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Mail Bag 5: California Tax Board, Wealth Tax, Housing Exemption, Filing without SS#, Startups, and Severance Payments

Ines Zemelman, EA
29-Jul-17

Ines Zemelman, EAJul-29-2017

1. California Tax Board

I live and file my taxes in Canada since 1974, but have not filed US taxes. I grew up in California and my sister sold the house we grew up in in 2015. We split the net proceeds 50-50. The value of the house at the time of my fathers death was around $330,000.00, the sale price was about $835,000.00. I have the documents showing the costs incurred for the sale.

I was contacted by the Calif. State Franchise Tax Board recently and they want me to pay capital gains tax on my portion of the sale. I have downloaded a copy of the 2015 non resident CA. tax form which asks on line 13 for federal AGI from Form 1040. I have Revenue Canada tax forms for 2015 but I have not filed IRS taxes for over 40 years now. I need some help to sort this out so I can be in compliance with the tax department in California.

There are two issues at hand.

1. Your overall non-compliance - we will cover this first
Because you have not filed for several years the best way to catch up with your US tax filing obligation is under the Streamlined Procedure.

We prepare thousands of tax returns for expatriates in your situation - breakdown of SP scenarios.

The Streamlined Program (SP) requires filing of the last 3 years of tax returns and 6 years of FBARs. In other words, you'll have to file 2011-2016 FBARs and tax returns for 2014-2016.

2. Your issue with the California Tax Department (FTB). Tax on your share of capital gains from the sale of CA property cannot be avoided.
I recommend you sign up and begin with #1, and we will concurrently prepare #2 for you. Please upload the letters you have received from the FTB into your account once you create it.

California Tax Board

2. Wealth Tax

I recently moved to Spain and I am in the process of working through my tax details for 2017. Most immediately, I'm looking for someone with deep PRACTICAL experience with the Spanish-US Dual Tax Treaty (I can find lots of people with general knowledge, but not with specific knowledge.). The central question revolves around whether I need to pay wealth tax (patrominio) or not. I'd like to schedule an introductory call with you, if you think you can be helpful here.

Wealth tax legislation has nothing to do with the US/Spain tax treaty. This is not an income tax as it is applied on assets, not on income. Therefore, patrimonio is beyond the scope of the tax treaty. Whoever tells you this is regulated by the treaty does not understand that document.

Whether you pay wealth tax in Spain or not depends on your net worth not on your income; therefore tax projection will not answer your question. If you also need our help for preparation of US tax return 2017 - please complete your tax questionnaire and come back when you are ready to proceed, we'll be happy to help!

Wealth Tax

3. 250k Housing exemption

I am a US citizen currently living in the UK with my family. We have been here because of my husband's job since September 1, 2014. We are looking for an accounting firm specialising in expats to prepare our taxes starting 2017 and also have an urgent inquiry related to the impending sale of our Condo apartment in New York? The question is whether the exemption altogether expires on September 1, 2017 or whether there is a gradual phase out.

First, the answer to your main question about expiration of the exemption:

The ownership test: you should have owned this house for at least 2 years during the last 5 years up to the date of closing. This will not change after September 1; you still meet the ownership test.

For the residence test - you are indeed close to not meeting the full exemption (reduced rate is possible yet better be avoided). Every month after September cuts off from the 24 months residency period.

A reduced exclusion is available if you do not meet the primary residence requirements because of a change in place of employment or certain unforeseen circumstances.

Example: if each spouse used house as a primary residency for 20 months within 5 years prior to selling the home (assuming you sell the house on December 31) - then max exclusion will be reduced to $205K per spouse ($410K for couple). If capital gain is smaller than $500K then allowed exclusion will be reduced the same way, i.e. 80% of capital gain but not to exceed $410K.

Moving to UK can be qualifying event for reduced exclusion provided that you both work there.

250k Housing exemption

4. Filing without SS#

I am a US Citizen born in the US living in Australia - I moved as a child. I do not have a SSN. I have received a job opportunity in the US for 2 years, and I would like to be take the offer.

