Tag Archive for: tax

The IRS is Targeting Puerto Rico Act 20, 22 and 60
Christian Reeves

The IRS is Targeting Puerto Rico Act 20, 22 and 60

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The IRS is targeting individuals who have taken advantage of tax incentives under Puerto Rico Act 20, 22 and 60, which exempts from taxation certain business and investment income of recently relocated Puerto Rican residents. The IRS has intensified its focus on individuals who may be erroneously reporting US source income as Puerto Rico source income to evade US taxation.

Act 20 and 22 became Act 60 in Puerto Rico on July 1, 2019. It was part of a larger bill that consolidated several tax incentive programs into a single law, known as the Puerto Rico Incentives Code 60.

Act 20 was originally enacted in 2012, and it offered tax breaks to businesses that exported services from Puerto Rico. Act 60 expanded the scope of Act 20 to include individuals who relocate to Puerto Rico and become bona fide residents. These individuals are now eligible for a variety of tax breaks, including exemptions from federal and local income taxes on certain types of income.

Act 22, also known as the Individual Investors Act, is a Puerto Rican law that provides tax breaks to individuals who relocate to Puerto Rico and become bona fide residents. The law exempts these individuals from Puerto Rico income taxes on all passive income realized or accrued after they become residents. Passive income includes interest, dividends, rental income, and capital gains.

To qualify for Act 22, individuals must meet certain requirements, including:

  • They must be U.S. citizens or lawful permanent residents.
  • They must not have been residents of Puerto Rico for the 10 years preceding their move.
  • They must spend at least 183 days per year in Puerto Rico.
  • They must make a minimum investment of $100,000 in Puerto Rico.
  • Act 22 has been controversial since it was enacted in 2012. Some people argue that the law benefits the wealthy at the expense of the poor, while others believe that it has helped to boost the island’s economy.

Here are some of the benefits of Act 22:

  • 0% tax on interest, dividends, rental income, and capital gains.
  • No property taxes on primary residences.
  • Reduced corporate income tax rates.
  • Reduced capital gains tax rates.
  • No inheritance tax.

The passage of Act 60 was seen as a way to attract businesses and individuals to Puerto Rico, and it has been credited with helping to boost the island’s economy. 

The IRS has also been investigating individuals who have used Puerto Rico’s Act 22 as a tax saving tool for cryptocurrency trading and other activities. In January 2021, the IRS launched a campaign targeting such taxpayers.

The IRS’s focus on Puerto Rico tax incentives is part of a broader effort to crack down on tax evasion and increase revenues. The IRS has also been targeting individuals who have used other US territories, such as the US Virgin Islands, to reduce their US tax bills.

Here are some key takeaways from a recent Bloomberg article. Also, here is a summary from Cointelegraph.

  • The IRS is targeting individuals who have taken advantage of tax incentives under Puerto Rico Act 20, 22 and 60.
  • The IRS is also investigating individuals who have used Puerto Rico as a tax haven for cryptocurrency trading and other activities.
  • The IRS’s focus on Puerto Rico tax incentives is part of a broader effort to crack down on tax evasion.
  • Individuals who are considering taking advantage of tax incentives in Puerto Rico or other US territories should be aware of the potential legal risks associated with non-compliance.
  • It is essential to seek professional advice to ensure compliance with tax laws and regulations.

Individuals who are considering taking advantage of tax incentives in Puerto Rico or other US territories should be aware of the potential legal risks associated with non-compliance. It is essential to seek professional advice to ensure compliance with tax laws and regulations, which so many have failed to do.

Here are some ways that taxpayers might abuse Act 22/60:

  • Claiming to be a resident of Puerto Rico but not fully relocating. This could involve spending less than the required 183 days per year in Puerto Rico, or maintaining a home and other ties to the mainland United States.
  • Claiming they purchased the asset/crypto after they moved to the island when they bought it before they moved. This could involve claiming that a stock or other investment was purchased after the taxpayer moved to Puerto Rico, when it was actually purchased before the move.
  • Setting up shell companies or other entities in Puerto Rico to funnel income through. This could involve creating a company in Puerto Rico that is owned by a taxpayer who is not a resident of Puerto Rico, or using a Puerto Rican trust to hold assets that are not actually located in Puerto Rico.
  • Using Act 22 to avoid paying taxes on income that is not actually passive. This could involve claiming that income from a business is passive when it is actually active, or claiming that income from a sale of property is capital gains when it is actually ordinary income.

The bottom line is that the tax benefits of moving to Puerto Rico are excellent and perfectly legal. But, shockingly, people have found ways to abuse the system. They want to live in the US but not pay US taxes. This is a road to trouble. If you want the tax benefits of Puerto Rico you must commit to living on the island. 

