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Volume 4 Issue 2, Spring 2003 (pdf)

Special Tax Report (pdf)

• We're Still Growing!

• Contiguous Dependents?

• There's No Place Like Tax Home!

• ITIN Numbers: The IRS's Way of Saying, "We Don't Discriminate."

• The Powers That Be

We're Still Growing!

by Kelly Phillips Erb

In response to growing demand for estate planning and estate administration services, we are pleased to announce the addition of a new associate to the firm. Madeline M. Martin has joined the firm's Philadelphia office.

Madeline, a native of State College, PA, earned her B.S. from Penn State University and her JD from Temple University School of Law. At Temple, Ms. Martin participated in a clinical with the Philadelphia District Attorney's office and earned the distinction of Outstanding Oral Advocate.

Ms. Martin has experience in all aspects of estate planning and administration, including the drafting of estate planning documents, preparation of estate and fiduciary income tax returns and estate and trust accountings. Ms. Martin joins the trusts and estates practice at The Erb Law Firm, PC, where she will focus on estate litigation matters, including will contests.

She is a member of the American Bar Association and the Philadelphia Estate Planning Council.

For more information, contact Madeline M. Martin at 215.508.4419 x7 or via email at mmmartin@erblaw.com.

Contiguous Dependents?

by Matthew Archambeault

Those in the business of tax preparation and planning need to be very well-versed in all the intricacies of the U.S. tax code. The U.S. tax code is infamous for its complexity but there are parts that seem rather simple and straight forward. The ability of an individual to claim an exemption for dependents may be one of those parts that seems rather straight forward. In terms of international effects and the effect this part plays upon immigrants working here in the U.S. it seems rather clear. Dependents living back in the home country of a non U.S. citizen working here in the U.S. are generally not considered dependents for U.S. tax purposes and thus the immigrant taxpayer cannot claim them for exemptions. This is simple and seemingly straightforward, or is it?

There is one notable exception, which many tax planners and preparers are not aware of, especially if they do not have contact with many immigrant tax payers. The exception is found in Section 152(b)(3) of the tax code and states, "The term "dependent'' does not include any individual who is not a citizen or national of the United States unless such individual is a resident of the United States or of a country contiguous to the United States." After a minute of reflection, one can easily deduce that the articulate authors of this section of the code are referring to Canada and Mexico when speaking of "a country contiguous to the United States." (Now why they just could not write "Canada and Mexico" is a topic for another day, and another author.)

It is clear that Mexicans and Canadians who are working in the U.S. can claim their families back in their home countries as dependents. That is clear enough, or is it? Could this mean that a citizen of China working in the U.S., who has family residing in Canada, claim them as dependents when filing their U.S. tax returns? Or a citizen of Guatemala working in the U.S., who has a family residing in Mexico claim them as dependents when filing their U.S. tax returns. To fully understand this section, one needs to understand the definition of "resident" in both Mexico and Canada.

I do not profess to have any knowledge of the Mexican or Canadian Tax Code, so I contacted a Mexican and Canadian tax attorney. Mr. Ruben Acquire of Enriquez, Gonzalez, Aguirre y Ochoa, S.C, in Chihuanhua, Mexico, was kind enough to inform me that according to article 9, of the Mexican Federal Tax Code, a resident of the Mexican Republic is a person who spent at least 183 days of a year, living in the Mexican Republic; or, a person who has his home in the Territory of the Mexican Republic. This would seem to indicate that a Guatemalan working in the US could claim his family as dependents if they spent at least 183 days of the tax year living in Mexico.

Katherine MacRae of Parlee McLaws LLP from Edmonton, Alberto wrote me and informed me that section 250 of the Canadian Tax Act considers those who have sojourned in Canada in the year for a period of, or periods the total of which is, 183 days or more to be residents of Canada for tax purposes. Which would answer my above query in the affirmative, if the Chinese family had spent 183 days or more in Canada.

If one does encounter Canadian or Mexican tax issues, one should consult one of our colleagues to the north or south.

For more information on this article, contact Matthew Archambeault at 215.508.4419 x4 or via email at mja@erblaw.com.

There's No Place Like Tax Home!

by Laurence Chevalier

As you may know if you've read the last newsletter, I am a French lawyer doing a six month internship at the Erb Law Firm, here in Philadelphia, miles away from home. What about you? Have you ever felt like trying your luck abroad? I'm sure that you've already thought at least one time in your life that going overseas would be, besides a radical way to change your life, a perfect way to have the IRS give you a break, right?

