Kempe Tax International

Frequently Asked Questions

FAQ

You first need to contact me, either by phone or email, to discuss your tax situation. Every person is unique, so I need details of your situation to determine how you will need to file.

Your best bet is to email me at kempetax@gmail.com. In a quick summary, tell me:

  • Your name.
  • Your visa status.
  • Your location in the U.S. (city and state)
  • WHEN you arrived (exact date, if possible).
  • Your marital status, and whether you have children or not.
  • If you are married or have children, whether they will need
  • Individual Tax Identification Numbers (ITINs)
  • If you are scheduled to return to your home country, WHEN you are leaving (exact date, if possible.
  • Your employment status (are you working as an employee under Form W-2, or as an independent contractor under Form 1099-MISC).
  • What was your annual salary for 2015?
  • Did you sell any stocks, bonds or mutual funds?
  • If you own a house or apartment in your home country, are you renting that house or apartment while you are staying in the U.S.??
  • Do you have any financial accounts (bank accounts, brokerage accounts, etc.) ANYWHERE overseas?

Once I have this summary, I will evaluate your situation and determine what type of tax returns (federal and state) you need to file. I will then email you a detailed fee quote (I charge by the form) and tell you HOW you can pay me (probably via PayPal, but bank transfers and checks are also acceptable). Note that I DO get paid in advance.

Once you agree, I will ask you to send me via secure email, fax or normal mail:

  • If you are a visa holder: Clear scanned copies of your visa, your wife’s visa (and passport, if we are applying for an ITIN) and your children’s visa (and passport, if we are applying for an ITIN). This is required by the IRS to verify BOTH your identity and your visa status.
  • If you are a green card holder: Clear copies of your and your wife’s green cards and SSN cards for you, your wife and children. This is required by the IRS to verify BOTH your identity and your visa status.
  • If you are a U.S. Citizen, a driver’s license or some other picture ID.
  • Copies of your W-2, 1099s, and any other tax documents.
  • A copy of your 2014 tax return.
  • A copy of your home country tax return, if one was filed.

Once I have this data, I will prepare the return, which I will, via secure email or the TaxAct Exchange, send to you in PDF form for review and approval. If you filing a normal U.S. return (Form 1040, 1040A or 1040EZ), I will also send you a Efile Signature Form that, if you approve of the draft return, I want you (and your spouse, if married) to sign and scan-and-email back to me.

Starting in the 2010 tax season, the IRS MANDATED efiling of all tax returns that could be efiled. Once I get the scanned copy of the SIGNED Efile Signature Form, I will then efile your federal and state tax returns. I will then email you a FINAL copy of your tax return for your records.

If you are filing a non-resident return (Form 1040NR or 1040NR-EZ), and once I have your approval, I will print, sign and package the tax return to mail to YOU. This non-resident return MUST BE MAILED (efiling is NOT possible), and since a tax return is a LEGAL document, it must be signed by you, the taxpayer. In the packet you will receive, you will get a COPY of the return for your records, along with a MAILING copy of the non-resident tax return for you to sign. A pre-addressed envelope will be attached to the mailing copy. If possible, the state return will be efiled, but if not, a mailing copy of the state return will also be sent to you with a pre-addressed envelope.

From start to finish, the entire process can take as little as one day or as long as a month or more. It depends on the complexity of your return, your physical location, and how many issues on your tax return requires research and resolution.

Also, this year I am using the TaxAct Client Exchange, which will allow you to upload your tax documents and download the draft and final copies of your tax return plus the efile signature forms described above. This exchange is provided at no cost to you.

I DO have references if you wish to email some of my satisfied clientele from past years. You will get an email address. If you wish to speak to them, you can ask them for their phone numbers.

Note that YOUR signature (as the taxpayer) is an ABSOLUTE REQUIREMENT; failure to provide your signature will cause the IRS to REJECT the tax return! However, MY signature as the tax preparer is NOT required by either the IRS or any of the states. For this reason, I can, if you wish, email you copies of the Forms 1040NR or 1040NR-EZ with packaging instructions for you to package and mail the return yourself. This saves mailing time and speeds up the refund, especially if you are located in a foreign country such as India.

The F-1 visa is for international students. The F-1 visa-holding student is admitted to the United States for “Duration of Status” (which is noted as “D” slash “S” on their Form I-94, “Arrival-Departure Record”, instead of a specific expiration date) to complete an educational program, plus any authorized practical training following completion of their studies, plus sixty day grace period to prepare for departure from the United States.

While students on F-1 visas are in the United States principally to receive an education, such students often work to help offset the expenses associated with seeking such a degree. These working students are NOT required to pay employment taxes (Social Security and Medicare), but must pay BOTH federal and state income taxes. The taxes are withheld from your pay and you must file a tax return (Form 1040NR or 1040NR-EZ) after the completion of the calendar year to reconcile your tax liability.

The F-1 visa holder is an “exempt individual”; in this context it does NOT mean he/she is exempt from taxation, but rather he/she is exempt from the Substantial Presence Test. If he/she is in the United States for the full tax year under the F-1 visa and has earned income, then he/she is considered a non-resident alien and must file either Form 1040NR or 1040NR-EZ, plus Form 8843. Even if he/she has no requirement to file a tax return, he/she must STILL file the Form 8843 annually. More on this later.

Filing as a non-resident alien allows the taxpayer to claim certain exemptions or credits authorized under the tax treaty negotiated between the country that originated the F-1 visa and the United States. They cannot, however, claim the Standard Deduction unless they are from India. If the F-1 visa holder comes from a country that has a tax treaty with the United States, this may actually work out better than claiming the Standard Deduction.

Let’s show an example. In 2015, a Chinese student is attending a college in San Francisco and works as a graduate assistant for one of the professors. He earns approximately $20,000 by the university, plus gets paid an additional $4,000 on a Form 1099-MISC for assisting in a research project with the professor. The $20,000 earned as an employee and the $4,000 earned as an independent contractor assisting the research project is subject to both federal and California income taxes, but NOT the employment taxes (either Social Security and Medicare taxes or the self-employment taxes, normally reported on Schedule SE). The student had $2,800 withheld for federal income taxes and $2,200 withheld for California income taxes.

