Q&A Page

  1. COST AND INFORMATION TO PREPARE TAXES
  2. AUTHORIZATION FOR SIM USA TO PROVIDE INFORMATION

  3. INTERNET SECURITY

  4. Gross Income and Earned Income

  5. PAYING TAXES

  6. Payment to Personal Management Services

  7. IRA Investing
  8. RESIDENCY

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1. COST AND INFORMATION TO PREPARE TAXES

Q. My husband and I currently live overseas. In the past we did our own taxes, but now we’re unsure how to proceed. We are looking for someone who is knowledgeable about international tax.

Would you be willing to do our income taxes? If so, what is your fee and what information do you need?

A. Tax preparation is priced by the various forms needed to complete the return. Most returns are priced in the range of $230 to $380. For 2015, the maximum charge will normally be $400 for those asking us to do their return for the first time. For subsequent years, we typically discount the standard fee by $50. Estimated taxes, bookkeeping and other personal or financial services are billed separately.

When available, we request a copy of your previous year tax return. Other information is gathered in a short-form Tax Organizer. We use web based (Cloud) software for most of our work. This allows encrypted file sharing and other advantages. However, we can work by regular mail, instead of email and the web, when that is better. Please go to www.pms01.com and “click around" for a few minutes to see what is available.

2. AUTHORIZATION FOR SIM USA TO PROVIDE INFORMATION:

Q. I work for SIM USA, Inc. Does SIM need to know if Personal Management Services will be doing our taxes?

A. Tax information can flow more smoothly if SIM has authorization to provide information to us. I suggest the following authorization be emailed to RonMuesing@sim.org and a copy to me:

"This is to authorize Harley Snyder at Personal Management Service to receive or access prior and current year information needed to prepare our federal, state and local income tax returns. This authorization is good until I write to rescind it." Print and sign your name and show the date.

3. INTERNET SECURITY

Q. Is the Tax Organizer and CyberCabinet SECURE? It's asking for SSN numbers.

A. Yes, it is protected with 128 bit encryption as evidenced by the locked padlock at the bottom of many pages of this website. The "Website Security" article on our Newsletter page explains "SSL 128 bit encryption" and the significance of the padlock.

4. GROSS INCOME AND EARNED INCOME

Q. What is the difference between Gross Income and Earned Income? Why is this important?

A. First, why it is important. One must pay social security taxes on ALL earned income, while Gross Income is a starting point for calculating income tax. From Gross Income, there are many exemptions, deductions and exclusions that apply to arrive at Taxable Income.

Gross income is "all income you receive in the form of money, goods, property and services that is not exempt from tax, including any income from sources outside the United States". This includes all earned income that is not otherwise excluded. (Excluded income includes inheritances, gifts, child support, qualifying foreign earned income, clergy housing, and more.)

Earned income (also called compensation) might be colloquially called “sweat of the brow” income. Common sources are wages, salaries, tips, self-employment income, speakers fees, bartered services, etc. It does not include investment, pension, rental, scholarship income, etc.

5. PAYING TAXES:

Q. How can I pay my taxes?

A. The IRS and all states will accept check or money order. The IRS has additional options of direct debit to your bank account, credit card payment and electronic payment (EFTPS) via the web.

For Americans abroad we suggest the use of a direct debit to your bank account for your IRS payment. For this, your bank routing and account numbers are included on your federal tax return. Tax Organizer and CyberCabinet transmissions of your information to us is encrypted, and your electronically filed federal tax return is also encrypted when sent. (See Q.3., above, about security via the internet.)

Payments to the IRS by check should be made payable to “United States Treasury”. The memo line should read, “TY2010, Form 1040” and your SSN. Mail the payment to Internal Revenue Service Center, Austin, TX 73301-0215, USA.

Credit card payments are made through two service providers and will incur a processing fee. Check the websites of www.officialpayments.com and/or www.PAY1040.com.

Electronic payment, using the IRS EFTPS system, can work well once registration is completed. Registration can be initiated via the web at www.irs.gov. It is a two-part process which requires immediate interaction to information coming from the IRS. Feedback indicates registration must be initiated well ahead of the first payment date and may be frustrating.

State tax payments will normally be made via check to the state’s Department of Revenue. The memo line should read, “2010”, the state abbreviation, and your SSN. Payment addresses are usually noted near the signature lines of the state income tax return.

To avoid international mailing of checks, many taxpayers living overseas make arrangements with a family member or friend to act as their financial manager. A few employers may provide this service. At this time, our office is not equipped or licensed to provide this service.

Q. We were home for part of the year and had to pay state income tax. Though it was paid by April 15, we received a penalty letter with the explanation, "You did not make full estimated payment by the required due dates." If we paid on time, why are we being penalized?

