When Junia (editor of the Singapore American Newspaper) asked me to write this article I thought it would be a cinch to come up with loads of useful information for our expat community as, every day it seems, I am bombarded with tax updates. But when I actually sat down to seriously review the changes from 2004 to 2005 (and the proposed changes for 2006) I, surprisingly, came up a bit short. This is not to say that Congress did not pass tax legislation in 2005 - far from it - it's just that their changes were so focused on alleviating the tax burdens of those affected by Hurricanes Katrina, Rita and Wilma, as well as pension reform and energy legislation, it left little time for them to pass any tax legislation affecting the masses.
In any event, here a few items which I hope you will find interesting.
Automatic six month extension to file tax return
This item, although only a regulatory change on the part of the IRS (as opposed to a Congressional change), I believe has the potential to have the greatest impact on those of us in the expat community who, with good reason, are unable to file our returns until the last possible moment.
Prior to the change there existed two extension forms: the automatic extension (form 4868) and the application for additional extension (form 2688). Since taxpayers residing overseas are entitled to an automatic two-month extension with which to file their returns (i.e. until June 15th), the 4868 (ordinarily a four-month extension form) was used to extend the return for two months (until August 15th). Thereafter, if more time was needed, the 2688 was used to extend the return until October 15th and, thereafter, to December 15th. Since the extension period requested on each 2688 was limited to two months at a time, a taxpayer who required an extension until December 15th previously needed to file three separate forms on three separate dates: one 4868 and two 2688s.
In order to simplify this process, the IRS lengthened the extension period of the 4868 from four months to six months thereby permitting taxpayers to extend their returns until October 15th with the filing of just one form. Concurrently with this change, the IRS eliminated the form 2688.
If you are a taxpayer living in the U.S. this is great news since your outside filing date was always October 15th, therefore, you now only need to file one form instead of two. However for those of us living overseas, who were previously able to request an extension until December 15th, our avenue for requesting this further extension has now vanished!
On the bright side, I understand that one or more of the Big Four accounting firms have been in contact with the IRS with regard to whether overseas taxpayers will still be permitted to request an extension until December 15th and, if so, how this is to be accomplished. However as we go to print, I do not believe that the IRS has given a formal answer.
Reporting of Capital Gains and Losses
Pardon my casual tone, but this one is a real doozy. It came on the heels of the extension news and had taxpayers and tax practitioners in a frenzy until the issue was resolved a few weeks later.
Back in December the IRS published instructions for the 2005 Form 1040, Schedule D (capital gains and losses reporting form) which required taxpayers to list each capital gain or loss transaction on a separate line on the schedule. Specifically, the instructions said: "You must enter the details of each transaction on a separate line. If you have more than five transactions to report on line 1 or line 8, report the additional transactions on Schedule D-1. Use as many Schedules D-1 as you need. Enter on Schedule D, lines 2 and 9, the combined totals from all your Schedules D-1. Do not enter "see attached" and summary totals from an attachment in lieu of reporting the details of each transaction directly on Schedule D or D-1." (emphasis added by author).
While these new instructions would have no affect on those taxpayers trading few or no stocks during the year, they would have been a major burden for those who regularly trade stocks and rely on either Excel spreadsheets or brokerage statements to attach to their returns in support of their gains and/or losses for the year.
Fortunately, several weeks later, the IRS came out with a clarification which said, in part,: “taxpayers may continue to use a substitute statement to provide all of the same information and in a similar format to lines 1 and 8 of Schedules D and D-1. They are not required to use the official version of Schedules D and D-1 to provide the details on each transaction. However, the details of each transaction still must be provided with the tax return and not just upon request.
And so, aside from small changes to standard deductions, personal exemptions and the tax table brackets, there is really little more to say with regard to the tax changes from 2004 to 2005 (with the exception of the amount which can be contributed to an IRA which went up from $3,000 to $4,000).
For 2006, we're still waiting to hear. On 11/17 the Senate passed The Tax Relief Bill of 2005 (Sen 2020) and on 12/8/05 the House passed the Tax Relief Reconciliation Bill of 2005 (H.R. 4297) but the bills contain different provisions and so it will be up to the Joint Committee to work them out in conference (which date has not yet been set although I have read where it is expected to take several months to reconcile the two bills).
The real battle will be over extending tax cuts made by the Economic Growth and Tax Relief Reconciliation Act of 2001 and Jobs and Growth Tax Relief Reconciliation Act of 2003 - especially the reduced capital gains and dividend rates which expired at the end of 2005. The House bill contains a two year extension but the Senate bill is silent on the matter.