Do I Need an LLC to Start a Business?

by Jane Haskins, Esq., Freelance writer, September 2017

If you're launching a new venture, you may have wondered, do I need an LLC to start a business? The simple answer is, no, you don't need an LLC to start your own business, although you may decide you want one.

An LLC, or limited liability company, provides personal liability protection and a formal business structure, but you can also get those things by forming a corporation or other type of business entity. It's also perfectly legal to open a business without setting up any formal structure. You'll gain simplicity but miss out on some key protections.

Here's a look at the risks and benefits of starting a business without an LLC.

LLC: Start Business Without One?

If you don't form an LLC, there are two types of legal options for running your business. The first is to file paperwork with your state to establish another type of business entity such as a corporation or limited liability partnership. Each business entity type has its own benefits, but all of them have one key feature: They limit your liability for business debts. If you decide to establish a business entity, a business lawyer or accountant can help you decide whether an LLC or another entity type is best for you.

Your other choice is to operate your business without creating a formal business entity at all. If you are the only owner, you'll be a sole proprietor. If you own your business with one or more other people, you will be a general partnership. Going this route has a few advantages:

• It's easy. You can be up and running without having to file documents with the state. However, you may still need a business license or permits from your locality and, if your business name isn't the same as your own name, you may have to register a fictitious name, or DBA ("doing business as").
• It's cheap. You won't have to pay your state's business formation fee or annual reporting fee. You also won't need to pay someone to act as your registered agent.
• It lets you test the waters and keep startup costs low. This may be especially appealing if your new business is a solo side gig and you're not sure you'll really make much money. You can always decide to form an LLC later.

Starting a business without an LLC does, however, carry significant risks, especially if you have business partners or employees.

Risks of Starting a Business Without an LLC

If you don't form an LLC or other business entity, you leave your personal finances vulnerable to business problems, and your operations may suffer from the lack of formal structure. Disadvantages of starting a business without an LLC include:

• No personal liability protection. If you're a sole proprietor or general partner and your business is sued or has unpaid creditors, you personally face liability. Everything you own is at risk. You also may be liable for business-related activities of your co-owners and employees. An LLC changes the equation: As an LLC owner, you might lose everything you have invested in the business, but your personal home, bank account, and other assets are protected. This is one of the main benefits of an LLC or other business entity.
• Lack of structure. Many business partners don't give much thought to the details of how to divide responsibilities, profits and losses, or what will happen if there are disagreements or someone wants to leave. These issues will come up eventually. Your LLC operating agreement sets up rules and a framework that can minimize expensive conflicts later.
• Harder to raise money. Banks and investors may be reluctant to loan or invest money in a sole proprietorship or general partnership.
• Potentially harder to market. Two business entities can't have the same name in the same state, and forming an LLC helps ensure that the name you have chosen is unique, and will stay that way.

So, no, you don't need an LLC to start a business, but, for many businesses, the benefits of an LLC far outweigh the cost and hassle of setting one up.

Xem chi tiết »

What's considered to be a good debt-to-income (DTI) ratio?

By Jean Folger

A debt-to-income ratio (DTI) is a personal finance measure that compares the amount of debt you have to your overall income. Lenders, including mortgage lenders, use the debt-to-income ratio as a way to measure your ability to manage the payments you make each month and repay the money you have borrowed.

To calculate your debt-to-income ratio, add up your total recurring monthly debt (such as mortgage, student loans, auto loans, child support and credit card payments) and divide by your gross monthly income (the amount you earn each month before taxes and other deductions are taken out). For example, assume you pay $1,200 for your mortgage, $400 for your car and $400 for the rest of your debts each month. Your monthly debt payments would be $2,000 ($1,200 + $400 + $400 = $2,000). If your gross income for the month is $6,000, your debt-to-income ratio would be 33% ($2,000 / $6,000 = 0.33). If your gross income for the month was lower, say $5,000, your debt-to-income ratio would be 40% ($2,000 / $5,000 = 0.4).

A low debt-to-income ratio demonstrates a good balance between debt and income. Lenders like the number to be low because, according to studies of mortgage loans, borrowers with a lower debt-to-income ratio are more likely to successfully manage monthly debt payments. On the contrary, a high debt-to-income ratio signals that you may have too much debt for the amount of income you have, and lenders view this as a signal that you would be unable to take on any additional debt. In most cases, 43% is the highest ratio a borrower can have and still get a qualified mortgage. A debt-to-income ratio smaller than 36%, however, is preferable, with no more than 28% of that debt going towards servicing your mortgage. In general, the lower the number, the better the chance you will be able to get the loan or line of credit you want.