In closing, I am often asked why Puerto Rico is allowed to make its own tax laws which superseded US Federal tax law. Here’s the reason: 

Why Americans Should Consider Moving Their Cryptocurrency Offshore
Christian Reeves

The IRS Targets Crypto Investors – Why Americans Should Consider Moving Their Cryptocurrency Offshore

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In a recent legal development, a federal court has ordered the cryptocurrency exchange, Kraken, to turn over account and transaction information to the Internal Revenue Service (IRS). This move by the IRS is intended to uncover whether any of Kraken’s users underreported their taxes, highlighting an increasingly intrusive regulatory environment for cryptocurrency holders in the United States​1​.

The IRS petitioned the court in the Northern District of California to issue this order, following Kraken’s settlement of charges related to a violation of securities law. The tax agency alleged that it issued a summons to Kraken in 2021, which the exchange failed to comply with, sparking the IRS’s interest in investigating the tax liabilities of users who transacted in crypto from 2016 to 2020​1​.

Under the court’s order, Kraken is required to provide the IRS with comprehensive data about users who transacted more than $20,000 in a calendar year. This data includes the user’s name, birthdate, taxpayer identification number, address, phone number, email address, and more. Additionally, Kraken must provide blockchain addresses and transaction hashes that are part of the transaction data, and it may also produce raw data for the IRS​1​.

While this order might appear to be a necessary step in ensuring tax compliance, it has raised concerns about the extent of privacy cryptocurrency users can expect. Despite the court’s denial of several IRS requests, such as receiving employment information and source of wealth from Kraken, this decision underscores the broad power the government can exert over cryptocurrency exchanges and their customers in the name of tax enforcement​1​.

In light of these developments, American cryptocurrency holders should consider moving their assets into cold storage or onto an international exchange. Cold storage, a method of holding cryptocurrency offline, would allow holders to maintain their privacy and control over their crypto assets. International exchanges, particularly those in jurisdictions with more favorable cryptocurrency regulations, offer an alternative to U.S.-based exchanges like Kraken. While these options come with their own considerations, such as the need for robust security measures in the case of cold storage or the implications of international tax law, they represent potential paths for those seeking to maintain greater privacy and control over their cryptocurrency investments.

In conclusion, while tax compliance is unquestionably important, the recent court order involving Kraken serves as a reminder of the potential privacy trade-offs involved in using domestic cryptocurrency exchanges. By considering alternatives like cold storage or international exchanges, American cryptocurrency holders can take steps to protect their privacy and control over their assets in an increasingly regulated U.S. crypto landscape.

Foreign Earned Income Exclusion 2020
Christian Reeves

Foreign Earned Income Exclusion 2020

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In this article, I’ll look at the Foreign Earned Income Exclusion 2020. The FEIE is the most powerful tool in the expat’s kit and is the focus of international tax planning for individuals and small business owners living abroad. The Foreign Earned Income Exclusion 2020 is the only major tax planning option left after Trump’s 2017 tax law changes. 

I wrote that the Foreign Earned Income Exclusion 2020 is the ONLY tax deal left after Trump’s changes to the US tax code. In previous years, small business owners could use the FEIE to eliminate the tax on their first $100,000+ and then retain profits in excess of the FEIE in an offshore corporation. These days are gone… we Americans can no longer retain profits in our offshore corporations tax-deferred. 

And there was a time when we had hope that the Foreign Earned Income Exclusion would be made obsolete by President Trump. During his campaign, he had indicated that he would move the US to a territorial tax system. Rather than taxing US citizens and residents on our worldwide income, we could pay tax only on profits made in the United States. 

Well, big corporations and multinationals moved to a territorial tax system, but the little guy got the shaft (per usual). We expats are still taxed on our worldwide income and we lost the ability to use an offshore corporation to retain profits over the Foreign Earned Income Exclusion 2020 amount tax-deferred. For more, see President Trump’s Tax Plan and Expats

With that in mind, here’s what you need to know about the Foreign Earned Income Exclusion 2020.

As stated above, the most important tool in the expat’s U.S. tax toolbox is the Foreign Earned Income Exclusion for 2020.  And, in most cases, the Foreign Earned Income Exclusion 2020 is the ONLY tax break you get for living abroad. 

If you qualify for the FEIE, you can exclude up to $107,600 in 2020 of earned income free from U.S. Federal income tax. This amount is up from $105,900 for the tax year 2019, $104,100 in 2018, $102,100 in 2017 and $101,300 in 2016. If you’re married, and both spouses qualify for the exclusion, your total combined exclusion may be up to $215,200.

There are two ways to qualify for the Foreign Earned Income Exclusion 2020. You can be out of the US for 330 out of 365 days or you can be a resident of a foreign country for a full calendar year. 

