Article Written by: Manu Shah
Photography by : Bijay Dixit, Unique Photo Images
HOUSTON: The Indo American Chamber of Commerce of Greater Houston (IACCGH) conducted a free seminar on a highly relevant topic – American Tax laws as applicable to tax payers – both citizens and resident aliens who own/control overseas assets. Held for a fourth year in a row, the seminar, which was held at India House on Sunday afternoon January 25nd, attracted more than 200 people.
Welcoming the gathering, IACCGH Executive Director Jagdip Ahluwalia offered the disclaimer that the seminar was for information purposes only and is not intended as tax advice. Stating that IACCGH is not just for Indo Americans but a very “inclusive Chamber, he quoted HMTDC President Richard Huebner to emphasize that fact that “we need to collaborate with each other to create value.”
IACCGH President Ashok Garg outlined the mission, objectives and the various programs hosted by the organization which helped foster Indo US bilateral trade and enabled members to network with each other. He also announced that IACCGH would be joining the Greater Houston Partnership in the upcoming Houston Trade Mission to India in April led by Houston Mayor Annise Parker. Encouraging the gathering to take advantage of the expertise and experience of the panel of 7 renowned CPA’s, he stated that despite one being a successful doctor, engineer or businessman, it takes a “CPA to guide us in the best way to increase as well save our hard earned money legally.”
Described by Program Chair Swapan Dhairyawan “as a mentor to all of us” panel moderator, Ajit Thakur commenced with the topics that would be covered during the seminar such as the FBAR, declaration of foreign assets, entity selection, current year tax updates and retirement planning.
CPA Kershaw Kumbatta began the seminar by emphasizing the importance of planning for one’s golden years or retirement with the caption “Goodbye tension, Hello pension.” He offered an overview of some of the retirement plans such as:
Traditional IRA is easy to set up, needs taxable income, can be set up before April 15th and the money can be taken out any time after the age of 59 ½. Taking it out before will result in a penalty. However, in the event of a disability or some other exceptions, the money can be taken out without paying the penalty.
Roth IRA is not taxed and there is no age limit for contributing. Converting your traditional IRA to Roth IRA is a taxable conversion. One needs to keep it for 5 years in the account, can be taken out after the age of 59 ½ otherwise it would be taxed.
Simple IRA is a fairly new plan for small businesses which have less than 100 employees and receive at least $5000 in compensation. Employees can contribute up to $12,000 and employers can contribute up to 2% of the employees’ salary.
Simplified Employee Pension (SEP) is a written plan, offers tax credit to employers who set up this plan for their employees, employee must be employed by the employer for three years of the last five years to be eligible.
401(k) Plan, one of the most popular retirement plans is more complex and expensive to set up, needs an accounting firm to set it up, offers greater design flexibility than IRA plans, allows employees to contribute to their own retirement, maximum amount of $17,500 can be contributed and an additional $5,000 for those above the age of 50. Employee’s contribution is vested. The 401(k) plan allows for loans and hardship withdrawals.
Declaration of foreign bank accounts: CPA Mahesh Desai continued the seminar by discussing one of the most controversial topics currently – Declaration of foreign bank accounts.
In April 2014, the Indian Government did not sign a formal agreement but agreed in substance to the Inter Government Agreement Scheme to share financial information about US citizens or Green Card holders who own funds in India, with the IRS.
US Laws impose an obligation of the US citizen or Green Card holder to file an FBAR FinCEN Form 114 (if you have over $10,000 in an overseas bank) through the BSA efiling system and Form 8938 which is a Statement of Specified Foreign Financial Assets with the Personal tax returns if assets more than $100,000 in an overseas bank. Foreign mutual funds and equity funds need to be reported on the above forms along with your tax returns by June 30th. Noncompliance may result in criminal penalties.
CPA Swapan Dhairyawan continued on the above topic. He cautioned the gathering that the IRS is extremely underfunded and taxpayers can expect to receive several mails but there is no reason for panic.
A new trend described as “quiet disclosure” is taking place where taxpayers are quietly amending their income tax returns but Swapan warned that the IRS was going to come down strongly on those who did so.
He also explained the liability of signature authority whereby a bank manager in India makes a decision on the basis of any communication via email, text message or telephone call by a person living in the US. The IRS can hold the person as a “signature authority” for this Asset per their communication.
The best way to avoid any kind of penalty is to join the Streamlined Domestic Overseas Program – (SDOP) which the IRS has initiated since July 2014 to encourage immigrants to voluntarily disclose their overseas accounts. If one has had more than $10,000 in an overseas account and has not disclosed this in the past, one can enter this program by:
- Providing Amended Tax returns of previously filed federal income tax returns (Form 1040) for the last 3 years and Form 114 FinCen for the last 6 years.
