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Mail Bag #2 - Social Security Tax Abroad / FEIE & ROTH IRA / Bringing Foreign Inheritance to the US

Mail Bag #2 - Social Security Tax Abroad / FEIE & ROTH IRA / Bringing Foreign Inheritance to the US
Ines Zemelman, EA
01-Jul-17

1. Dealing with SS / Medicaid tax abroad.

I am currently a US citizen living in Brazil and will start working for a Brazilian company in August. I know I have to pay SS / Medicaid tax abroad as well as income tax. How do i know how much I need to pay? When is it due? Can I pay my social security tax through the Social Security website or through the IRS?

Brazil does not currently have a Social Security totalization agreement with the US. If you were self-employed, you would be subject to SECA (Self Employment) tax in both countries.  The two countries signed an agreement in June 2015, but it has not yet been ratified. Until this is ratified, unfortunately in many scenarios US citizens residing in Brazil are subject to double taxation (paying into the social security system of both countries). 

However, as an employee of a foreign company you are exempt from paying Social Security tax in the US. Although you are still required to pay income tax in the US, your final bill will be significantly reduced through the variety of tax saving mechanisms available to expats (i.e. foreign tax paid in Brazil will be applied as a credit towards the US tax due). Your full tax payment will be due  tax by April of next year. We can determine the amount you will pay during tax preparation, please get in contact in early January so that we can prepare your return with plenty of time to spare.  Any payments of tax due will be made to the IRS and not SSA.gov.

Dealing with SS / Medicaid tax abroad.

2. FEIE and Roth IRAs

My wife and I will be teaching abroad in Qatar for the 2017-2018/2018-2019 school years. I recently met with our financial advisor to set up some retirement plans. In short, he wants both me and my wife to contribute to Roth IRAs while abroad. We can't take the FEIE in 2017, but in 2018, we will take the FEIE. It's my understanding that if we take the FEIE, then we will not be able to contribute to our Roth IRAs as planned because we will be penalized. We will both make around a $50,000 tax free salary in Doha. My advisor/his CPA insist that we will be able to. Can you clear this up for me and provide me guidance on contributing to a Roth IRA/taking the FEIE in the 2018 tax year?

Let's tackle this step by step. 

1. If you are staying in Qatar for three years, we may be able to utilize FEIE for you for all three years, including 2017. Next - as an expat you can still contribute to your ROTH IRA. However, you must have taxable income to do so.  What does this mean? If you earn a salary of 50k, and you exclude it all with FEIE, you have 0 taxable income left, and thus cannot contribute to your ROTH IRA. Let's say you get a raise, and you now earn 105k, of which 100k was excluded with FEIE, you would have 5k left of taxable income to contribute to your ROTH.  If you earned 200k, well, you made too much to contribute anyway.           

2. Back to the first scenario of your 50k income. Creative solutions come into play here, whereby we can prepare your return (50k income), without excluding more than you need to, and netting you A. 0 tax due  B. Taxable income that you would utilize to contribute to your ROTH IRA. Of course, this would depend on your particular situation, but from a 30,000 foot view this is certainly possible. We would not recommend this strategy for an amended return.                                    

3. If you prepare a tax return with 0 taxable income (i.e - made 50k and excluded it all), and contributed to your ROTH, you will receive a 6% penalty for excess ROTH contributions. Penalties will not be applied just once. They will continue to accumulate each year until you withdraw the excess contribution.To prevent penalties, you have to do two things: 

A. If you already made this mishap, there is still time. You need to withdraw the excess contribution by the end of the year. If your excess contribution was made for 2017, you must withdraw it by the due date of your federal tax return for 2017 including extensions to avoid a penalty. You must withdraw the entire amount of excess contribution and earnings accumulated on that amount. If you don't do so, penalties on excess contributions will continue every year but the option to withdraw will not be available.

B. Please contact us early next year. We will prepare a draft of your tax return and tell you the exact amount of contribution you are allowed to make that will be not considered excess. Do not make contributions now. You have time until April 15 of next year to make contributions for this year.

FEIE and Roth IRAs

3. Bringing foreign inheritance to the US

I am a US citizen living in Miami. Both of my parents are recently deceased and I am receiving some inheritance / assets from sale of their properties. My question is: do I have to pay taxes for those assets if I bring them to the United States?

Firstly, our condolences for your loss.  As far as your question: the reporting requirements depend on whether the person who left your client inheritance was a foreign national or U.S. person and it depends on the location of the estate.