I need to be able to pay taxes to the IRS. I have had difficulty obtaining a SSN and to be honest, I do not want one considering I only plan to be working in the US for two years. I have no interest in participating in the Social Security program; I already have a Superannuation fund in Australia (similar to a 401k) for my retirement and I file taxes in Australia annually for what I earn.

If I understand correctly, I am ineligible for an ITIN because I am a US Citizen so I should get a SSN. What other form of Tax Identification can I use for the purposes of filing taxes with the IRS? I am wanting to ensure how I handle my taxes is legal because I do care about being in right standing in the eyes of the government; I have no objection to paying taxes, even if my unique situation means I have to pay more than normal.

If filing taxes as an individual is impossible without an SSN or ITIN, is it recommended to file through a business instead (e.g. I would work on a contract basis)? Is it best if the business is incorporated or an LLC? Does it matter if the business is in Australia or the USA? I'm brainstorming at this point because I feel stuck in a corner unable to accept a job in the US without the right paperwork to file my taxes. Any help will be much appreciated!

If you are a US citizen you are eligible for SSN and should apply for one. All else is going in the wrong direction. See our article on IRSN and why it is bad

Separately, you are required to have filed tax returns every year (assuming your worldwide income exceeds the minimum filing requirements) and file FBARs if applicable. If you have been working for the past few years and needed to file - you need to get caught up.

When you work in the US your US employer will take mandatory withholding from your salary to the US Social Security fund; this withholding cannot be avoided like withholding of state taxes for the state where you will temporary reside. However, when you go back home you will be free from any further obligations with regard to US Social Security.

Because you have not filed for several years the best way to catch up with your US tax filing obligation is under the Streamlined Procedure (SP). Now - without an SS# you cannot file, of course, but you should apply for one and we can plug in the number once you get it - we can get started now.

Filing without SS#

5. Self-employment

I am thinking of moving to the UAE. I'd like to know, if I establish a company in the UAE under a freelance license, does this mean that the income generated by my freelance company would not be subject to self employment tax, if a US company pays me though that business entity?

A freelance license will not be considered as a corporation in the US. Corporation assumes limited liability (LTD). The freelancer has unlimited liability for his business venture. You will be considered self-employed, file Sch C and your income will be subject to self-employment tax.

Self-employment

6. Startups

I'm looking for help to file 83b form for myself. I'm a US citizen, living in Switzerland, and a co-founder of a Swiss start-up. I have received 50% of my shares in the start-up at the end of October 2016. We had no vesting originally, yet we are about to finish a fundraising round, and investors introduced a vesting period. Do I need to file 83b with IRS and if yes could you help me with this? Thanks

Firstly - good luck with the start-up - we wish you well. We can certainly help you file your tax return. As far as the 83(b) election - it is not required but may be beneficial on the long run. 83(b) elections must be made within 30 days of the grant date of the stock. I am not sure if your shares are being re-issued with a new vesting period. We have just put out an article on the 83(b) election - have a look!

Startups

7. Severance

I saw your expat tax guidance on your web page regarding job loss and wasn't sure how you would treat severance pay. If severance was received the year after employment, and the foreign earned income exclusion states that it only applies to income received when the service was performed...how would you reconcile the two? Take the exclusion in the year the severance was received per Pub 4128?

Severance pay should always and only be included in taxable income for the year when you received it. As far as methods to mitigate tax impact - there is more than one way of handling it.
The simplest and most obvious is to take the foreign tax credit. Foreign tax credit can be taken for taxes paid of withheld in 2017 for income earned in the past.

The second method - take the foreign earned income exclusion on 2017 return for income received in 2016. You can take exclusion for the amount of annual ratio of severance pay (i.e 2 weeks pay) on the 2016 return. However, you can only take this exclusion if you did not max out your annual foreign earned income exclusion for 2016. For example, If you excluded $90K you can additionally exclude on 2017 return up to $11,300 on 2017 return. This can be done even if you are back to the US and do not qualify for the regular foreign earned income exclusion in 2017.
The two methods may be combined; you can take foreign tax credit in 2017 for the remaining non-excluded amount of severance pay. We will handle this for you during tax prep.

Severance

 

Ines Zemelman, EA