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OBLIGATION TO FILE TAX RETURNS 1040 AND 1040PR CPA EULALIO ORTIZ RODRIGUEZ ORTIZ & LOPEZ LLP, CPAs PRESENTATION TO: NW ADMINISTRATION SERVICES THURSDAY,

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Presentation on theme: "OBLIGATION TO FILE TAX RETURNS 1040 AND 1040PR CPA EULALIO ORTIZ RODRIGUEZ ORTIZ & LOPEZ LLP, CPAs PRESENTATION TO: NW ADMINISTRATION SERVICES THURSDAY,"— Presentation transcript:

1 OBLIGATION TO FILE TAX RETURNS 1040 AND 1040PR CPA EULALIO ORTIZ RODRIGUEZ ORTIZ & LOPEZ LLP, CPAs PRESENTATION TO: NW ADMINISTRATION SERVICES THURSDAY, NOVEMBER 8, 2007 CABO ROJO, PR & 8250 FAX:

2 2 WHICH RETURNS TO FILE GENERALLY ONE IN PR AND OTHER IN USA, DEPENDING ON THE RESIDENCY STATUS 1040 vs 1040A vs 1040EZ 1040EZ - SINGLE AND MARRIED TAXPAYER FILING JOINT WITH TAXABLE INCOME < $50,000 AND CLAIMING NO DEPENDENTS; INCOME OF SALARY AND WAGES WITH INTEREST INCOME UP TO $1,500; ONLY STD DED CAN BE CLAIMED AND CREDITS FROM WITHHOLDING ON SALARIES/WAGES. 1040A – UNLIMITED AS TO EXEMPTIONS AND ANY FILING STATUS. INCOME FROM SALARIES, DIV, INT, PENSION AND ANNUITIES AND UNEMPLOYMENT COMPENSATION. DEDUCTIONS ARE ALLOWED FOR IRA CONTRIBUTIONS, FOR EXAMPLE. CREDITS ALLOWED INCLUDE THOSE FROM WITHHOLDING, CHILD CARE AND EARNED INCOME – USED TO REPORT ALL TYPES OF INCOME, DEDUCTIONS AND CREDITS. USUALLY INVOLVE MANY ADDITIONAL FORMS AND SCHEDULES. BONAFIDE RESIDENTS OF PUERTO RICO (BFR) WILL GENERALLY PAY TAX TO PR ON THEIR WORLDWIDE (WW) INCOME.

3 3 US CITIZEN OR RESIDENT ALIEN AND BONA FIDE RESIDENT (BFR) OF PR DURING ENTIRE TAX YEAR A PR tax return reporting income from worldwide (WW), and a credit is allowed for income taxes paid to US. A US tax return reporting income from WW sources, but excluding PR source income. Thus, if total income is from PR sources no US return is required (exception is if you have reportable SEI)

4 4 NON RESIDENT ALIEN BUT A BFR OF PR DURING ENTIRE YEAR A PR tax return reporting income from WW sources. A credit is allowed in PR for the US tax paid for US source of income. A US tax return (1040) reporting income from WW sources, but excluding PR source income, except those as an employee of the US. You will be considered as a nonresident alien, and as such you are not allowed the Std Deduction, not allowed to file joint, and generally not allowed the dependency exemption unless the person qualify as a citizen or national of the US. Also certain limitations exist on deductions and credits.

5 5 NOT A BFR OF PUERTO RICO Generally files tax returns with both PR and US, depending the sources of income. US CITIZEN OR RESIDENT ALIEN: A PR tax return reporting only PR source of income. A US tax return reporting income from worldwide sources. A credit is claimed on the US return for income taxes paid at PR for PR income which is not exempt in the US return.

6 6 A NON RESIDENT ALIEN OF THE US WHO IS NOT A BFR OF PR FOR THE ENTIRE YEAR A PR tax return reporting only PR source of income. A US tax return (1040NR) reporting income according to rules applicable to a nonresident alien.

