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James Maertin, CPA |
U.S.
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Tax Guide
2018 Tax Changes Your 2018 tax return is not filed until 2019. Since the tax law was passed December 22, 2017, the IRS is still working on releasing information and guidance. Here is some preliminary information about tax changes in 2018 compared to 2017. 2015, 2016 and 2017 Tax Changes No major income tax changes for 2015, 2016 and 2017. The tax law for your current 2017 tax return (filed in 2018) remains mostly unchanged from 2016. 2014 Tax Changes
The Affordable Care Act requires that U.S. tax residents (with some exceptions) have health insurance starting in 2014. If you are not insured, you may have to pay a health care tax penalty on your 2014 tax return (filed in 2015). U.S. expatriates who claim a foreign earned income exclusion under the bona fide resident test or the physical presence test are exempt from this requirement. The mandate for this ends as of tax year 2019. 2013 Tax Changes
The information below refers to tax law for 2017 (tax returns filed in 2018), not the new tax law changes, which primarily affects tax year 2018 (filed in 2019). The tax law gives preferential treatment to some kinds of income and allows special deductions and credits for some kinds of expenses. Taxpayers who benefit from these provisions of the law may have to pay an additional tax called the alternative minimum tax. It is a separate tax computation that, in effect, eliminates many deductions and credits and creates a tax liability for an individual who would otherwise pay little or no tax. Residents (Form 1040):
Short-term capital gains (assets held a year or less) are taxed as ordinary income. Therefore, the
nominal tax rate will be whatever tax bracket you are in. There are three exceptions: 1. The taxable part of a
gain from selling Section 1202 qualified small business stock is taxed at a
maximum 28% rate. If your net capital loss exceeds $3,000, you can only take $3,000 of the loss in a tax year and must carry the remainder forward ($1,500 if married filing separately). Short-term and long-term loss carryovers retain their short or long-term character when they are carried over. Nonresidents (Form 1040NR): If you are physically present in the U.S. for 183 days or more during the year, no matter what type of visa you are on, U.S. source capital gains (i.e., stock) are taxable to you. A 30% flat tax rate will apply, unless a treaty between the U.S. and your home country reduces or eliminates the tax. If you are physically present in the U.S. for less than 183 days during the year, there is no tax on capital gains unless they are directly linked to the conduct of your trade or business.
To be deductible, contributions must be made to qualified U.S. charities (and certain charities in Canada, Mexico and Israel). You cannot deduct the value of your time or services, personal expenses, appraisal fees or contributions to specific individuals, among other things. For more information, see Contributions or IRS Publication 526.
Always ask for and save receipts when giving to charity!
Cash Charity: In case of audit, the IRS requires proof of any cash contribution of $250 or more.
Non-Cash Charity: For non-cash charitable donations in excess of $500, the following information will be reported on the tax return: a.) Name and address of the organization(s) to which you donated the goods. b.) Fair market value of goods donated to each charity (this is generally substantially less than the original purchase price). c.) Description of goods donated d.) Date(s) of contribution.
A person donating property valued at more than $5,000 must obtain a qualified written appraisal.
Note: Unless you donated newly purchased items (such as for children's Christmas charities), you will need to find the fair market value of the items that you donated (if not shown on your receipt). You should be able to make a good estimate using the Salvation Army Valuation Guide.
Car donations: You will need to obtain and keep evidence of your car donation and be able to substantiate the fair market value of the car. Car donations valued at over $500 will generally be restricted to the actual sale value of the vehicle. The charity that receives your donation is required to send you and the IRS a written acknowledgement of the gross sale amount of your donated car.
All dependents must have a social security number (SSN) or Individual Taxpayer Identification Number (ITIN). The ITIN application is submitted with the tax return. Click on the following links for more information on how to obtain a ITIN or SSN. Residents (Form 1040): Important Note: A spouse is never claimed as a dependent. In general, an individual may not be claimed as a dependent unless: 1) he/she is a qualifying child and lived with you more than half the year, or a qualifying relative, 2) he/she is a U.S. citizen or legal tax resident of the U.S., Mexico or Canada, and 3) you provided over half of his/her total support in 2017, and 4) he/she had gross income of less than $4,050 in 2017, or, if the individual was your child, and a) your child was under age 19 at the end of 2017, or b) your child was under age 24 at the end of 2017 and was a full time student.