Xem chi tiết »

Wills, Estates, and Probate

California Courts

Losing a loved one is a sad and difficult time for family, relatives, and friends. In addition, those left behind must often figure out how to transfer or inherit property from the person who has died.

To do this, you must usually go to court. And dealing with the courts and the property of someone who has died is very complicated. Sometimes, however, family or relatives may be able to transfer property from someone who has died without going to court. But it is not always easy to tell whether you need to go to court or qualify to use a different procedure.

This section will give you some general information to help you understand what your choices may be, but we still encourage you to talk to a lawyer to get specific answers about your situation. You can usually pay the lawyer’s fees from the property in the case.

To find a lawyer, click for help finding your bar association's lawyer referral service or call 1-866-442-2529.

If you want information about a probate guardianship case, visit our Guardianship section.

What Is “Probate”?

Probate means that there is a court case that deals with:

• Transferring the property of someone who has died to the heirs or beneficiaries;
• Deciding if a will is valid; and
• Taking care of the financial responsibilities of the person who died.

In a probate case, an executor (if there is a will) or an administrator (if there is no will) is appointed by the court as personal representative to collect the assets, pay the debts and expenses, and then distribute the remainder of the estate to the beneficiaries (those who have the legal right to inherit), all under the supervision of the court. The entire case can take between 9 months to 1 ½ years, maybe even longer.

Deciding If You Need to Go to Probate Court and Whether You Can Use Simplified Procedures

You may or may not need to go to probate court to obtain title to property belonging to a dead person. Figuring out if you have to go to probate court depends on many issues, like the amount of money involved, the type of property involved, and who is claiming the property.

And deciding if probate court is needed may also depend on the how the property is owned (the type of title ownership) or if there is some type of contract with beneficiaries. For example:

• Type of Title Ownership: Sometimes all or some of a dead person’s property passes directly to the beneficiaries because of how the property is owned. So if the property was owned in joint tenancy, if it was community property with the right of survivorship, if it was a bank account owned by several people, or a bank account that is transferred to someone when the owner dies, then, in general, when the owner of the property dies, the property goes to the survivor. Keep in mind that even in these cases, the survivor may have to take legal steps to clarify his or her ownership of the transferred property.
• Type of Contract: Sometimes all or some of a dead person’s property does not need to go through probate to pass to the beneficiaries. This is because this property is a type of contract with named beneficiaries. Examples of this are life insurance that pays benefits to someone else other than the dead person’s estate, retirement benefits, death benefits, and trusts.

If the Person Who Died Left $150,000 or LESS

If you have the legal right to inherit personal property, like money in a bank account or stocks, and the estate is worth $150,000 or less, you may NOT have to go to court. There is a simplified process you can use to transfer the property to your name. The value of the property is based on what it was worth on the date of death —not on what the property is worth now.

Keep in mind, this process CANNOT be used for real property, like a house. If the person left $150,000 or less in real property, including some personal property, you may be able to use a form called Petition to Determine Succession to Real Property (Estates $150,000 or Less) (Form DE-310). You will have to file the Petition with the court, obtain and file an Inventory and Appraisal (Form DE-160), and provide notice of hearing. Talk to a lawyer to make sure you can use this simplified process in your case. Click for help finding a lawyer.

To use the simplified process for transferring personal property

First, figure out if the value of the property (the estate) is worth $150,000 or less. To do this:

Include:

• All real and personal property.
• All life insurance or retirement benefits that will be paid to the estate (but not any insurance or retirement benefits designated to be paid to some other person).

Do not include:

• Cars, boats or mobile homes.
• Real property outside of California.
• Property held in trust, including a living trust.
• Real or personal property that the person who died owned with someone else (joint tenancy).
• Property (community, quasi-community, or separate) that passed directly to the surviving spouse or domestic partner.
• Life insurance, death benefits or other assets not subject to probate that pass directly to the beneficiaries.
• Unpaid salary or other compensation up to $5,000 owed to the person who died.
• The debts or mortgages of the person who died. (You are not allowed to subtract the debts of the person who died.)
• Bank accounts that are owned by multiple persons, including the person who died.

For a complete list, see California Probate Code section 13050.

If the total value of these assets is $150,000 or less and 40 days have passed since the death, you can transfer personal property by writing an affidavit. There is a special form for this that you can get from most banks and lawyers. Your court’s self-help center may also have this form or a sample you can use to guide you.

Click for more information on the affidavit and for help preparing your own form.