If the Chinese student was from India, he could claim only the standard deduction of $6,300 along with the $4,000 personal exemption. The standard deduction replaces any itemized deduction (unless, of course, the itemized deductions EXCEED the $6,300 allowed for the standard deduction). This would result in $13,700 being taxed. However, as a Chinese student on a F-1 visa, he is eligible for a tax treaty exemption of $5,000 under Article 20(c). That effectively replaces the standard deduction. He can still claim the $4,000 personal exemption. Further, he can claim, as an itemized deduction, the $2,200 in California taxes withheld from his pay on the W-2. That means only $12,800 would be taxed. This would reduce his taxes by about $100 MORE than if he claimed the Standard Deduction by itself.

There are two other forms the F-1 visa holder should file. The first is Form 8843 (Statement for Exempt Individuals and Individuals with a Medical Condition). This form must be filed annually, either with your tax return (Form 1040NR/1040NR-EZ), or by itself if you do not have to file a tax return. The filing deadline is April 15th of each year.

The second form that the F-1 visa holder may need to file is Form 843. I noted above that students on a F-1 visa are NOT liable for Social Security and Medicare taxes. Unfortunately, not all employers are aware of this fact, and they will withhold these taxes unless the student takes steps to stop the withholding. Often, when the student proves to the employer that he is not liable for the taxes, the employer stops withholding the taxes, but refuses to refund the taxes that were already withheld. That is when the student has to file Form 843 to request a refund of these taxes. There are other supporting documents required, and you need to download and read Chapter 8 of IRS Pub 519 for the process of requesting the refund, but the refund usually makes it well worth the effort.

The H-1B is an employment visa which is normally issued to individuals who seek temporary entry in a specialty occupation as a professional. It is normally restricted to persons who have a bachelor degree (or the equivalent in work experience). By its very nature, this visa is limited in duration, with an initial period up to three years, with possible annual extensions up to six years total.

The H-1B visa holder who has been in the United States for the entire tax year (in other words, you entered the U.S. on your H-1B visa prior to 1 January 2015) is considered a resident alien and will file Form 1040, 1040A or 1040EZ. You will pay taxes at the state and federal level at the same tax rates as U.S. citizens, PLUS you are liable to pay Social Security and Medicare taxes. You can claim all the exemptions and credits which are available to U.S. citizens, to include filing jointly with your spouse (even if he/she is living in another country) and claiming the exemptions for your children (assuming the children lived with you in the U.S. Long enough to meet the Substantial Presence Test). To file jointly with your spouse and/or to claim the exemptions for your children, you must request Individual Tax Identification Numbers by filing a Form W-7 for your spouse and each child when you file your first tax return.

The H-1B visa holder who files as a resident alien also needs to remember that ALL of his/her worldwide income is subject to U.S. taxes, not just U.S.-based income. While these taxes can be offset by the Foreign Tax Credit (Form 1116, for taxes paid to another country) and/or the Foreign Income Exclusion (Form 2555), the visa holder should not fail to report income from his home country.

Those who enter the United States before July 3rd during the tax year will meet the Substantial Presence Test (which requires presence in the U.S. for at least 183 days) and are considered dual-status aliens and must file a dual-status tax return, which, for them, consists of a Form 1040 with a Form 1040NR as an attachment. In most cases, the taxpayer cannot claim the Standard Deduction, cannot file jointly with her/her spouse (though he can claim his spouse and children as dependents), cannot claim the Head of Household filing status, and cannot claim either the Earned Income Credit, the education credits or the credit for the elderly or disabled. He CAN claim the Child Tax Credit if he ends the tax year as a resident.

As you may have guessed, the dual-status return is somewhat complicated and probably should NOT be filed without professional help.

Those who enter the United States after July 2nd during the tax year cannot meet the Substantial Presence Test and may file as a non-resident alien, but also MAY file a dual-status tax return under the First Year Choice. The First Year Choice option requires that you be in the United States for at least 31 days in a row in 2015 AND be present in the United States for at least 75% of the number of days from the beginning of your 31 consecutive day period and ending with the last day of 2015. You will also have to file a statement with your return concerning the First Year Choice. See IRS Pub 519 for details. You must wait until you meet the Substantial Presence Test for 2012 before you can file, which means you might have to wait until late June of 2012 before you can file. While it is POSSIBLE that the benefits of filing dual-status instead of filing as a non-resident alien may be worth it, it is UNLIKELY, so, if you are SINGLE and do not meet the 183-day Substantial Presence Test, it is probably best that you file as a non-resident alien.

Finally, if you are married and your wife is with you on a H-4 visa, you can both choose to be treated as resident aliens, regardless of whether you entered the United States before or after July 3rd. You would have to use the Married Filing Joint option under First Year Choice (and file the joint filing statement), then meet the requirements for choosing to file as a resident alien as well. These requirements are:

  • Be a non-resident alien at the beginning of the year.
  • Be a resident alien at the end of the tax year.
  • Be married at the end of the year.
  • Your spouse must join you in this choice.

The results/consequences of this choice are as follows:

  • You and your spouse are treated are treated as U.S. resident for the entire year for income tax purposes.
  • You and your spouse are taxed on all of your world-wide income.
  • You and your spouse must file a joint income tax return for 2015.
  • Neither you nor your wife can make this choice again in later tax years, even you are divorced, separated or remarried.
  • You can claim your children as dependents IF the children also meets the Substantial Presence Test in the United States in 2015 or 2016 as noted below.

As noted above, you must WAIT until you meet the Substantial Presence Test in 2016 before filing, which means you would have to file Form 4868 to extend you filing deadline to 15 October 2016. However, in almost all cases, the tax benefits of filing jointly with your spouse is WELL WORTH the delay of filing in May/June of 2016.

You entered the United States as a student on a F-1 visa to pursue a degree at a higher learning institution. You succeeded in getting your degree, and, while working on Optional Practical Training (OPT) assignment, you impressed someone at the company where the OPT was done and they offered to sponsor you for an H-1B employment visa. For filing your taxes, you have several options.

As noted earlier, while you were in school and on OPT, you were on a F-1 visa and were considered a non-resident alien. If you were required to file a tax return, you filed Form 1040NR or 1040NR-EZ. If you are single, you probably will file as a non-resident ONE LAST TIME, because you cannot meet the 183-day Substantial Presence Test, because only the time from 1 October to 31 December 2015 counts.

