ELITE ADVISOR BEST PRACTICES
Have Clients With Overseas Investments?
Here are the top 15 things to remember before they file 2014 tax return(s)
By Cecil Nazareth
- 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
- 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.
- 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.
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!