I have inherited property from my parents in India . What are the tax implication ?

I get this question a lot  “My dad died and left me a piece of real estate in India I’m going to sell it. What happens for U.S. tax purposes when I sell it?”

The capital gain must be reported on the U.S. heir’s personal Form 1040 in the year of sale. So the question is how do we calculate that capital gain? The answer — sale price minus expenses of sale minus the seller’s basis in the property equals capital gain for U.S. tax purposes.

The sale price is whatever it is. Expenses of sale are whatever they are. But basis. A U.S. taxpayer who inherits foreign real estate from a nonresident/noncitizen of the USA — this is interesting. The real estate was never subjected to U.S. estate tax. The deceased person never filed a U.S. income tax return, and the executor never filed a U.S. estate tax return, because they didn’t have to.

Does an asset inherited from a nonresident/noncitizen get a step up in basis even though no estate tax was ever imposed?

Yes, indeed.

Back to our little example. Pretend that Dad bought the land India  for $10,000 way back when. At the time of death the land was worth $100,000. The U.S. son who inherited the property immediately sold it for $100,000. Pretend that sale expenses are zero, because that makes my example a bit easier.

The U.S. son reports the sale on Schedule D. Proceeds of sale of $100,000 minus basis of $100,000 equals capital gain of zero.

REV. RUL. 84-139, 1984-2 C.B. 168

ISSUE

Will a United States citizen who inherits foreign real property from a nonresident alien receive a stepped-up basis in such property under section 1014 of the Internal Revenue Code even though the property is not includible in the value of the decedent’s gross estate?

FACTS

D, who was a citizen and a resident of Z, a foreign country, died in 1982 owning real property located in Z. B, a United States citizen, inherited the real property in accordance with the laws of Z. At the time of D’s death, the real property had a basis of 100 x dollars and a fair market value of 1000x dollars. Because the real property is located outside the United States and D was a nonresident alien, the value of such property is not includible in D’s gross estate under section 2103 of the Code for purposes of the United States federal estate tax. B sold the real property in 1983 for 1050x dollars, claiming a basis of 1000x and a gain of 50x dollars.

LAW AND ANALYSIS

Section 1014(a)(1) of the Code states that the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, if not sold, exchanged, or otherwise disposed of before the decedent’s death by such person, be the fair market value of the property at the date of the decedent’s death.

Section 1014(b)(1) of the Code provides that property acquired by bequest, devise, or inheritance, or by the decedent’s estate from the decedent shall be considered to have been acquired from or to have passed from the decedent for purposes of section 1014(a).

Section 1014(b)(9)(C) of the Code further provides that section 1014(b)(9) shall not apply to property described in other paragraphs of section 1014(b).

Section 1014(b)(9) of the Code provides that, in the case of a decedent dying after December 31, 1953, property acquired from a decedent by reason of death, form of ownership, or other conditions (including property acquired through the exercise or non-exercise of a power of appointment), if by reason thereof the property is required to be included in determining the value of a decedent’s gross estate shall be considered to have been acquired from or to have passed from the decedent for purposes of section 1014(a).

Section 1.1014-2(b)(2) of the Income Tax Regulations provides that section 1014(b)(9) property does not include property that is not includible in the value of a decedent’s gross estate, such as property not situated in the United States acquired from a nonresident who is not a citizen of the United States.

In this case, B inherited the real property from D, and such property is within the description of property acquired from a decedent under section 1014(b)(1) of the Code. Therefore, B will be entitled to a stepped-up basis under section 1014(a). Under section 1014(b)(9)(c), section 1014(b)(9) does not apply to property described in section 1014(b)(1); hence, the requirement of section 1014(b)(9) that property be includible in the value of a decedent’s gross estate does not apply here.

HOLDING

Foreign real property that is inherited by a United States citizen from a nonresident alien will receive a step-up in basis under sections 1014(a)(1) and 1014(b)(1) of the Code. B’s basis in the real property sold is 1000x, the fair market value of the property on the date of D’s death, as determined under sections 1014(a)(1) and 1014(b)(1) of the Code.