The first option, referred to as the 330-day test, is the easiest to use. Just be out of the US for 330 out of any 365 day period. For example, if you are out of the US from March 30, 2020, to March 15, 2021, you qualify for the Foreign Earned Income Exclusion 2020. 

The second option, known as the residency test, is much more challenging to implement. To oversimplify a complex topic, you need to move to a foreign country with the intention of making that place your home for the foreseeable future. You should have a residency permit and pay taxes in this new home. 

In most cases, you will use the 330 day test for the Foreign Earned Income Exclusion for the first year or two you’re living abroad. Once you’ve put down roots in a new country, you can switch to the residency test. 

Maximize the Value of the Foreign Earned Income Exclusion 2020

While you can’t retain earnings in an offshore corporation in 2020, you still need a structure in a tax-free country to maximize the value of the FEIE. 

First, if you use a personal bank account or a US company to run your business, you must pay self-employment tax on your income. The Foreign Earned Income Exclusion does not reduce self-employment or payroll tax. 

If you draw your salary from an offshore corporation, you can eliminate SE tax. This is a savings of about $15,000 a year for a single person earning $100,00 and about $30,000 for a husband and wife where both are working in the business. 

Second, if you operate a business without a corporate entity, the amount of your Foreign Earned Income Exclusion for 2020 will be reduced in proportion to your expenses. 

For example, the FEIE is $107,600 for 2020. Let’s assume you gross $160,000 from business and your net profit is $80,000 after deductible business expenses. You report this income on Schedule C and use Form 2555 to calculate the Foreign Earned Income Exclusion. 

Your allowed business expenses are about 50% of your gross. Because you are using Schedule C, your FEIE will be reduced in proportion to your deductible expenses. So, your available FEIE for 2020 is 50% of $107,600 = $53,800. 

You will be allowed to exclude $53,800 of your $80,000 net using the FEIE. Thus, you will pay US tax on $26,200. 

If you had operated your business through an offshore corporation for 2020, you would have paid zero in self-employment taxes and would have been allowed the full FEIE amount of $107,600. 

Perpetual Travelers and the Foreign Earned Income Exclusion 2020

There’s one group of expats that can never use the residency test. A perpetual traveler is someone that is out of the United States but never puts down roots. This group includes military contractors and those who can’t become residents of the country in which they work and Americans who travel constantly. 

If you’re a perpetual traveler, you won’t have a home base. You won’t get a residency visa and you will not pay taxes in any foreign country. In this case, you must use the 330-day test because you will never qualify for the Foreign Earned Income Exclusion 2020 using the residency test. 

Because the residency test allows you to spend more time in the United States, it might be in your best interest to gain residency in a low or no-tax country. For a list of options, see Which Countries Tax Worldwide Income?

One of the easiest residency programs for Americans is Panama’s Friendly Nations Reforestation Visa. Invest $25,000 in teak and get residency. For more on this topic see Best Panama Residency by Investment Program (note the investment amount has increased from $20,000 to $25,000 for 2020). 

I hope you’ve found this article on the Foreign Earned Income Exclusion 2020 to be helpful. If you need assistance preparing your US tax returns, drop me a line to info@premieroffshore.com and I will connect you with a tax prep expert. If you would like to form an offshore corporation to maximize the value of the FEIE, you can reach me by email or at (619) 483-1708

Income-Tax-Deductions
Christian Reeves

Itemized Deductions for 2020

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Itemized deductions are expenses on specific products, services, or contributions, that can be used to reduce your tax bill. These itemized deductions are only allowed if the taxpayer does not use the standard deduction to reduce the amount of taxes.

Some of the most popular types of itemized tax deductions used by taxpayers include charitable donations, child tax credit, adoption credit, mortgage interest, earned income tax credit, and medical expenses among many others.

You should not confuse itemized tax deductions with tax credits. Tax credits are a much simpler fiscal concept than tax deductions. With tax credits, you just subtract the number of tax credits to what you pay on yearly taxes, while tax deductions take into consideration many things such as what tax bracket you belong to.

There are many itemized deductions that you can include in your tax report, the list is quite extensive. You must do your research and make sure which deductions apply and which not, the following are some of the most popular itemized deductions for 2020.

By far one of the most popular items used to deduct taxes is by adding medical and dental expenses on your tax report. This includes payments done to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, etcetera.

Deductions using medical and dental expenses will remain the same percentage as in 2019 for 2020 which is 10%. Meaning that you will only be able to deduct those expenses that exceed 10% of your adjusted gross income. 

Taxpayers who reduce taxes through itemized deductions on federal income tax returns are permitted to reduce state and local real estate and personal property taxes including income taxes or general sales tax. 

These deductions done to state and local taxes are limited to a total of $10,000 dollars. Married taxpayers who file their taxes separately is $5,000 for each. These deductions are some of the most popular and it is quite easy to apply for them. 