If You Were Married to or Were a Registered Domestic Partner of the Person Who Died

You may be able to use a simple form, called a Spousal or Domestic Partner Property Petition (Form DE-221) to get a court order that says:

• What your share of the community property is; and
• What part of your deceased spouse or partner’s share of community and separate property belongs to you.

If the surviving spouse/partner is legally entitled to all of the property, a more complicated probate procedure may not be required. For example, a couple that was married for decades may only own “community property,” which belongs to the surviving spouse/partner and is confirmed by the court in the spousal property petition case.

If the Person Who Died Left MORE Than $150,000

If the dead person’s property is worth more than $150,000, none of the exceptions apply. You must go to court and start a probate case.

To do this, you must file a Petition for Probate (Form DE-111). This one form has different options, such as:

• Petition for Probate of Will and for Letters Testamentary
• Petition for Letters of Administration

Talk to a lawyer if you are not sure which option you should choose on this form. Click for help finding a lawyer.

Steps to Take If the Case Belongs in Probate Court

1. The custodian of the will (the person who has the will at the time of the person’s death) MUST, within 30 days of the person’s death:

• Take the original will to the probate court clerk’s office within 30 days. Contact your superior court courthouse to find out where the probate court clerk’s office is located.
• Send a copy of the will to the executor (if the executor cannot be found, then the will can be sent to a person named in the will as a beneficiary).

If the custodian does not do these things, he or she can be sued for damages caused.

NOTE: If there is no will and a court case is needed, the court will appoint an administrator to manage the estate during the probate process. The person who wants to be the administrator must file a Petition for Letters of Administration (Form DE-111). The administrator usually is the spouse, domestic partner, or close relative of the dead person.

2. Someone, called "the petitioner," must start a case in court by filing a Petition for Probate (Form DE-111). The case must be filed in the county where the person who died lived (or if the person lived outside of California, in the California county where that person owned property).

The Petition for Probate has different options, like:

• Petition for Probate of Will and for Letters Testamentary
• Petition for Probate of Will and for Letters of Administration with Will Annexed
• Petition for Letters of Administration

Note: To start a probate case you will need more forms than just the Petition for Probate form. Talk to a lawyer for help with your case. Click for help finding a lawyer.

3. After a probate case is filed:

• The probate clerk sets a hearing date.
• The petitioner must give notice of the hearing to anyone who may have the right to get some part of the estate, plus the surviving family members even if there is a will and they are not named in it. Any person who is interested in the court case may file a Request for Special Notice (Form DE-154), which means that they must receive a copy of paperwork filed by the person who is chosen to manage the estate.
• The petitioner CANNOT mail the notice. It must be mailed by any other adult who is not a party to the case.
• The petitioner must arrange for notice to be published in a newspaper of general circulation.
• A court probate examiner reviews the case before the hearing to see if it was done correctly.
• Once all the paperwork has been reviewed by the examiner and corrected, if necessary, the judge decides who to appoint to be in charge as the personal representative of the estate (also called the “administrator” or “executor”).
• The personal representative gathers up the assets and prepares an Inventory and Appraisal (Form DE-160) to be filed. The personal representative usually will also need to contact a probate referee to value the nonmonetary assets. Find the contact information for a probate feferee in your county. (Get more information on probate referees.)
• The personal representative provides formal notice to creditors with the Notice of Administration to Creditors (Form DE-157) and pays the debts.
• A final personal income tax return is prepared for the person who died.
• The probate court figures out who gets what property.
• A Report of Sale and Petition for Order Confirming Sale of Real Property (Form DE-260) is filed with the court so that sales of real property are confirmed by the court.
• If the estate earned any money (such as interest or profit in a sale), the personal representative will have to submit a final estate tax return.
• The personal representative reports to the court on how the estate was handled. This report is a final plan and accounting. The report is scheduled for hearing so the judge can review how the personal representative handled everything. The judge needs to be satisfied that everything has been properly taken care of.
• After filing with the court any required final receipts to show that everyone received their property from the estate, the court discharges the personal representative from his or her duties.

More Information on Wills, Probate, Trusts, and Estates

Do I Need Estate Planning?

A State Bar of California pamphlet.

Do I Need a Living Trust?

A State Bar of California pamphlet.

Do I Need a Will?

A State Bar of California pamphlet.

DMV: Transfer a vehicle without probate

Information from the Department of Motor Vehicles' website. Scroll down to the section called "Transferring Ownership" and then to "Transfer Without Probate."

DMV: Affidavit for Transfer Without Probate

Department of Motor Vehicles' form.

California Public Law Libraries

This website provides extensive online self-help information, listing of county law libraries, AskNow law librarian service, mini-research classes, general research, and links to more resources. Talk with a lawyer to understand how law affects you and your rights. Click for help fnding a lawyer.