How to Get a Copy of Your Prior Year Tax Information

How to Get a Copy of Your Prior Year Tax Information

There are many reasons why you may need a copy of your tax return information from a prior year. Transcripts are free and available for the most current tax year after the IRS has processed the return. You can also get them for the past three tax years. If you don’t have your copy, the IRS can help. Here are the types of transcripts to choose from:

• Tax Return Transcript.  A return transcript shows most line items from your tax return just as you filed it. It also includes any forms and schedules you filed with your return. However, it does not reflect changes made to the return after you filed it. If you are applying for a mortgage, most mortgage companies require a tax return transcript and participate in our Income Verification Express Service program. If you are applying for financial aid, you can use the IRS Data Retrieval Tool on the FAFSA website to import your tax return information to your financial aid application. In both of these cases, you won’t have to request a transcript directly from the IRS.
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• Tax Account Transcript.  This transcript shows any adjustments made by you or the IRS after you filed your return. It shows basic tax return data, like marital status, type of return, adjusted gross income and taxable income, and other transactions such as payments you made.

Here’s how to get a transcript:

• Order Online. The fastest way to get a Tax Return or Account transcript is through the ‘Get Transcript’ tool available on IRS.gov. Although the IRS temporarily stopped the online viewing and printing of transcripts, Get Transcript still allows you to order your transcript online and receive it by mail. Just click the “Get Transcript by Mail” button to have a paper copy sent to your address of record.
• Order by phone. You can also order by phone at 800-908-9946 and follow the prompts.
• Order by mail.  To order your tax return transcript by mail, complete and mail either Form 4506-T or Form 4506T-EZ. Form 4506-T can also be used to request other tax records: tax account transcript, record of account, wage and income and verification of non-filing.

If you need an actual copy of your tax return, they are generally available for the current tax year and as far back as six years. The fee per copy is $50. Complete and mail Form 4506  to request a copy of your tax return. Mail your request to the IRS office listed on the form for your area. If you live in a federally declared disaster area, you can get a free copy of your tax return.

Self Employed ? Check out these Tax Tips

Self Employed? Check Out These IRS Tax Tips

If you are self-employed, you normally carry on a trade or business. Sole proprietors and independent contractors are two types of self-employment. If this applies to you, there are a few basic things you should know about how your income affects your federal tax return. Here are six important tips from the IRS:

• SE Income. Self-employment can include income you received for part-time work. This is in addition to income from your regular job.

• Schedule C or C-EZ. You must file a Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business, with your Form 1040. You may use Schedule C-EZ if you had expenses less than $5,000 and meet certain other conditions. See the form instructions to find out if you can use the form.

• SE Tax. You may have to pay self-employment tax as well as income tax if you made a profit. Self-employment tax includes Social Security and Medicare taxes. Use Schedule SE, Self-Employment Tax, to figure the tax. If you owe this tax, attach the schedule to your federal tax return.

• Estimated Tax. You may need to make estimated tax payments. Try IRS Direct Pay. People typically make these payments on income that is not subject to withholding. You usually pay estimated taxes in four annual installments. If you do not pay enough tax throughout the year, you may owe a penalty.

• Allowable Deductions. You can deduct expenses you paid to run your business that are both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and proper for your trade or business.

• When to Deduct. In most cases, you can deduct expenses in the same year you paid, or incurred them. However, you must ‘capitalize’ some costs. This means you can deduct part of the cost over a number of years.

Six Tips on Whether to File a 2015 Tax Return

Most people file a tax return because they have to, but even if you don’t, there are times when you should. You may be eligible for a tax refund and not know it. Here are six tips to help you find out if you should file a tax return:

1.      General Filing Rules. Whether you need to file a tax return depends on a few factors. In most cases, the amount of your income, your filing status and your age determine if you must file a tax return. For example, if you’re single and under age 65 you must file if your income was at least $10,300. Other rules may apply if you’re self-employed or if you’re a dependent of another person. There are also other cases when you must file. Go to IRS.gov/filing to find out if you need to file.

2.       Premium Tax Credit.  If you enrolled in health insurance through the Health Insurance Marketplace in 2015, you may be eligible for the premium tax credit. You will need to file a return to claim the credit. If you chose to have advance payments of the premium tax credit sent directly to your insurer during 2015 you must file a federal tax return. You will reconcile any advance payments with the allowable premium tax credit. You should receive Form 1095-A, Health Insurance Marketplace Statement, by early February. The form will have information that will help you file your tax return

3.       Tax Withheld or Paid. Did your employer withhold federal income tax from your pay? Did you make estimated tax payments? Did you overpay last year and have it applied to this year’s tax? If you answered “yes” to any of these questions, you could be due a refund. But you have to file a tax return to get it.

