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Recent Tax Court decision could wreak ha

Glover v. Comm, a recent tax court decision, presents several issues to Merchant Mariners. Mr. Glover worked for Reinauer Transportation. His tugs pushed oil coastwise as far as Virginia. The tugs wou

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Recent Tax Court decision could wreak havoc on Mariners

State Taxes and Mariners

Suz asked this question So, what about if you live in one state (TN) and work as a merchant mariner in another state (HI), 45 days on/45 days off rotation? Do you pay HI state taxes, or does the payro

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State Taxes and Mariners

Mariner Tax Update January 2011

E-Filing alert! How many times have you read that mariners cannot E-File? How many websites have posted this. Year after year. And then all of a sudden preparers start proclaiming “mariners can

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Mariner Tax Update January 2011

Employee vs. Non-Employee LLC and S-Corp

I’ve been a client of yours for a few years now and I had a general tax question concerning my wife’s job status. She currently works full time for a marketing firm in “Deleted”

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Employee vs. Non-Employee LLC and S-Corp Planning for Mariners and their families

Maritime Tax Preparers and the Alternati

What they don’t want you to know… This video points out the tremendous effect of the AMT on merchant mariners. Seamen taking business deductions and offsets may very well be realizing litt

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Maritime Tax Preparers and the Alternative Minimum Tax

Foreign Tax Payments

2
by on October 22, 2010 at 3:40 pm

Do Mariners write off Foreign taxes?

In these tight times we’re looking for any avenue available to rub two dimes together. I remember when I started shipping there were plenty of decent jobs available. Over the years, work has become tighter. More and more I see clients seeking employment under foreign flags, and or on foreign rigs.

Some Countries require that you pay income taxes

I’ll use Brazil as an example – Under the Brazilian tax law, foreigners working with offshore work visas only have to pay personal income tax (imposto de renda )after having physically been more than 184 days in Brazil. For employees working offshore this takes roughly 1 year, 6 months (=184 days) in Brazil and 6 months outside.

This means if you’re working offshore past that time period you owe Brazil. How does that affect you as a US taxpayer? Are you simply going to be taxes by two countries and not be able to offset either return? Let’s run a few what ifs…

You are required to pay and have paid Brazil $20,000 in income taxes

Section 901 of the Internal Revenue Code states -

(a) Allowance of credit

If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter shall, subject to the limitation of section 904, be credited with the amounts provided in the applicable paragraph of subsection (b) plus, in the case of a corporation, the taxes deemed to have been paid under sections 902 and 960. Such choice for any taxable year may be made or changed at any time before the expiration of the period prescribed for making a claim for credit or refund of the tax imposed by this chapter for such taxable year. The credit shall not be allowed against any tax treated as a tax not imposed by this chapter under section 26 (b).
You’ll probably be able to take a foreign tax credit for the taxes paid. The biggest restriction is that the credit cannot exceed how much you would have owed on the same income in the US.
Things you’ll need -
  • Proof you were working
  • Proof you owed the tax
  • Proof showing how much income was taxed (important and I have seen this overlooked)

You were required to pay and have not paid Brazil $20,000 in income taxes

This is something I am seeing quite a bit of. It isn’t that mariners aren’t paying the taxes due to the foreign country. It’s that the employer is paying the foreign taxes on behalf of the employee. There are two instances of this that appear to be most prominent.

  • Company pays foreign tax due on behalf of the mariner and requires no compensation
  • Company pays foreign tax due on behalf of the mariner and includes it as income on their W-2

What are the requirements for the credit?

The magic language in the Code is “Paid or Accrued”… The internal revenue service states that -

  1. The tax must be imposed on you
  2. You must have paid or accrued the tax
  3. The tax must be the legal and actual foreign tax liability
  4. The tax must be an income tax (or a tax in lieu of an income tax)

http://www.irs.gov/businesses/article/0,,id=183263,00.html

Generally speaking, we’re not encountering issues with parts 1, 3, and 4. It’s the paid or accrued concept… If we don’t pay the amount due personally, can we still be eligible for the foreign tax credit? If it is included as income on our W-2 can we still take the foreign tax credit?

Disclaimer!

A little CYA… Just because a tax position holds water doesn’t mean that you won’t be audited. It also doesn’t mean you will win an audit. Many tax positions, though valid, are dismissed in audit and appeals. The taxpayer is forced to litigate the issue. This can be a costly venture.