You CAN file a dual-status tax return under the First Year Choice. The First Year Choice option requires that you be in the United States for at least 31 days in a row in 2015 AND be present in the United States for at least 75% of the number of days from the beginning of your 31 consecutive day period and ending with the last day of 2015. You will also have to file a statement with your return concerning the First Year Choice. See IRS Pub 519 for details. You must wait until you meet the Substantial Presence Test for 2012 before you can file, which means you might have to wait until 1 June of 2016 before you can file.

MOST of the time, there are NO benefits tax-wise for filing dual-status over filing as a non-resident alien. That being the case, it is easier and quicker to just file as a non-resident alien for 2015.

However, if you are married, you can file jointly with her and you both choose to be treated as resident aliens. You WILL sign a Joint Filing Choice Statement with your return. To file this way, the requirements are:

  • Be a non-resident alien at the beginning of the year.
  • Be a resident alien at the end of the tax year.
  • Be married at the end of the year.
  • Your spouse must join you in this choice.

The results/consequences of this choice are as follows:

  • You and your spouse are treated are treated as U.S. resident for the entire year for income tax purposes.
  • You and your spouse are taxed on all of your world-wide income.
  • You and your spouse must file a joint income tax return for 2015.
  • Neither you nor your wife can make this choice again in later tax years, even you are divorced, separated or remarried.
  • You can claim any children who have lived with you in the U.S. in 2015 long enough to meet the Substantial Presence Test as dependents.
  • You must wait to meet the 183-day Substantial Presence Test which means, for a H-1B visa that goes into effect on 1 October 2015, that you must wait until 1 June 2016 before you can file your return. This requires you file Form 4868 to request an extension, but the benefits of filing jointly almost always makes the wait worthwhile.

If you file a dual-status OR a non-resident return, you must file Form 8843 one last time with the IRS. For every successive year, you will file as a resident alien and Form 8843 is no longer required.

Finally, you should look carefully at your pay stubs while you were on the OPT. It is possible that you were exempt from Social Security and Medicare taxes, but your employer withheld these taxes anyway. By filing Form 843, you can claim a refund of these withheld taxes as long as you file either as a non-resident alien or as a dual-status alien. You should refer to IRS Pub 519 for details. Please note that if you file as a resident alien, you forfeit the opportunity claim a refund of these withheld Social Security and Medicare taxes, so it may be advisable to first request the Form 843 refund and file as a non-resident alien. Once you have gotten the Form 843 refund, then, and only then, amend the return to file as a resident.

The IRS categorizes long-term visitors to the U.S as either resident aliens, non-resident aliens or dual-status aliens.

Tax-wise, the resident alien has the simplest tax situation because he/she is treated just like a U.S. citizen, and will file Form 1040, 1040A or 1040EZ. He/she is liable for local, state and federal income taxes, and must also pay Social Security and Medicare taxes. ALL of his/her income is subject to the federal income tax, including income earned/received from the resident alien’s home country or anywhere else in the world. U.S tax law is somewhat unique in this respect; most other countries do not tax income that is not earned in that country. However, the resident alien is also eligible for the various tax credits and deductions that a U.S. citizen enjoys, to include the Earned Income Credit and the Child Tax Credit for children living with them in the U.S. Most important, the resident alien can claim the Standard Deduction, whereas most non-resident aliens cannot claim this rather large ($6,300 for 2015) deduction!

The basic requirement to be considered a resident alien is that you reside within the U.S. borders for all of the calendar year (except for brief vacation periods) under a valid work visa (like H-1, H-1B, or L-1) or as a legal immigrant (green card holder). If you are a non-resident alien at any time (even if it is only one day) during the calendar year, you fail to meet this requirement and are therefore considered either a dual-status or a non-resident alien. This ambiguity normally applies only during the year you initially entered the U.S.

Lest you think that being a resident alien is all advantages, there IS the problem of reporting the existence of foreign accounts to the IRS on the FBAR (FinCen Form 114). The FBAR is addressed in detail in the next question.

The non-resident alien is treated much differently tax-wise. If required to file, he/she files a special tax form called Form 1040NR or 1040NR-EZ. He/she normally is not liable for Social Security and Medicare taxes, but normally will pay local, state and federal income taxes on any income he/she earns while living in the U.S. Generally, he/she cannot claim the Standard Deduction and are not eligible for some credits or deductions, but can claim others. Further, he/she normally cannot file jointly with his/her spouse and may not be able to claim his/her children as dependents. The rules, however, are rather complicated and specific to the type of visa under which he/she entered the U.S. Much depends on the tax treaty (if one exists) between the U.S. and the non-resident alien’s home country. Most non-resident aliens hold either a student (F-1) or a researcher/teacher (J-1) visa.

A fair number of persons enter the country on either an F-1 or J-1 visa, then convert to a working visa, normally H-1 or H-1B. In the year of their conversion, they are considered dual-status aliens. Additionally, those who initially enter the country on a work visa in the middle of the year fall into this category as well. Finally, those who leave the U.S. to return to their home country also are expatriate dual-status aliens. A dual-status return requires the alien to file a Form 1040 with an attachment that documents the income earned during the non-resident period. The attachment is normally Form 1040NR. The expatriate dual-status return reverses the forms, in that the Form 1040NR is the principle form and the Form 1040 is the attachment.

Dual-status aliens CANNOT file jointly, nor, in most cases, can they claim the standard deduction. They also cannot file as a Head of Household, nor can they claim any education credits/deduction nor the Earned Income Credit. However, they can claim their spouse and children as dependents; they can itemize their deductions; and, if they qualify, they can claim the Child Tax Credit for any qualified child, the Foreign Tax Credit, the Adoption Credit, the Retirement Savings Credit and the Child and Dependent Care Credit.

Dual-status aliens often have the option of filing as a non-resident alien, and in some cases, it is more advantageous for them to do so. Further, if a dual-status alien is married, they have the option of being treated as a resident alien for the entire year. In either case, they need to look at their entire tax situation to determine which method of filing is most advantageous to them. In such cases, using a tax professional who is familiar with tax preparation for visa holders is highly recommended.

The FBAR is an acronym that informally stands for “Foreign Bank Account Report”. It used to refer to Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (the “FBAR”), which is used to report a financial interest in or signature authority over a foreign financial account. However, starting on 1 July 2013, the IRS mandated that all FBAR submissions (both current and past-due) MUST be submitted electronically using FinCen Form 114.