4.       Earned Income Tax Credit. Did you work and earn less than $53,267 last year? You could receive EITC as a tax refund, if you qualify, with or without a qualifying child. You may be eligible for up to $6,242. Use the 2015 EITC Assistant tool on IRS.gov to find out if you qualify. If you do, file a tax return to claim it.

5.       Additional Child Tax Credit. Do you have at least one child that qualifies for the Child Tax Credit? If you don’t get the full credit amount, you may qualify for the Additional Child Tax Credit.

6.       American Opportunity Tax Credit. The AOTC is available for four years of post secondary education and can be up to $2,500 per eligible student. You, your spouse or your dependent must have been a student enrolled at least half time for at least one academic period. Even if you don’t owe any taxes, you still may qualify. You must complete Form 8863, Education Credits, and file it with your return to claim the credit. Use the Interactive Tax Assistant tool on IRS.gov to see if you can claim the credit. Learn more by visiting the IRS’ Education Credits Web page.

The instructions for Forms 1040, 1040A or 1040EZ list income tax filing requirements. You can also use the Interactive Tax Assistant tool on IRS.gov. Look for “Do I need to file a return?” under general topics to see if you need to file. The tool is available 24/7 to answer many tax questions. Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on IRS.gov.

WHAT IS SELF DIRECTED 401 K / SOLO 401 K PLAN

A Self Directed 401k is a qualified retirement plan approved by the IRS.  It follows the same rules and requirements as any other 401k  plan – these rules being established in 1981.  In 2001 the EGTRRA law was passed.  This is commonly referred to as one of the two “Bush Tax Cuts”.  This act made significant changes to the IRS code lowering taxes for qualified plans such as a personal 401k plan.

The participants of the plan have complete flexibility to invest in anything they wish – as long as they are legal.They simply write a check and make their investments – they are not confined or stifled as most people are with their traditional brokerage retirement accounts.

401(k) Eligibility Requirements

In order to be eligible for opening and making contributions to self directed solo/individual 401(k) plans, you need to meet the following 401k eligibility requirements:

• If you’re a business owner, you need to be the sole proprietor and have no employees other than your spouse. If your business is a partnership, it should have no employees other than self-employed partners and their spouses.
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• You have received taxable compensation in the form of a salary or wages as an individual, during the current financial year. Whether your business is incorporated or incorporated, a sole proprietorship, partnership or corporation, the deadline for establishing a self directed 401(k) is the last day of the tax year.

In addition to the 401k eligibility requirements listed above, you should also note that the individual 401(k) should be the only arrangement maintained by your business if it’s not part of a controlled group under federal tax law.

Investments in Self Directed 401(k)

A Solo 401(k) can invest in almost anything. Examples are: Real Estate – residential or commercial – rentals, foreclosures raw land, Tax Liens, Precious Metals, Private Placements, Foreign Currency, Hard Money Lending etc

Prohibited Transactions

Under IRS rules, a Solo 401k is prohibited from certain types of investments or transactions. Some examples are:

Engaging in a Transaction with a Disqualified Person

– Plan participant buys a condo and lets daughter live there
– Plan participant buys part of business owned by his Father

Direct or Indirect Lending of Money

– Plan participant loans money to his wife or son
– Father signs a loan guarantee for the Solo 401k Plan

Receiving Direct or Indirect Benefits of the Plan

– Plan participant buys property and charges a management fee
– Plan participant “fixes” a property himself rather than paying a 3rd non-disqualified party.
– Plan participant receives a commission for selling a property to the Plan.

Corporate Stock

A Solo 401(k) can invest in shares of a C Corp but the rules of an S Corp prohibit a Solo 401(k) from the purchase of shares.

Pros and Cons of a Self Directed 401k

This is a valid question and one we are asked quite often.  The pros of course are the ability to have total checkbook control of your plan and take immediate action when an investment becomes available.  The con would simply be – the client is now the decision maker.  We are pro-active with our clients – encouraging them to contact us about all facets of their new plan.

Self Directed 401K Benefits

1. Any contributions made to these plans, as well as investment returns and earnings, are tax-deferred until withdrawal, and employers receive tax benefits too.
2. You can opt for voluntary elective contributions from your salary, and your employer can also make contributions on your behalf.
3. You are allowed to defer up to $18,000 or all of your earnings annually (whichever is less), with catch-up contribution limits of $6000 once you’re over the age of 50.
4. You retain greater control over investments, and can choose where your funds will be invested from any of the options offered by the plan.
5. These plans are highly portable and you can roll them over if you change jobs, rather than establishing a new plan for every employer.