Where were we…

The courts have historically shown a strong emphasis on the “liable” portion. There have been many cases over the years where the courts have restated that the taxpayer need be “legally liable” to the tax in question to be eligible for the foreign tax credit. (Riggs v. Comm, Amoco v. Comm, Guardian v. US, Gleason Works v. Comm, Nissho Iwai American Corp v. Comm) The courts also demonstrate the requirement to document liability for the actual tax in question (Wilcox v. Comm)

It seems from the common law that it is irrelevant who pays the tax due… What is relevant is who was liable. That said, taxes paid reported as income may make the transaction seem more concrete but do not seem to be a requirement. The fact that you owed the tax and it was paid has generally been the test from the Court’s perspective….

See Disclaimer above again. There are no guarantees. This is a risky position. Not because of law. Because of the amount of possible revenues that could be collected on audit. A $20,000 credit is a sizable amount. I would assume it would not go overlooked…

Aren’t I even if it’s on my W-2 and I take the credit?

No, you’re way ahead of the game. W-2 income is taxed at your Marginal Tax Rate, say 25%. So $20,000 in income would cost $5,000 in taxes. With the credit you’re still up by $15,000.

That doesn’t seem right… Does this happen elsewhere?

Yes… If you own stocks and receive dividend statements you may have noticed foreign taxes paid as a reporting line. Some mutual funds pass on the proportionate tax payment to you as the shareholder although you never physically paid the tax due.

The most common instance is with mortgages and interest deductions. It doesn’t matter who paid the interest. It matters who is liable (who is on the deed). That is the person who gets the deduction for interest paid. Even though Auntie Sally made the payments.

Summary – plan for rain

This is a fair and valuable tax position. It should be carefully considered. You should make sure to have all necessary documentation before taking this position (especially the amount of income that the foreign taxes were paid on)…. You should try to get it on a corporate report. How many times have we left a company and needed documentation down the line, only to discover they were not very accommodating? And remember, no guarantees. If you’re audited, plan on losing. Remember attorney’s fees generally start at around $5,000 for this type of venture.

Integrated Financial Partners – HOT TOPIC: Risks of Relying on Social Security

0
by on October 18, 2010 at 1:43 am

Consider the Risks of Relying on Social Security

The 58 million Americans who currently receive Social Security benefits will not receive a cost-of-living adjustment (COLA) in 2011. This is the second consecutive year in which payments were frozen because the Consumer Price Index measured little or no inflation.1

Although the decision to freeze benefits in 2011 is not directly related to the social insurance program’s projected funding shortfall, consider it a lesson in the risk of relying too heavily on a program that has a potentially uncertain future. Millions of Americans who rely on Social Security just found out that they won’t receive an anticipated benefit increase — and they learned this only a few months in advance, too late for them to do much about it.

Given that nothing like this has happened before, the disappointment among Social Security beneficiaries may have been compounded by an element of surprise: 2010 was the first year since 1975, when Social Security instituted automatic COLAs tied to the rate of inflation, in which benefits did not increase year-over-year.2 It’s likely that many retirees believed that the lack of a COLA in 2010 meant that one would be virtually guaranteed in 2011 because it would be unheard of for the government to go two years without increasing benefits. But that is exactly what has happened.

Going forward, it might be prudent to expect more surprises from Social Security. The program’s already fragile situation has deteriorated further in the face of widespread unemployment and a significant reduction in the payroll tax receipts that fund the government’s largest program. The Congressional Budget Office now expects that in 2010, Social Security outlays will exceed tax revenues for the first time since Social Security was amended in 1983. Although the CBO expects that revenues will generally equal outlays over the next few years, growing numbers of retiring baby boomers will eventually overwhelm the system and cause outlays to regularly exceed tax revenues by 2016. The CBO also projects that Social Security’s so-called trust funds, which are actually IOUs issued by Congress for borrowing Social Security’s surplus revenues in years past, will be exhausted by 2039 if no changes are made to current laws.3

What if It Happened to You?

Imagine what your own financial situation might look like if Social Security announced shortly before your anticipated retirement date that, because of underfunding, it would cut benefits and raise eligibility requirements.

