Year: 2024

Kienitz 09 2024 FeaturedImage

Foreign Bank Accounts and Your Taxes

If you have substantial wealth, spend a lot of time overseas, or both, there’s a fair chance that you have one or more foreign bank accounts. Whether it’s due to convenience or investing opportunities, you may have a legal obligation to report those accounts to the United States government.

The most well-known duty is often referred to as FBAR, or the Report of Foreign Bank and Financial Accounts. The Bank Secrecy Act requires eligible individuals and institutions to file an FBAR with the Treasury Department using Financial Crimes Enforcement Network Form 114. If you’re required to file an FBAR, you might also have to file a special form with the IRS, specifically Form 8938, Statement of Specified Foreign Financial Assets. Let’s take a brief look at this form and what it requires.

What is Form 8938?

This IRS form allows eligible taxpayers who have an interest in certain foreign financial assets to report those assets to the IRS. Often, but not always, if a taxpayer is required to file an FBAR, they’ll also need to file Form 8938.

When to File Form 8938

Form 8938 is usually filed along with the annual income tax return, typically due on April 15 each year. However, if a taxpayer isn’t required to file an income tax return for a particular tax year, then they don’t need to file Form 8938 for that year, either.

Who Must File Form 8938?

A covered individual or entity must file Form 8938 if they have an interest in a specified foreign financial asset and the value of that asset exceeds a certain threshold. There’s a lot of information here, so let’s break it down to better understand these requirements.

A covered individual or entity includes U.S. citizens, resident aliens of the United States, nonresident aliens who choose to be treated as resident aliens so they can file joint income tax returns, nonresident aliens who are bona fide residents of American Samoa or Puerto Rico, and specified domestic entities.

Specified domestic entities are closely held domestic corporations and partnerships with at least 50% of their gross income coming from passive income (or at least 50% of their assets producing or being held to create passive income) and certain domestic trusts with one or more specified persons or domestic entities as a current beneficiary.

Assuming a taxpayer is covered by Form 8938’s requirements, they must also have an interest in a specified foreign financial asset. In this context, “interest” means holding or disposing of a foreign account or asset that results in any income, gains, losses, deductions, credits, gross proceeds, or distributions that would normally need to be reported on an income tax return.

In addition to the above two requirements, there’s also a dollar value threshold for the foreign accounts and assets that must be reported. For individual filers (unmarried or married filing individually), the reportable assets or accounts for taxpayers living in the United States must have a total asset value of more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. These thresholds rise to $100,000 and $150,000 respectively for married taxpayers filing joint returns.

Taxpayers living outside the United States have thresholds that are quadruple in amount. So, individual filers (unmarried or married filing individually) must have a total asset value of more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year. Married taxpayers filing joint returns have thresholds of more than $400,000 on the last day of the tax year and more than $600,000 at any time during the year.

Only after all three of these requirements have been met will a taxpayer usually need to file Form 8938.

Are There Any Other Tax Filing Requirements in Addition to Form 8938?

Possibly. Depending on the type of tax return that taxpayer is required to file, they may need to answer questions relating to their foreign bank accounts and other overseas financial assets. Examples of other tax forms that may ask for information about foreign financial accounts include Form 1041, U.S. Income Tax Return for Estates and Trusts; Schedule B (Form 1040), Interest and Ordinary Dividends; Form 1065, U.S. Return of Partnership Income; and Schedule N (Form 1120), Foreign Operations of U.S. Corporations.

All of this can be quite complicated, and the above discussion is only an overview of Form 8938 and the IRS tax reporting requirements for foreign assets and bank accounts. Failing to comply can result in penalties of up to $60,000 and even criminal charges. Therefore, it’s strongly recommended that if you think you might be subject to Form 8938’s reporting and filing requirements, you should consult with a tax professional.

Kienitz Tax Law is here to help you with your tax issues. Schedule your FREE consultation today!


Do Not Ignore Your Tax Problems!