7 7 SPECIAL RULES ON INCOME TO BE REPORTED US Government employees working in PR: Wages of these employees are subject to PR taxes, excluding the COLA if they comply with certain PR rules (evidence of the amount received for such category; demonstrate full compliance with PR tax responsibilities). Such wages are subject also to US tax, except the COLA. A foreign tax credit is allowed at US for taxes paid in PR. Form 1116 must be filed to claim the credit. Important: Distinguish between a civil or military employee of the US versus an employee of a US based entity doing business in PR. Income from sources outside both, PR and USA and taxpayer is a BFR of PR, is foreign source income under both tax systems. Perhaps you are also required to file a return for the foreign country too. In order to avoid double taxation, a FTC is generally available for either the US or PR return.

8 8 MOVING EXPENSE DEDUCTION MOVING TO PR Expenses are directly attributable to wages, salaries or other earned income from PR. They are employee expenses deductible as such and subject to the 3% of wages rule, if taxpayer is a BFR of PR in the year of move. If taxpayer is not a BFR of PR, the deduction is claimed in both places, PR and US, and for purposes of the FTC and adjustment is made for the expense in Form MOVING BACK TO US Expenses are directly attributable to wages, salaries or other earned income from US. Direct moving expenses are claimed as a deduction from GI filing Form Two conditions must be met there, including a distance requirement (50 miles test) and time requirement (39/78 weeks)

9 9 RULES FOR BONA FIDE RESIDENCY (BFR) (PUBLICATION 570) Generally the taxpayer is a bona fide resident of PR (the relevant possession) if during the tax year the taxpayer: Meet the presence text, Do not have a tax home outside PR, and Do not have a closer connection to US or a foreign country than to PR

10 10 PRESENCE TEST IS MET BY A US CITIZEN OR A RESIDENT ALIEN FOR THE ENTIRE YEAR IF ONLY ONE OF THE FOLLOWING IS MET: 1. Were present in PR for at least 183 days during the tax year. 2. Were present in PR for at least 549 days during the 3-yr period, including the current yr. and the preceding 2 yrs. During each yr of the 3-yr period were present in PR at least for 60 days. 3. Were present in the US for no more than 90 days during the tax year. 4. Had earned income in the US of no more than a total of $3,000 and were present for more days in PR than in US during the tax year. 5. Had no significant connection to the US during the tax year. Note: These rules do not apply to nonresident aliens. Publication 519 explains the requirements for them.

11 11 DAYS OF PRESENCE IN PR THE FOLLOWING DAYS WILL BE DEEMED OF PRESENCE IN PR 1. Any day physically present in PR at any time during the day. 2. Any day outside PR in order to receive or to accompany any of the following family members to receive qualifying medical treatment (parents, spouse, child which includes a son, daughter, stepson/daughter, adopted or eligible foster child). 3. Any date outside PR because you leave or are unable to return to PR during any 14-day period within which a major disaster occurs in PR for which a FEMA notice of a Presidential declaration of a major disaster is issued in the Federal Register; or a period for which a mandatory evacuation order is in effect for the geographic area in PR in which your main home is located. 4. Being present in a single day in US and in PR. 5. Being present in a single day in two US possessions and the tax home is in PR.

12 12 DAYS OF PRESENCE IN THE US The following dates are not counted as days of presence in the US: 1. Days temporarily present to receive qualifying medical treatment or to accompany a qualifying family member for the medical treatment. 2. Any day in US for less than 24 hours when traveling between two places outside US. 3. Days temporarily present in US as a professional athlete to compete in a charitable sports event. 4. Days temporarily present in US as a student. 5. Days in US serving as an elected representative of PR, or serving full time as an elected or appointed official or employee of the government of PR or its political subdivisions. 6. Days temporarily present in US because you leave or are unable to return to PR due to the third condition explained for days considered present in PR.

13 13 TAX HOME REQUIREMENT The tax home test is met if the taxpayer did not have a tax home outside PR during any part of the tax year. The tax home is your regular or main place of business, employment, or post of duty, regardless where the taxpayer maintain his/her family home or domicile (i.e. tax home versus residential place). Special rules apply to taxpayers not having a regular place of work; students; government officials; seafarers, etc. (See Publication 570).

