INTERNATIONAL EXECUTIVE SERVICES
American Jobs Creation Act of 2004:
what it means for US citizens and tax
residents
TAX
AmCham Poland Tax Session
Warsaw, Poland
Tuesday, January 25 2005
Agenda
Overview of US tax system
Working Familes Tax Relief Act of 2004
American Jobs Creation Act of 2004
What it includes
What it does not include
Program Considerations
IRS Publications
KPMG Frankfurt
US tax practice
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Fundamentals of US Taxation
Self Assessment System
Filing Status
Resident vs. Nonresident
US Citizens and Greencard holders
Regular tax calculation with parallel Alternative
Minimum Tax (AMT) calculation for taxpayers
exceeding income thresholds
§911 Foreign Earned Income Exclusion
$80,000
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Prologue ...
Working Families Tax Relief Act of 2004
Signed into law on October 4, 2004
Revenue-neutral bill
Accelerates the phase-in of individual tax provisions of
the 2001 tax bill
Extends certain provisions that were due to expire
Preserves the 10% income tax bracket and “marriage penalty
relief”
Extends the child tax credit at its current level of $1,000 through
2010, and creates a uniform definition of “qualifying child” for the
purposes of the credit, the dependency exemption, etc.
Extends the higher alternative minimum tax exemption amounts
for one more year (2005)
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American Jobs Creation Act of 2004
Signed into law October 22, 2004
Most significant tax law changes since 1986
Started as response to WTO dispute resolution panel
finding
Grew into sweeping change of the tax law with major
changes to corporate, individual and international
areas of the law
Bill was not revenue-neutral, but rather increases the
deficit
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American Jobs Creation Act of 2004
Key provisions affecting international assignees
Foreign tax credit provisions
Expatriate provisions
Foreign financial account reporting
Deduction of state and local sales tax
Increase in withholding from supplemental wage
payments
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Foreign Tax Credit Provisions
Translation of foreign taxes
Paid vs. Accrued Method
Under current accrued method
Average exchange rate for the tax year
Fluctuation between tax return rate versus spot rate when paid
New law allows taxpayers to make election to use the
spot rate on the date tax was paid
Irrevocable election applies to all future tax years
Effective beginning in 2005
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Foreign Tax Credit Provisions – continued
Translation of foreign taxes – continued
Making the election may be a gamble and should be
considered case-by-case
Currency stability and exchange rate fluctuation
Circumstances which cause the election to be desirable in a
given year may cause the election to be undesirable in a future
year
Program Impact: Moderate
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Foreign Tax Credit Provisions – continued
Foreign tax credit carryover rules
Current law allows excess foreign taxes to be carried
Back two years
Remainder forward five years
New law allows excess FTC to be carried
Back only one year for credits generated beginning in 2005
Forward ten years for credits generated 1999 or later
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Foreign Tax Credit Provisions – continued
Longer carry forward period may decrease unused
foreign tax credit
Extends the period after end of assignment that the taxpayer’s
foreign travel is tracked
Shorter carry back period could result in situations
where taxes are not creditable
Program Impact: Major
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Foreign Tax Credit Provisions – continued
Repeal of 90% FTC limitation for Alternative Minimum
Tax (AMT)
Prior law limited foreign tax credit to 90% of the AMT
Created residual US tax liability of approximately 3% - 4% on
foreign-source income
New law allows full foreign tax credit for AMT
Effective beginning in 2005
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Foreign Tax Credit Provisions – continued
Outbound assignees to countries with a tax rate higher
than the US tax rate
Residual US tax liability will be lower, lowering overall cost of
foreign assignment
May reduce required US federal withholding during foreign
assignment
Minimum tax credit carry forward tracking reduced
Program Impact: Moderate
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Expatriation Provisions
Expatriation provisions
Affects US citizens and green card holders:
Held green card in at least 8 out of the preceding 15 years; AND
Surrender their citizenship or green card; OR
Risk being characterized as abandoning green card while living
abroad
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Expatriation Provisions
New Law strengthens the expatriation rules (IRC §877)
Higher thresholds for presumption of US tax avoidance
as principal purpose if:
Average annual income tax liability over 5-year period greater
than $124,000; OR
Net worth is equal to or greater than $2 million, OR
Taxpayer has failed to certify compliance with US tax laws for
prior five years
If either test is met, individual is subject to expatriation tax
No ability to counter presumed tax avoidance motive
with ruling request available under prior law
Very narrow exceptions to expatriation tax
Dual citizens
Certain minors with minimal US contacts
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Expatriation Provisions - continued
Expatriating individuals continue to be taxed as U.S. citizens
Until they fulfill expanded reporting requirements pertaining to
expatriation (DOS or DHS)
Form 8854-Expatriation Initial Information Statement
Citizens file forms with consular office or federal court
Long Term Residents file with the IRS by attaching form to the return
After expatriation US nonresident tax and reporting requirements
will be much more onerous than on nonresidents who never held a
green card
Sanctions imposed on individuals who return to the U.S. for
extended periods of time
Generally, more than 30 days, with exceptions
Effective date: Expatriations after June 3, 2004
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Expatriation Provisions - continued
Taxpayers should ...