Self Directed 401K Drawbacks

1. Any withdrawals made from the plan before the age of 59.5 may incur a 10% penalty, except for employees who retire within the calendar year when they turn 55.
2. The company can set eligibility requirements to some extent, and can restrict employees who’ve worked with them less than a year or work part-time, union members, etc.
3. If you don’t have a range of index funds available as part of your plan’s options, the long-term management of the investment portfolio can be problematic.
4. These plans can be expensive to establish and monitor, especially when it comes to administrative costs associated with loans taken against them, early withdrawals, etc.
5. You may not be able to access a very wide range of investment options for your 401(k) funds, and the ones available might be below average in terms of quality.

Top Year-End IRA Reminders from IRS

Individual Retirement Accounts, or IRAs, are important vehicles for you to save for retirement. If you have an IRA or plan to start one soon, there are a few key year-end rules that you should know. Here are the top year-end IRA reminders from the IRS:

• Know the contribution and deduction limits.  You can contribute up to a maximum of $5,500 ($6,500 if you are age 50 or older) to a traditional or Roth IRA. If you file a joint return, you and your spouse can each contribute to an IRA even if only one of you has taxable compensation. You have until April 18, 2016, to make an IRA contribution for 2015. In some cases, you may need to reduce your deduction for your traditional IRA contributions. This rule applies if you or your spouse has a retirement plan at work and your income is above a certain level.
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• Avoid excess contributions.  If you contribute more than the IRA limits for 2015, you are subject to a six percent tax on the excess amount. The tax applies each year that the excess amounts remain in your account. You can avoid the tax if you withdraw the excess amounts from your account by the due date of your 2015 tax return (including extensions).
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• Take required distributions.  If you’re at least age 70½, you must take a required minimum distribution, or RMD, from your traditional IRA. You are not required to take a RMD from your Roth IRA. You normally must take your RMD by Dec. 31, 2015. That deadline is April 1, 2016, if you turned 70½ in 2015. If you have more than one traditional IRA, you figure the RMD separately for each IRA. However, you can withdraw the total amount from one or more of them. If you don’t take your RMD on time you face a 50 percent excise tax on the RMD amount you failed to take out.
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• IRA distributions may affect your premium tax credit. If you take a distribution from your IRA at the end of the year and expect to claim the PTC, you should exercise caution regarding the amount of the distribution.  Taxable distributions increase your household income, which can make you ineligible for the PTC.  You will become ineligible if the increase causes your household income for the year to be above 400 percent of the Federal poverty line for your family size. In this circumstance, you must repay the entire amount of any advance payments of the premium tax credit that were made to your health insurance provider on your beha

Health Coverage Providers: Understanding Minimum Essential Coverage

The Affordable Care Act requires any person or organization that provides minimum essential coverage, including employers that provide self-insured group health plans, to report this coverage to the IRS and furnish statements to the covered individuals.

These reporting requirements affect:

• Health insurance issuers or carriers
• The executive department or agency of a governmental unit that provides coverage under a government-sponsored program
• Plan sponsors of self-insured group health plan coverage
• Sponsors of coverage that the Department of Health and Human Services has designated as minimum essential coverage

For purposes of reporting by applicable large employers, minimum essential coverage means coverage under an employer-sponsored plan.

Minimum essential coverage does not include fixed indemnity coverage, life insurance or dental or vision coverage.

Minimum essential coverage does include:

Government-sponsored programs

• Medicare part A, most Medicaid programs, CHIP, most TRICARE, most VA programs, Peace Corps, DOD Non-appropriated Fund Program

Employer sponsored coverage

• In general, any plan that is a group health plan under ERISA, which includes both insured and self-insured health plans. Importantly, employer plans that cover solely excepted benefits, such as stand-alone vision or dental plans, are not MEC

Individual market coverage

• Includes qualified health plans enrolled in through the federally facilitated and state-based marketplaces and most health insurance purchased individually and directly from an insurance company

Grandfathered plans

• Generally, any plan that existed before the ACA became effective and has not changed

Miscellaneous MEC

• Other health benefits coverage recognized by the Department of Health and Human Services as MEC