14 14 CLOSER CONNECTION REQUIREMENT The taxpayer is deemed to have met the closer connection requirement if during any part of the tax year he/she did not have a closer connection to the US, other possession or foreign country than to PR. The taxpayer will be considered to have maintained significant contacts with PR depending on facts and circumstances that will be examined.

15 15 SOME FACTS AND CIRCUMSTANCES EXAMINED IN DETERMINING CLOSER CONNECTION 1. Location of taxpayer’s permanent home; family; personal belongings. 2. Location of social, political, cultural, professional, or religious organizations with which taxpayer relates. 3. Location of where to conduct routine banking activities; business activities. 4. Location of jurisdiction of driver’s license; where the taxpayer votes; of charitable organizations the taxpayer contributes. 5. Country of residence designated on forms and documents. 6. Types of official forms and documents filed. Note: In filing Part III of Form 8898 (Statement for Individuals Who Begin or End Bona Fide Residence in a US Possession), will help to establish the jurisdiction to which the taxpayer has a closer connection.

16 16 WHO MUST FILE FORM 8898 (Statement for Individuals Who Begin or End Bona Fide Residence in a US) MUST BE FILED FOR THE TAX YEAR IN WHICH THE TAXPAYER MEETS BOTH OF THE FOLLOWING CONDITIONS: 1. Taxpayer WW income is higher than $75,000, and, 2. Taxpayer meets one of the following: a. Takes the position (for US tax purposes) that he/she became a BFR of PR after a tax year for which he/she was required to file a tax return as a BFR of Guam, USVI, CNMI or AS. b. Takes the position (for US tax purposes) that he/she became a BFR of a US possession (in our case PR) after a tax year for which he/she was required to file a US tax return as a citizen or resident alien but not as a BFR of a US possession. c. Is a citizen or resident alien of US and takes the position (for US tax purposes) that ceased to be a BFR of a US possession after a tax year for which he/she filed a tax return for the IRS or the US possession, or both, as a BFR of the US possession. Penalties: Penalty for not filing a required Form 8898 for any tax year is $1,000; in addition of any criminal penalty that may be imposed

17 17 WHERE TO FILE, RULES FOR SOURCE OF INCOME ITEM OF TAXABLE INCOME FACTOR DETERMINING SOURCE 1. Compensation for labor or personal services Place where labor or services are performed 2. PensionsPlace where services were performed that allowed to ear the pension 3. InterestResidence of payer 4. DividendsPlace where payer was created or organized 5. RentsLocation of property 6. Royalties-Natural resourcesLocation of property

18 18 WHERE TO FILE, RULES FOR SOURCE OF INCOME-continued ITEM OF TAXABLE INCOME FACTOR DETERMINING SOURCE 7. Royalties-Patents, copyrights and like intangibles Place where property is used 8. Sale of business inventory, purchased Place where sold (generally where title to the property passes to the buyer) 9. Sale of business inventory, produced Allocation is required if produced and sold in different locations (Regulation (f)) 10. Sale of real propertyLocation of property 11. Sale of personal (non real) property, except intangible and depreciable personal property* Seller’s tax home

19 19 WHERE TO FILE, RULES FOR SOURCE OF INCOME-continued ITEM OF TAXABLE INCOME FACTOR DETERMINING SOURCE 12. Sale of natural resourcesAllocation based on FMV of product at export terminal (Regulation (b)) 13. Scholarships, fellowships, Grants, prizes and awards (other than compensation for salaries or services) Generally the residence of the payer, regardless who actually disburses the funds (to be a PR source, the payer must be a BFR of PR or a corporation created or organized in PR)

20 20 WHO MUST FILE (See US Publication 570) IF INCOME FROM PR IS NOT EXCLUDED: FILING STATUSAGE AT END OF YR*GI LEVEL 1.Single<65 65 or older $ 8,450 $ 9, Married filing jointBoth <65 One 65 or older Both 65 or older $16,900 $17,900 $18, Married filing separately (An exception to the general rule) Any age$ 3, Head of household<65 65 or older $10,850 $12, Qualifying widower with dependent child<65 65 or older $13,600 $14,600