(Note: Foreign students on an F, J, M or Q visa are not considered tax residents for their first 5 years on the visa, and so cannot be claimed as dependents). The maximum Child Tax Credit is $1,000 per child under age 17 at the end of 2017. If you paid someone to care for your child or a dependent so you could work or look for work, you may be able to claim a Child and Dependent Care Credit. If you adopt a child, you may be eligible for an Adoption Credit. Nonresidents (Form 1040NR): Cannot claim dependents unless you are from Canada, Mexico, Japan, South Korea, or are a US national (e.g., from Puerto Rico or American Samoa). All dependents must have an SSN or ITIN number. Exception: Residents of India who were students or business apprentices may claim dependents under the tax treaty. Residents (Form 1040): Dividends (U.S. and foreign source) are tax ordinary tax rates unless the dividends are considered qualified. You have to hold common stock more than 60 days to qualify for the lower tax rate on dividends, and 90 days for preferred stock. The qualified dividend tax rate is 15%. However, the rate could be 20% to 23.8% if your taxable income is over $418,400 (single), $470,700 (married filing jointly) in 2017 (20% plus 3.8% net investment income tax). Nonresidents (Form 1040NR): Dividends form U.S. corporations are usually taxable at a 30% flat tax rate, unless a treaty between the U.S. and your home country reduces or eliminates the tax. Dual Status Taxpayers (Foreigners) A dual-status year is one in which you change status between nonresident and resident alien. Most dual-status years are the years of arrival and departure. Year of Arrival: If you were a U.S. nonresident (living outside the U.S.), and you entered the U.S. during the tax year and met the substantial presence test (you were present for 183 days or more on a work visa), then you would normally file a dual-status resident tax return, although there are a few possible exceptions. If you entered the U.S. during the tax year but did not meet the substantial presence test, then you will be considered a non-resident, rather than a dual-status resident. Year of Departure: If you were a U.S. resident for tax purposes, and you leave the U.S. (becoming a nonresident) for the remainder of the year, and during the next calendar year you are not a U.S. resident under either the green card test or the substantial presence test, then you may file a dual-status nonresident tax return. In this case, you will be considered a U.S. resident until the last day you are physically present in the U.S. during the tax year (excluding up to 10 days of presence in the tax year after permanently departing). For example, if you meet the substantial presence test and leave the U.S. permanently on June 1, but then return to the U.S. on vacation from Nov. 1–15, you will be considered a U.S. resident until Nov. 15. But if your vacation is less than 10 days (e.g., Nov. 1-9), you will be considered a U.S. resident until June 1. Work Related Education: You may be able to deduct work–related educational expenses paid during the year as a business expense, even if the education leads to a post-bachelor degree. Your expenses must be for education that:
Even if your education qualifies in one of these two categories, you can't deduct the costs if one of the following applies:
If your education qualifies, the following are expenses you may deduct tuition and registration fees, textbooks, and required course supplies including computer software, any computer or related peripheral equipment, fiber optic cable related to computer use, and internet access. For more information, see Work Related Education. If you are an employee, the education deduction would be subject to the 2% AGI (adjusted gross income) limitation for miscellaneous itemized deductions. So, even if you qualify for the education deduction, it is possible that taking a Lifetime Learning Credit or American Opportunity Credit will be more beneficial. I will make that determination for you. Other Education Benefits: If you don't qualify for the work-related education deduction or if you are getting your bachelor's degree, you may be eligible to take the American Opportunity Credit or Lifetime Learning Credit. For 2016, the maximum AOC is $2,500 and can be claimed for the first 4 years of college. The Lifetime Learning Credit has a maximum credit of $2,000. Generally, most tax returns are eligible for electronic filing. Exceptions include Forms 1040NR and many state tax returns that have a foreign address. Note: There is no penalty for filing an extension. In fact, I file an extension for my own return every year. If I have not completed your tax return by April 15, I will automatically file an extension for you free of charge, and will complete your tax return as soon as possible afterward. For tax year 2017, the federal deadline is April 17, 2018 (normally it falls on April 15). If you can't meet the tax filing deadline to file your tax return, you can get a six-month extension of time from the IRS. If you have a refund coming, you don't have to worry; there will be no interest or late penalties. If you owe, extensions get you out of late filing penalties, which, at 5% per month (maximum 25%) of the balance due, are the stiffest ones, but you would still owe interest (federal short term rate plus 4%) and late payment penalties (1/2 % per month) after April 15. If you think you will owe tax, you may send a payment for the expected balance due by April 15, but this is not required to obtain the extension. The failure-to-file (i.e. late filing) penalty for returns filed more than 60 days after the due date (including extensions) is increased. In this situation, the minimum penalty is the smaller of $135 or 100% of the unpaid tax. If you will be sending in payment with your federal extension by April 15, mail Form 4868 with a check or pay online at IRS Payments. For New York State, use Form IT-370 or file a NY extension online or pay NY tax online. The IRS and most states allow extensions with payments to be filed electronically. I can set it up for you. If you reside outside the U.S., you have an automatic extension to file until June 15. However, if there is a balance due, interest will be assessed on it starting after April 15. There is no penalty for being late if you owe no tax.
