Have Clients With Overseas Investments?

Here are the top 15 things to remember before they file 2014 tax return(s)

By Cecil Nazareth

Key Takeaways:

  • Thinking globally is no longer optional for elite advisors. You must have a good grasp of your clients’ international holdings – even if your clients don’t.
  • Concerning the individual health care mandate, your clients and their families should all have Minimum Essential Coverage (MEC).
  • It is important that you maintain good documentation to support your deductions and credits.

Donald Rumsfeld, the outspoken former United States secretary of defense, was fond of telling reporters, “We also know there are known unknowns: that is to say, we know there are some things [we know] we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tends to be the difficult one.”

When it comes to your clients’ investments, holdings and transactions – especially those that transverse international borders and jurisdictions – it is the rules and regulations you don’t even know apply to them that are the ones most likely to land them in hot water.

If nothing else, make sure you have a skilled advisor on your side who can turn those “unknowns” into “knowns” and prevent you from stepping on dangerous cross-border landmines.

Guidance for advisors
  • Work with an international tax accountant who understands both international tax law and U.S. tax law (more specifically, U.S. international tax law).
  • Consult professionals with the right expertise – not your friends and family.
  • Assume that any tax law information or tips that clients glean from a cocktail party or office conversation are usually erroneous.
  • Realize that tax documentation is critical to substantiate your deductions.
  • Understand that the same income cannot be taxed twice. You may be entitled to a foreign tax credit.
  • Review the tax treaties between countries.

Many of my clients are from India or have interests in India. That country’s tax code, like many others, has a fiscal year ending March 31 of each year, and returns have to be filed by July 31 of that year. The U.S. tax compliance basis for most individuals is on a calendar year and cash basis. Someone has to align and organize the information adequately to file an Indian tax return and a U.S. tax return. This is a much more difficult task than it seems.

Top 15 things for clients to remember before filing 2014 tax returns
  1. U.S. citizens and residents are taxed on worldwide income. Income earned from Indian sources is taxable in the U.S.: e.g., bank interest from a fixed deposit in India (similar to a CD in the U.S.) is taxable on your U.S. tax return.
  2. It is always good to file an Indian tax return even if you do not owe any Indian tax for the following reasons:
    • You can show compliance with Indian tax laws.
    • If tax was deducted at the source (TDS) you could get a refund by filing an Indian tax return.
    • You will get a foreign tax credit in the U.S. on Form 1116 for taxes paid in India.
  3. Dividends from Indian stocks are not taxable in India, but they are considered taxable income in the U.S.
  4. Maintain documentation for your deductions for charities – insist on a document from the charity. Paying a donation to a temple in India is not deductible, but paying the temple in the U.S. is deductible, if there is an approved tax identification number and an approved 501(c)(3) status.
  5. Health care mandate – You MUST check box 61 of your Form 1040 confirming that you and your dependents have minimum essential health care coverage for 2014. If the box is not checked, a fine or penalty is triggered. The penalty for 2014 is the greater of 1 percent of income, or $95 per adult and $47.50 per child under 18. The maximum penalty for a family for 2014 is $285, and it goes up in subsequent years. Complete Form 8965 if you are exempt from the requirement.
  6. Individual health care mandates and mandates for employers with 100 or more employees or full-time equivalents began in 2014. For all others, it will commence in 2015 or 2016.
  7. Employers need to pay at least 60 percent of the annual premium to meet the requirement for an employer mandate.
  8. Consider tax credits – See if you are eligible for any credits: e.g., childcare credits, education credits or foreign tax credits.
  9. Dependents – A parent can be claimed as a dependent if he or she has a Social Security number and meets the definition of a dependent.
  10. FBAR – Foreign Bank Account Reporting – If you have more than $10,000 in a foreign bank/CD/securities account outside the U.S. at any time during the calendar year, you will have to report the details of that account and maximum balances before June 30, 2015.
  11. Form 8938 – Specified Foreign Financial Assets – If you own bank accounts, securities or any other specified foreign financial assets, you need to fill out Form 8938.
  12. Capital gains – Like many countries, India considers an asset that’s held for 3 years as a long-term capital asset for capital gains treatment. The U.S. considers a 1-year holding period sufficient to qualify for capital gains treatment of lower rates.
  13. Countries like India allow capital gains to be reinvested in certain assets to defer the capital gains tax for 3 years: e.g., investments in rural bonds. The U.S. has no such exemption. So even though the transaction does not attract Indian tax, it does attract U.S. capital gains tax in the year of the sale or gain.
  14. If your clients own real estate in India, they have a 30 percent standard deduction on their Indian tax returns, but no depreciation. In the U.S., they are entitled to depreciation at a special rate.
  15. If one of your clients owns more than 10 percent of the outstanding shares in a foreign company/entity and is also a director of that company, then he or she needs to report this information on Form 5471. There is a $1,000 penalty for not filing this report on a timely basis.
Other tax facts and suggestions
  • Clients can give $14,000 to each child as a gift with no gift tax implication. Each child can receive $28,000 ($14,000 from each parent) in gifts tax-free every year.
  • The estate tax exemption is $5,340,000 per spouse.
  • The gift tax exemption is $14,000 per person. Most states do not have a gift tax filing requirement.
  • The Net Investment Income Tax of 3.8% applies to high-income earners, defined as those with modified adjusted gross incomes above $200,000 for single filers and $250,000 for married couples filing jointly.

Think globally, act locally. Start by getting your clients’ international houses in order now. Understand the risks and rewards of investing globally. Make sure clients and their other financial advisors are staying current with international finance, accounting, tax regulations and policy shifts. You’ll be glad you now know what you know – and have someone to turn to when you don’t!

About the Author

Cecil Nazareth, ACA, CPA, MBA, is managing partner of IFRS Partners in Norwalk, Connecticut. He is a recognized expert and global thought leader on international financial reporting standards (IFRS) and compliance issues. He is a chartered accountant and a U.S. CPA and has lived and practiced internationally. He is an adjunct professor of international accounting at Fordham University, teaching graduate and undergraduate students. He holds an MBA in finance from Fordham University and a certificate in information technology from Columbia University. He has led more than 100 live sessions and webinars and advises several companies, as well as HNW individuals, on their international operations.