January 20, 2015, marked a start for a tax filing season that is going to be different from all previous ones. The reason being is Affordable Care Act (ACA), and its requirement to report ownership of health insurance coverage directly on a face of a tax return. This reporting was not designed to be taxpayer-friendly, so most taxpayers will most likely face difficulties when preparing their 2014 tax returns. Even the US citizens and green card holders living overseas are subject to additional reporting requirements under the ACA. 2014 tax year is also the second year of enforcement of the Net Investment Income Tax, which was specifically enacted to fund the subsidies under the ACA.

 

Both US residents owning foreign financial assets and US expats should take into account that all foreign income is subject to reporting on US tax returns. Certain types of foreign financial assets are subject to (the most) complicated reporting rules that most taxpayers are not aware of. With different reporting techniques come different deadlines, failure to adhere to which may trigger substantial penalties.

 

We know that preparing a tax return with foreign income can turn out into a challenge. Below we decided to provide a brief overview of specifics applicable to such reporting. This information should alert taxpayers about the challenges they might face when preparing their 2014 tax returns.

 

New for 2014 Tax Returns for Expats and Foreign Income

Shared Responsibility Payment (Obamacare Tax)

If you and all members of your family had minimum essential coverage during the year, the only thing you would need to do is check the box on a face of a tax return. If you did not, you might need to calculate and pay the tax called “Shared Responsibility Payment” (or Obamacare Tax) which for tax year 2014 might be as high as 1% of your total household income.

 

Foreign nationals required to file non-resident US income tax returns (foreign expats coming to the US for a short period of time, foreign students and others) should not worry about this tax, as it only applies to US residents. However, all US passport and green card holders living abroad are automatically considered US residents, and thus are subject to the Obamacare Tax.

 

There is a special provision under the ACA, though, that exempts US residents living overseas from paying this tax. Such taxpayers should attach a special IRS form to their tax returns (Form 8965 — note this update to the form Janaury 23, 2015). Determining whether you qualify for an exemption can be complicated. You will only be considered exempt if you either were a bona fide resident of a foreign country in 2014, or you lived abroad for at least 330 full days within a 12-month period. The rules are, basically, the same as for claiming the foreign earned income exclusion (on Form 2555). However, determining taxpayer’s eligibility to ACA and foreign earned income exemptions is easy only when a taxpayer is a long-standing resident of a foreign country.

 

Another Tax That is Not a Tax: Net Investment Income Tax (NIIT)

This tax already applied in 2013. The rule here is that if your adjusted gross income exceeded $200,000 (single taxpayers), $250,000 (married filing jointly) or $150,000 (married filing separately), investment income you had during the year might be subject to additional 3.8% NIIT.

Even though it is just about as grating it's not "Ni," but NIIT."

 

NIIT does not apply to nonresident aliens. However, there is a snag for US expats. Earned income that may be excluded on a tax return through the foreign earned income exclusion (Form 2555) cannot be excluded for NIIT purposes. There is also no offset of the NIIT through foreign tax credit. According to the IRS, NIIT is not an income tax, although it is called so. Only income taxes paid to a foreign country that have corresponding income being reported on a US tax return can be used as a foreign tax credit.

 

The above situation may result in a zero regular income tax liability (after taking into account the exclusion and the foreign tax credit), but comparatively substantial NIIT liability. Special IRS form should be attached to a tax return when a taxpayer owes NIIT (Form 8960).

 

Please note that there are special NIIT rules pertaining to income from Passive Foreign Investment Companies (PFICs; most typical example: foreign mutual funds) and Controlled Foreign Corporations (CFCs). In most cases, income from such investments is subject to NIIT. In case your 2014 income exceeded the above NIIT thresholds, and you had income from PFICs or CFCs, professional tax assistance in preparing your 2014 tax return would be highly recommended.

 

More Specialness: Additional Medicare Tax

In cases where a taxpayer earned or business income exceeded the above NIIT thresholds, the exceeding portion of such income would be subject to 0.9% Additional Medicare Tax. This tax also already applied in 2013. Individuals owing Additional Medicare Tax should attach Form 8959 to their 2014 tax returns.

 

Beware the traps of international tax shelters

With all of these new taxes and even more compliance costs, there is a natural inclination to avoid such pain. So many people become nearly desperate to find ways to limit their taxes. Offshore Tax Attorney Robert Hanson, Esq. and IRSMedic Founder Anthony E. Parent, Esq. discuss the fundamental elements of international tax planning for US persons. I strongly recommend you watch the video before doing anything that you are not sure of.