Prior to 2016, the FBAR must be received by the Department of the Treasury on or before June 30th of the year immediately following the calendar year being reported. The June 30th filing date may not be extended, and the submission MUST be done electronically.

Under recent tax law changes, for the 2016 year, the FBAR deadline has been moved to 15 April 2017, same as the annual tax return. However, now you CAN request an extension for filing to 15 October 2017. However, for 2015 (the current tax filing year), the deadline is 30 June 2016, with NO extensions allowed.

First, before you go into shock because you never heard of this requirement and did NOT submit it for 2014 or earlier, understand that, in order for you to be required to submit this document, ALL of your foreign accounts must have, in aggregate, been more than $10,000 in them at any one time in the calendar year. If you do not meet this $10,000 amount, then you have no legal requirement to file the FBAR.

Second, you only have to file it ONLY IF you are a resident alien, green card holder, U.S. resident, U.S. Citizen, U.S. national or dual-status alien. If you are a non-resident alien, then you do NOT have to file the FBAR.

Third, it is NOT a tax!! It is an information return that the IRS uses to try to find assets that were hidden overseas in order to avoid U.S. taxes on those assets. In fact, foreign workers who are here on work visas are NOT the primary targets for the FBAR. Wealthy Americans who are trying to hide money from the IRS are the primary target, plus it is a tool to fight the funding of terrorism.

Now, if you meet all of the criteria above and therefore ARE required to file the FBAR both for 2015 AND for earlier years, do not stress out! There are literally TENS of THOUSANDS of people like you who have not reported, and the IRS has conducted several separate amnesty programs to increase compliance. If the amount of money you have overseas amounts to LESS than $250,000, you can file the FBAR for all of the past years (back to 2010; the IRS has no interest in years prior to 2010). The FBARs must now be submitted electronically, so NO cover letter explaining the late entries is currently possible. However, there IS a comment section where you can offer an simple explanation (most commonly it is “I did not know about the requirement.”). This is known as a “quiet submission” of past-due FBARs. The IRS has historically NOT levied penalties in such cases, but merely will acknowledge receipt of the report with an admonishment that you should henceforth submit the report each year by April 15th.

As noted above, the FBAR MUST now be submitted electronically. That includes late submission of past year FBARs. Since submission electronically is now mandatory, FinCen Form 114a will need to be completed and signed to authorize third-party electronic submission of the FBAR.

You have been in the U.S. for some time now, and are looking into buying a home. Multiple friends have told you that renting is a waste of money and that there are great tax advantages in owning a home. You have been very responsible in managing your money and have little debt. The real estate agents and mortgage brokers all say you would easily qualify for a mortgage at very good rates. Everyone is urging you to buy, yet no one has fully explained the advantages and pitfalls associated with buying a house. This article will attempt enlighten you on that subject.

The purchase of a home will most likely be the largest investment in your life. The investment will easily exceed $100,000, and may be as much as $500,000, depending on where in the United States you live. Therefore, you must be very careful before you make this purchase, as you will live the benefits (or consequences) for many years to come.

Tax-wise, the principal benefit on your annual tax return will be your ability to deduct the mortgage interest and real estate taxes as an itemized deduction. On a $150,000 house, the principal-and-interest payment for a 30-year mortgage at 5.0% will result in a monthly payment of about $900. The three-bedroom apartment you are currently renting for your wife and family runs about $850 a month, so the difference in monthly payments is only $50. In the first five years of a 30-year mortgage, almost all of the monthly payment is interest, so your house payment will generate an annual deduction of about $10,500 in the first five years. Your real estate tax bill will vary widely across the country. This tax could be as little as $500, or as much as $5,000. Regardless of the amount paid, in most cases, this real estate tax is also fully deductible as an itemized tax deduction. Additionally, in the year you purchase the house, certain expenses in closing the house are also deductible. I am speaking of points and loan origination fees. These payments, which are paid when you close on the house, are pre-paid interest, and therefore can be deducted in full in the year you make the purchase or, if necessary, can be amortized (spread out over the life of the loan).

A quick comparison of the itemized deductions versus your standard deduction makes the tax appeal of home ownership obvious. Assuming the $150,000 house noted above with an annual real estate tax of $2,500, your itemized deductions for just the mortgage interest and taxes are $13,000. This exceeds the 2015 joint standard deduction of $12,600 by $400. It also allows you to deduct the state and local income taxes you paid, plus any donations to charity you may have made, plus other miscellaneous deductions. All things considered, your total itemized deductions claimed on Schedule A could easily exceed $20,000, about $7,400 more than your $12,600 standard deduction, all for money you are, for the most part, already spending as a renter.

Further, there IS another tax advantage in purchasing a home. In 1997, Congress decided to make the profits made on home sales tax-exempt up to $250,000 for single persons and $500,000 per married couple. Further, you are allowed to make these tax-exempt sales of your home every two years. This has led to enterprising people “flipping” homes (buying run-down homes, moving in, fixing them up, then reselling them for a substantial profit) every two years. In areas like Las Vegas from 1998 to 2006, this was to be a very lucrative financial venture.

You are now asking yourself: What’s the problem? Numbers do not lie! This is a no-brainer! Where do I sign? Let get this done!!

Not so fast! There are hidden costs and other factors which must be considered when purchasing a home.

First, there are the purchase costs for the home. Typically, the home buyer will pay between 2.5% to 3.5% of the cost of the house in closing costs. Normally, these costs are rolled into the loan and will be paid off over the life of the mortgage. Except for pre-paid interest noted above and some pre-paid taxes, none of these costs are tax deductible. Even if you get a deal where the seller pays most or all of the closing costs, you are in fact still paying these costs because the seller, in most cases, makes up these costs with a higher sales price. So, on that $150,000 house, your purchase costs will be about $4,500, most of which is not tax deductible!

Second, there are the house set-up costs. Most modern apartment complexes provide a stove, range, microwave oven, refrigerator and probably a washer and dryer. Most of the time, you must buy all of these appliances for your new or used house. Also, it is very possible that you currently rent a furnished apartment, which means you will have to also buy a living room set, at least one bedroom set, plus various other pieces of furniture. Curtains, drapes, window shades, and other accessories will also have to be purchased and installed. It would not be unusual at all if you would have to spend an additional $20,000 for these costs.

