Robert Atkins Walker PC, CPA, PhD

Yes, it’s true, and you’ll likely also have monthly-fee-related medical deductions of $5,000-10,000 per year thereafter. Most continuing care retirement communities (CCRCs) offer guarantees of life care in exchange for a sizeable entry fee. This guarantee is a type of long-term care medical insurance deductible in the year paid. Based on my experience and research, 20% to 40% of the entry fee and monthly fees is medical expense. The exact percentage depends on your contract type and the cost data of the CCRC.

Please contact me if you or your loved ones have questions about this. For greater details, please see my law review article.

All US citizens and permanent residents (Green Card holders [but see the note below]) must file annual U.S. income tax returns including all their worldwide income. There are two principal types of income — earned (wages, salaries, self-employment income and earned royalties from, inter alia, books and patents) and unearned or investment income (dividends, interest, capital gains, rental income, and royalty income from, inter alia, oil and gas investments).

There are two lines of defense against paying US. income tax on your foreign income. First, for your earned income you may take advantage of the Foreign Earned Income Exclusion and exclude up to $91,400 in 2009 using Form 2555 if you lived outside of the US for at least 330 days out of any 365-day period. Also you may be able to exclude or deduct some of your foreign housing expenses on the same form. Second, for all types of income you may take a credit on Form 1116 for the foreign income taxes (and in many cases foreign payroll taxes – see below) you paid on your foreign income.

There are many nuances to US taxation of your foreign income, one of which we discuss below. we would be honored to help you minimize the US’s tax bite on your foreign and domestic income, but preparation of US tax returns including foreign income is expensive. My fee typically ranges from $800-$3,000. Quality is expensive, and we believe you will find it money well spent.

Note: If you are a Green Card holder and want to avoid the hassle of filing Form 1040 and reporting your world-wide income, you may want to consider an alternative with some risk attached. If you live in a country that has a tax treaty with the US, you may file as a non-resident alien using Form 1040NR with a Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), attached if you qualify to do so under the treaty tie-breaker rules. There is some risk that the INS may revoke your Green Card. The last sentence of Treas. Reg. Section 301.7701(b)-7(b) says, “The filing of a Form 1040NR by a [Green Card holder] may affect the determination by the INS as to whether the individual qualifies to maintain a residency permit.”

We have several clients in this situation. They would rather not hassle with filing a regular 1040 each year, but they put up with it in light of the risk to their residency status.

Foreign payroll taxes must usually meet two tests — the tax test and predominate-character test — to be creditable as income taxes. The tests are applied for each tax independently as per Treas. Reg. § 1.901-2(a)(1)]: “Whether a foreign levy is an income tax is determined independently for each separate foreign levy.”

Here is my analysis of the two tests:

(1) Is it a tax? Treas. Reg. § 1.901-2(a)(2)(i) states, “A foreign levy is a tax if it requires a compulsory payment pursuant to the authority of a foreign country to levy taxes. A penalty, fine, interest, or similar obligation is not a tax, nor is a customs duty a tax. … [I]t is not a tax, to the extent a person subject to the levy receives (or will receive), directly or indirectly, a specific economic benefit (…) from the foreign country in exchange for payment pursuant to the levy.” Almost all foreign payroll taxes in my experience are compulsory and are levied by the foreign government or a subdivision thereof.

Regarding the specific economic benefit disqualifier, Treas. Reg. § 1.901-2(a)(2)(ii)(C), titled “Pension, unemployment, and disability fund payments.”, states, “A foreign levy imposed on individuals to finance retirement, old-age, death, survivor, unemployment, illness, or disability benefits, or for some substantially similar purpose, is not a requirement of compulsory payment in exchange for a specific economic benefit, as long as the amounts required to be paid by the individuals subject to the levy are not computed on a basis reflecting the respective ages, life expectancies or similar characteristics of such individuals.”

Therefore a FICA- or unemployment-type tax qualifies as a tax if it is not computed on a basis reflecting the respective ages, life expectancies or similar characteristics of such taxpayer. U.S. FICA and unemployment taxes would qualify as taxes under this provision. I ask my clients specific questions about how their foreign payroll taxes are computed in order to determine if they qualify as taxes for FTC purposes. Their payroll taxes usually qualify.

(2) Is the predominant character that of an income tax? Per Treas. Reg. § 1.901-2(a)(3)(i) and (ii) it is if the foreign tax is “likely to reach net gain in the normal circumstances in which it applies” and it is not dependent on the availability of another country’s foreign tax credit. U.S. FICA and unemployment taxes are computed on an individual’s net gain, whether be it salary or net gain from self-employment. Moreover, they are not levied based on the availability of another country’s foreign tax credit. Again I question my clients about their foreign payroll taxes. None in my experience has failed the predominant-character test.

Reference: See also Bittker and Lokken’s, Fundamentals of International Taxation, Boris I. Bittker and Lawrence Lokken (Warren Gorham & Lamont), ¶ 69.4.2:

“. . . ‘a foreign levy imposed on individuals to finance retirement, old age, death, survivor, unemployment, illness, or disability benefits’ is not considered a payment for a specific economic benefit unless the amount of the levy is ‘computed on a basis reflecting the respective ages, life expectancies or similar characteristics of [the] individual’ required to pay it. [Treas. Reg. § 1.901-2(a)(2)(ii)(C)] Foreign taxes analogous to the U. S. social security (FICA) taxes are thus considered taxes, not payments for social security benefits. The same rule applies to a levy imposed for any ‘substantially similar purpose.’”

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