Home Mortgage Interests may only be deducted on acquisition indebtedness interests such as your mortgage being used to buy, build, and/or repair your home. The amount that is allowed to do this can reach up to $750,000 or half which is $375,000 for those married taxpayers who file their taxes separately. 

Even though they have been a number of controversies involving charitable donations as a means to deduct taxes, these itemized deductions are still going strong. Although they are being scrutinized more than ever before and some changes were made for taxpayers who make charitable donations and then report them. 

Due to these changes and tax reforms the limit of cash donations allowed for public charities made an increase from 50% to 60% in 2020 and it will remain that percentage for the rest of the year. 

One of the major changes for itemized tax deductions in 2020 is for casualty and theft losses. Casualty and theft losses have been removed from the list except for the losses that can be proved in a federal disaster area.

Another major change on itemized deductions is the ones for job expenses and miscellaneous deductions which in 2019 were subject to a 2% deduction on Adjusted Gross Income. They have all been eliminated. 

The child tax credit had an extension of $2,000 for every child that qualifies that is refundable by up to $1,400. The $1,400 are subject to phaseouts and reviews by the corresponding fiscal authorities.

Adopting a child with special needs gives you as a taxpayer a credit of $14,300. The maximum credit that is allowed for any additional expenses is also $14,300. The amount fluctuates for taxpayers with an income that equals more than $214,520.

Student loan interest deduction for 2020 remains the same as it was in 2019 at $2,500. If you pay more than $85,000 you do not qualify for this deduction. This is one of the most sought after deductions, currently, there are a number of proposed reforms to make this number higher. 

Having a Medical Savings Account can be very beneficial for your tax plan. For individual taxpayers who are only covered by the Medical Savings Account, there is an annual deductible that is no less than $2,350 but no more than $3,550.

Shared individual responsibility payment has been eliminated for a variety of reasons, also the Pease Limitations for 2020 have been shut down. For Americans living outside of the country, the Foreign Earned Income Exclusion for 2020 is $107,600.  

I hope you’ve found this article on changes to the itemized deductions for 2020 to be helpful. For more information, or for assistance with international tax matters contact us at info@premieroffshore.com or call us at (619) 483-1708

tax deductions
Christian Reeves

Standard Deduction Amounts, Tax Exemptions, and Other Applicable Taxes

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Standard tax deductions are flat amounts of money that the tax system of the United States lets you deduct, plain and simple. Tax deductions allow an individual and a corporation to subtract applicable expenses to reduce the amount of taxes they have to pay. 

These tax deductions need to include some kind of proof to the IRS that they indeed apply for a deduction. Standard deduction amounts are expenses that are not subject to federal income tax, no questions asked. 

As an individual or corporation who pays yearly taxes you have the option to make tax deductions or to use standard deduction amounts to pay fewer taxes, but you can never choose both options. 

It would be smart and beneficial for you to make sure if you qualify for the federal standard deduction as some taxpayers are not allowed to apply for this. If you are married but you and your spouse file separate taxes and itemize deductions when you file your annual tax report then you will not be able to realize the standard deduction. 

Another situation in which an individual would not be able to make a standard deduction is if you file joint taxes with your spouse and he/she was a non-resident at any moment during the tax year.

It is simpler and much faster to make a standard deduction amount than to reduce taxes. You have to make an in-depth analysis of your fiscal situation and decide which option best fits your needs and will make you pay less in tax.

For 2020, the standard deduction amount increases to $12,400 from the $12,200 of 2019. The $12,400 is only applicable for individual taxpayers and for married couples who file their taxes separately. 

Heads of household have a standard deduction amount set for $18,650 for 2020. Married couples who file jointly have a standard deduction amount of $24,800, the same goes for surviving spouses.

You will also see that the standard deduction amount for taxpayers who are blind increased to $1,300. The $1,300 is an addition to the category that these blind taxpayers already fall under when paying their taxes. 

Unmarried taxpayers also have an additional standard deduction amount of $1,650. Individuals who are listed as dependents by other taxpayers cannot deduct an amount greater than $1,100 or $350 plus the earned income of the individual. This amount should not exceed the normal standard deduction amount. 

Just like last year, there will be no personal exemption amount for 2020. Standard deduction amounts are not the only tactic that a taxpayer can use to reduce taxes, there are other tax exemptions that he can take part in. 

Alternative Minimum Tax Exemptions is the amount that a taxpayer can deduct from the taxable income before calculating its liability. This amount depends on which tax bracket the taxpayer belongs to. 

For an individual taxpayer born in the United States the exemption amount is $72,900. For married couples who file their taxes jointly the number is $113,400, the same goes for surviving spouses. 