Sacramento County Public Law Library Legal Resource Guide

This site has a list of books on wills, probate, trusts, and estates and other topics. Click on the topic that interests you for more information.

San Francisco Law Library's Research Guide

This site has a list of books on wills, probate, trusts, and estates. Click to find a book on this list.

Statutory Will Form

This site includes the statutory will form, instructions, commentary, and questions and answers about the form. Created by the State Bar of California.

Xem chi tiết »

People don’t like paying taxes. That’s because they don’t understand them.

(AP/Mark Lennihan)

Without tax literacy, our debate stagnates.

By Marjorie E. Kornhauser April 14
Marjorie E. Kornhauser is the John E. Koerner professor of law at Tulane University Law School.

The Washington Post

For the past few years, I’ve sat in New Orleans high school classrooms watching students debate the fairest way for government to raise revenue. They role-play — first as management consultants advising legislators; then as lawmakers, weighing what to tax: property vs. sales vs. income. Are there limits on what or who can be taxed? Is a flat tax or a progressive rate structure fairer? Sometimes their discussions are heated.

These teenagers, however, have an edge that many adults don’t: basic tax literacy. Guided by Tulane law students, the high schoolers explore different philosophies and methods of taxation through TaxJazz, a program I began in 2013. Students who take the week-long course study issues of fairness and technical matters such as bases and rate structures. They examine key concepts such as the difference between marginal rates (the percentage of tax paid on the last dollar of income) and effective rates (the average percentage of tax paid). They learn that narrower tax bases, such as sales tax, need higher rates than broader bases, such as income taxes, to raise equivalent amounts of revenue. They discover that changing the method of taxation increases how much some taxpayers owe and decreases that amount for others.

If more people knew what these students know, we’d have a far more reasonable tax debate and better tax laws.

As Tax Day approaches (April 18 this year), many of us bemoan our tax bills coming due. Why is taxation such a charged issue? Many Americans are fuzzy on who and what are taxed and the reasons we pay taxes at all. A year ago, 57 percent of Americans polled told Gallup they pay “too much” in federal income taxes; note, though, that 45 percent of Americans pay no federal income taxes at all. We fight about taxes because we disagree about what is fair and what government should do. If we knew more, we’d still have disagreements, but at least our discussions would be more rational and produce more coherent policies. Tax law can be complex, but if high school students can get a handle on the basics, so can the adults who choose the politicians who implement it.

Is a flat or a progressive tax fairer? It depends on your sense of justice — but before you can even answer that question, you need to know how each mechanism works. So students learn that the relative tax burden on individuals depends on which tax base is used. Sales taxes place a higher burden on lower-income people, because lower-income taxpayers generally spend a greater percentage of their income than higher income taxpayers do. A flat income tax is easy to understand: You pay a certain percentage of your income, no matter how much you make. With a progressive income tax, escalating rates apply as income increases. For example, if a married couple had $52,000 of taxable income in 2016, the return they file this year will show a tax liability of $6,872.50 (assuming no tax credits). They will pay 10 percent on their first $18,550 and 15 percent on the rest of their taxable income. Their marginal rate is 15 percent, but their effective, or average, tax rate is 13.2 percent.

Real-world discussions often occur in a tax-ignorant universe. Many people — including some politicians — incorrectly say that the IRS, not Congress, writes federal tax laws. They say that some taxation is needed to pay for the government but that it should be lower and “fairer.” An astonishing number don’t realize that they already get tax breaks for many things they want, such as education, housing and child care. Often they state that we should lower the income tax rate to a number that is actually higher than the current top rate. Some have no idea what rate they pay or whether they’ve benefited from a tax cut.

Unfamiliarity with tax basics is harmful. At the individual level, people may pay more than necessary when they don’t know about deductions and credits that can reduce their burden. At the local, state and national levels, lack of tax knowledge hampers the promulgation of rational laws that could help spur the economy and lead to prudent budgets. A tax-literate electorate could demand that politicians provide coherent tax policy options.

To be tax literate, citizens should understand that taxes are not just numbers and abstract principles, and they are not arbitrary. “Taxation is an art and a technique as well as science,” said Harold M. Groves, an economics professor who was a Wisconsin state legislator in the 1930s, “and it always needs to be judged against the conditions of time and place.”

How can more Americans become tax knowledgeable? The first step, of course, is to include more discussion of taxes in schools — not just in high school and college, but even elementary school. This is no less important than the financial-literacy programs many schools now incorporate into their curriculums.