21 21 WHO MUST FILE (See US Publication 1321) IF INCOME FROM PR IS EXCLUDED, USE THE FOLLOWING FORMULA TO DETERMINE IF REQUIREMENT TO FILE IS MET: FIRST, DETERMINE THE ADJUSTED STANDARD DEDUCTION FOR YOUR STATUS WHICH IS AS FOLLOWS : 1. Determine your regular standard deduction, including the additional standard deduction allowed for age conditions (but not for blindness) 2. Multiply the amount in 1 by the fraction A/B*, this is your applicable standard deduction SECONDLY, 3. Add your personal deduction ($3,300; $6,600 or $0) to the product in 2 above. The total of the sum is the minimum gross income level to meet the requirement to file. CAUTION: This formula does not apply to married couple filing separate. In such a case, the GI level is $3,300 or more for 2006 and no reference is made to the applicable standard deduction. Further, it does not apply to taxpayers claimed as dependent on another’s return for which a special computation must be made. *A/B formula: A=Gross income subject to US income tax and includable in US return B=Gross income from all sources, including the excluded PR income under IRC Section 933.

22 22 REGULAR STANDARD DEDUCTION Single$ 5,150 Married filing joint 10,300 Married filing separate 5,150 Head of household 7,550 Qualifying widower 10,300 Notes on exceptions: a. S/D is not considered in determining the minimum gross income level to file for those filing separate. b. If you are dependent of a taxpayer, there is an special worksheet that must be worked to compute your S/D. In general, it is equal to the greater of: (a) the dependent’s earned income plus $300 (up to regular and additional S/D), or, (b) $850. c. Additional S/D for the aged and for blindness are: Married and qualifying widower$1,000 for each condition Unmarried$1,250 for each condition d. These amounts are changed annually through indexing procedures.

23 23 ADJUSTMENTS TO ITEMIZED DEDUCTIONS & PERSONAL & DEPENDENCY EXEMPTIONS 1. ADJUSTMENTS FOR LIMITATION ON DEDUCTIONS FROM AGI (MEDICAL EXPENSES, CASUALTY LOSSES, INVESTMENT INTEREST EXPENSE, GAMBLING LOSSES, EMPLOYEE EXPENSES, AND OTHERS) 2. ADJUSTMENTS DUE TO EXEMPT PR INCOME UNDER IRC SECTION 933 (it is applied individually to each I/D) (See Publication 1321) 3. ADJUSTMENT DUE TO PHASE OUT PROVISIONS (Full reduction will gradually be eliminated, 1l3 in 2006) a. 2006’s Reduction: 2/3 of the 3%-80% rule for 2006; with a threshold amount of $150,500/$75, ADJUSTMENT FOR PERSONAL & DEPENDENCY EXEMPTIONS: 2% for each $2,500 or fraction thereof by which AGI exceeds the Phase Out (P/O) amount. It will be gradually eliminated, starting in 2006 with 1/3 of the full reduction. P/O amounts are: $225,750 for MFJ and QW; $188,150 for HH, $150,500 for unmarried; and $112,875 for MFS.

24 24 DEPENDENCY EXEMPTIONS, RULES FOR QUALIFICATION The personal & dependency exemption amount (2006) is $3,300. This amount is subject to indexing adjustments every year as well as to P/O adjustments, as previously presented. The rules for dependency exemptions are various and sometimes very complex. They are the following:

25 25 RULES FOR DEPENDENCY 1. Must have an ID (SS) number. 2. Citizenship = must be US citizen, national (born in outlying possession, i.e. AS, Guam, USVI, CNMI, PR), or resident of (not a US citizen, but legally residing on…) US, Canada or Mexico for some part of the year. 3. If married, cannot file joint returns unless done by exception. 4. If qualifying child – must comply with the following requirements: (a) age (under 19 or student under 24 or permanently and totally disabled), (b) abode (same principal abode as taxpayer for more than ½ of the yr), and, (c) support test (dependent does not provide more than ½ of his/her own support).