Married couples who file separately have an alternative minimum tax exemption of $56,700. Trusts and estates have a tax exemption limit of $25,400. It should be noted that trusts and estates operate differently depending on your situation so the amount may vary.

I mentioned two of the most popular options you have as a taxpayer to pay less taxes. But you might also know that regarding your situation you might also have to pay additional taxes that the ones you are used to.

One of these taxes that you might have to pay is the kiddie tax. The kiddie tax’s purpose is to tax unearned income of a child at a marginal rate of what the parent is already paying that year in taxes. 

It does not matter if the child is or can be claimed as a dependent on the parent’s tax return, the kiddie tax needs to be paid. Children under the age of 19 and college students under the age of 24 are subjects of this tax. 

When I mention unearned income I am talking about income from assets that are not wages or salary. Unearned income that will have to be paid under the kiddie tax is dividends and interests obtained by the child. 

As you can see there are a number of tactics that you can use to pay less in taxes. I just mentioned two of the most famous ones, but depending on your situation you may apply for more. 

I hope you’ve found this article on standard deduction amounts, tax exemptions, and the kiddie tax to be helpful. For more information, or for assistance in tax matters contact us at info@premieroffshore.com or call us at (619) 483-1708

tax rates 2020
Christian Reeves

IRS Releases Tax Rate Tables 2020 – Part 2

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Taxes are dreaded by a lot of Americans as they see them as this burden that needs to be tended to or it will cause mayhem, but I don’t believe they should be viewed like this. I may sound like a college professor telling his students to don’t wait until the last minute to study for the big test, but the same concept applies for taxes. 

Most Americans do not even know what tax bracket they fall under. I mentioned in the last article the taxes you have to pay as a couple, but even if you are married you have the option to pay for separate taxes filing separately.  

IRS professionals strongly advise couples to file their taxes jointly as there are many benefits and tax returns you can obtain from this, but there are situations when it is better for married couples to file separately such as: 

  • When you or your spouse have a large amount of out of pocket medical expenses
  • When both spouses work and earn approximately the same amount of money
  • Filing separately also cuts the deductions for IRA contributions and eliminates child tax credits among other tax breaks

Filing separately may look similar to filing jointly but do not get the both of them combined. If you and your spouse earn separately less than $9,875 you have to pay ten percent of your taxable income. 

Couples who separately earn between $9,876 and $40,125 have to pay $987.50 plus 12% of the amount over $9,875. The next tax bracket includes earnings between $40,126 and $85,525 which the amount to be paid is equal to $4,617.50 plus 22% of the amount over $40,125.

Going higher in the tax bracket, earning anywhere between $85,526 and $163,300 will lead you to pay $14,605.50 plus 24% of the amount over $85,525 in taxes. $163,301 to $207,350 is the next tax bracket which those who fall under this one has the pay the amount of $33,271.50 plus 32% of the amount over $163,300. 

As you can tell the amount differentiating the tax brackets is much lower than in those where the married couple files jointly. If you and your spouse earn $207,351 to $311,025 separately you will have to pay $47,367.50 plus 35% of the amount over $207,350. 

Finally, if your annual earnings is any amount above $311,026 the taxable income that you and your spouse has to pay is $83,653.75 plus 37% of the amount over $311,025. This is the final tax bracket for spouses filing separate tax reports. 

Another type of tax bracket that you might fall under depending on your situation is head of household. As head of household you file as an individual and you must meet certain requirements such as: 

  • Be unmarried or considered unmarried at the end of the year
  • Have paid more than half the cost of keeping up a home for the tax year
  • Have a qualifying child or dependent 

The tax bracket for head of household is as follows, if you earn below $14,100 dollars you get taxed 10% of your income. Following the first stage of the head of household income is for taxpayers who make anywhere between $14,101 and $53,700 who have to pay $1,410 plus 12% of the amount over $14,100. 

As you can see the difference between the amount of money in each stage of the tax bracket is quite far apart if you compare them to the other three that I have mentioned in this and the last article. 

A head of household who earns the amount of $53,701 to $85,500 has to pay $6,162 plus 22% of the amount over $53,700. If you earn anywhere between $85,501 and $163,300 then you have to pay $13,158 plus 24% of the amount over $85,500. 

Following those amounts, taxpayers who make $163,301 to $207,350 have to pay $31,830 plus 32% of the amount over $163,300. The next column of the tax bracket is for Americans whose income is a number between $207,351 and $518,400. If you fall under this column then you have to pay $45,926 plus 35% of the amount over $207,350. 

In the last column of the head of household bracket you will find that the last amount is $518,401 in order to calculate how much money you will have to pay if you are in this category, then you must add $154,793.50 plus 37% of the amount over $518,400. 