Well, it's unfortunately not that easy. Indeed, living and working abroad for a while won't relieve you from your usual filing obligations or your income taxation according to the Federal regulation. Generally a US citizen is taxed on all income regardless of the country from which it originates or of the individual,s residence. And US citizens cannot avoid US income taxation by giving up their citizenship and moving abroad if one of the principal purposes of expatriation is avoidance of the US tax.

Despite the general rule, special tax treatment is afforded to assist US business abroad, which normally must provides supplements to cover the extra costs of employees overseas. On one hand, income from foreign sources may be exempt from US tax under a treaty in order to eliminate international double taxation, or if not the taxpayer may be entitled to a credit for foreign taxes paid on his earnings abroad, and income from certain US possessions may also be exempt from US tax. On the other hand, US citizens and residents living and working abroad may deduct excess foreign living expenses or elect to exclude up to $80,000 of foreign earned income from gross income in 2002. The sum of the exclusions and the deduction may not exceed the taxpayer,s foreign earned income.

For the exclusions and the deduction to apply, the taxpayer's tax home must be in a foreign country, and he must establish qualified residence either through use of the bona fide residence test or the physical presence test. But what does that mean exactly? Where is your tax home when you,re a non resident citizen? First, what is a foreign country? A foreign country is any territory, including the airspace and territorial waters, under the sovereignty of a government other than the United States. The following are not considered like foreign countries for purposes of the exclusions and deductions: American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, Puerto Rico, the Virgin Islands and the Antarctic region.

Then, what is tax home? Generally, an individual's tax home is in the area where the primary place of business or duty post is located, regardless of where he maintains a family home.

The location of a taxpayer's tax home often depends on whether a work assignment is temporary or indefinite. If the taxpayer is temporarily absent from a tax home in the US on business, he may be able to deduct certain travel, meal and lodging expenses. However, if the taxpayer,s new work assignment is for an indefinite period, the new place of employment may be the tax home. In such case, the away from home? expenses are not deductible, but, assuming the bona fide residence test or physical presence test is met, a foreign earned income exclusion may be available.

Employment at a foreign location of more than one year is considered indefinite, while employment for a lesser period of time may be either

indefinite or temporary, depending upon the facts and circumstances of the particular case. If an individual does not have a regular or main place of business because of the nature of his work, his tax home is located in the place where he regularly lives. The taxpayer won,t be considered to have a tax home in a foreign country for any period during which his abode (where you have your center of vital interests, where your personal and economic relations are closest, and where you intend to return) is in the US (temporary presence in the US or maintenance of a dwelling in the US doesn,t necessarily mean that). The individual must maintain his tax home during the entire period he meets the bona fide residence test or the physical presence test.

The requirements of the bona fide residence test are met if a US citizen establishes bona fide residence in a foreign country (or countries) for an uninterrupted period (that does not necessarily mean 365 days of physical presence in the foreign country) that includes a full tax year. Questions of bona fide residence are determined according to each individual case, taking into account such factors as the taxpayer,s intention or the purpose of the tax payer,s trip, and the nature and length of the stay abroad. A taxpayer does not automatically acquire bonafide residence status merely by living in a foreign country or countries for a year. A taxpayer who goes to work in a foreign country for an indefinite or extended period of time and sets up permanent quarters will probably have established a bona fide residence in a foreign country, even though the taxpayer intends to return to the US. An individual is not considered to be a bona fide resident of a foreign country if he files a statement with the authorities of that country stating that he is not a resident of thereof and is not held subject to that country,s income tax.

The purpose of this rule is to prevent an individual from avoiding income tax both in the Us and in the foreign country. A US citizen whose tax home is in a foreign country will be eligible for the foreign earned income exclusion and housing cost exclusion if he is present in a foreign country or countries for 330 days out of any consecutive 12-month period. The taxpayer does not have to be present in the foreign country solely for business purposes in order to meet that test; some of the qualifying foreign presence time can be vacation time.

With one exception (when the taxpayer is forced to leave the foreign country because of civil unrest or war), the 330 day requirement is unconditional. Thus, if a taxpayer falls short of the 330 day requirement because of a vacation in the US or because illness forces a return to the US, then the physical presence test is not satisfied.