26 26 RULES FOR DEPENDENCY, CONTINUED 5. Other relatives a. Must be qualified relatives (those up to third degree relationship and those specified in-laws), or reside in taxpayer household for the entire year. Relationship established by marriage (in-laws) is not terminated by death or divorce. b. Dependent’s gross income (statutory, i.e. not including exempt income) must be less than the exemption amount (<$3,300 in 2006). c. Support test. Taxpayer must provide more than 50% of dependent’s support (except those in a multiple support agreement or tie-breaker rules). Exempt income enters into this test.

27 27 RULES FOR DEPENDENCY, CONTINUED Tie-breaker rules (if more than one person can meet the requirements to claim someone as a dependent under the qualifying child rules) 1. Priority is given to taxpayers who meet the requirement under the qualifying child rules 2. Parents have priority over others 3. If none in 1 & 2 are child’s parents, the exemption is allowed to the one with highest AGI

28 28 RULES FOR DEPENDENCY, CONTINUED RULE WHEN SEVERAL INDIVIDUALS CONTRIBUTE TO THE SUPPORT OF AN INDIVIDUAL WHO IS NOT A QUALIFYING CHILD – SUBMIT A MULTIPLE SUPPORT DECLARATION (MSA, FORM 2120). OBTAIN A SIGNED STATEMENT BY ALL THOSE WHO QUALIFY FOR THE EXEMPTION. RULES (IRC Section 152(c)); TAXPAYER MUST: 1. PROVIDE MORE THAN 10% OF PERSON’S SUPPORT 2. PROVIDE NO MORE THAN 50% OF THE SUPPORT 3. ALL QUALIFYING PROVIDERS PROVIDE MORE THAN 50% 4. ALL OTHER DEPENDENCY REQUIREMENTS ARE MET, EXCEPT THE SUPPORT TEST

29 29 MULTIPLE SUPPORT AGREEMENT, EXAMPLE Pedro lives alone in Virginia. His total support ($8,000) came from the following persons during 2006: Maga (daughter) $ 400 Luis F. (son)2,800 Aponte (son)2,000 McClintock (friend)2,800 Total $8,000 Either Luis F or Aponte can claim Pedro’s exemption if the other agrees in writing. Maga fails to comply with the 10% rule and McClintock fails to comply with the abode rule, since Pedro did live alone and not in his home and Pedro is not his relative. Maga & McClintock need not agree in writing.

30 30 Child of Divorced or Separated Parents – Dependency Exemption General rule: dependency is allowed to the custodial parent. Exceptions: Non custodial parent can get the exemption if provided in the divorce or separation instrument or if custodial parent agrees in writing. Form 8332 is submitted for the last condition.

31 31 EXAMPLE OF DETERMINING THE MINIMUM GI LEVEL TO FILE THE US RETURN AND FOR THE ALLOCATION OF THE STANDARD DEDUCTION IF PR INCOME IS EXCLUDED UNDER IRC SECTION 933 Pedro, 68 of age, is retired and blind. He worked for the US Post Office at PR for his whole life. He is married with Ana, 60 of age, working for the UPR, and in good health conditions. They are BFR of PR for life. During 2006, Pedro received a pension as a retired federal employee ($40,000); Ana received a salary for $30,000 from the UPR. She also had a long-term capital gain for $10,000 on the sale 1,000 shares of Coca Cola Co., which were bought on 2/15/03 for $30,000. Before the sale, she received $4,000 in ordinary dividends from Coca Cola in They file a joint return with two qualified dependents. Minimum GI income level to file is: S/D for them for purpose of this test: ($10,300 +$1,000) $11,300 Income subject to US tax/Total WW income=($44,000/$84,000)= X 44/84 Allocated S/D To determine the minimum GI level $ 5,919 Personal exemptions ($3,300 x 2) +6,600 Minimum gross income level $12,519 =====