Without tax knowledge, voters enable politicians who spout inflammatory, empty rhetoric and perpetuate counterproductive, unfair tax policies. Democracies need informed voters to function properly. The cost of tax ignorance is too high.

Xem chi tiết »

Sale of Your Home - Capital Gains Taxes

Ariel Skelley/Stockbyte/Getty Images

By William Perez Updated September 20, 2016

If you sold your main home and made a profit, you may be able to exclude that profit from your taxable income. Here's how it works.

$250,000 Exclusion on the Sale of a Main Home

Individuals can exclude up to $250,000 in profit from the sale of a main home (or $500,000 for a married couple) as long as you have owned the home and lived in the home for a minimum of two years. Those two years do not need to be consecutive.

In the 5 years prior to the sale of the house, you need to have lived in the house for at least 24 months in that 5-year period. In other words, the home must have been your principal residence.

You can use this 2-out-of-5 year rule to exclude your profits each time you sell or exchange your main home. Generally, you can claim the exclusion only once every two years. Some exceptions do apply.

Exceptions to the 2 out of 5 Year Rule

If you lived in your home less than 24 months, you may be able to exclude a portion of the gain. Exceptions are allowed if you sold your house because the location of your job changed, because of health concerns, or for some other unforeseen circumstance.

Change in the Location of Your Job

If you lived in your house for less than two years, you can exclude a part of your gain on the sale of your house if your work location has changed. This exception would apply if you started a new job, or if you are moved to a new location with your employer.

Health Concerns

If you are selling your house for medical or health reasons, be ready to document those reasons with a letter from your physician. Such a letter does not need to be filed with your tax return. Instead, keep the documentation in your personal records just in case the IRS wants further information.

Unforeseen Circumstances

If you are selling your house because of unforeseen circumstances, be ready to document what those reasons are. IRS Publication 523 defines an unforeseen circumstance as "the occurrence of an event that you could not reasonably have anticipated before buying and occupying your main home." The IRS has given specific examples of unforeseen circumstances:

• natural disasters,
• acts of war,
• acts of terrorism,
• change in employment or unemployment that left you unable to meet basic living expenses,
• death,
• divorce,
• separation, or
• multiple births from the same pregnancy.

Partial Exclusion

You can exclude a portion of your gain if you are selling your home and lived there less than 2 years and you meet one of the three exceptions. You calculate your partial exclusion based on the amount of time you actually lived in your home.

Count the number of months you actually lived in your home. Then divide that number by 24. Then multiply this ratio by $250,000 (if unmarried) or by $500,000 (if married). The result is the amount of gain you can exclude from your taxable income.

For example: you lived in your home for 12 months, and then sold the home because your employer asked you to relocate to a different office.

You are an unmarried person. You calculate your partial exclusion: 12 months divided by 24 months (for a ratio of .50) times your maximum exclusion of $250,000. The result: you can exclude up to $125,000 in gain. If your gain is more than $125,000, you include only the amount over $125,000 as taxable income. If your gain is less than $125,000, then your gain can be excluded from your taxable income.

Loss on the Sale of a Home

You cannot deduct a loss from the sale of your main home.

Reporting the Gain on the Sale of Your Home

Gain on the sale of your home is reported on Schedule D as a capital gain.

If you owned your home for one year or less, the gain is reported as a short-term capital gain. If you owned your home for more than one year, the gain is reported as a long-term capital gain.

Calculating Your Cost Basis and Capital Gain

Just like calculating capital gains, the formula for calculating the gain or loss involves subtracting your cost basis from your selling price.

The formula for calculating your cost basis on your main home is as follows:
Purchase price

• + Purchase costs (title & escrow fees, real estate agent commissions, etc.)
• + Improvements (replacing the roof, new furnace, etc.)
• + Selling costs (title & escrow fees, real estate agent commissions, etc.)
• - Accumulated depreciation (for example, if you ever took the office in the home deduction)
• = Cost Basis

And then calculating your profit or loss would be:

• Selling price
• - Cost Basis
• = Gain or Loss

If the resulting number is positive, you made a profit when you sold your home. If the resulting number is negative, you incurred a loss.

Finally, calculate your taxable gain:

• Gain
• - Maximum or Partial Exclusion
• = Taxable Gain

Additional Resources from the IRS

• Sale of Your Home (Tax Topic 701)
• Selling Your Home (Publication 523)
• Tax Information for First-Time Homeowners (Publication 530)
• Instructions for Schedule D

Sale of Residence - Real Estate Tax Tips

Money is complicated. We can help. and get tips and insights from our personal finance and tax experts, delivered straight to your inbox.