A. Note that the explanation uses the term "estimated payment". The IRS and most states have a pay-as-you-go tax payment policy. Unless explained otherwise, it is assumed that income is earned during the year in equal monthly amounts. The state law says that the esitmated tax for each quarter must be paid during the year as it is earned. For example, if the estimated state tax for January to March is $250, the state requires an "estimated payment" of $250 on or about April 15. The other three payment dates are typically June 15, September 15 and January 15.

The rules are rather complex and there are exceptions. If, during the year, quarterly payments equal to 1/4 of the total state tax of the previous year are paid, the taxpayer is relieved of the penalty for "late payment of estimated taxes". For example, if the total state tax liability for the previous year was $900, four quarterly payments of $225 relieves the taxpayer of the penalty even though the total tax liabilty for the current may end up being much higher than $900. If one owes state taxes for the current year, but had no tax liability the previous year, no penalty would be assessed. Most states do not charge the penalty for current year taxes of less than a certain amount. This exception varies by state and may be as low as $100 or as high as $1,000.

6. PAYMENT TO PERSONAL MANAGEMENT SERVICES

Q. How should I pay PMS01 for the tax preparation fee?

A. We can accept check or your credit card payment by VISA, MasterCard or Discover. If you are an SIM missionary, ask the mission if you can make payment from your ministry or personal account. Checks should be made payable to Personal Management Services.

7. IRA INVESTING

Q. How much can I invest in my IRA account?

A. If you are overseas for an entire year, you cannot contribute to your IRA that year because your taxable compensation is zero. A 6% excise tax is applied for overcontributions.

For income earned in the U.S., you can contribute the smaller of (1) your U.S. compensation reduced by your contributions to your 403(b) retirement plan and the deduction allowed for one-half of the self-employment taxes that you must include in income for the year, or (2) the maximum allowed for the year. For 2010, the maximum contribution allowed is $5,000 each for taxpayer and spouse, a total of $10,000. Each taxpayer over the age of 50 can contribute $6,000, subject to the same calculation described above. This is the most you can contribute regardless of whether your contributions are to one or more regular or Roth IRAs.


Q. Why can't I invest in an IRA account when we are overseas all year?

A. There is a lot of confusion and misinformation on this issue. Many tax advisors do not understand or consider the effect of the foreign earned income credit on the calculation of how much can be contributed to a regular or Roth IRA for the year.

IRS Pub. 590 explains that contributions are limited to the amount of taxable compensation. For missionaries, this is generally calculated as total wages and gifts from churches, MINUS the foreign earned income and the deduction of one-half of the social security tax. For a taxpayer who has been overseas for the entire year and claims the Foreign Earned Income Exclusion, the taxable compensation is zero. Since one cannot contribute more than his taxable compensation for the year, no IRA contribution is allowed.

Q. Can I undo an excess IRA contribution that I've made?

A. Because an excise tax of 6% of excess contributions is payable each year on the excess balance in the account, the excess should be corrected or used up as early as possible.

If the excess contribution was made during a tax year (or prior to April 15th of the next year), you can instruct the trustee of your account to withdraw the excess contribution from your IRA account by the date your return is filed for that year. This can be done without financial penalty.

If an excess contribution to a Roth IRA is discovered for a prior tax year, it must be used up in the current or later years in which a contribution is allowed. Until it is used up, the 6% excise tax applies. Contact our office if you have this situation.

If an excess contribution for a prior year was made to your traditional IRA account, it may be possible to avoid the 6% excise tax by filing amended returns for the years in which an IRA deduction was taken on Form 1040 of your tax return. Contact us if you have this situation.

8. RESIDENCY

Q. Our missionary family lives in Ghana and all wages are paid to me. We will be in Pennsylvania for six months of furlough from August through January. Are we residents of Lancaster, PA if we are there for four months or so?

A. Assuming you will return to your home in Ghana, you continue to be residents of Ghana and your residence is there; unless you abandoned your ties there and do not intend to return. Your bona fide residence is also Ghana since you apparently intend to return there after a six-month interval. That means you qualify for the IRS foreign earned income exclusion for the first part of 2014 without any need to "count days". Your abode is where you "hang your hat" from day to day. Your domicile, which you haven't asked about, is where you eventually expect to return after "a temporary absence". Virtually all tax rules decline to define "temporary", except on a case by case basis. Your domicile is usually the last state or country where you have lived or consider your home. Your mailing agent has an address of his own, and it shouldn't be confused with any address related to the terms above. Permanent and temporary addresses are where you may be contacted.

The facts related to your family indicate that you are non-residents of Lancaster County and non-residents of any location outside Ghana. As missionaries on duty 24/7, you are required to report PA income and local PA income, prorated for the number of days you are present (abode) there. It is my belief that most tax experts do not understand definitions related to the terms above and make incorrect assessments as a result.