July 6, 2020

Wealth Matters: Rules Aimed at Tax Evasion Abroad Trip Up Average Americans

Managing an international financial life was once solely the purview of the superrich, who jetted around the world. But given the still-high unemployment rate in the United States, opportunities for middle-class jobs abroad, in areas like finance, oil and construction, are becoming more appealing.

By taking those jobs, though, many middle- and upper-middle-class Americans have found it more and more difficult to comply with requirements on reporting the existence and value of bank accounts overseas and to reconcile the taxes of different countries.

At the same time, Americans from immigrant families who have bank accounts in their home countries that they may have overlooked are being swept up by the same laws used to ferret out millionaires and billionaires stashing money in secret Swiss accounts. The Internal Revenue Service has increased its examination of such accounts, lawyers said, with serious penalties for those who have not reported them.

So how should Americans working abroad or with a financial life in two countries manage their finances?

BASIC CONFUSION One of the great enemies of people working abroad is bad advice. That is a problem anywhere, but there are fewer sources to counter misinformation thousands of miles from home.

For example, Americans working abroad are eligible for the foreign earned income exclusion, which in 2012 exempted the first $95,100 from tax. But even if Americans earn less than that or are paying higher taxes in the country where they are working, they still need to file a tax return with the I.R.S.

“Some think if you’re paying taxes in Germany and the Netherlands and the taxes are higher than in the U.S., you don’t have to file a return,” said Ian M. Comisky, partner at the law firm Blank Rome and co-author of “Tax Fraud and Evasion.” “That’s not accurate. You have to file a U.S. return, and you get a credit for it.”

Increased I.R.S. scrutiny of bank accounts abroad under the Foreign Account Tax Compliance Act, which began to take effect this year, means foreign banks must report more information on American account holders. Mr. Comisky said he had received calls from people with undeclared overseas accounts who asked if they could transfer the money to a friend who was not an American citizen and have that person transfer it back to them as a gift to avoid the penalties from years of not paying their taxes.

“I said, ‘You can do it, but it’s illegal,’ ” Mr. Comisky said. “That’s pure tax evasion.”

There is also the issue of other countries’ taxes that the United States does not recognize. Marylouise Serrato, executive director of American Citizens Abroad, a lobbying group, said many wealth, social and value-added taxes in Europe were not eligible for credits or deductions on American taxes. “They could be a significant part of your foreign tax bill, but you can’t apply them to your U.S. taxes, so you just pay them,” she said.

While making mistakes on taxes is common, Frank Reilly, president of Reilly Financial Advisors, which has had an office in Saudi Arabia since the 1970s, said people working abroad also often made poor financial decisions about real estate.

With homes in the United States, there are two common problems. One is the logistical challenge of renting out a home you own from thousands of miles away. The other is deciding to buy a retirement home somewhere in the United States when you plan to work abroad for many more years. By the time you stop working, you may not want to live there.

“I always advise people to go as slowly as possible with buying real estate,” Mr. Reilly said.

The most financially destructive real estate problem comes when income and mortgage payments are in different currencies. “When someone in the United States takes out a mortgage, they know that their payment is $1,300,” Mr. Reilly said. “When they take out a mortgage in euros, it could be 1,300 euros. That could be $1,500 or $1,800 or $2,300. They’re exposed to currency fluctuations.”

Mr. Reilly said he counseled clients to imagine what a shift in the exchange rate could mean to them and asked some to consider putting many months of payments in that currency as a hedge.

ACCOUNT COMPLICATIONS While new American reporting requirements are meant to catch tax evaders, they are causing problems for people simply making a living abroad.

Article source: http://www.nytimes.com/2013/04/06/your-money/rules-aimed-at-tax-evasion-abroad-trip-up-average-americans.html?partner=rss&emc=rss

Obama’s Tax on Millionaires

Britain and France have imposed new taxes on their highest earners — and Italy, Spain, Greece and Japan are considering similar moves, despite some protests.

Whether the taxes on the rich in Europe raise enough money to close much of their budget shortfalls, they are being promoted as a step toward economic fairness at a time when governments are cutting spending on social programs like pensions, health care and education. Mr. Obama — whose millionaire’s tax would probably raise a modest amount of revenue over the next 10 years by collecting more from several hundred thousand Americans — has also framed his plan as a way to make the system more equitable.

Specifically, the proposal would counteract decades of tax reductions for most Americans that have given the wealthy the most benefit.

But the idea being embraced by much of the world faces strong opposition in the United States from Republicans and other conservatives who say it would harm the economy and cost jobs.

“Other countries explicitly use the tax system to redistribute resources in society,” said Reuven S. Avi-Yonah, a professor at the University of Michigan and expert in international tax law. “But going all the way back to no taxation without representation, Americans have had a mistrust of government. So we tolerate a greater inequality in terms of wealth. There is more opposition to tax increases, even when rates are low. And there is less confidence that government will use the money wisely.”

Still, there are some indications that Americans may be more open to tax increases on the affluent. One recent poll by The Associated Press and CNBC found that Americans feel they are less likely to become millionaires, making them more willing to embrace a tax on that group.

The initiative also echoes a populist chord sounded by Warren E. Buffett, the billionaire investor who has publicly complained that the American tax system allows him and some other wealthy individuals to pay a lower percentage of their income in federal taxes than their secretaries do.