Xem chi tiết »

US Taxes on Sale of Foreign Home

Imagination/Moment/Getty Images

By William Perez - Updated June 22, 2016

"The Baron" asks about reporting taxes to the IRS when selling a home in a foreign country:

"I am planning to sell a home I own in a foreign country I lived before, and to transfer the money to my bank account in US. How do I declare this for IRS? Do I have to pay taxes on this transaction? Thank you."

You will need to report the tax on the sale of your home just like everyone else. That's because the United States taxes its citizens on their worldwide income.

If this real estate was your principal residence and you both lived and owned the house for at least 24 months in the last 60 months ending on the sale date, then you can exclude $250,000 of gains (or $500,000 in gains if you are married and file a joint return). If the house was a rental property, you'll need to calculate your gain using the rules for selling rental properties. Gains on a primary residence in excess of the exclusion amount will be taxed as long-term or short-term capital gains, depending on how long you have owned the house.

You might also pay taxes on the transaction in the foreign country where the property is located. Those taxes can be claimed as a foreign tax credit on your US tax return. However, you cannot claim a foreign tax credit based on any gains you excluded under the provisions of Internal Revenue Code Section 121 (the $250,000 or $500,000 exclusions).

By reporting your gains and any exclusions on your tax return, you will have sufficient documentation to establish why a significant amount of money is being transferred into your US bank accounts.

Also, remember to report your foreign bank accounts.

Xem chi tiết »

Specified Foreign Financial Assets

Source from IRS

What are the specified foreign financial assets that I need to report on Form 8938?

If you are required to file Form 8938, you must report your financial accounts maintained by a foreign financial institution. Examples of financial accounts include: Savings, deposit, checking, and brokerage accounts held with a bank or broker-dealer.

And, to the extent held for investment and not held in a financial account, you must report stock or securities issued by someone who is not a U.S. person, any other interest in a foreign entity, and any financial instrument or contract held for investment with an issuer or counterpart that is not a U.S. person. Examples of these assets that must be reported if not held in an account include:

• Stock or securities issued by a foreign corporation;
• A note, bond or debenture issued by a foreign person;
• An interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap or similar agreement with a foreign counterpart;
• An option or other derivative instrument with respect to any of these examples or with respect to any currency or commodity that is entered into with a foreign counterpart or issuer;
• A partnership interest in a foreign partnership;
• An interest in a foreign retirement plan or deferred compensation plan;
• An interest in a foreign estate;
• Any interest in a foreign-issued insurance contract or annuity with a cash-surrender value. 

The examples listed above do not comprise an exclusive list of assets required to be reported.

Specific Examples:

Cash or foreign currency, real estate, precious metals, art and collectibles

1/ I directly hold foreign currency (that is, the currency isn't in a financial account). Do I need to report this on Form 8938?

Foreign currency is not a specified foreign financial asset and is not reportable on Form 8938.

2/ Does foreign real estate need to be reported on Form 8938?

Foreign real estate is not a specified foreign financial asset required to be reported on Form 8938. For example, a personal residence or a rental property does not have to be reported.

If the real estate is held through a foreign entity, such as a corporation, partnership, trust or estate, then the interest in the entity is a specified foreign financial asset that is reported on Form 8938, if the total value of all your specified foreign financial assets is greater than the reporting threshold that applies to you. The value of the real estate held by the entity is taken into account in determining the value of the interest in the entity to be reported on Form 8938, but the real estate itself is not separately reported on Form 8938.

3/ I directly hold tangible assets for investment, such as art, antiques, jewelry, cars and other collectibles, in a foreign country. Do I need to report these assets on Form 8938?

No. Directly held tangible assets, such as art, antiques, jewelry, cars and other collectibles, are not specified foreign financial assets.

4/ I directly hold precious metals for investment, such as gold, in a foreign country. Do I need to report these assets on Form 8938?

No. Directly held precious metals, such as gold, are not specified foreign financial assets. Note, however, that gold certificates issued by a foreign person may be a specified foreign financial asset that you would have to report on Form 8938, if the total value of all your specified foreign financial assets is greater than the reporting threshold that applies to you.

5/ This tax year I sold precious metals that I held for investment to a foreign person. Do I have to report the sales contract on Form 8938?

The contract with the foreign person to sell assets held for investment is a specified foreign financial asset investment asset that you have to report on Form 8938, if the total value of all your specified foreign financial assets is greater than the reporting threshold that applies to you.

Foreign stocks or securities

1/ I acquired or inherited foreign stock or securities, such as bonds. Do I need to report these on Form 8938?

