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Tax Question

Tax Question

Old Mar 8th 2018, 4:28 pm
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Default Tax Question

Hi,
I have 2 tax questions if someone doesn't mind helping please.
Firstly, are bonuses taxed at the normal income rate or are they taxed at a separate/ higher level?
Secondly and slightly more complicated (and genuinely asking for a friend!)
A friend remortgaged their property in the U.K. after moving out here. The value of the remortgage was £186,000 and the exchange rate was was $1.57 on the day of purchase of the house and $1.29.4 on the day of the remortgage. Whilst l understand in principle the tax implications, for the life of me l can't work out the value of their exposure and wondered if someone could help please?
Finally, is there a rate that this type of gain is taxed at?
Sorry for all the questions, it is our first return. Thanks for your help.
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Old Mar 8th 2018, 4:46 pm
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Default Re: Tax Question

There is a standard deduction for bonuses it used to be 42%, but after the tax reform it is a little lower - probably around 38%-39%. Don't worry though, it all come out in the wash in your annual tax return.

Selling or refinancing a home outside the US creates two separate gains and losses - the gain/loss on the home, and the gain/loss on the loan, both are calculated in dollars. I think the gain on the home is fairly obvious (though there are allowances and deductions that may be available to reduce a gain or increase a loss), but the gain on the loan is the value of the payoff amount in USD calculated at the exchange rate when the loan was first taken out, less the value of the payoff amount at the date of the payoff/refi.

Here's an example I posted previously:
Originally Posted by Pulaski View Post
The capital gain on the payoff of your mortgage is created because it took fewer dollars to pay off the balance than you received when you took out the mortgage. Say you borrowed £120,000 when the exch rate was $2/£1, so you borrowed $240,000 from the IRS's perspective. Several years later, after you have paid off £20,000 and moved to the US you sell the house and pay off the mortgage. The exch rate is now $1/€1, so you pay £100,000, but at today's rate, from the IRS's perspective, it only cost you $100,000, not the $200,000 (paid down part of what) you received. You have a taxable gain of $100,000!

In short, it's the difference between the current dollar value of the mortgage payoff amount and the dollar value of the mortgage payoff amount at the exchange rate on the day you originally took out the mortgage (or most recent refinance if you have refi'ed previously). ....

Last edited by Pulaski; Mar 8th 2018 at 4:52 pm.
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Old Mar 8th 2018, 5:21 pm
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Default Re: Tax Question

Originally Posted by Pulaski View Post
There is a standard deduction for bonuses it used to be 42%, but after the tax reform it is a little lower - probably around 38%-39%. Don't worry though, it all come out in the wash in your annual tax return.

Selling or refinancing a home outside the US creates two separate gains and losses - the gain/loss on the home, and the gain/loss on the loan, both are calculated in dollars. I think the gain on the home is fairly obvious (though there are allowances and deductions that may be available to reduce a gain or increase a loss), but the gain on the loan is the value of the payoff amount in USD calculated at the exchange rate when the loan was first taken out, less the value of the payoff amount at the date of the payoff/refi.

Here's an example I posted previously:
Thanks for your response.
On the bonuses, are there further deductions or is it roughly all that is taken. Sorry if that seems an obvious one.
I think l am on the right lines of thinking that the exposure for the remortgage is $51,336, does that sound about right to you based on the figures above?
Do you have a rough idea of what rate that 'gain' is roughly taxed at? My friend is getting very worried and trying to help her establish an estimate? Not sure if that is possible or not.
Also you mention a gain on the value of the property, is there further exposure beyond the loan differential that she should be aware of?
Thanks for a quick response, greatly appreciated.
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Old Mar 8th 2018, 5:46 pm
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Default Re: Tax Question

I've been through a similar thing recently myself.

- If the UK house was her primary residence then there shouldn't be any capital gains tax just as their wouldn't in the UK for the same reason.

- Any foreign mortgage gain is added to your taxable income for the year and taxed at the same rate as everything else. However I believe that this would only be applicable if your friend is a resident alien and therefore liable to report worldwide income for the entire tax year. If she does not pass the substantial presence test for the year, then her worldwide income (including foreign wages and capital gains) is not reportable for that tax year.