Tax Law is Our Specialty. Contact us to Get Your Life Back to Normal.

Tax Deductions You May Not Know About

If you have any experience with filing income tax returns, you probably have a general idea of what tax deductions are. Off the top of your head, you may know some of the more common deductions, such as the standard deduction, the charitable contribution deduction, and the mortgage interest deduction. But there are many others you could be eligible for, but don’t know about or fully understand. Let’s take a look at some of them in this month’s blog post.

Student Loan Interest Deduction

If you’re paying interest on your student loans, you can use some (or all) of the money spent on interest to lower your taxable income. For federal tax purposes, the money you spend on interest for your student loan payments is deductible, but only up to $2,500.

One of the nice things about this deduction is that it’s not an itemized deduction. However, you’ll only receive the full $2,500 deduction if your modified adjusted gross income is less than $70,000 ($145,000 if filing jointly). However, as long as your income is less than $85,000 ($175,000 if filing jointly), you may still be able to take this deduction, just not the full $2,500.

Medical Expense Deduction

One of the reasons you may not know about this deduction is that you probably won’t qualify for it unless you end up with some hefty medical bills. Generally speaking, you can only take this deduction for a tax year if you have unreimbursed medical (including dental) expenses that exceed 7.5% of your adjusted gross income for that tax year. These expenses can be deductible for not just your medical expenses, but also those of your spouse or dependent.

Deduction for Gambling Losses

Losing money at the casino or on a sports game is never fun, but there’s some consolation in the fact that some of your losses may be tax deductible. But before you start placing your bets, you need to understand that the deduction only applies to the extent of your winnings. In other words, the amount of your gambling deduction cannot exceed your gambling winnings.

For example, if you placed five $100 bets during March Madness and lost on all five of those bets, you don’t get to take a $500 tax deduction for your gambling losses. However, if you won two of those bets and lost three of them, then you could take a $200 gambling loss deduction (and not a $300 deduction). Another thing to consider is that you can only take this deduction if you itemize your deductions.

Another important consideration about this deduction is the need to detailed and complete records. You’ll want to document each bet, including how much you spent (including any fees), your wins/losses, as well as the source of the money used for the bets.

Deduction for Retirement Contributions

If you’re diverting some of your paycheck into an eligible 401(k) or traditional IRA retirement account, then some (or all) of what you’re saving could be tax deductible. With a traditional IRA, you’re limited to making contributions that don’t exceed the lesser of your total income for that year or $7,000 (if you’re under 50) and $8,000 (if you’re 50 and older).

With a 401(k), your deduction is not a deduction in the traditional sense. Rather, those contributions to your 401(k) get taken out of your paycheck before you even see the money. So you’re not claiming the contributions as a deduction later on in March or April when you prepare and file your taxes for the prior tax year. This is not only easier on you when you file your taxes, but you get the tax benefit immediately as the 401(k) contribution lowers your income subject to income tax withholding by your employer.

Health Savings Account Contributions

If you make contributions into a qualified health savings account, or HSA, the contributions you make directly into your HSA may be tax deductible.

Deduction for Expenses Incurred as a Self-Employed Worker

Contractors and freelancers can deduct certain expenses they incur as a result of their work. Some of these include money spent on home office expenses, health insurance premiums, continuing education costs, vehicle mileage, self-employment taxes, and office supplies.

Education Expense Deduction

Eligible teachers and educators can deduct up to $300 spent on classroom and teaching supplies.

Bottom Line

Tax deductions offer a great way to lower your tax bill, but they often have special conditions or limitations. You may also need to itemize your taxes to take advantage of them. To learn more about how these deductions work and whether it may be worth taking them, speak with your tax professional. If you take one or more deductions when you’re not supposed to, you could find yourself in trouble with the IRS.

Kienitz Tax Law is here to help you with your tax issues. Schedule your FREE consultation today!


Do Not Ignore Your Tax Problems!