It is important to take into consideration that if you are a head of household who is receiving financial assistance toward your expenses from a parent or third party you can still qualify for this bracket as long as you prove that you are paying for 50% of your bills with your own capital.

Divorced parents can still fall under this category if your child lived in your home for more than half of the year. You can still file under head of household if the other parent has the right to claim the child as a dependent.

Filing as a head of household or as a separate married couple has a lot of layers and can get quite complicated at times. Please feel free to send us a message and we will help you through this complicated process. 

I hope you’ve found this article on the tax rate tables of 2020 to be helpful. For more information, or for assistance in tax matters contact us at info@banklicense.pro or call us at (619) 483-1708

tax rates
Christian Reeves

IRS Releases Tax Rate Tables 2020 – Part 1

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It’s that time of the year when the IRS releases its annual inflation adjustments. These adjustments calculate tax projections for the upcoming year and give taxpayers an estimate of what is to come regarding tax returns.

They include tax rate schedules, tax tables, and cost of living adjustments. It is important to mention that these are not the numbers and tables that you will use to prepare your taxes for 2019, but the ones that you will use to prepare for your 2020 tax returns in 2021. 

If you are not expecting any major changes in the next year then you should take these tax considerations at full, but if you are planning on getting married or starting a family then you can adjust these projections to best fit your needs and have a more accurate estimate of your tax payments. 

You will find the seven different tax brackets featured in 2020 which are: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. You may also find a zero percent tax bracket, but that is a whole different story. 

For the average American who earns an income below ten thousand dollars (0-$9,875) the amount of tax that they will have to pay is 10%. This is in cases in which the taxpayer only works based on commission or has a part-time job. 

The most common tax bracket includes all taxpayers who earn anywhere from $9,876 to $40,125. The amount of tax that they will have to pay equals $987.50 plus 12% of the amount over $9,875. 

Next is for taxpayers who earn $40,126  to $85,525. In order to calculate how much you would have to pay in taxes, you must calculate $4,617.50 plus 22% of the amount over $40,125. Not that confusing or complicated if you think about it. 

You will see that the more money you earn the more you pay in taxes, that is how the fiscal system of the United States works and there is nothing you can do about it. If you earn anything from $85,526 to $163,300 you have to calculate $14,605.50 plus 24% of the amount over $85,525.

Moving up, if you are one of those fortunate Americans who earn the high volume income of $163,301 – $207,350 to figure out how much taxes you pay you will have to find the sum of $33,271.50 plus 32% of the amount over $163,300.

As you can tell the numbers continue to go up. Earning an income from $207,351 to $518,400 leads you to pay a total amount of taxes of $47,367.50 plus 35% of the amount over $207,350 US dollars. 

Finally, if you are a high earning income American the amount of taxes that you will have to pay is $156,235 plus 37% of the amount over $518,400. That is the highest amount of taxes that you will have to pay as an American. 

The numbers and the information that I gave you right now was only for individual taxpaying Americans. The situation is different for married individuals filing joint returns and surviving spouses. 

If the taxable income of you and your spouse is somewhere between zero and $19,750 you have to pay 10% on taxable income. When your earnings are $19,751 to $80,250 the amount that will be paid is $1,975 plus 12% of the amount over $19,750. 

Spouses earning $80,251 to $171,050 have to calculate $9,235 plus 22% of the amount over $80,250. An income of $171,051 to $326,600 will pay $29,211 plus 24% of the amount over $171,050. 

$326,601 to $414,700 has to figure out their taxes by adding up $66,543 plus 32% of the amount over $326,600. High earning couples who make anywhere from $414,701 to $622,050 have to pay $94,735 plus 35% of the amount over $414,700. 

For those high earning couples who make a combined amount of more than $622,051 the amount that they have to pay equals $167,307.50 plus 37% of the amount over $518,400. Hopefully, you are part of this tax bracket. 

There are many ways in which the amount of taxes that you have to pay may vary. A list of many factors to consider that may change how much you pay or in which tax bracket you fall under. 

Every taxpayer is in a very unique situation tax-wise, ad there are a ton of factors to consider before your accountant or you puts you in your corresponding tax bracket. Being 100% transparent is necessary for all matters involving taxes. 

After all, every taxpayer has the right to find ways to pay the least amount of taxes possible. This might sound a tad illicit, but you must remember that there is a sentence in a proper tax document that includes that very phrase.

If you need help with any topic involving your taxes and ways in which you may reduce the percentage that you pay please feel free to contact us. We will be your trusted guide in these matters.

I hope you’ve found this article on the tax rate tables of 2020 to be helpful. For more information, or for assistance in tax matters contact us at info@premieroffshore.com or call us at (619) 483-1708

trust and estate tax
Christian Reeves

Trust and Estate Tax Bracket 2020

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Before I begin to explain the amount of money that is included in the tax bracket for trusts and estates for the year 2020 I will explain a few things about what it entails as I believe that many Americans just see this listed on their tax sheet and have never considered if they can take advantage of it. 