I am not an expert though so others may correct me.
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Old Mar 8th 2018, 6:15 pm
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Can the tax burden be spread across a married couple opposed to just the husband who is the only one working? The reason l ask is because l don't think they are filling as a married couple this year as they only came over in the spring and therefore could this reduce the implication as otherwise it will about 15k l would think! Thanks
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Old Mar 8th 2018, 6:16 pm
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Default Re: Tax Question

Spring 2017 or Spring 2018?
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Old Mar 8th 2018, 6:25 pm
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Default Re: Tax Question

Originally Posted by Ecto17 View Post
Can the tax burden be spread across a married couple opposed to just the husband who is the only one working? The reason l ask is because l don't think they are filling as a married couple this year as they only came over in the spring and therefore could this reduce the implication as otherwise it will about 15k l would think! Thanks
Well maybe they should file as a married couple. If the contractual responsibility is his, i.e. her name isn't on the paperwork, then the only way to "share" that with his wife is to file jointly.

[I'll get back to your other questions later.]
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Old Mar 8th 2018, 6:48 pm
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Default Re: Tax Question

Originally Posted by Pulaski View Post
Well maybe they should file as a married couple. If the contractual responsibility is his, i.e. her name isn't on the paperwork, then the only way to "share" that with his wife is to file jointly.

[I'll get back to your other questions later.]
The mortgage is in both their names apparently so could they share the burden and file still separately?
They came in May 17.

Thanks both
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Old Mar 8th 2018, 6:49 pm
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Default Re: Tax Question

If they came in May 2017 then they will owe the foreign mortgage gain as they pass the substantial presence test for 2017 and will be considered resident aliens regardless of how they chose to file.
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Old Mar 8th 2018, 7:01 pm
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Default Re: Tax Question

Originally Posted by jammiie View Post
If they came in May 2017 then they will owe the foreign mortgage gain as they pass the substantial presence test for 2017 and will be considered resident aliens regardless of how they chose to file.
I do understand that and they assumed that this tax is unfortunately payable however we were looking at ways of reducing the exposure and wondered if the tax burden can be shared by them as the wife hasn't been working and l wondered if her half of this could be off set.
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Old Mar 8th 2018, 7:05 pm
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Default Re: Tax Question

I do not believe so. Their best bet would probably be to file married jointly as this will give them the lowest tax bill for their US earnings.

Cook_County has some views on the foreign mortgage gain tax and I expect he'll be on here before long.
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Old Mar 8th 2018, 7:12 pm
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Default Re: Tax Question

Originally Posted by jammiie View Post
I do not believe so. Their best bet would probably be to file married jointly as this will give them the lowest tax bill for their US earnings.

Cook_County has some views on the foreign mortgage gain tax and I expect he'll be on here before long.
Ok, thanks for your help.
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Old Mar 8th 2018, 10:03 pm
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Default Re: Tax Question

Originally Posted by Ecto17 View Post
Thanks for your response.
On the bonuses, are there further deductions or is it roughly all that is taken. Sorry if that seems an obvious one. ...
In my experience the incremental increase in my pay due to bonuses is 58% of the gross value, and I discovered recently that that was set by the IRS, so how it shakes out with other deductions, such as state income tax, I honestly don't know.
.... I think l am on the right lines of thinking that the exposure for the remortgage is $51,336, does that sound about right to you based on the figures above? ....
Well it's possible but depends on the size of the mortgage and when it was taken out. If the exchange rate was around $1.75, and has fallen by 20%, to $1.40, $51,000 would imply a mortgage of around £150,000 (payoff amount).
... Do you have a rough idea of what rate that 'gain' is roughly taxed at? My friend is getting very worried and trying to help her establish an estimate? Not sure if that is possible or not.
Also you mention a gain on the value of the property, is there further exposure beyond the loan differential that she should be aware of? ....
CGT is potentially chargeable on the home and the loan, that's all, but only if the home is sold, there would be no "gain" on the home if it was just a refi. I think CGT is now charged at 20%, but I don't know if that rate applies to a gain on an foreign currency loan.

Last edited by Pulaski; Mar 8th 2018 at 10:12 pm.
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Old Mar 8th 2018, 10:35 pm
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Default Re: Tax Question

My only other easy thinking here is perhaps aiming to optimise excess foreign tax credits, so as to use some of these against the tax on the currency gain.
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