Tax Law is Our Specialty. Contact us to Get Your Life Back to Normal.

tax lien and tax levy

What’s the Difference Between a Tax Lien and a Tax Levy?

If a taxpayer has unpaid taxes and doesn’t make arrangements with the IRS to pay that tax balance off over time, then the IRS will initiate the tax collection process. It will begin with letters and notices, asking the taxpayer to pay their tax bill. But, pretty soon, the IRS will send a written warning to the taxpayer that a lien or levy is imminent.

If the IRS files a tax lien against you or levies your property, what does that mean exactly, and should you care which method the IRS uses?

What is an IRS Tax Lien?

When the IRS files a Notice of Federal Tax Lien against you, the IRS is telling the general public that you owe back taxes. This makes it practically impossible to sell or transfer your property unless you first remove the tax lien. This is because no one wants to buy property from you, knowing the IRS may have the legal right to step in and take it from them to pay off your tax debt.

When it comes to your credit history, the tax lien no longer has the negative effect it used to have. Now, IRS tax liens do not show up on your credit report or have an impact on your credit score. That being said, a tax lien can still hurt your credit in that it makes it more difficult (and/or more expensive) to get a loan.

If you’re trying to buy a new car or house by borrowing money, it will be extremely difficult to do so with a tax lien. Not only does a tax lien signal you’re struggling financially, but it also means the creditor likely can’t get a security interest in your property to secure the loan.

For instance, if you wanted a car loan, your lender would probably expect your car to serve as collateral for the loan in case you default. But if there’s a tax lien in place, the car will automatically have a tax lien on it after you buy it (IRS tax liens apply to current and future properties).

This means the car loan lender may not be able to repossess the car from you in case you default on the car loan. The practical consequence is that you either get denied the car loan, or you get it but with a larger down payment and/or a higher interest rate.

What is an IRS Tax Levy?

IRS tax levies can pose a bigger problem than a tax lien. Unlike a tax lien, which is basically a legal warning to others that your property could be used to pay a tax debt, a tax levy is the actual taking of property to satisfy a tax debt. For example, the IRS might levy your bank account and withdraw money from it without your consent, or they might levy your paycheck in the form of a wage garnishment.

Can the IRS File a Lien or Place a Levy on My Car or Home?

Yes, for liens, and almost never for levies. When the IRS files a lien against you, it attaches to not just a specific piece of property, but almost anything you own, including your home and your primary vehicle.

And although the IRS can, theoretically, levy your home or car, it’s very rare for the IRS to do so. There are several reasons for this. First, it’s not worth the trouble, as using a bank levy or paycheck levy (wage garnishment) is almost always a more effective and efficient way to collect back taxes.

Second, the IRS understands that taking away your car or home could hurt your ability to earn income, and they know you need income if you are to pay off a tax debt.

Third, taking your car or home is a bad look for the IRS. The IRS already has a less-than-positive reputation with most people (and members of Congress). A viral story about how they made you go homeless or got you fired because you could no longer get to work is just asking for unnecessary scrutiny and political pressure.

Bottom Line

The IRS trying to collect taxes from you is bad news, regardless of whether the IRS decides to use a lien or levy. However, when it comes to your financial health and daily living, a levy is more likely to cause problems for you in the short term.

Kienitz Tax Law is here to help you with your tax issues. Schedule your FREE consultation today!


Do Not Ignore Your Tax Problems!

Tax Law is Our Specialty. Contact us to Get Your Life Back to Normal.

KTL juneblog

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Income Tax Deductions: Itemized Versus Standard

Income Tax Deductions: Itemized Versus Standard

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The answer to that question is really easy, at least in theory. You take the deduction that offers you more tax savings. But how do you know which one offers more tax savings? That’s a tougher question and its answer depends on your unique situation. However, if you’re like most taxpayers, you’ll be better off taking the standard deduction. But why is that? We’ll answer that question in this blog post, but before we do, let’s take a quick look at tax deductions.

Continue reading “Income Tax Deductions: Itemized Versus Standard”