32 32 EXAMPLE OF DETERMINING THE MINIMUM GI LEVEL TO FILE THE US RETURN AND FOR THE ALLOCATION OF THE STANDARD DEDUCTION IF PR INCOME IS EXCLUDED UNDER IRC SECTION CONTINUED NOTES ON PRIOR EXAMPLE: 1. S/D ALLOCATED FOR PURPOSES OF DETERMINING THE MINIMUM GI LEVEL TO FILE EXCLUDES THE ADDITIONAL S/D FOR BLINDNESS BUT NOT FOR THE FINAL DEDUCTION ALLOWED 2. THE ALLOCATED S/D ALLOWED IS AS FOLLOWS $12,300 ALLOCATION FRACTION X44/84 S/D ALLOWED $6,443 ===== Explain the modification to the amount of the regular S/D: “S/D modified due to exempt income under IRC section 933” 3. ASSUMING ITEMIZED DEDUCTIONS ARE CLAIMED, THOSE ALLOCABLE TO US INCOME WILL BE MULTIPLIED BY THE FRACTION ABOVE OF 44/84 AND PRESENTED IN THE SCHEDULE A OF FORM THERE IS NO PHASE OUT OF I/D, DUE TO GI LEVEL.

33 33 FOREIGN TAX CREDIT WHEN A BFR OF PR IS EXCLUDING PR SOURCE INCOME IN THE US TAX RETURN (SEE PUBLICATION 1321) PURPOSE: REDUCE TAXES PAID OR ACCRUED TO PR BY THE TAXES ALLOCABLE TO THE EXEMPT INCOME PROCEDURE: USE THE FOLLOWING FORMULA TO COMPUTE THE REDUCTION. (A/B x Tax paid or accrued to PR) = Reduction in foreign taxes A = Income from PR sources not subject to US tax, less deductible expenses allocable to these expenses B = Total income subject to PR tax, less total deductible expenses allocable to that total income

34 34 EXAMPLE OF COMPUTATION OF REDUCTION IN PR TAXES PAID FOR PURPOSES OF FTC IN US (See Publication 570) ASUME THE DATA ON PRIOR CASE AND THAT IN PR THE TAX PAID OR ACCRUED WAS A TOTAL OF $10,400 AS FOLLOWS: OVER SALARIES, PENSION =$ 9,000 OVER DIVIDEND 400 OVER CAPITAL GAIN = 1,000 TOTAL $10, Reduction for excluded salaries of Ana from the UPR = $3,857 ($9,000 x 30/70) 2. Reduction for excluded capital gain = $1,000 = ($1,000 x 10/10) 3. TOTAL REDUCTION IS $4,857 (SUM OF 1, 2), HOWEVER A FTC FOR THE TAX PAID IN PR FOR DIVIDEND INCOME IS DISALLOWED AT US RETURN, THEREFORE, IN FACT THE REDUCTION IS FOR A TOTAL OF $5,257. Notes: As per Publication 570, two 1116 forms are submitted one for the exempt salaries and other for the capital gain, to recognize the reduction in each one.

35 35 WHO MUST FILE 1040 PR 1.TAXPAYER HAVING NO US TAX FILING REQUIREMENT BUT HAVING INCOME THAT IS EFFECTIVELY CONNECTED WITH A TRADE OR BUSINESS IN PR WHICH MAY BE SUBJECT TO SELF EMPLOYMENT TAX (SET) ($400/$ RULES). 2. HAVING NO SELF EMPLOYMENT INCOME (SEI) BUT CLAIMS THE ADDITIONAL CHILD CREDIT. 3. OTHER SITUATIONS: CLAIMING AN EXCESS WITHHOLDING OF SS TAXES OVER $94,200 (2006); PAYMENT TAXES FOR DOMESTIC EMPLOYEES; PAYMENT SS ON UNREPORTED TIPS AND CERTAIN OTHER CONDITIONS, INCLUDING THAT YOU ARE NOT REQUIRED TO FILE FORM 1040 AND IS A BFR OF PR.