Although these measures have not been adopted, it’s worth noting that they are being considered. The Congressional Budget Office has studied policy options that include reducing benefits, raising the retirement age, limiting future COLAs, and increasing payroll taxes.4 Because there is little consensus among lawmakers or the public, a solution reached by political negotiation could combine several different measures.

Fortunately, Social Security’s precarious financial situation has not gone unnoticed. Seventy-seven percent of Americans now believe the enormous cost associated with entitlement programs like Social Security and Medicare will eventually create major economic problems for the nation if they are left unchecked.5 Fifty-six percent of retirees believe they will eventually suffer a cut in their benefits, and 60% of workers have expressed doubt they will ever receive Social Security payments.6

It seems clear that, at the very least, Social Security will not be able survive without making some adjustments. The good news is that you are already aware of the likelihood, so it might be wise to prepare for your own retirement on the assumption that Social Security won’t be able to provide the same level of benefits that you might currently be expecting. Better to make such an assumption now, and begin seeking ways to offset the potential shortfall, than wait until it’s too late to do anything about it.

via Integrated Financial Partners – HOT TOPIC: Consider the Risks of Relying on Social Security : Newsletter: HOT TOPIC: Consider the Risks of Relying on Social Security.

Medical Deductions, Fertility Treatment, and FSA Alternatives

1
by on October 12, 2010 at 12:25 am

Should I Save My Medical Receipts?

Quick answer – hopefully not! Medical expenses have to exceed 7.5% of adjusted gross income (AGI) before they have the ability to start counting.

If your AGI was $100,000, you would need $7,500 in medical expenses before you could take a tax deduction. KEEP IN MIND – this doesn’t mean you will be deducting the entire amount. Only the amount that EXCEEDS the limitation. So in this case, medical deductions totaling $7,501 would allow a $1 deduction.

When are deductions likely?

  • On a very low income year. Ironically, income would probably be so low that you wouldn’t recognize a substantial benefit.

A low income year can lower the AGI threshold. AKA 7.5% of $20,000 is $1,500. This is a much easier amount to surpass. When examining disabled and elderly taxpayers, remember some income is not used in arriving at AGI – certain amounts of Social Security, disability, etc…

  • Taxpayers do not have medical insurance

A very tricky situation. If I was personally not paying expenses, this would be my last to go. If you are in this situation where you cannot afford insurance you should check with your State to see what assistance programs they may have available. More and more States are requiring all residents to maintain adequate health insurance. They have programs that provide assistance for those who cannot afford it on their own.

If you’re on unemployment, you should also check to see if there are cobra or other medical insurance subsistence programs available.

  • Taxpayers incur a substantial amount of uninsured medical expenses within a year

Generally these are elective surgeries or similar. A common high level expense is fertility treatments. Bills can pile up in the tens of thousands. Most medical insurance programs do not cover these expenses. This is one scenario where you may be able to recognize a medical deduction within a high income year…

Tips and tricks

  • Remember – a big stack of bills does not mean you have a deductible medical expense. It means you have bills you haven’t paid. Unless you have paid the expenses or have a secured loan they will most likely not be deductible.
  • A surrogate is not a medical expense. This is becoming more common these days. A surrogate mother will carry a child to term. Since the surrogate did not have an ailment (she was able to bear children) it is not deductible.

Best financial medical defense is the FSA

If you know you are going to incur substantial medical expenses (your deductible is $3,000 and you’re going to have a baby that year) use your FSA. An FSA (flexible spending account) allows you to set aside earned income to cover certain medical expenses. This income circumvents Federal, State, Social Security, and Medicare taxes. This is a huge benefit! My average client saves 30-35 cents on a dollar with their FSA

Keep in mind that FSA’s are a use it or lose it system. If you haven’t spent the money by the end of the allocated expense period you lose it. So never allocate more than you’re certain you’ll spend. As FSA rules and regs become more lax, there are more and more items that they can be used to purchase. OTC drugs, acupuncture, perhaps reiki. Look to your plan provider regarding availability and allowable expenses. Federal regs give the individual employers a great deal of leeway in administering the plans.

Home Ownership Advantages

0
by on October 3, 2010 at 12:37 pm

Should Mariners Buy A House?

Jim gives a quick overview of the tax advantages of home ownership.

Don’t forget that these benefits aren’t just from a primary residence. Investment properties have the same properties in general.

Investment properties are not the same as rental properties. Be sure to check out our articles examining the cost benefit of rentals and how they differ from other properties.