Third, there are the sales costs when it comes time to move. These costs can run as high as 12% of the value of the home, because you will again pay the 2.5 to 3.5% closing costs, plus a real estate commission of between 5 – 7%, plus the fix-up costs you must do to get your house ready to show prospective buyers.

Finally, there is your special status as an H-1B visa holder to consider. By definition, your presence in the United States is a temporary arrangement which can be terminated as a relatively short span of time. Americans working for corporate America structure live in similar circumstances, with sudden moves dictated by the employer and terminations causing a quick sale of the home to move to a new job at a different city. However, U.S. citizens do not have to move their household goods to a different country, often on the other side of the world, which would be a very expensive proposition. One client of mine who came to Atlanta from England got caught in this situation when he bought a house in 2006, then lost his job when the 2008 financial crisis hit. The value of his house (purchased for $325,000 in 2006) plummeted to a value of about $150,000, less than half of the original purchase price. Given the circumstances, he had no choice but to walk away from the house and let the bank foreclose on the mortgage. He negotiated a deal with the bank where the bank agreed NOT to sue him for the balance of the mortgage (the cost of such a suit in international court would have been prohibitive), but he LOST over $20,000 in the process, and the foreclosure effectively RUINED his and his wife’s credit rating for SEVEN years. Because of that bad credit rating, he could not purchase another home in England even though returned to his former job there.

All of the above were valid considerations well before the 2008 financial crisis, but now, you also have to factor in the lingering effects of that 2008 crisis. I refer to the fact that there is a vast OVER-supply of houses in some areas of the United States. This over-supply has dramatically driven down house values, which no doubt is a REAL temptation for you to take advantage of great bargains in housing you can get now. Example: Houses that sold in Las Vegas for $500,000 in 2005 can now be purchased for $100,000 today. There are similar bargains throughout the United States. That over-supply has existed for SEVEN years now, and many estimates project that the over-supply will continue for AT LEAST two more years, and it will continue to adversely affect any price appreciation for that time period.

Now does that mean you should not buy a house?? No! Some of the housing bargains currently available are SO good that, if you have the money, you SHOULD buy that house, but you must consider all these costs and circumstances, and then go into the purchase with a clear understanding of what is involved. Most importantly, you must be able to afford the initial purchase and set-up costs noted above. If you live in the house for a minimum amount of time, it is likely the value of the house will appreciate enough to cover all of your costs and allow you to sell the house at a profit. Prior to 2008, that minimum amount of time (which varied across the country) was generally five years. NOW, however, the minimum holding period is MUCH longer, at least SEVEN years and maybe as long as FIFTEEN years. In today’s dynamic job market, especially for H-1B visa holders, there are few jobs that can guarantee that amount of stability.

Family homes in Las Vegas that sold for $100,000 in 1998 were selling for over $300,000 in 2000. However, the 2008 housing collapse caught those same people in Las Vegas in a tight spot, because they now live in houses that are valued nowhere near what they owe on first and second mortgages. Most everyone who purchased a house in Las Vegas from 1990 to 2005 are now upside down in their mortgage, meaning that they owe more than the house is worth. Further, this situation is NOT unique in the country. Much the same problem exists in Atlanta, Orlando, Tampa, Detroit, Philadelphia, Boston and DOZENS of other U.S. cities. Also, this is NOT the first time in history this has happened. People who bought homes in Los Angeles in 1980 saw the value of their homes collapse during the 1981 recession. Their properties did not recover their original purchase value until around 1993, some thirteen years later.

BOTTOM LINE: While certain tax advantages exist for home ownership and the potential for profit when you sell the house DOES definitely exist, it is not without risk. With the housing collapse of 2008, that risk is now MUCH higher now than in the past, and I hope this answer gives you a clearer understanding of that risk! If you DO buy, buy carefully, and go in with your eyes WIDE OPEN, being fully aware of the risk.

The IRS also has Tax Assistance Centers through which you may be able to have the passport verified as genuine, then submit the tax return and Form W-7 IN PERSON to be forwarded to the ITIN Processing Center in Austin, Texas for processing , without having to get the photocopies certified by your home country consulate.

You go to the TAC with your wife and/or children, their passports, the SIGNED Forms W-7, and the completed and SIGNED tax return with your W-2s.

The IRS official verifies the passports, asks a few questions, completes the certification paperwork, checks the Forms W-7 and tax return, then returns the passports with a receipt for the tax return and Forms W-7, which is sent to Austin, Texas for processing.

You leave the TAC with your wife and/or family, the passports and a receipt for the Forms W-7 and the tax return.

You would get the ITIN about six weeks after you left the TAC.

The tax returns are NOT processed at Austin, Texas, but rather forwarded to the regional IRS centers for processing, so the refund will come about one month AFTER you get the ITIN letters.

The list of the TACs are at the link below:

http://www.irs.gov/uac/TAC-Locations-Where-In-Person-Document-Verification-is-Provided

THIRD ALTERNATIVE. I am a Certifying Acceptance Agent, and I can certify the passport if the TACs are not close.

You would mail the passport and the SIGNED Form W-7 and SIGNED tax return to me. I would contact you via SKYPE, conduct a brief interview with your spouse, certify the passport, attach the certification to the SIGNED W-7 and sign both documents. I would also sign the tax return, then paperclip the W-7 with certification to the tax return, and then mail them to the IRS ITIN Processing Center in Austin, Texas.

The passport I would mail BACK to you via tracked PRIORITY MAIL, so the passport would be out of your possession for about a week.

Note that I DO charge extra for this service, but many clients prefer to pay the extra fee rather than waste a day waiting in line at the TAC.

The FINAL alternative is to mail in the actual passports themselves, something most of my clients are reluctant to do because…

If the IRS gets the passport, they hold it for at least TWO months, and maybe up to six months.

These are short descriptions of a variety of tax deductions that are often left OFF your tax return. These descriptions are NOT comprehensive, and you should do further research (or ask for a more detailed explanation via email) to determine if you qualify.

  1. Non-Cash Contributions (Itemized Deduction). Money is often tight, and while we all try to give as much as possible, sometimes we cannot give as much as we want. However, we have all given old clothes and furniture (maybe even a car) to the Salvation Army and Goodwill. Now you want to deduct those donations, which you can do if you itemize your deductions on Schedule A.