36 36 SELF EMPLOYMENT INCOME PARTICULAR SITUATIONS FOR: CHURCH EMPLOYEES WHILE CHURCH ELECTED THE EXEMPTION FROM FICA & MC TAXES AS EMPLOYER MINISTERS & MEMBERS OF RELIGIOUS ORDERS, IF NO ELECTION FOR EXEMPTION IS MADE EMPLOYEES OF INTL GOVERNMENTS (SEE US TREATIES) PR RESIDENTS LIVING ABROAD INSOLVENCY UNDER CHAPTER 11 MORE THAN ONE BUSINESS, ONE OR MORE WITH LOSSES ESTIMATED PAYMENTS MADE AT NAME OF EACH OTHER AND DECIDE TO FILE JOINT; MADE AT NAME OF BOTH AND DECIDE TO FILE SEPARATE. PAYMENTS OF FICA IN EXCESS COMPENSATION OF $94,200 WITH 2 OR MORE EMPLOYERS; WITHHOLDING OF FICA TAX OVER SALARY IN EXCESS OF $94,200 WITH ONLY ONE EMPLOYER (ERROR). RULE APPLIES SEPARATELY TO EACH PARTY IF FILING JOINT.

37 37 ADDITIONAL CHILD TAX CREDIT (ACTC) FOR BFR OF PR ALL THE FOLLOWING THREE CONDITIONS MUST BE MET: 1. TAXPAYER IS BFR OF PR (AS DEFINED IN PUBLICATION 570) 2. HAD SS & MC WAGES WITHHELD FROM SALARIES OR PAID FROM SEI 3. HAD 3 OR MORE QUALIFYING DEPENDENT CHILDREN (AS ESPECIALLY DEFINED)

38 38 QUALIFYING DEPENDENT CHILDREN FOR THE ACTC 1.SON, DAUGHTER, STEPSON OR STEPDAUGHTER, ADOPTED OR FOSTER CHILD, SIBLINGS OR THEIR DESCENDANTS (I.E. GRANDCHILD OR NEPHEW OR NIECE) 2. MUST BE UNDER 17 OF AGE AT END OF YEAR 3. QUALIFYING CHILD DID NOT PROVIDE HIM OR HERSELF MORE THAN 50% OF HIS/HER SUPPORT 4. TAXPAYER RESIDENCE WAS CHILD ABODE FOR MORE THAN ½ OF THE YR, EXCLUDING CERTAIN EXCEPTIONS 5. WAS US CITIZEN, NATIONAL OR RESIDENT ALIEN OF US

39 39 ACTC COMPUTATIONS MAXIMUM CREDIT ALLOWED IS $1,000 FOR EACH QUALIFIED DEPENDENT CHILD OR THE AMOUNT PAID FOR SS & MC TAXES, THE LOWER (ASSUMING NO ADJUSTMENT IS MADE TO ALLOWABLE CREDIT AND NO EXCESS PAYMENT FOR SS TAXES IS BEING CLAIMED). ADJUSTMENT TO THE ALLOWABLE CREDIT IS REQUIRED IF REPORTABLE PR GROSS INCOME EXCEEDS $110,000 (MFJ), $75,000 (SINGLE); $55,000 (MFS). ADJUSTMENT IS EQUAL TO 5% OF THE EXCESS OF PR GROSS INCOME OVER THE APPLICABLE PARAMETER ABOVE (ROUNDED TO NEXT $1,000 MULTIPLE), DEPENDING THE FILING STATUS.