Whether a higher tax rate would stifle business and economic growth continues to be debated. Britain raised its top tax rate to 50 percent after the 2008 financial crisis, and a number of economists and others have said that it inhibited investment and hiring. They are asking that the issue be reconsidered if the additional money generated proves less than projected.

Spain, Greece and Italy have less room to maneuver. They are under external pressure to raise tax rates and reduce spending to help meet targets for debts and deficits imposed on all members of the euro zone. To continue to raise money in the international financial markets, these countries have taken a number of steps painful for their citizens. Adding a 3 percent “solidarity tax” on the wealthy, as Italy is considering, reminds the voters that everyone is sharing the pain.

Until the recent financial crisis and worldwide economic downturn, individual tax rates had fallen substantially in most developed countries over several decades. In 1980, the top federal rate on Americans was 70 percent, and most European countries were above 60 percent. Today most European countries have rates below 50 percent. The United States has a top rate of 35 percent, but many wealthy Americans pay considerably less because their earnings are derived from dividends or capital gains, which are taxed at no more than 15 percent.

As a result, the effective federal tax rate, including payroll taxes, for the wealthiest 0.01 percent of earners fell to 31.5 percent in 2005, from 42.9 percent in 1979, according to data from the Congressional Budget Office. Over the same time, effective rates for taxpayers in the center of the range fell to 14.2 percent, a decrease of just 4 percentage points.

Article source: http://feeds.nytimes.com/click.phdo?i=4d7e0b7971f7b7262c048098c946d571

Obama Tax Plan Would Ask More of Millionaires

With a special joint Congressional committee starting work to reach a bipartisan budget deal by late November, the proposal adds a new and populist feature to Mr. Obama’s effort to raise the political pressure on Republicans to agree to higher revenues from the wealthy in return for Democrats’ support of future cuts from Medicare and Medicaid.

Mr. Obama, in a bit of political salesmanship, will call his proposal the “Buffett Rule,” in a reference to Warren E. Buffett, the billionaire investor who has complained repeatedly that the richest Americans generally pay a smaller share of their income in federal taxes than do middle-income workers, because investment gains are taxed at a lower rate than wages.

Mr. Obama will not specify a rate or other details, and it is unclear how much revenue his plan would raise. But his idea of a millionaires’ minimum tax will be prominent in the broad plan for long-term deficit reduction that he will outline at the White House on Monday.

Mr. Obama’s proposal is certain to draw opposition from Republicans, who have staunchly opposed raising taxes on the affluent because, they say, it would discourage investment. It could also invite scrutiny from some economists who have disputed Mr. Buffett’s assertion that the megarich pay a lower tax rate over all. Mr. Buffett’s critics say many of the rich actually make more from wages than from investments.

In a speech on Thursday, Speaker John A. Boehner, Republican of Ohio, agreed with Mr. Obama that the deficit-reduction committee “can tackle tax reform, and it should,” to get rid of many tax breaks and allow for lower marginal rates.

“Tax increases, however, are not a viable option for the joint committee,” Mr. Boehner said. Instead, he emphasized that meeting the deficit-reduction target should come largely from overhauling benefit programs like Medicare, Medicaid and Social Security.

The Obama proposal has little chance of becoming law unless Republican lawmakers bend. But by focusing on the wealthiest Americans, the president is sharpening the contrast between Republicans and Democrats with a theme he can carry into his bid for re-election in 2012.

It could also reassure Democrats who have feared that Mr. Obama would agree to changes in programs like Medicare without forcing Republicans to compromise on taxes.

The administration wants such a tax to replace the alternative minimum tax, which was created decades ago to make sure the richest taxpayers with plentiful deductions and credits did not avoid income taxes, but which now hits millions of Americans who are considered upper middle class. Mr. Obama has said that many average Americans could see a tax cut if the system is overhauled, since ending many tax breaks would allow for lower rates while raising more revenues from the wealthiest.

The millionaires’ tax is among several changes Mr. Obama will propose in urging Congress to overhaul the federal income tax code next year, both to raise revenues for reducing deficits and to make the tax system simpler and fairer, said the administration officials, who agreed to speak in advance of the president’s announcement on the condition of anonymity.

The millionaires’ rate would affect only 0.3 percent of taxpayers, they said. That would be fewer than 450,000; 144 million returns were filed for 2010.

Mr. Obama’s proposal comes a month after Mr. Buffett began reviving his longstanding objection that he and “my megarich friends” pay a significantly lower percentage of their income in federal taxes — income and payroll taxes — than everyone else, thanks to the tax code’s favoritism toward the rich, and especially toward investors like him.

“My friends and I have been coddled long enough by a billionaire-friendly Congress,” he wrote in an opinion article in The New York Times, a complaint he has repeated in talks and media interviews since. “It’s time for our government to get serious about shared sacrifice.”

Mr. Obama has been citing Mr. Buffett as he promotes his $447 billion job-creation plan. He proposes to offset the cost of that plan and reduce future budget deficits through higher taxes on the wealthy and on corporations after 2013, when the economy will presumably be healthier.

Mr. Obama’s proposed Buffett Rule puts a new spin on that pitch, as he tries to put Republicans in Congress and in the presidential race on the defensive for their rigid stand against higher taxes.

Article source: http://feeds.nytimes.com/click.phdo?i=465ae14bd294dfd5ed0a1d77b8a41f49