    First, be aware that if you get audited, you must prove that you gave the clothes and furniture by showing a receipt. If you do not have a receipt, it is likely that the donation deduction will be disallowed. So if you are planning to give away clothes, furniture and the like, make the effort to get the receipt.

    Now, how much to claim? You cannot claim the price you paid for the clothes and furniture. The IRS expects you to deduct the fair market value (FMV) of the clothes. You can determine FMV with a trip to your local thrift store. What they charge is what you can claim for the clothes.

    Finally, do not be greedy!! Goodwill, Salvation Army and other charities give out dated blank receipts to allow YOU to fill in the amount given and the FMV of what was given. You may be tempted to exaggerate what you gave. If you go too far and try to say $500 of used clothes and furniture is worth $5,000, the IRS can verify the donation with a simple phone call to the charity, which maintains a detailed log of what was given on which date and by whom. Claiming a bedroom set and four large bags of clothes is worth $5,000 is a good way to get the donation deduction disallowed in total plus get hit a large fraud penalty (up to 100% of the tax due).

    If you decide to donate a used vehicle (car or truck), you must have extensive paperwork to document your donation. This has been an area of significant fraud in the past fifteen years, so new rules require the charity to notify you for what the amount they sold the vehicle. That is the amount you can claim on your tax return. However, generally speaking, if you claim $500 or less as the deduction for a used vehicle, it is unlikely that the IRS will challenge that amount, since $500 is normally the lowest amount with which you can buy any type of car or truck.

    Finally, if you have already donated to the Salvation Army or Goodwill and neglected to get a receipt, you can go ahead and claim the deduction if it is not too large relative to your income. The IRS normally will not question a $500 non-cash contribution if your income is around $40,000. If your donation is $2,000 for a $40,000 income, then you better have the receipt, as it is much more likely the IRS will question such a donation.

  2. Health Insurance Premiums (Itemized Deduction). Due to a deduction floor that is equal to 10% of your Adjusted Gross Income, most people cannot deduct the medical costs as an itemized deduction on Schedule A. That means that if you make $50,000, the first $5,000 of your medical costs are NOT deductible. Even if you add in what you pay from your paycheck for your medical coverage, you probably will not exceed that 10% floor.

    However, if you had to pay out-of-pocket a rather large medical expense that was NOT covered by your insurance, then you will want to add your medical insurance premiums to the deduction calculations, because it is likely you have exceeded your 10% floor.

    Further, if you are self-employed or work as a contractor (getting paid on a Form 1099-MISC), then you can document your medical insurance premiums on Schedule C and deduct them as an adjustment to income rather than as an itemized deduction. In that case, the 10% floor does NOT apply.

    Note that most medical insurance paid through your employer are paid with pre-tax money, so you cannot deduct medical insurance premiums paid through your job.

  3. Educator Expenses (Adjustment to Income). My clientele income a fair number of teachers who work in the education system. If you are one of them, you may be eligible to deduct $250 of your expenses associated with that work. You must a teacher, instructor, counselor, principal or aide who has worked at least 900 hours in a school that has grade levels ranging from kindergarten through 12th grade. Eligible expenses are most any item that is used in the classroom to aid in teaching or presenting education material. While a $250 deduction is not much, it is better than nothing and it is easily claimed if you work in a K – 12 school.

  4. Student Higher Education Expenses (Credit/Adjustment to Income/Itemized Deduction). Most everyone knows about the American Opportunity and Lifetime Learning Education Credits or tuition deductions. However, a fair number of people do not realize that they can also claim a deduction for education costs that are related to their employment, IN ADDITION to the educating credits. There are a number of requirements that must be met for the education to be considered work-related, but most people normally attend school to enhance their work skills, so these requirements are usually met quite easily.

    Example: In 2008, Michelle works as a software engineer in New York City, earning $125,000 per year. Michelle also attends graduate school at New York University, studying advanced software engineering concepts. While she is on a partial scholarship, she still pays $15,000 in tuition. Her employer reimburses only $5,000 of the cost, and she deducts $4,000 as an adjustment to income. That leaves $6,000 that she can claim as a deduction under work-related education. She can claim this deduction by completing Form 2106 and claiming the deduction under the Miscellaneous Deduction section of Schedule A. There is a 2% AGI floor that she must meet, which means the first $1,500 is NOT deductible. Since it is an itemized deduction, the $4,500 remaining deduction would not exceed Michelle’s $5,000 standard deduction. However, since she works and lives in New York City, she also pays about $5,000 in state and city income tax, which, when combined with the $4,500 education deduction, is almost DOUBLE her standard deduction.

    Please note that you MUST factor in all reimbursements, grants and scholarships when you claim these deductions. For this reason, it is probably best to use a tax professional to prepare the returns. Still, this work-related deductions can save you thousands in taxes if you qualify.

  5. Student Loan Interest (Adjustment to Income). Very few people can attend undergraduate or graduate school and pay for it out of savings. A few fortunate people get scholarships. Most everyone else borrows the money and, once they are done with school, have to pay the money back with interest. For the last several years, that student loan interest has been deductible as an adjustment to income IF you did not make too much money. For 2015, the cut-off for claiming this deduction was $65,000 if you were single and $130,000 if you were married and filed jointly.

    The AGI requirement is historically the biggest obstacle, since salaries in high cost-of-living areas for most professionals can start in the low six figure range, thus precluding you being able to claim this deduction. Further, even if you do not make $100,000 a year, your spouse may, and you CANNOT claim this credit by filing separate tax returns.

    Still, many people starting out CAN claim this deduction, provided they meet the criteria for being an eligible student and provided that the interest is from a qualified student loan. These conditions are normally easily met, but you should research it (either by going to www.irs.gov or posting a question on the blog) before you attempt to claim this deduction.

  6. Retirement Savings Contribution Credit. This credit was designed to encourage those of modest means to begin to save towards their retirement by contributing to a retirement plan at work or to a Roth or traditional Individual Retirement Account (IRA). It is NOT for everyone, but rather those whose income does not exceed the following limits:

    • Single filers: $30.500.
    • Married filing jointly: $61,000.
    • Head of Household: $47,750.
    • Further, you CANNOT qualify for this plan if you are under 16 years of age OR if you are a student. The credit is not much (it tops out at $400 for a married couple filing jointly, and it is dependent on how much you save), but it is better than nothing, and it does serve as an incentive to start saving for retirement, something most everyone should do as soon as they leave college.
  7. Points (Itemized Deduction). The term “points” refers to the pre-paid interest on home mortgages, whether it is a first or second mortgage. Points are documented on the HUD Form 1 closing statement that you receive when you close on the loan. Listed on the second page, they are clearly marked as discount points. However, the loan origination fee (normally one percent of the loan) is also considered a “point”.

