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Mail Bag #3 - W8-Ben/RRSP/Selling Personal Residence/Retirement Distributions/Incorporating Abroad/Job Offer in the U.S.

Mail Bag #3 - W8-Ben/RRSP/Selling Personal Residence/Retirement Distributions/Incorporating Abroad/Job Offer in the U.S.
Ines Zemelman, EA
10 July 2017

1. Capital Gains/W8-BEN/1040NR

I work for an Australian Stockbroker and we provide access to US markets for our clients via our US entity. One of our clients was charged a non-resident withholding tax (“NRWT”) at the rate of 28% on a sale transaction valued at approximately USD 132,000. Consequently approximately USD 37,000 was deducted in NRWT.

The clients W-8BEN form that had been provided by the client in September 2012 was voided by the US broker in early 2013 and the Australian entity had not become aware of this. We understand that had a valid W-8BEN form been in place at the time of the sale, the treaty rate of 15% (approximately USD 20,000) would have been applied to the NRWT rather than 28%.

Our client is a trustee of a superannuation account in the pension phase (I believe this is similar to 401(k) plans in the US).Under Australian taxation law, such entities do not pay tax. We are not sure whether the 15% treaty rate should apply or zero. Could you please confirm? Additionally, we are puzzled as to why the NRWT was applied to the whole of the sale proceeds instead of the profit on the transactions (i.e. the difference between the purchase and sale prices). Could you please confirm?

The capital gain from disposition of US stocks is exempt from US tax for nonresident aliens. If a correct form W8-BEN was filed, the entire amount of sale proceeds would be tax exempt, not on the net gain.

In order to get a refund, the account holder has to file a US tax return and claim the excess of tax withheld. Now - if the taxpayer is a US person (which the US brokerage does not know without the form W8-BEN), then the taxpayer would report the cost basis (i.e - purchase price of the securities) to the IRS and pay tax only on net proceeds, getting the refund for the excess.

If the taxpayer is a non-US person then they can claim treaty benefits directly on their non-resident US tax return form 1040NR and receive a full refund of tax withheld on capital gains. In either scenario, we can assist.

Regarding the superannuation account: it does not matter whether the funds were included in the Superannuation portfolio (which, by the way, is not identical to the US 401K) or if it was just an investment account.

Capital Gains/W8-BEN/1040NR

2. Amending Return to Include FEIE

I am a US citizen that lives abroad and I opted not to use the foreign earned income exclusion for the 2016 tax year.

I received a job offer in another country (not the US) and it will be significantly over the FEIE limit so I wanted to ask if that is enough reason for the IRS to accept re-instating the exclusion for the coming tax years without waiting the 5-year period.

It is unlikely that such a letter would be accepted because the reason cannot be related to saving in tax. Only change in family situation, etc - but not to pay less tax, which is of course the only reason why people want to change.

Now we'd be happy to prepare your return and see if your return is optimized and if we can improve your tax savings than what you generated for yourself.

Secondly, if it would make sense for you to amend your prior year to include form 2555 so that you could file it in a future year, we can do that as well.

Amend Return to Include FEIE

3. RRSP Declaration

Hello Ines, I have recently discovered, like so many other Canadians, that I was supposed to have declared my earnings in my RRSP. We moved to the USA in 1995. We received green card status in 1997 and then naturalized in the summer of 2006.

I have prepared a USA tax form every year since 1995 without reporting earnings, interest or dividends in my RRSP because I just didn’t know I was supposed to. I do want to be law obiding and I do not want to do battle with the IRS. We live in Phoenix AZ and I was hoping that you could perhaps give me some good advice. I read several articles online and yours was the best - which is why I am writing to you.

Earnings in RRSP are not required to be reported. A beneficiary of a Canadian registered retirement savings plan may defer United States taxation with respect to any income accrued in the plan but not distributed by the plan, until such time as a distribution is made from such plan.

For US tax purposes, your RRSPs are reported on FBAR (FinCEN 114) and possibly FATCA (form 8938). Please see this page for your options to file your delinquent FBARs - we'd be happy to help.

RRSP Declaration

4. Selling Property - Like Kind Exchange

I own a single family dwelling that has appreciated quite a bit. I have not lived in this house for 2 years out of the last five. I do not want to sell it, because then I will not be able to claim the $500,000 exemption between my wife and me.

If I do a like kind exchange on this house to 2 smaller rental units, can the cost basis be adjusted, so that I can later claim the $500,000 exemption by living in one of the new properties?

Personal residence is not allowed for Section 1031 Like-kind exchange. The property or asset being sold must be held for investment or use in a trade or business, and cannot be a personal residence.

Selling Property

5. Rollover from Foreign Retirement - Not Possible

I was wondering if you could answer a retirement tax question. I am an american citizen and have worked abroad for 25 years and will soon be receiving a lump sum retirement amount from a foreign university. The country in which i am a permanent resident has no tax treaty with the US. The common wisdom is that i should open a regular IRA account and that i have 60 days in which to place the lump sum amount so that it is not taxed (it will be taxed as a regular IRA when i withdraw after 70). However, as I do not plan to return to the US, I am now wondering if i have to open up an IRA account, or if there is another way to deal with this money on which I intend to live.

If you have any suggestions or advice, i would greatly appreciate to hear your opinion on this matter.

Unfortunately the common wisdom you are referencing is incorrect. The 60 day window you are referencing are for rollovers within the US. When transferring from a foreign retirement to the US, the idea of a rollover does not exist.

Even if you received a lump sum from the country with tax treaty (i.e. UK) , tax -free rollover is not allowed. The withdawal amount will be taxable in the US.

Rollover from Foreign Retirement - Not Possible

6. Setting Up Business in NZ

Taxes for Expats has now done two tax returns for me, a streamlined return, and one annual return. In my most recent years I've been filing as a self-employed contractor. I am now about to set up a business in New Zealand, and will pay myself a wage from this business (and so will be filing as an employee). Would you please explain:
1. Any obligations re. filing as a business...I don't expect to have any profits from this business, as virtually all incomings will be paid to me as wages...not sure if that makes any difference.
2. The costs for having Taxes for Expats prepare any required business tax return.
Thank you. I'll look forward to your response.

Great to hear from you and congrats on the new business ventures. Some great reading for you -

  1. Offshore Corporation Guide
  2. Top 6 Tax Issues Business Owners Abroad Need To Be Aware Of
  3. As an employee you will no longer have to pay Self-Employment tax to the US

Firstly - paying yourself as an employee is the smart move (see #1 guide above - comprehensive). The filing requirements will depend on how you structure it, but most likely I assume it will require form 5471. This form is $500.

Setting Up Business in NZ

7. Moving Back to the U.S; Spouse Remaining Abroad

Taxes for Expats has prepared the tax return for my wife and I the past few years and we have been extremely satisfied with your service. Beginning this summer I have accepted a school administrator position back in the States (in Oregon), but my wife will be staying in <foreign country> teaching internationally for at least another year.

We would like to know if my being in the States and paying federal and state income taxes here for part of 2017 will adversely impact her IRS international tax-free status, for instance, if we file "married filing separately".

The Oregon State return will also account for your wife out of the country status and will not include her income.

Please note, we can continue to file your returns when you return home to the states as we continue to do so for our other clients.

Moving Back to the U.S.; Spouse Remains Abroad

Ines Zemelman, EA
Founder of TFX