Oh and by the way, pay attention before moving abroad, because the exclusion will be denied if the foreign country is one in which travel for US citizens is generally restricted by regulations issued under the Trading with the enemy act or the International emergency powers act. Currently, the following countries are subject to the limitations: Cuba, Libya, and Iraq.

For more information on this article, contact Kelly Phillips Erb at 215.508.4419 x2 or via email at taxgirl@erblaw.com.

ITIN Numbers: The IRS's Way of Saying, "We Don't Discriminate."

by Matthew Archambeault

It is tax time and all of you must go forward and file your taxes, regardless of your immigration status. Some of you may say, "Hey, I am undocumented and the government does not even know I am here, so why bother?" The best answer to that is because the law says you must. People generally hate this answer and the lawyer who gives it. The lawyer may go on to add, "You may also be entitled to a refund," which means money. People generally like this answer. If their opinion of the lawyer changes much, I do not know.

Aside from the legal obligation and possibilities of a refund, other important reasons to file exist for aliens. Filing gives the alien an excellent record of residency in the U.S. which can be important for some forms of immigration relief. The periodic offers of amnesty have always included the alien being able to prove residency for a specific number of years and no proof is better than a filed federal tax return. Filing taxes is also evidence of good moral character, which can be helpful for the alien if they wish to adjust status to permanent residence or citizenship.

For every person that appears on the return one needs, either a valid Social Security Number (SSN) or an Individual Tax Identification Number (ITIN). An ITIN is a government processed number used solely for tax purposes, and can not be used for employment. In filing taxes, aliens should not use a SSN that it is not valid for employment or is not authentic, regardless if it appears on their paychecks. For assistance in obtaining an ITIN you can call 215-516-ITIN (215-516-4846). This is the official ITIN office in Philadelphia.

Immigrants should be aware of a few things. Those using an ITIN number will be ineligible for some advantageous tax benefits, including the Earned Income Tax Credit (EITC). All those listed on the return must have a valid SSN in order to receive this benefit.

Beware of unscrupulous tax preparers who will assist you in filling out your tax return with false SSNs in order to qualify you for the EITC and other benefits that you should not receive. The result is you will get more money back from the government then you are entitled. While this sounds great, trust me, it will not last. The government will find out and come after you, not only the amount you unlawfully received as a refund, but also for penalties and interest. Tax fraud is also a criminal offense, which could lead you towards all types of immigration problems, aside from the criminal penalties you may face.

The Powers That Be

by Madeline M. Martin

It is important to have a General Durable Power of Attorney to name an individual to manage your financial matters in the event you are unable to act on your own behalf. Generally, the Financial Power of Attorney is thought of as an instrument that is used when a person is incapacitated. However, the document can be extremely flexible and it is possible to implement a Special or Limited Power of Attorney that has a specific scope or time frame. Such a document can be used to name an individual to act on your behalf to oversee the sale of real estate or to manage your affairs if you are going to be out of the country for an extended absence.

While by definition, a "General" Power of Attorney should allow your agent to act in any instance, many institutions, such as the Internal Revenue Service ("IRS") require that certain powers be specifically listed in the document. You should review your General Durable Power of Attorney to confirm that it includes a clause that allows your agent to sign tax returns and to correspond with the tax agencies on your behalf. For example, if you are going to out of the country at tax time you will want to have a Power of Attorney in effect that allows your agent to sign your tax returns for you.

For ongoing matters with the IRS which require personal attention, such as a tax dispute or controversy, where you want to designate a third party to communicate with the IRS for your personal and corporate tax matters, you will need to complete a separate IRS Form 2848 (Power of Attorney and Declaration of Representative). You can find this form by visiting the IRS website at http://www.IRS.gov and choosing the heading Forms and Publications. You can search by form number or by topic.

In addition, your Power of Attorney should include a gifting power to allow your agent to make gifts. This can be an important power for estate tax planning and Medicaid planning. This is especially valuable given recent developments in Pennsylvania and New Jersey case law significantly limiting the ability of Guardians to implement Medicaid planning on the behalf of incapacitated persons.

As with all of your estate planning documents, you should periodically review your Power Attorney to verify that person(s) that you have designated are up to date, and that it coordinates with your overall estate plan.

For more information on this article, contact Madeline M. Martin at 215.508.4419 x7 or via email at mmmartin@erblaw.com.