Tax Time! Here we go again!

paperworkSome time ago I wrote about the difficulties that expatriates face when we calculate our taxes.  As an American I don’t mind paying my fair share of taxes, even though I don’t live in the country, and even though America is practically the only supposedly-civilized society to tax non-resident citizens.

And as I wrote even more recently, I began the process in early March, trying to sort through this year’s paperwork.  For those keeping track, this year’s taxes look to weigh in at about 350 grams, or just over 3/4 of a pound. Here are some things we expatriates have to do:

  • Keep track of every day we spend in America for business.  This is the chunk of change the U.S. gets.  I think the idea is that someone shouldn’t live just across the border in Vancouver, for instance, and then commute to Washington.
  • Don’t just assume Turbotax will do the right thing with the standard deduction.  In fact, this isn’t just an expat thing: if you are subject to alternative minimum tax (AMT), the standard deduction is taxable, and so if you have some deductions it is sometimes better to itemize.  The change from last year is that more expatriates pay AMT this year due to America’s deflated currency.
  • Keep track of the largest sum in each foreign account for the year.  This is because the Department of Treasury wants to know if we’re laundering money (we aren’t).  This one is particularly important to manage because the government claims they can seize accounts for which information is not correctly reported.  It’s also not made easy for investment accounts, where portfolio values vary by the day.  This is a change from last year.
  • Allocate deductions between those that are related to foreign income, and those that are not.  The change from last year is that many could have used the standard deduction.
  • Properly calculate exchange rates for both income and taxes paid or accrued.  For those who have to do this, has a lovely web site for this purpose.  Perhaps the most annoying thing for expatriates is that many of the fields we fill in need to be converted to dollars.  What’s more, in Europe it is not uncommon to have multiple currency accounts, making everything just a bit trickier.  This is particularly true in Switzerland where some securities are only issued in euros.

And so, the average expatriate has to fill out the following forms:

  • 1040 (no 1040a or -EZ);
  • Schedules A, B, and possibly D.
  • Four copies of Form 1116 for Foreign tax credit (general, passive) both normal and AMT;
  • Two copies of Form 2555 for Foreign Income & Housing Exclusion;
  • Form 2441 for children;
  • Form 6251 for AMT;
  • Treasury Form TD-F 90-22.1 for foreign bank accounts;
  • a plethora of explanation statements for currency conversion and allocations.

If you own a home, there’s more paperwork.  If you have other income, such as royalty income of some sort, you have more paperwork.  If you have a disability, there’s more paperwork.  If you have a home office, there’s more paperwork.

This is all for federal taxes.  Nominally many states such as California would then like you to repeat the effort.  If you have any deferred compensation from when you lived in the U.S., such as stock options, you will end up having to file state returns just to reclaim excess withholding.  Some states want you to file for merely having attended a professional convention or conference (what some people call the basketball tax).

And so you might say, “Eliot, isn’t your time worth more than doing all of this paperwork?”  No. The cost of accountants who prepare expatriate tax returns runs into the thousands of dollars for us, and ours is a relatively simple return.  Often times employers will pay for these returns.  If so, it’s a good deal for the employee.

Also, all of this does not take into account the taxes we must file in Switzerland.  Here we do use an accountant.  While my German has improved somewhat, each country has their own rules on where to fill in what column.  I will say this about Zürich: they provide free copies of tax software to anyone who has to file.

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Misadventures with taxes

I began my tax preparation this year with my mind on President Obama looking to tax the wealthiest Americans a bit more to pay for a reduction in taxes on the rest of us.  For expatriates, taxes are a sore subject.  American expatriates, unlike citizens of just about any other country, are required to file tax returns no matter where we live in the world, an we have to claim back foreign taxes, as either a credit or a deduction.  The notion behind all of this is that you can’t simply move off shore to avoid paying U.S. taxes.  Fair enough, except that of course you don’t get to avail yourself of nearly any of the services you are paying for.

The way this works is that we get a deduction for housing and a credit for tax paid.  In the end the idea is still that if you’re not working in the U.S., you shouldn’t have to really pay much. The deduction for housing was limited based on where you lived. This year, we in Europe are treated to an extra insult.  Because the American dollar did so poorly overall in 2008, we all expected that the Department of Treasury would adjust the housing limit accordingly – but they didn’t.  That amounts to about a 10% additional tax on us.  And of course there are penalties for not prepaying based on the currency fluctuation.

I might not mind so much, except that as an American citizen I still cannot buy mutual funds, just because I live outside the U.S.  There are many other services I don’t get, that perhaps I would enjoy.  Like courtesy at the American consulate in Zurich.

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Tax & Spend Administration?

Bureau of Economics

Last night Secretary Paulson announced that the U.S. would seize control of Fanny & Freddy Mae, the two largest loan corporations in America.  Those two are so large that they could not fail, and yet there was the distinct possibility.  And so the government stepped in.  The terms of the seizure are not yet clear, but it’s sure to cost tax payers a bundle, although it will surely be less than if the loan system failed.

The administration probably did the responsible thing at this point in the game, by acting to see that chaos didn’t prevail in the loan market.  However, all of their protestations of keeping government small should be taken with a very very very small grain of salt, given that this administration will have spent more money and placed America in more debt than the previous two administrations combined (and perhaps the 2nd Reagan administration).  Also, stricter regulation of the loan market would have prevented such silliness in the first place, proving that some regulation actually saves us money.

So when Republicans say they’re for smaller government, be sure to ask who’s paying the bill for Fanny and Freddy.

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Oops! McCain loses one point

He was doing just fine at his lovefest in the Twin Cities, but then Senator John McCain started talking about cutting taxes.   As I wrote earlier, he was palatable because he was talking about the least offensive tax, a corporate tax cut.  As he takes a more offensive position by generalzing cuts, especially in light of news like the Federal Highway Fund running out of money, now I’m giving Obama the win for the economy, and McCain loses personality points for pandering.

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Taxation and Representation, Take 3

Bureau of Economics

Saving money is hard for lots of people.  It certainly is something that nowhere near enough Americans devote time or money to.  In other societies, saving is done mostly by the government or through fixed pensions.  In the case of Switzerland there is a three legged approach, where you, the government, and your employer all contribute to retirement.

In America, we have 401k plans, IRAs of various sorts, educational savings accounts, medical savings accounts, social security, and then private saving.  Many of the *SAs and things like 529 plans require speculation, and indicate a government that is hell bent on taking your money should you NOT get sick, or should you need less education than you planned.  Social security is a very small suppliment as compared to actual costs of living, and health care remains problematic.

If you’re like most people, you probably have a little money in mutual funds.  At some point, if you have children, you might even open for them a custodial account.  As it turns out, neither of these options are available to expatriates due to the way they are regulated.  That is- they are regulated by the states and if you don’t live in one, many brokerages will not know what regulatory framework to apply (and thus protect themselves with).  While this sounds like a negative situation, it can have some advantages: there exist professional fund managers whose primary purpose is to maintain a balanced portfolio for individuals, given a set of goals.  Mutual funds charge money.  These guys charge money.  So long as they know what they’re doing, you’re getting about the same service, only your portfolio is kept balanced and the stocks are at least somewhat vetted, which is something many people neglect over time.  And you don’t need to be an expatriate to take advantage of the service.  You just need to have some funds.

Most Americans place their primary savings into their houses.  This is advantagious from a tax perspective.  If you live outside the country, doing so (a) may not offer you those same advantages and (b) may tie you to a locale in which you do not wish to live (either the current international location or some place in America).  This in turn can keep people from setting down roots in a community, which itself is probably bad.

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