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Urgent news concerning NYC income taxes: If you have a financial interest in, or signature or other authority over, any type of financial account in a foreign country, such as a bank account, you may be required to report this to the U.S. government. Taxpayers use Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (known as the “FBAR”) on their New York income taxes, if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year. The instructions are fairly straightforward, asking for account numbers, New York taxpayer identification number, country in which the account is held and the like. The FBAR is due June 30 (with some exceptions).
Some Manhattan taxpayers may be eligible for an extension beyond June 30 for 2008 FBARs. Taxpayers who reported and paid tax on all of their 2008 New York City taxable income but only learned shortly before the June 30, 2009 deadline of their responsibility to file a FBAR have until September 23, 2009 to file. Additionally, the IRS has extended the deadline for taxpayers with only signature authority over foreign accounts and taxpayers with foreign hedge funds or private equity accounts to June 30, 2010. The IRS will not impose a penalty. If you are uncertain about whether you need to file a FBAR on you New York income taxes, contact our office. The IRS also has a special FBAR hotline (800) 800-2877.
Failure to file the FBAR and disclose offshore accounts subjects the taxpayer to stiff penalties. In addition to penalties assessed on failing to report your Manhattan income for US tax purposes from these accounts, the IRS can assess penalties for simply failing to disclosure the existence of the accounts. Taxpayers failing to report foreign financial accounts on their New York City income tax returns risk a civil penalty of $10,000. If the failure is willful, the penalty jumps to $100,000 or 50 percent of the account.
To bring more offshore account holders into compliance, the IRS is offering a deal. Those whole file their Manhattan income taxes with unreported income in offshore accounts now have a temporary window to take advantage of a special IRS settlement initiative. In exchange for full disclosure by taxpayers not already under investigation, the IRS will agree not to criminally prosecute New York tax evaders. Taxpayers still must pay all back taxes plus interest and penalties (except the 75 percent fraud penalty, which the IRS will waive). The IRS initiative ends in September 2009.
If you own real property outside of the U.S., you may claim a deduction for property taxes paid to a foreign jurisdiction on Schedule A of Form 1040, the same as you would for domestic real property. If this property has been your principal residence for two of the past five years and you sell the property, you may exclude gain on the sale subject to the same rules as for a domestic residence (a maximum exclusion of $250,000, $500,000 for joint filers; a surviving spouse can continue to use the $500,000 exclusion if the jointly owned residence is sold within two years after the death of the individual’s spouse). Although an itemized deduction is generally available for New York taxes paid on personal property, this deduction is not available for taxes paid on personal property held outside the U.S. However, if this property is used in connection with a trade or business or for the production of income, a deduction for the taxes may be taken in connection with that income on the appropriate form or schedule.
If you have intangible assets in a foreign country, such as a patent, license, trademark or copyright, taxation of the income derived from the ownership or use of these assets may be subject to different rules in comparison with similar domestic income. Note also that the rules for taxation of foreign income as contained in the Internal Revenue Code may be altered by treaty. The U.S. has income tax treaties with many nations. Treaty provisions are treated as equal in weight to statutory law, and some provisions may be overridden by Tax Code provisions. The general rule is that the last in time is controlling. Tax treaties are subject to continuous renegotiation, so it is important to have current information, just as you would want with Tax Code provisions. Please consult our office regarding the applicability of tax treaty provisions with respect to foreign-sourced income to learn whether or not this will effect your income taxes in Manhattan.
Income from all sources must be reported in U.S. currency, regardless of how it is paid. However, if you have received income in a currency that is not convertible to U.S. currency because of that country’s laws, you have a choice in reporting. Income paid in “blocked” currency, as it is called, may either be reported in the tax year when earned according to the most accurate valuation means available and taxes paid from other funds, or you may delay the reporting of the income until the currency becomes unblocked.
Because tax rules for foreign-sourced income and on foreign-based assets may be different from domestic tax treatment, there are many additional layers of complexity. If you have additional questions regarding tax treatment of particular items, and would like to know how this effects your income tax preparation in New York, please do not hesitate to contact me.
About us: MEDOWS CPA, PLLC is a boutique New York CPA NY Firm serving the needs of Individuals & Small Businesses in New York City and throughout the nation. We work with the self-employed, freelancers, LLC, C-Corporations and S-Corporations to help them with their accounting and tax needs.
Jonathan Medows, CPA
MEDOWS CPA, PLLC
A Unique, Boutique New York CPA Firm Serving the Needs of Individuals & Small Businesses