,000 in my 2014 return? If I were to open say 2 bank accounts with 5k in each would I still have to report?


Don't forget that the US tax year is the calendar year - so if the house sells (at any time - before or after April) you "should" report the gain as part of the appropriate US tax return. How or where you stash the proceeds is a separate issue - if you leave the money in the UK, then yes, you will probably wind up having to report the bank accounts on your FBAR filing. FBAR filings are based on the combined total of all your foreign (to the US) bank accounts. 

However, on the house sale, any and all income taxes (including capital gains tax) paid on your share of the gain can be credited against whatever tax liability the sale generates on the US side. Your wife's tax accountant should know how to handle that one when it becomes an issue.
Cheers,
Bev


----------