Consult immigration counsel regarding consequences
of claiming IRC §911 exclusion for green card holders
Be careful not to cause inadvertent abandonment of
green card
Be informed of risks
Program Impact: Major
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Foreign Financial Account ReportingForm TD F90-22.1
Prior law had penalty for willful reporting requirement violation
Applies to foreign bank and securities accounts
New penalty for non-willful failures to file
Up to $10,000
Not being aware of the rule does not constitute reasonable cause
New penalty for willful reporting violations
Greater of $100,000 or 50% of the balance in the account
May also be subject to criminal penalties of up to $500,000 and
prison sentencing
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Foreign Financial Account Reporting
Impact on taxpayers is significant
Some taxpayers may object to reporting foreign
accounts
Applies to US nationals with corporate bank account
reporting requirements
Program materials must advise of new penalties
Inform assignee that company will not indemnify
Change policies to document
Program Impact: Major
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Deduction for State and Local General Sales Tax
Under new law, taxpayers may elect to deduct state
and local general sales taxes in lieu of income taxes
Applies to 2004 and 2005 only
Greater of actual receipts or amount per IRS tables
Impact on foreign assignment programs
Should be minimal for employee in/from states with income tax
Communications on implementation with employees
Program Impact: Moderate
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Increase in Supplemental Withholding Rates
Under current law, supplemental wage payments to
employees are subject to withholding at 25%
If a supplemental wage payment exceeds $1 million
when added to all payments previously made during
the year, the withholding rate will be the maximum
marginal tax rate (currently 35%)
Impact on foreign assignment programs: hypothetical
withholding rates should mirror actual
Program Impact: Minor
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Additional Tax Provisions
Application of Basis Rules to Pension Plans
Exclusion of ISOs and ESPP Options from wages
Sale of Principal Residence Aquired in Like-Kind
Exchange
Expensing of Business Assets
Repeal of Foreign Holding Company Rules and
Foreign Investment Company Rules
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IRS §911-Foreign Earned Income and Housing
Exclusions
Act does not repeal or amend these exclusions
May 2004 US Senate passed a bill imposing caps,
however, it was dropped during the legislative process
HOWEVER, expect continued discussion to include
caps or to eliminate these provisions
Significant revenue source
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Updated IRS Publications for Expatriates with
US Tax Compliance Obligations
Pub 54: Tax Guide for US Citizens and Resident Aliens Abroad
Pub 513: Information for Visitors to the United States
Pub 1542: Per Diem Rates (for travel within the United States)
Pub 1187: Specifications for Filing Form 1042-S, Foreign Person‘s US
Source Income Subject to Withholding, Electronically or Magnetically
ITIN and Form W7-Information concerning the requirement for residents
or nonresidents applying for an Individual Taxpayer Identification
Number
Visit the IRS Website Forms and Publications at http://www.irs.gov
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Jobs Creation Act of 2004
Questions?
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KPMG Frankfurt-US tax return services
US tax services provided in Frankfurt and Munich
3 managers and 13 professionals
Compliance services in the areas of
- individual income tax (residents and nonresidents)
- gift and estate tax
- partnerships and corporations investing in the US
Consulting services in the areas of
- individual income tax
- gift and estate tax
- structuring of US investments
- tax equalization policies
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KPMG Frankfurt US Team Members
Dagmar Gessner Gaspar, C.P.A.
dgessner-gaspar@kpmg.com
49(69) 9587 2250 direct
49(69) 9587 2239 fax
Rashel Meiworm, C.P.A.
rashelmeiworm@kpmg.com
49(69) 9587 2026 direct
49(69) 9587 2239 fax
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