There is no income tax on any gifts that you receive. The gift tax is a completely separate tax from the income tax and is always assessed on the giver, never on the recipient. See also IRS Gift Tax Questions.
If you made a gift in excess of $14,000 to any one donee during the year, it is taxable and I will need the following details:
General Rules: To qualify, a portion of your home or a separate structure must be used exclusively on a regular basis: (1) As the principal place of your business (this includes a place where you conduct administrative or management activities of the business if there is no other fixed location to conduct them), or (2) as a place where you meet clients in the normal course of business.
Employee Rule: In addition to the above rules, if you have a home office for work as an employee, it must be for your employer's convenience.
See IRS Publication 587 for more information.
Residents (Form 1040): Interest (U.S. and foreign source) is taxed as ordinary income. Therefore, the nominal tax rate will be whatever tax bracket you are in. Nonresidents (Form 1040NR): Interest (U.S. bank and portfolio interest) is generally exempt from taxation. See IRS Publication 519. Some types of interest (e.g., interest from the IRS), are taxable at normal rates, unless a treaty between the U.S. and your home country reduces or eliminates the tax. Itemized Deductions vs. Standard Deduction See also my List of Deductions (some items apply to tax year 2017, not tax year 2018). Residents (Form 1040): Everyone is entitled to a standard deduction, which reduces your taxable income, but you may choose to itemize deductions if it gives you a larger dollar amount to deduct. The standard deduction varies according to your filing status. For 2017, your standard deduction is: single or married filing separately $6,350; head of household $9,350; married filing jointly $12,700. Nonresidents (Form 1040NR): You must itemize any deductions. Exception: Students and business apprentices from India can claim the standard deduction under the tax treaty. A nonresident is not entitled to certain deductions allowed to tax residents. These include mortgage interest, real estate taxes, and medical expenses. Late Payment - Interest and Penalties Interest, compounded daily, is charged on any unpaid tax from the due date of the return until the date of payment. The interest rate is the federal short-term rate plus 3 percent. That rate is determined every three months. In addition, if you filed on time but didn't pay on time, you'll generally have to pay a late payment penalty of one-half of one percent of the tax owed for each month, or part of a month, that the tax remains unpaid after the due date, not exceeding 25 percent. However, you will not have to pay the penalty if you can show reasonable cause for the failure. The one-half of one percent rate increases to one percent if the tax remains unpaid after several bills have been sent to you and the IRS issues a notice of intent to levy. If you filed a timely return and are paying your tax pursuant to an installment agreement, the penalty is one-quarter of one percent for each month, or part of a month, that the installment agreement is in effect. If you did not file on time and owe tax, you may owe an additional penalty for failure to file unless you can show reasonable cause. The combined penalty is 5 percent (4.5% late filing, 0.5% late payment) for each month, or part of a month, that your return was late, up to 25%. The late filing penalty applies to the net amount due, which is the tax shown on your return and any additional tax found to be due, as reduced by any credits for withholding and estimated tax and any timely payments made with the return. After five months, if you still have not paid, the 5% failure-to-pay penalty continues to run, up to 25%, until the tax is paid. Thus, the total penalty for failure to file and pay can be 47.5% (22.5% late filing, 25% late payment) of the tax owed. Also, if your return was over 60 days late, the minimum failure-to-file penalty is the smaller of $135 or 100% of the tax required to be shown on the return. For more information, see IRS Notices and Bills, Penalties and Interest Charges. New York State - Interest and Penalties New Jersey - Interest and Penalties Marriage - How it Affects Your Tax
Filing Status: You are considered married for the entire year in which you get married. So if, for example, you were married on Dec. 31, 2017, for tax purposes you are deemed married for all of 2017 You must file either as Married - Filing Joint or Married - Filing Separate. You cannot file as Single (except in rare cases of legal separation).
Married Couples - One Working Spouse Married couples with one non-working spouse (with little or no income) and one working spouse often pay less tax filing jointly than if the working spouse could file as Single. One reason this could be the case is that the couple is able to claim the exemption and standard deduction for the nonworking spouse. Filing Single, these benefits would be lost because the non-worker would not file a tax return at all.