- Provide Form 8938 – a statement of Specified Foreign Financial Assets, if applicable from years 2012.
- Pay an offshore penalty (Title 31) equal to 5%. The IRS will consider other payment arrangements if the taxpayer is unable to pay the full amount at one time.
Fortunately, the procedures have been streamlined and made easier. About 50,000 people have joined the program and the IRS has collected $6.5 billion to date from this program.
Ignorance of the law will not be counted as an excuse. 2,500 investigations were initiated in 2014 However, if one has reported all overseas income and paid tax on all taxable income but did not file an FBAR, one need not use the OVDP/SDOP. If one is currently under examination by the IRS, one cannot enroll in the OVDP. The IRS has not issued a deadline for the program as yet.
Seeking qualified tax and legal advice when making a voluntary disclosure was recommended.
Swapan also called attention to a phone scam targeting immigrants where callers identified themselves as IRS officers and threatened deportation or imprisonment if some amount of money was not deposited. He clarified that the IRS never makes personal phone calls or emails. It only sends notifications through the mail. He suggested in such a circumstance, contact your CPA or the FTC website (Federal Trade Commission) or email email@example.com
On January 2nd, 2013, the American Taxpayer Relief Act was signed by President Obama impacting every taxpayer and this topic was covered by CPA Mike Jain. Some of the highlights are:
- The high income tax bracket is 39.6% from 35% for earnings above $400,000.
- The Alternative Minimum Tax has gone up by 28%
- Long term capital gains for high income taxpayers increased from 15% to 20%.
- Estate and Gift Tax rate has increased from 35% to 40%
- Small businesses can write off 50% on new, depreciable assets through Bonus Depreciation.
- Small businesses can get R & D tax credit which is very liberal. This is however a credit and not a deduction.
- Social Security tax has increased to 6.2% while Medicare tax has increased to 1.45%. High income tax payers would pay 0.9% Medicare tax.
- Businesses can get a tax credit for hiring qualified veterans.
- “S” Corps are subject to 3.8% capital gains tax if you are active in the business
- Texas has no State Income tax but one can get sales tax itemized deductions.
- Affordable Care Act Form 1095 A and B will be monitored by the IRS
An entity is any way, shape or form to limit liability for your business and this topic was covered by CPA Atul Kothari. Tax forms the largest part of doing business or making money and for a sole proprietor, the proper entity could be the cheapest form of insurance one can buy. There are two different types of entities – the No Liabilities Protection and Liabilities Protection. The options to save tax will be based on the entity you own.
Entities with Liabilities Protection could be
Sub C – formed at the State level, has double taxation, CEO compensation must be market based, is good if planning to go public, has health insurance deductible at the corporate level
Sub S – has one level of taxation and liability protection with certain criteria.
According to him, one can start by going as Sub C and switching to Sub S. He also stated that LLC is the most suitable entity for small businesses as it has one level of taxation and offers both liability protection.
The disadvantage of a Corporation vs a Partnership is that in a Corporation, the profit/loss goes to the shareholders and double taxation exists, whereas in a Partnership, the profit/loss can vary between the partners.
The last panelist was CPA Imtiaz Munshi who answered the questions most frequently asked by his clients. Some of the answers were:
- One must keep records of an asset sale for 6 years after the sale.
- Backup for income/deductions must be kept for 6 years
- Bank Statements must be kept for longer than 6 years if possible and it is acceptable to keep them in digital form.
- One cannot claim the support sent to parents in India unless they are US citizens or Green Card holders living in the US, Canada or Mexico
- After a divorce, only the parent who has custody of the child can claim a deduction.
- If an adult child lives at home, he/she can be claimed if they are under 19, a student under 24 or disabled.
- Mileage rate is 57.5 cents a mile in 2015
- Deducting your home office is a possibility if you use it regularly or exclusively for office work but could elevate your audit risk
- Foreign students who have income in the US must pay taxes. However they are exempt from Social Security taxes for the first five years.
- Foreign investors can invest in real estate in the US either as a partner or owner in an LLC
This concluded the seminar. The audience was invited to speak to the CPAs on a one on one basis after the event.
President Ashok Garg presented Certificates of Appreciation to the panel of CPA’s while Executive Director Jagdip Ahluwalia thanked Mahesh Puducheri from Halliburton for their support of IACCGH, Mahesh Shah from Madras Pavilion for providing the snacks and India House for the facility.
He also thanked IACCGH Board Member Rajiv Bhavsar, Hasu Patel from the Mayor’s Council, ICC President Charlie Patel, Mr. Narasimhan of Meenakshi Temple, GOPIO President Surender Trehan, and Dr. Upadhyay for their presence at the event.