In simplest terms, a trust is a fiduciary relationship between three different parties in which the head of the trust transfers property or assets to a second party for the benefit of the third party or beneficiary. 

An estate, as defined by texts of law, is the amount of money a person has accumulated whether he is alive or dead. It is the sum of all of the assets, property, legal rights, and any other source of income he has or is still accumulating. 

Trusts and estates have to pay taxes on the amount of income that they earn. Even if the person who owns the trust or estate is dead, taxes have to be paid. Any and all income must be reported to the proper authorities by the person who is controlling the trust or the estate. 

Same as in individuals and married couples who file annual tax reports, so do trusts and estates. They pay different taxes depending on the amount of money that they report on a yearly basis. 

In many cases, money that you inherit or are given through a trust will never have to pay taxes, such as when you are given stocks by a family member. You don’t have to pay taxes on those stocks until you sell them. 

Same goes for real estate, nothing is paid in taxes until it is sold. You have the option of paying income tax on interest right now or postponing the bill until you cash in the real estate or the bonds that you might have inherited. 

A trust needs to file a return if it has a gross income of more than $600 year during the full tax year or if there is any taxable income. Another reason why you might need to file a return on a trust is if there is a nonresident alien beneficiary. 

An estate needs to file a return if it also has a gross income of $600 or more or if a person in the estate is a nonresident alien beneficiary. The category where you will find trusts and estates is the K-1, 1041 income report. 

Income taxes are only paid if the assets inside the trust or estate are distributed among different parties. Capital gains and losses stay in the trust as they are part of the whole, this can be arranged to be distributed but it needs to be mentioned in the constitution of the trust. 

You must also explain in detail how the trust must be divided and report all income on the 1041. The amount each person gets must be shown. It is important that every one of these dividends is shown to the IRS. 

Trusts and estates also have a tax bracket on how their taxes work. As they function in a completely different way than regular individual taxpayers and married couples they have different columns depending on the amount of taxable income. 

If the taxable income in your trust or estate is under $2,600 then you are taxed for 10%. You can see that the amount that is taxed for trusts and estates is much lower than those in the other tax brackets. 

Taxable income that you get from your trust that is anywhere between $2,601 and $9,450 is taxed by calculating $260 plus 24% of the amount over $2,600. The next column is for people who hold trusts and estates and have a taxable income of $9,451 to $12,950, you will have to pay $1,904 plus 35% of the amount over $9,450. 

Finally, the last column of the tax bracket for people who are in trusts or in an estate which is for those who make more than $12,951 have to calculate $3,129 plus 37% of the amount over $12,950.

By these numbers alone you will see how beneficial it is for your tax planning to have a trust or an estate. While other tax brackets reach their final column with $518,000 and a 37% income tax, trust reach it with $12,750. 

For joint married couples the amount is $612,350 divided into two if they are filing separate reports. Few Americans know that they can use trusts and estates for lowering their taxable income, among other things. 

Trusts and estates can be used to benefit your children. It is a huge misconception that trusts and estates are only for the rich. There is a lot that goes into establishing a trust or an estate so don’t hesitate to send us a message so we can help you establish the trust or estate that best fits your needs. 

I hope you’ve found this article on trusts and estates and their tax bracket for 2020 to be helpful. For more information, or for assistance in international tax

PFIC investment
Christian Reeves

What is a PFIC Investment – Passive Foreign Investment Company

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In this article, I’ll review the rules around PFIC investments and the Passive Foreign Investment Company statutes. Here’s everything you need to know about passive income in an offshore corporation.  

First let me define a few terms around PFIC.

Passive Income: Income from interest, dividends, annuities, capital gains, and most rents and royalties.

Passive Foreign Investment Company: An offshore company used primarily to hold passive investments rather than to operate an active business. The two tests to determine if a corporation or LLC is a Passive Foreign Investment Company are:

  1. Any foreign company where 75% of it’s is passive is a PFIC, and  
  2. Any foreign company where 50% or more of its assets are assets that produce passive income is a PFIC

PFIC Investment: A passive investment within a Passive Foreign Investment Company. Also, any investment in a foreign mutual fund, or in a corporation treated as a PFIC is a PFIC investment. Buying stock in company generating passive income, and not operating an active business, can be a PFIC investment.

Second, here are the consequences of investing in a PFIC.

I’ll start with a little commentary in saying that these punitive PFIC rules are a form of capital control imposed on Americans who want to invest offshore. The IRS is charging you a penalty for investing offshore. And, god forbid you make a mistake in reporting your offshore account. The penalties will be swift and severe.