Foreign stock or securities, if you hold them outside of a financial account, must be reported on Form 8938, provided the value of your specified foreign financial assets is greater than the reporting threshold that applies to you. If you hold foreign stock or securities inside of a financial account, you do not report the stock or securities on Form 8938. For more information regarding the reporting of the holdings of financial accounts, see FAQs 8 and 9.

2/ I directly hold shares of a U.S. mutual fund that owns foreign stocks and securities. Do I need to report the shares of the U.S. mutual fund or the stocks and securities held by the mutual fund on Form 8938?

If you directly hold shares of a U.S. mutual fund you do not need to report the mutual fund or the holdings of the mutual fund.

Safe deposit box

I have a safe deposit box at a foreign financial institution. Is the safe deposit box itself considered to a financial account?

No, a safe deposit box is not a financial account.

Xem chi tiết »

Reporting Foreign Earned Income on Your US Tax Return

Contributed by: Sudhir Pai, CPA, FCA, EA, CGMA

If you are a U.S. citizen or resident alien, you must report income from sources outside the United States (foreign income) on your tax return unless it is exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form W­2, Wage and Tax Statement, or Form 1099 from the foreign payer. This applies to earned income (such as wages and tips) as well as unearned income (such as interest, dividends, capital gains, pensions, rents, and royalties). If you reside outside the United States, you may be able to exclude part or your entire foreign source earned income.

Tax on Foreign Income

If you are a US citizen or resident alien, you need to pay tax on foreign income. If you paid any tax on foreign income in your respective country you may get a tax benefit from the US government, but there is also a limit of exclusion for foreign income.

Reporting Your Foreign Income

If you are a U.S. citizen or resident during tax year, you likely have foreign income that you must report on your tax return. Here we help you to understand a few concepts affecting foreign income.

The main foreign income concepts (explained below) are:

• General Rules Regarding Foreign Income
• The Foreign Tax Credit
• The Foreign Earned Income Exclusion
• Reporting Foreign Financial Assets and Accounts

General Rules Regarding Foreign Income

1. What foreign income is taxable on my U.S. return?

If you are a U.S. citizen or resident, you are required to report your worldwide income on your tax return. This means that you must not only report income you receive from U.S. sources, but you must also report income you receive from foreign sources.

2. Where do I report the foreign income on my return?

Generally, you report your foreign income where you normally report your U.S. income on your tax return. Earned income (wages) is reported on line 7 of Form 1040; interest and dividend income is reported on Schedule B; income from rental properties is reported on Schedule E, etc.

The Foreign Tax Credit

Since it is likely your foreign source income will be taxed by both the U.S. and a foreign country, there is a Foreign Tax Credit. The foreign tax credit helps to ensure that you are only taxed once on the foreign source income, but at the higher of the foreign or U.S. income tax rates on that income.

The Foreign Earned Income Exclusion

If you meet certain tests related to the length and nature of your stay in a foreign country, you may qualify to exclude some of your foreign earned income from your tax return. You may also be able to exclude or deduct some of your reimbursed housing costs. You cannot exclude or deduct more than your foreign earned income for the year. For 2014, the maximum foreign earned income exclusion is $99,200.

Reporting Foreign Financial Assets and Accounts

There has been a requirement for many years to report foreign income, referred to as FBAR (foreign bank and financial accounts report). You must report any foreign financial assets or accounts that meet certain thresholds. Generally, a report on foreign accounts is required if you hold in the aggregate more than $10,000.

Reportable Financial Accounts

The following types of financial accounts are reportable, meaning you must report these on your U.S. tax return.

1. “Account” is broadly defined to include any foreign bank, securities, or other financial accounts.
2. “Bank accounts” include savings deposits, demand deposits, checking accounts, and any other accounts maintained with a person engaged in the business of banking.
3. “Securities accounts” include accounts maintained with a person in the business of buying, selling, holding, or trading stock or other securities. 
4. “Other financial accounts” include:

• An account with a person that is in the business of accepting deposits as a financial agency;
• An account that is an insurance policy with a cash value or an annuity policy;
• An account with a person that acts as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association; or
• An account with a mutual fund or similar pooled fund which issues shares available to the general public that have a regular net asset value determination and regular redemptions (does NOT include hedge funds).

Form 8938, Statement of Specified Foreign Financial Assets:

This is a relatively new form filed with your Form 1040 and is used to report specified foreign financial assets. The reporting threshold for FATCA depends on filing status and whether the taxpayer is living within the U.S. or abroad.

What are the Reporting Thresholds for Domestic Taxpayers?