Married Couples - Both Spouses Work Married working couples with similar incomes may pay more tax filing jointly than they would if they both could file as Single - this extra tax is referred to as the marriage penalty. Different factors can be involved in this including: (1) less favorable tax rates applied to individuals filing separately, (2) earlier phase-out of itemized deductions, and (3) alternative minimum tax (AMT) rules.
Many married couples comprised of two working spouses do not have enough taxes withheld during the year and end up owing tax (sometimes a lot of tax) to the IRS when they file their returns. The main reason for this is because the withholding tables for married taxpayers assume that only one spouse works. It is a good idea to coordinate your withholdings on Form W-4. To have more tax withheld on Form W-4 claim "Married but withhold at higher Single rate" and claim zero or one allowances (the fewer allowances, the more tax is withheld).
Married Filing Separately In most cases, filing jointly on the federal return is better - but I always check this to be sure. Once a joint tax return has been filed for the tax year, a couple will not be entitled to file amended separate returns.
Nonresidents (Form 1040NR): To deduct moving expenses (travel and moving household goods), your move must be closely related to a new or changed job location, and be at least 50 miles farther from your old home than your old job was. If you are an employee, you must have worked at the new job for at least 39 weeks, if self-employed, at least 78 weeks. If the expenses are deductible on the federal return, they may also be deductible on the state. If your move was for a job within the state or to the state, the moving expenses are generally deductible. If your move was for a job outside the state, it is generally not deductible. You cannot deduct the moving expenses you have when returning to your home abroad or moving to a foreign job site. You also cannot deduct the expense of moving to the U.S. if you are claiming temporary living expenses. Moving expenses are based on a change in your principal place of business while travel expenses are based on your temporary absence from your principal place of business. For more information, see IRS Publication 521, Moving Expenses. See Nanny Tax.
Keep the following for at least 3 years:
Keep forever: A copy of your tax returns. You never know when these might be needed.
Resident (Form 1040) or Non-Resident (Form 1040NR)? (Foreigners)
With few exceptions, you are a resident alien for tax purposes if any of the following apply: 1. You were a permanent resident (e.g., green card holder) at any time during the tax year.
2. You meet the
substantial presence test*.
*Exceptions: Do not count the days during which:
Nonresidents: If you do not have a green card, and you do not meet the substantial presence test, then you are a non-resident. Due to exceptions to the substantial presence test, students, teachers, trainees and diplomats are often nonresidents.
Note: If, during the tax year, you arrived in the U.S. or departed permanently, you may be a dual status resident. See Dual Status Taxpayers below. Many states are now trying to collect sales and use tax on personal purchases (excluding shipping & handling) on which (1) you did not pay sales tax in your resident state/city (such as on out-of-state online purchases), and (2) you paid less than your resident sales tax rate. Please note that if all of your purchases were in state and sales tax was paid on them (excluding exempt items such as groceries), you don't need to declare sales and use tax. Scholarships and Fellowship Grants Residents (Form 1040): For
scholarship and fellowship grants reported on a Form 1042-S: If you were
required to work for your scholarship, your scholarship is taxable. Tax Treaties: Generally, only nonresidents may use the terms of a tax treaty to reduce or eliminate U.S. tax on income from a scholarship or fellowship grant. A student (including a trainee or business apprentice) or researcher who has become a resident alien for U.S. tax purposes may be able to claim benefits under a tax treaty that apply to reduce or eliminate U.S. tax on scholarship or fellowship grant income. Most treaties contain a provision known as a "saving clause." Exceptions specified in the saving clause may permit an exemption from tax to continue for scholarship or fellowship grant income even after the recipient has otherwise become a U.S. resident alien for tax purposes. Nonresidents (Form 1040NR): Any U.S. source (U.S. payer) scholarship or fellowship grant used to pay for tuition, fees, books and supplies required for your courses is not taxable. However, any part of a scholarship you worked for is taxable. Exception: If there is a tax treaty between the United States and your home country, it might contain a provision excluding scholarship payments. The amounts you used for expenses other than tuition and course-related expenses (such as room, board and travel) are generally taxable. Foreign source scholarships are not taxable, and do not have to be reported on the return. Social Security and Medicare Tax (Foreigners) As a nonresident (1040NR), if you are self-employed, you must pay income tax, but not self-employment tax (i.e., social security tax) on the income. Residents (1040) must pay social security tax. A nonresident alien employee (filing Form 1040NR) temporarily in the United States on an "F-1," "J-1," "M-1," or "Q-1" visa is not subject to social security and Medicare taxes if one of the following apply: 1. The pay is for services performed to carry out the purpose for which the alien was admitted to the United States. 2. You are working under Curricular Practical Training and Optional Practical Training, on or off campus, as long as the employment is authorized by the Immigration and Naturalization Service. 3. If you are enrolled and regularly attending classes at a school, you may be exempt from social security and Medicare taxes on pay for services performed for that school. 4. You are employed due to severe economic hardship, and were issued Form I-688B or Form I-766 by the IRS. However, if you hold an F, J, M or Q visa but are considered a resident alien (i.e., you’ve been on an F visa for more than 5 calendar years or a J visa for more than 2 calendar years), your pay is subject to social security and Medicare taxes. Refund of Taxes Withheld in Error If social security or Medicare taxes were withheld in error from pay that is not subject to these taxes, contact the employer who withheld the taxes for a refund. If you are unable to get a full refund of the amount from your employer, file a claim for refund with the Internal Revenue Service on Form 8316, Information Regarding Request for Refund of Social Security Tax Erroneously Withheld on Wages Received by a Nonresident Alien on an F, J, or M Type Visa and Form 843, Claim for Refund and Request for Abatement (note: I have added an explanation to the form). Attach the following items to these forms.