    Points can be claimed as a deduction in total in the year the loan is originated if you are purchasing a home with the loan. IF you are refinancing, or you are originating a second mortgage, then you must amortize (stretch out) the deduction over the life of the loan. Such amortization reduces the value of the deduction. However, if you refinance again, either later in the year or in a successive year, you can then claim the part of the points (the unamortized portion) have not yet been claimed in the tax year you did the second refinance.

    The points, be they marked as discount points or as the loan origination fee, are normally documented on the Form 1098 that you will receive from the bank or mortgage company in late January. If you bought a house, look for this important deduction on the Form 1098. If you refinanced, you need to dig out your closing paperwork to claim the points from the previous loan.

  8. Capital Losses (Direct Offset). When you buy or sell capital assets, you want to show a profit. Unfortunately, that is not always possible, especially given the financial meltdown of 2008. However, you DO get a tax benefit if you sell a capital asset (be it stocks, bonds, mutual funds, a business property, whatever) for a loss.

    Capital gains and losses are normally reported on Schedule D when you file your tax return. Such gains and losses are separated into short-term (for assets owned for a year or less) and long-term (for assets owned for more than a year). Short-terms losses will first offset short-term gains, and long-term losses will first offset long-term gains. After this initial set of offsets, ANY loss remaining will offset ANY gain remaining.

    With all the offsetting completed, you now show a capital loss. Up to $3,000 of that loss can be used to offset ANY other source of income, be it wages, dividends, interest, rental income, etc. If your capital loss exceeds $3,000, the remaining loss carries forward to future years to be used against future capital gains or, in $3,000 yearly increments, to be used against other income. This will continue until you use up the accumulated loss, or until the taxpayer who incurred the loss dies.

  9. Moving Expenses (Adjustment to Income). This used to be an exceptionally large deduction because virtually any expense associated with a move in excess of 50 miles was deductible. However, it was an itemized deduction, so a fair number of people could not claim their moving expenses because the expenses did not exceed their standard deduction.

    Congress addressed that inequity in the 1990s by changing the law, making moving expenses (reported on Form 3903) an adjustment to income. That means anyone can claim moving expenses now IF they meet the time and distance tests (discussed below). However, as a trade-off, the number and type of deductions associated with the move were dramatically cut back. Only the costs directly associated with moving your personal effects can be deducted. This means the cost of moving your household goods, the travel costs (a mileage rate for all your cars plus the mover’s costs plus the lodging costs) during the actual move, certain disconnect fees for utilities, and the storage costs for your household goods are deductible, and that’s it! The costs of meals during the move are not deductible, nor are the costs of sell your old house and buying your new house. Further, any costs of trips made prior to the move to look for an apartment or house are also not deductible. So while the current moving expense deduction can be claimed virtually anyone who moves from one city to another (in most cases), the deduction is not nearly as lucrative as it once was.

    The Time Test states that, as an employee, you “work full time in the general area of your new workplace for at least 39 weeks during the 12 months right after your move.” Self-employed people must work at least 39 weeks during the 12 months right after your move AND a total of at least 78 weeks during the 24 months right after your move. There are exceptions to the Time Test, but they are too involved to discuss here. If you have questions, please email me.

    The Distance Test is generally thought to be 50 miles. However, this test does not refer to the distance you move, but the difference between the driving distance from your old home and your new workplace and the driving distance your old home and your old workplace. Example: Let’s say you work in downtown Dallas and live in an eastern suburb of Dallas. Your daily commute is 15 miles. You take a new job in Fort Worth, which is about 35 miles from your old job location. Not wanting to commute 100 miles round-trip each day, you decide to move to a suburb west of Fort Worth. Your move from the eastern suburbs of Dallas to the western suburb of Fort Worth is about 80 miles, so you think the move qualifies for the Moving Expense deduction. That’s not the case. As noted above, the difference between the driving distance from your old home and your new workplace (50 miles) and the driving distance your old home and your old workplace (15 miles) is only 35 miles. Even though your move covered 80 miles, the difference, being only 35 miles, means that you cannot claim any moving expenses associated with your job change.

  10. Sales Tax Deduction (Itemized Deduction). A change to the Internal Revenue Code allows you to deduct the sales taxes you pay on your purchases throughout the year, IF these sales taxes exceed what you had withheld for state and local income taxes. In high tax states like California, New York, New Jersey and Massachusetts, this deduction means nothing, because the withheld taxes will well exceed any possible taxes paid. If, however, you live in a state with a relatively low income tax, it is possible that your sales tax deduction will be greater than the state income tax withheld. This is especially true if you have bought a big ticket item, like a car or a boat. Of course, if you live in a state that has no income tax (like Texas, Tennessee, Alaska, Nevada, Florida, South Dakota, Utah, Wyoming, Washington, New Hampshire), then the sale tax deduction will be a big deduction for you. The computations are relatively simple, and in addition to the deduction that comes from those computations, you can write any big-ticket item you bought in 2011.

One of the uses of the J-1 visa is for international students. The J-1 visa-holding student is admitted to the United States for “Duration of Status” (which is noted as “D” slash “S” on their Form I-94, “Arrival-Departure Record”, instead of a specific expiration date) to complete an educational program, plus any authorized practical training following completion of their studies, plus sixty day grace period to prepare for departure from the United States.

While students on J-1 visas are in the United States principally to receive an education, such students often work to help offset the expenses associated with seeking such a degree. These working students are NOT required to pay employment taxes (Social Security and Medicare), but must pay BOTH federal and state income taxes. The taxes are withheld from your pay and you must file a tax return (Form 1040NR or 1040NR-EZ) after the completion of the calendar year to reconcile your tax liability.

The J-1 visa holder as a student is an “exempt individual”; in this context it does NOT mean he/she is exempt from taxation, but rather he/she is exempt from the Substantial Presence Test. If he/she is in the United States for the full tax year under the J-1 visa and has earned income, then he/she is considered a non-resident alien and must file either Form 1040NR or 1040NR-EZ, plus Form 8843. Even if he/she has no requirement to file a tax return, he/she must STILL file the Form 8843 annually. More on this later.

