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Mar 24
0

Withholding

By | Uncategorized | No Comments

Withholding is money withheld from the positive income generated from a US based investment. This is mandatory if it involves a non US resident. It basically means you receive only a portion directly from your investment whereas the amount withheld is paid to the US Tax office in your name where it is a credit in your name. This means that investment companies label the payment to the US Tax office in general as a distribution directly to you.

The amount withheld can be determined in a few different ways. It can be a percentage over the total sales price (10%) or a higher percentage over the profit and/or gain realized (35%) in that year. The gain is based upon the sales price minus the equity at the beginning of that fiscal year. Therefore this is not the actual gain because the equity is most likely reduced by depreciations and/or expenses made.

When the tax return is prepared there are elements that did not play a part in the determination of the amount withheld but can have an important impact on calculating the tax due. The main “new” elements are losses such as the Net Operating Loss (NOL) and the Passive Activity Loss Adjustment (PALA).

PALA consists of losses booked but not yet realized such as depreciation, renovation cost and/or management fees. They are registered in the tax return by investment every year as unallowed until the termination at which point the losses are actually realized. The equity paid in has been reduced with these losses and therefore create a gain that is not really made.

An example:

100
Paid in capital
60
Losses prior years
40
Equity beginning year of sale
150
Sales price
40
Equity beginning year of sale
110
Gain for that year and basis for withholding
110
Gain for that year
60
Correction for unused losses prior years
50
Realized gain

NOL consists of losses actually realized. Any deductions are added to this on a yearly basis. Also PALA that is remaining after an investment ends with a loss, as that loss is now unfortunately realized, is added to the NOL.

In the tax return we correct the gain, as listed for that one year, with these losses and because the actual tax rate is a lower percentage, than the one used to determine the amount withheld, there is most likely too much withheld. In the return the actual tax due is calculated and any overpayment asked to be refunded. Some of this can be done well before a return can be filed by filing a form 8804-C in which these losses are reported to the manager of your investment so they can preemptively lower the gain as the base for the withholding.

Refunds are in principal paid by the issuing of a paper check. If you have a bankaccount in America the refund can also be directly deposited. This will be faster and most likely cheaper than cashing a check.

Mar 24
0

US Tax identification numbers

By | TIN, US Tax | No Comments

A US Tax Identification Number or TIN is crucial for the tax offices as that is indeed their main source of determining what income, gain, withholding and/or refunds is linked to you. The other source would of course be the name but it is secondary. Both need to be correct however. There are two TINs. There is the Employer Identification Number or EIN which is for legal entities and there is the Individual Taxpayer Identification Number which is for individuals.

The Employer Identification Number is for legal entities such as corporations, foundations, partnerships and estates. We would need an excerpt of a chamber of commerce as well as a copy of the passport for the individual who will be signing on behalf of the entity. We will use this information to fill out the application form, SS4. This needs to be signed by the official and returned to us. We use this to apply by phone. Every entry will be transferred letter by letter and, as a confirmation, this will all be spelled back to us. This does mean however that the normal duration of this procedure would on average be a week.

The Individual Taxpayer Identification Number is a bit harder to come by. To be able to fill out the application form, W7, we need a copy of the passport. The application lastly needs “proof” for the reason to obtain the ITIN. Assuming this is because of the requirement to file a US tax return the proof is the initial tax return. Other reasons are usually linked to the tax treaty and have the opposite as a reason: not to have to file a US tax return. The proof would then be a letter from the entity that would make distributions on original letter head, naming you and the type of income you will be receiving.

The application for an ITIN consists out of three parts: the application form W7, an original copy of your certified passport and the initial return. The certification of the passport can only be done by the issuing agency. This would mean either city hall if you reside in the country of your citizenship. If you live abroad the certification has to be done by your embassy or the consulate. What it basically is, is a copy of your passport on which the civil servant signs off that he or she checked it, it was real and a copy was made on the spot. It will require a stamp which states this as well as a signature of the civil servant.

The complete application will be filed to the ITIN unit and they will assign a number. This takes about 6-8 weeks including international mail. The return will be forwarded to the appropriate tax office for further processing.

An EIN is valid until the corporation is dissolved. An ITIN is valid for 20 years after which it has to be renewed. The application for a renewal goes through the same procedure with two major exceptions: the ITIN is named on the W7 form and a tax return is not required as proof.

As all our services the application fee is including any correspondence in case the initial application requires additional information or is denied.

Sep 29
0

Introduction to US taxes

By | US Tax | No Comments

If you invest in American Real Estate and/or in US shares through a US based company/stock exchange you have, no matter what the result of the investment is, a legal obligation to file US tax returns. Plural because you will have to file a Federal tax return as well as in most cases a state return.

In order to file you will need a Taxpayer Identification Number (TIN). For legal entities this is an EIN or Employer Identification Number. For individuals this is an ITIN or Individual Taxpayer Identification Number. The application for an EIN can be done immediately. The application for an ITIN requires a first tax return as proof that an ITIN is needed.

At the beginning of the year the books of the prior tax year will be closed and if you invest through an investment company these will file their tax returns first. Part of those returns will be statements that you in turn will need for the tax return: K-1, 1099, 1042-s, 8288a etc. On these you will find all necessary components such as: capital contributed, income, interest paid, gain, deductions, non-deductible expenses, distributions of capital and withholdings.

Now that all the information is available the tax returns can be created. Once we put all information in, the returns will be checked by a US Certified Public Accountant or CPA to make sure nothing got missed. The returns will need your signatures so we will send you these clearly marked as well as a two page summary.

Once we receive the signature pages we will file these with the appropriate tax offices. The normal deadline for filing is April 15th or the first weekday if that would be a holiday or in the weekend. Non residents get an extra 3 months to file. Adding an extension of time of 6 months if filed puts the due date on December 15th. Most states follow the same dates as the Federal tax office.

The information received pertains to the one year. In the tax returns more is taken into account. Of course if you have multiple investments they might interact. A loss could offset a profit. But also losses from the past can offset that years gain as it actually contributed to that same gain. the result of your return could be a refund, a loss or a tax due. A loss will be registered to offset possible future gains.

When paying out non residents investment companies have to withhold money from the distribution and deposit this in the taxpayers name with the tax office. As the tax return calculates the exact amount due part of the withholding will be determined to be overpaid. This overpayment can be credited to the next year or a request can be made for a refund. Refunds can be paid out as a paper check or as a direct deposit into an American bank account.

Tax due is, because of the practice of withholding, not common but it can happen. Payment of tax due can be done by writing a paper check our money order. Payment online is however becoming more popular. Unfortunately the process of your tax return by the tax office might not go smoothly every time. That is when we start our communication with the tax office so you don’t have to. This can be challenging but challenges can also be interesting. Solving these issues are satisfying, we find.

As the rules can be changed by the IRS at anytime the above mentioned is to give you a general understanding.