Click on this link for an example of how to complete questions 3 and 5 of Form 843. Send Form 843 and Form 8316 with attachments to the Internal Revenue service center where your tax return was filed. If you filed Form 1040NR, this would be Department of the Treasury Internal Revenue Service, Austin, Texas 73301-0215. Who does not qualify for a refund? There is no provision for a social security tax refund for resident aliens, or for non-resident aliens holding any visa other than F, J, M or Q. If you were on an F visa for more than 5 calendar years, or J visa for more than 2 calendar years, you are considered a resident and do not qualify. If you were a resident for tax purposes (such as working all year on a H visa), and had social security tax withheld from your paycheck, but then you returned to your home country, you cannot claim a refund of these taxes.
Click here for New York Residency Rules.
March 15 - Last day to file corporate
and partnership
returns. September 15- Extension deadline for partnership and S-Corp tax returns. October 15- Extension deadline for individual and C-Corp tax returns. Please be aware that extensions give you extra time to file, not to pay. If you have a refund coming, you don't have to worry; there will be no interest or late penalties. If you owe, extensions get you out of late filing penalties, which, at 5% per month (maximum 25%) of the balance due, are the stiffest one, but you would still owe interest and late payment penalties (1/2 % per month). Note: Any year that a deadline falls on a weekend, it is extended to the following Monday or Tuesday. Tax Treaties (Foreigners) Nonresidents (Form 1040NR): I will search for any tax treaty benefit you are entitled to. Tax treaties can be found in IRS Publication 901. Residents (Form 1040): Generally, only nonresidents may use the terms of a tax treaty, however residents can sometimes claim treaty benefits. If you claim treaty benefits, you must file Form 8833, Treaty-Based Return Position Disclosure. This would be the case in the following example: You are from China and were on an F-1 visa for more than 5 calendar years (and therefore a resident). You worked on OPT and want to claim the $5,000 treaty exemption. Residents (Form 1040): Taxable on worldwide income (U.S. and foreign source). Nonresidents (Form 1040NR): Only taxable on U.S. source income. Any income reported on a Form W-2 for services performed outside the U.S. is not taxable.
How is my
income being taxed? Your tax is a percentage of your taxable income (total income minus deductions). There are six federal tax rates as of 2017: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. See the tax rates. Each state that has an income tax has its own tax rates, which are generally a lot lower than the federal rates. If you go to my Links page, you will find links to each state tax department website. Temporary living expenses are travel expenses incurred during an extended business trip or temporary work assignment that was intended to last one year or less. The expenses may only be claimed for a stay for business. Personal or school stay expenses generally are not deductible. Temporary living expenses also have no relation to having alien status. A U.S. citizen working temporarily in another city can also claim them. However, the time limitation of the visa makes it easier for a foreigner to claim that he is "away from home" on a business trip if he intends to work in the new location for less than a year. Temporary living expenses include hotel lodging (or apartment rent for longer stays), meals, and local transportation. Meals may be estimated using federal per diem rates. For example, the IRS may allow $74 per day for a high cost locality (e.g., New York City). On the tax return, temporary living expenses are deducted as unreimbursed employee business expenses. What are
the rules for taking temporary living expenses? For more information, please read Temporary Living Expenses. |