Filing as a non-resident alien allows the taxpayer to claim certain exemptions or credits authorized under the tax treaty negotiated between the country that originated the J-1 visa and the United States. They cannot, however, claim the Standard Deduction unless they are from India. If the J-1 visa holder comes from a country that has a tax treaty with the United States, this may actually work out better than claiming the Standard Deduction. Look in the F-1 visa question for the example as to how this is possible.

There are two other forms the J-1 visa holder should file. The first is Form 8843 (Statement for Exempt Individuals and Individuals with a Medical Condition). This form must be filed annually, either with your tax return (Form 1040NR/1040NR-EZ), or by itself if you do not have to file a tax return. The filing deadline is April 15th of each year.

The second form that the J-1 visa holder may need to file is Form 843. I noted above that students on a J-1 visa are NOT liable for Social Security and Medicare taxes. Unfortunately, not all employers are aware of this fact, and they will withhold these taxes unless the student takes steps to stop the withholding. Often, when the student proves to the employer that he is not liable for the taxes, the employer stops withholding the taxes, but refuses to refund the taxes that were already withheld. That is when the student has to file Form 843 to request a refund of these taxes. There are other supporting documents required, and you need to download and read Chapter 8 of IRS Pub 519 for the process of requesting the refund, but the refund usually makes it well worth the effort.

In addition to the student visa variety of the J-1 visa, there is also a trainee/business apprentice version of the J-1 visa. This visa allows the apprentice or trainee to work in the United States to gain experience and/or to train in either a business, technical or medical field for up to three years, depending on the wording in the tax treaty that the U.S. has with with the trainee’s home country. If there is no treaty, then the term of the J-1 visa is 24 consecutive months from the date of arrival. During this period, the trainee is a non-resident alien and must file Forms 1040NR or 1040NR-EZ to report the income earned while under training plus Form 8843 to report on his visa status. The trainee may or may not be entitled to certain treaty exemptions, depending on his home country. This type of J-1 treaty is frequently used by doctors who are newly graduated from medical school and come to the United States for their internships and residencies.

Note that these J-1 visa tours for business apprentices and trainees are often for one year or less. If the duration IS less than one year, then they are considered TEMPORARY jobs by the IRS and thus the J-1 visa holder can and should claim their daily living expenses (rent, food, utilities, cell phone, Internet) using Form 2106. It is often the case that these expenses will almost completely offset any taxes owed on the income earned by working as a trainee or apprentice.

The final form of the J-1 visa is for teachers, scholars and researchers.

The teacher version is for those persons who come to the U.S. From their home country to teach in a U.S. school. The school can be either public or private, but must be a recognized educational institution. If there is a tax treaty between the visa holder’s home country and the United States, and if there is a provision in the tax treaty that allows it, the pay of the teacher MAY be exempt from federal income taxes for the first 24 consecutive months of the stay. Since the teacher is considered to be a non-resident alien, the teacher’s pay is definitely exempt from Social Security and Medicare taxes for the first two calendar years of their stay. The exemption from Social Security and Medicare taxes is a matter of U.S. tax law and is NOT subject to any tax treaty.

EXAMPLE: Ms. Alyce Betancourt is from France and has come to work in Los Angeles to teach at a private school that caters to French citizens who wish their children to be taught in their native language. Alyce arrived in Los Angeles in August, 2013 to begin teaching at the beginning of the 2013-2014 school year. Her contract runs from August 2013 to July 2015. Alyce is exempt from federal income taxes for the duration of her contract, which runs less than 24 consecutive months, provided she leaves the U.S. on or about the second anniversary of her her arrival date. Further, for 2013 and 2014, she is exempt from Social Security and Medicare taxes. However, starting in January of 2015, Ms. Betancourt’s employer must begin to withhold Social Security and Medicare taxes. If they fail to do so, she is legally obliged to tell them that she IS liable for the Social Security and Medicare taxes starting in January 2016. Note that while Ms. Betancourt is exempt from federal income taxes, California, like MOST states, do NOT honor tax treaties, so she IS liable for California STATE income tax.

Further note that some tax treaties, most notably the U.S.-India Tax Treaty, has a provision in them that REVOKES the income tax exemption if the teacher remains in the United States beyond the two-year time limit.

The scholar version applies to visiting professors who come to the United States to lecture or visit teach at U.S. Universities. These professors are often paid to reimburse them for travel costs and living expenses. Like the teachers, the professors earned income is exempt from federal (but NOT state) income taxes and, for the first two calendar years, from Social Security and Medicare taxes.

The researchers version are for those who come to the U.S. to conduct research at a U.S. university or government agency. Like the teacher and scholar, if the tax treaty between their home country and the U.S. allows it, their earned income as a researcher is exempt from federal income tax, usually for two years, and they are exempt from Social Security and Medicare taxes for the first two calendar years. Again, they normally ARE liable for state income taxes, and they too must be cognizant of the possibility that they will be retroactively liable for the federal income tax if they remain beyond the original two-year time limit.

FATCA (Foreign Account Tax Compliant Act) was enacted in 2010 by Congress to target non-compliance by U.S. taxpayers using foreign accounts. FATCA requires foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

FATCA reporting is done via IRS Form 8938, which is submitted as part of the annual income tax return. If you are single, the reporting threshold is $50,000 on the last day of the calendar year, or $75,000 at any time in the calendar year. If you are married and filing jointly, the reporting threshold doubles ($100,000 at the end of the year and $150,000 at any time during the calendar year. If you live overseas, the reporting thresholds are much higher:

  • SINGLE – $200,000 at the end of the year and $300,000 at any time of the year
  • MARRIED – $400,000 at the end of the year and $600,000 at any time of the year
  • Unlike the FBAR, an extension for the tax return also extends the FATCA reporting requirement to 15 October 2016.

The information reported on FATCA is identical to the FBAR:

  • name of the bank or financial company
  • address of the bank or financial company
  • account number for the account
  • account balance in U.S. dollars at its highest point in the calendar year
  • When you do the currency exchange, you must use the exchange rate on the last day of the calendar year.

I hope you have found this informative. Please email me at kempetax@gmail.com if you have questions.

Copyright Kempe Tax International 2017