These PFIC penalties where the brainchild of the U.S. mutual fund industry… not a political conspiracy. The industry didn’t want to compete with the better products available abroad, so they paid lobbyists and Congress to invent the PFIC. But, the result is the same as if the Illuminati were imposing capital control on average Americans.

As for the reporting, the IRS estimates it taxes up to 30 hours of work to complete Form 8621, which must be filed each year for each PFIC investment. Add to this forms for the corporation, foreign asset statement, FBAR, and maybe a trust, and you’re over 200 hours to report your offshore investment.

And most of these forms are required no matter the size of your investment and regardless of whether you made a profit. Having a single PFIC investment of $100 inside of an offshore corporation will trigger multiple filing obligations and cost a couple thousand in tax prep should you decide to hire a professional.

This, and the fact that the penalty for getting it wrong on that $100 investment is over $10,000 per year, and you see that average American’s can afford to go offshore. This effectively locks them and their cash in the United States.

All of this negativity and I haven’t even gotten to the PFIC penalties yet. Here they are:

Penalty 1: When you receive a dividend or sell a PFIC share, you must prorate the investment over your holding period and pay an interest charge in addition to the tax.

That’s right, where passive investments in the United States are taxed when sold, those same investments offshore pay tax for each year they are held plus an interest penalty. The purpose of the interest charge is to treat the gain as if it were earned and taxed each year over the holding period.

For example, let’s say you buy a PFIC investment in 2017. You hold it for 3 years and sell it for a gain of $300,000 in 2019. When you file your 2019 return, you’ll need to split the investment over the holding period and pay tax on it as if ⅓ was sold in 2017, ⅓ in 2018 and ⅓ in 2019. That is to say, report $100,000 in gains for each year, plus pay interest on the gains made in 2017 and 2018 (because you reported them “late.”)

Penalty 2: Capital gains from PFIC investments are taxed at the highest ordinary income rate plus the interest charge. Long term capital gains rates are NOT available.

While long term capital gains are taxed by the Feds at 20% to 23.8% (including Obamacare taxes as applicable), the top ordinary income rate is 39.6%. When you add up penalties 1 and 2, the tax and interest penalties for investing offshore can eat up 70% or more of your gain.

Penalty 3: Capital losses on PFIC investments can’t be used to offset capital gains on domestic investments.

While U.S. passive gains and losses offset each other, you can’t reduce your U.S. capital gains with offshore capital losses from PFIC investments. This means your offshore investments MUST turn a profit, or the penalties for going offshore will be severe.

Here are a few exceptions to the PFIC investment penalties…

You can opt out of the PFIC Investment rules with an LLC. If you form an offshore LLC and then make an election to be classified as a disregarded entity or partnership, you will not be considered a PFIC. Only a foreign entity with the ability to retain earnings, such as a corporation or an LLC treated as a corporation, is classified as a PFIC.

In most cases, the PFIC rules do not apply to investments of less than $25,000 (single) or $50,000 (joint).

  • My example above of a $100 investment was inside a corporation, which must always be reported no matter the size.

You can opt out of the PFIC investment rules by making a QEF Election. If a PFIC meets certain accounting and reporting requirements, and is FATCA compliant, you can avoid the PFIC penalties by treating the investment as a Qualified Electing Fund (QEF).

But a QEF election is very complex and difficult to use unless your offshore investment or fund is set up for QEF reporting. In my experience, only the very largest offshore funds have the ability to provide QEF reports that allow you to use the QEF election. This is because:

  1. You must report and pay tax on your share the ordinary gains and passive income of the PFIC investment each year. Your investment might not be able to provide (or willing to provide) such an annual report.
  2. You can elect to report but pay no tax on the QEF elected gains in a PFIC. In this case, you will pay interest on untaxed gains when the investment is sold. You are effectively “carrying over” your gains and losses year to year and paying the tax plus interest when the sale is made. This is best if the returns are uncertain or you have gains in some years and losses in others.
  3. If you don’t make the QEF election in the first year, it becomes difficult to make it later. You need to report a “deemed sale” and then begin with the QEF from that year.

The bottom line is that Passive Foreign Investment Company rules are complex and punitive. They’re a form of capital controls being imposed on Americans by the Internal Revenue Service.

And I haven’t even covered the more esoteric areas of PFIC investing, such as 1291 funds, or the mark-to-market election for stock under the PFIC and section 1296.

For this reason, it’s important to hire a U.S. expert to form ANY offshore structure. Whether you use it to buy real estate, invest in stocks, hold a bank account, or operate a business, a U.S. expert should be the one to quarterback your offshore adventure.

I hope you’ve found this article on the joys of PFIC investments and the Passive Foreign Investment Company Rules helpful. For more information on structuring your investments offshore, please contact me at info@premieroffshore.com or call us at (619) 483-1708.