Unmarried taxpayers living in the U.S.: The total value of specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

Married taxpayers filing a joint income tax return and living in the U.S.: The total value of specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.

What are the reporting thresholds for taxpayers living abroad?

You are filing a return other than a joint return and the total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year.

You are filing a joint return and the value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

How do I report interest I earned on a foreign bank account?

You must report interest earned on a foreign bank account as part of your worldwide income if you are one of these:

• U.S. citizen
• Resident alien

Report this interest with domestic interest income on Form 1040. You'll also file Schedule B if you had one of these for a financial account in a foreign country:

• Interest in
• Signature authority over

This applies even if you had less than $1,500 or more of total interest and/or dividends for the year. Convert the foreign currency into U.S. dollars at the current exchange rate when you receive the income. If there's more than one exchange rate, use the rate that most properly reflects the income.

The income might be taxable to both the United States and the foreign country. If so, you can claim a foreign tax credit on taxes paid to the other country.

Usually only U.S. citizens and resident aliens must include this income on their return. However, if you're identified as a U.S. person, you have to report foreign bank accounts to the IRS. This is true as long as both of these apply:

• You have a financial interest in or signature authority over one or more accounts in a foreign country. This includes bank accounts and securities accounts.
• The total value of all foreign financial accounts is more than $10,000 at any time in the year.

A U.S. person is any of these:

• A citizen or resident of the United States
• A person doing business in the United States on a regular and ongoing basis
• A domestic corporation
• A domestic estate or trust

If these tests apply to you, you meet the reporting conditions when you do both of these:

1/ Check the appropriate FBAR-related federal return questions. The questions are found on:

• Form 1040, Schedule B
• Form 1041, Other Information
• Form 1065, Schedule B
• Form 1120, Schedule N

2/ If the foreign financial account is worth more than $10,000 at any time in the year, you must report it. Do so by filing FinCEN 114: Report of Foreign Bank and Financial Accounts. Unlike the previous form TD F 90-22.1, you can’t mail the form. You must file it online. 

What are the consequences for Evading Taxes on Foreign Source income?

You will face serious consequences if the IRS finds you have unreported income or undisclosed foreign financial accounts. These consequences may include, but are not limited to, additional taxes, substantial penalties, interest, fines, and even imprisonment.

© Copyrights CompareRemit.com

Xem chi tiết »

What Are Tax Credits?

Overview

A tax credit is a dollar-for-dollar reduction of the income tax you owe.

Tax credits reduce the amount of income tax you owe to the federal and state governments. Credits are generally designed to encourage or reward certain types of behavior that are considered beneficial to the economy, the environment or to further any other purpose the government deems important. In most cases, credits cover expenses you pay during the year and have requirements you must satisfy before you can claim them.

How tax credits work

A tax credit is a dollar-for-dollar reduction of the income tax you owe. For example, if you owe $1,000 in federal taxes but are eligible for a $1,000 tax credit, your net liability drops to zero. Some credits, such as the earned income credit, are refundable, which means that you still receive the full amount of the credit even if the credit exceeds your entire tax bill. Therefore, if you owe $400 in tax and claim a $1,000 earned income credit, you will receive a $600 refund.

Types of tax credits

There is an array of tax credits available to all types of taxpayers covering a wide range of expenses. As incentive for taxpayers to protect the environment, the federal government offers a credit for the cost of purchasing solar panels and wind turbines for use in your home or for when you install energy-efficient windows. To help families wanting to adopt a child, the federal adoption credit can reduce your tax bill for the costs you incur that are necessary to adopt a child. Other credits cover the expense of child and dependent care and for taxpayers purchasing their first home.

Comparing credits to deductions

Tax credits generally save you more in taxes than deductions. Deductions only reduce the amount of your income that is subject to tax, whereas, credits directly reduce your tax bill. To illustrate, suppose your taxable income is $50,000 and you have $10,000 in deductions, which reduces your taxable income to $40,000. If that $10,000 would have been taxed at a rate of 25 percent, then the deduction saves you $2,500 in tax. If the $10,000 was a tax credit instead of a deduction, your tax savings is $10,000 rather than $2,500.

State tax credits

Many states that impose an income tax on residents often times offer tax credits. For example, if you live in California, you may qualify for a renter's credit if your income is below a certain amount and you meet other state requirements. Many states also offer tax credits similar to the federal credits. For example, 23 states and the District of Columbia offer credits that mirror the federal earned income credit.

https://turbotax.intuit.com/tax-tools/tax-tips/Taxes-101/What-Are-Tax-Credits-/INF14393.html

Xem chi tiết »