40 40 COMPUTATIONS OF THE ACTC, FOUR (4) EXAMPLES FOR A PR BFR 1. ASSUME TAXPAYER FILES JOINT AND HAVE TWO (2) QUALIFYING DEPENDENT CHILDREN (QDC). HE IS SELF EMPLOYED WITH SEI FOR $20,000 AND HIS WIFE EARNED $40,000 IN SALARIES. THE SET IS $2,826 ($20,000 X.9235 X.153). THE ACTC IS $0 (RULE OF 3 QDC IS NOT MET). 2. ASSUMING THERE ARE 3 QDC, THE ACTC IS $3,000 WHICH IS LOWER THAN $4,473 ($2,826 X 50%) + ($40,000 X 7.65%) OF SS & MC PAYMENTS. 3. ASSUMING HIS WIFE EARNED $10,000 IN SALARIES AND THERE ARE 3 QDC, THE ACTC IS $2,178 WHICH IS LOWER THAN $3,000, AS FOLLOWS: ($2,826 X 50%) + ($10,000 X 7.65%). 4. ASSUMING SHE EARNED $98,400 IN SALARIES AND HAVING 3 QDC, THE MAXIMUM AMOUNT ALLOWED OF $3,000 IS REDUCED FOR $450 (5% OF $9,000). THE $9,000 ARE DETERMINED AS FOLLOWS: ($20,000 + $98,400 - $110,000, ROUNDED TO NEXT NEAR $1,000 MULTIPLE). THEREFORE A TOTAL ACTC OF $2,550 ($3,000 - $450).

41 41 WHEN AND WHERE TO FILE AND EXTENSIONS and 1040PR or 1040SS (English version) tax returns are due on the 15 th day of the 4 th month following the close of the tax yr. They must be sent to: IRS Center Austin, TX Extensions: Automatic 6-month extension (filing Form 4868 or e-filing and paying by credit card by phone or internet). Extension is not applicable to the required payment; if not made, interest and penalties may be assessed. There is an automatic 2-month extension if: (a) you are a US citizen or resident and at due date of the return you are living outside US and PR and your main place of business or post of duty is outside US and PR, or, (b) you are in military or naval service on duty outside the US and PR. Just attach a statement (i.e. not Form 4868) to the return explaining the situation that qualified you for the extension. If you need additional time, file Form 4868 for additional 4-month period after the original 2-month extension expired. There are other particular an especial extensions periods.

42 42 ALTERNATIVE MINIMUM TAX (AMT) FOR 1040 INCOME 1.The AMT computation must be presented (Form 6251) if the AMT base income is over the exemption amount of $58,000 for MFJ ($29,000 MFS) and $42,250 for singles (in 2006). These amounts are reduced at certain AMTI levels. General formula is as follows: (AMTI-Exemption) x AMT rate = X X – nonrefundable personal credits and regular tax =AMT AMT Rate=26% up $175,000 of AMT Base; 28% in excess of $175,000 AMTI= Taxable income plus or minus certain adjustments. Tax base AMTI = AMTI - exemption Required Form 6251 must be filed if conditions to file are present, even if no AMT is payable. Also file AMT FTC, which is Form 1116 adjusted for AMT purposes.

43 43 ESTIMATED TAXES, STATUTE OF LIMITATIONS 1. ESTIMATED TAXES: 1040ES Form must be filed if estimated amount is at least $1,000 (2006). A penalty is assessed for underpayment (See rules for 90%, 100%, 110% (expected AGI>$150,000)). Submit form 2210 if underpayment is determined. 2. GENERAL STATUTE OF LIMITATIONS: For returns: 3 years from the later of the date the return was actually filed or its due date. For refunds: Requires a refund claim be filed 3 years from the later of the date the return was actually filed or 2 years of the date the tax was paid. 3. EXCEPTION FOR GENERAL RULE IN 2 ABOVE: (a) If the 25% gross income rule is met (6 years); (b) it will remain open if a fraudulent return is filed or no return is filed.

44 44 MORE QUESTIONS? PENSAMIENTOS INEDITOS: 1.“HAY DOS PERSONAS CON MUCHA SUERTE EN ELMUNDO. AQUELLA A LA QUE LE DISPARAN UN TIRO Y FALLAN; Y LA QUE RECIBE UN REINTEGRO DE CONTRIBUCION SOBRE INGRESOS”. 2. “DOS COSAS SON SEGURAS EN LA VIDA: LA MUERTE Y…….. LAS CONTRIBUCIONES”. 3. “ESTUPIDO ES AQUEL QUE PUDIENDO EVITAR PAGAR MENOS CONTRIBUCIONES, NO LO HACE”.


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