I presume that your parents were non US citizens/GC holders and left you an inheritance located abroad; if the value of your share in inheritance is below $100K you do not have any reporting requirements before the IRS. If it is $100K or more then you have to file form 3520. The form is informational only - you will not owe tax. You may owe tax when you sell that property if you realize capital gain. If you break even or incur a loss at sale there will be no tax due upon sale as well.

Bringing foreign inheritance to the US

4. I am inquiring to get my past tax information from the IRS.

The problem is I do not have a current bank account in the United States. I am currently married and residing in Zhengzhou China. I am in the process for applying for the I-130 petition for my wife's residency in the United States.

I have not been employed in United States since 2012. I have not filed for tax since last employed. I have been traveling the world since and now married and living in China.

I’m trying to register myself with the IRS website but they are requiring a current bank account which I do not have. How do I access my tax information with the IRS?

You can request either a tax transcript  or a full record of your tax account for via the IRS (800-829-1040). The automated message will guide you through the process. Or, you can request your tax transcript by filling out and mailing the IRS form 4506-T. Through either method, you can expect to receive your transcript anywhere from ten to thirty days from the time the IRS receives your information. For more detail see our article - how to obtain a copy of your past tax return.

Please be advised: As a U.S. Citizen or green card holder you are legally required to file a U.S. tax return each year regardless of whether you already pay taxes in your resident country.  Separately, if you try to get a Green Card for your wife, you will be asked to provide the last 3 tax returns on form I-864.

I am inquiring to get my past tax information from the IRS.

5. I am the beneficiary of an insurance policy my recently deceased father had purchased. I am an Italian citizen and green card holder living in the US.  In addition, I will inherit a portion of his checking accounts once everything clears. 

The Italian bank where my father's accounts and policy are held is requiring the following:

1) the opening of a checking account in my name to transfer the amount contained in the policy.  Because my legal residence is in the US, this would be considered a foreign account and therefore, I would also have to

2) fill a FATCA form (Tax Exemption​ Application Form for Non-Residents), and

3) fill a W9 form (Request for Taxpayer Identification number and Certification). 

A. I have no idea if any of this applies to me ​ (though, as your website indicates, this seems to be the case) and deeply worried ​ about unknowingly making a false statement. ​

B. I need to ask you whether it is true that the money from the insurance policy cannot be credited to my checking account in the US -- which would be my preference.

C. I am concerned about this element of the W9 form. I am asked to certify under penalty of perjury that I am not subject to backup withholding because 

  • I am exempt from backup withholding or
  • I have not been notified by the IRS that I am subject to backup withholding as a result of a failure to report all interests and dividends or
  • the IRS has notified me that I am no longer subject to backup withholding

I have no idea if any of this applies to me (though, as your website indicates, this seems to be the case) and am deeply worried about unkoiwngly making a false statement. I have never seen a W9, I fill out a W2 for tax purposes.

We are very sorry to hear about your father's loss. The reporting requirements depend on whether the person who left you the inheritance was a foreign national or U.S. person and it depends on the location of the estate. In your case, a Foreign national left you an inheritance located abroad. If the value of your share in inheritance is below $100K you do not have any reporting requirements before the IRS. If it is $100K or more then you have to file form 3520. The form is informational only. You will not owe tax.          

As far as opening the account in Italian bank then indeed you would have to file FBAR (Treasury form 114). If higher thresholds are met, you would also need to file the IRS form 8938. Those will be your annual reporting requirements until you transfer the money to the US bank. As far as other forms and certificates - yes, you have to provide that to the Italian bank because they have their own compliance requirements. The best way to avoid a false statement is to tell the truth on the bank forms.

As far as form W-9 - it is a confirmation of your American tax residency status. All foreign banks participating in FATCA (80 countries and counting) are required to obtain from their clients a written statement of whether they are American citizens (if there are direct or indirect indications to any relation of the account holder to the United States).
 

  • It is not a request for proof of your tax compliance. The Bank will use your completed form W-9 as the proof of their own FATCA compliance. Please fill out the form, sign it and send to the bank.
  • Note - you do not fill out a W2. If you work for a US employer you receive a W2 - but they are not completed by taxpayers.

I am the beneficiary of an insurance policy my recently deceased father had purchased. I am an Italian citizen and green card holder living in the US.  In addition, I will inherit a portion of his checking accounts once everything clears. 

Ines Zemelman, EA
Ines Zemelman, EA
founder of Taxes for Expats
She may be reached at: