This week, the Tax Forum helps an overseas reader determine his trader status, passes on another college savings plan tip (boy, did that
column hit a nerve) and answers an English inheritance issue. We even throw in a question about bonds for good measure -- not to mention a great perk for the elderly.
Send any other questions you may have to
firstname.lastname@example.org. Don't forget to include your first and
Overseas Trader Status
I have asked three tax advisers in three countries the following questions and got wildly different answers. Here's my current situation: I am a U.K. citizen living in Germany. I buy options all day. I have no other job. I am self-employed in the sense that I live off my past gains and savings I made three years ago, on which I paid tax in the U.K. I have always paid taxes in the U.K. right up to 1997, when I stopped working. I do not buy and hold for longer than 20 days. I trade only in U.S. stocks. I do all my trades via U.S. Internet discount brokerages. So my question for you: Where do I pay my taxes? Do I qualify as a trader? What tax bracket do I fall within? Which forms do I need to fill out? -- George Perdios
You are not a trader for U.S. tax purposes, so don't worry about the crazy U.S.
trader rules. (Please note that I do not know how Germany or the U.K. defines or taxes a trader.)
For U.S. purposes, if you are conducting a trade or business in the States, the income is considered to be "effectively connected to the U.S." and you will owe tax on it, says Nick Morrow, foreign tax specialist at
, a New York accounting firm.
But if all your trading is done overseas and for your own account, your income is not effectively connected with U.S., says Morrow.
Assuming your only U.S. income is from your trades, you may not even have to file a U.S. tax return. Like all nonresident aliens who trade, you will not owe capital-gains tax on your trades in the U.S. There may be withholding on any dividends you receive, but as long as the withholding covers your tax obligation, you would not have to file a U.S. return. (See this previous
Tax Forum for more details.)
For more international questions, be sure to check out this recent
Global Tax Forum.
More on College Savings Plans
It took quite a while to get Fidelity to mention the UNIQUE New Hampshire plan to me. And Vanguard says it has no plan other than the Education IRA. What's the deal? -- Joe Sanfilippo
Seems like everyone is interested in state college savings
plans. The follow-up questions keep coming in.
When gathering information about these plans, it's best to contact the states directly. Some of these plans, like New Hampshire's UNIQUE plan, are run by private firms like Fidelity. But the involvement and administrative responsibilities of these companies vary from plan to plan. For instance,
has very limited responsibility to the Iowa plan, but
manages everything from soup to nuts for New Hampshire's plan.
We included links for some great college savings plans'
Web sites in last week's Tax Forum. Be sure to check them out.
Bond Trader Hopes to Save Trees
I am interested in bonds, but I want a minimum of tax-related paperwork. How can I find out which of these instruments only generate 1099s each year without original issue discount (OID) forms? Because I do my own taxes, I would be willing to make less money to avoid the fuss. -- Tom Deutsch
If you're looking for fixed income without much paperwork, try munis.
Munis, a.k.a. municipal bonds, are bonds issued by a state, city or local governments to finance operations or special projects. The interest from these bonds is tax-free on the federal level and can be tax-free on the state level. Even so, you'll still get a
The only exception would be if you bought a new issue at discount. Then you would receive an original issue discount, which is a form of interest, says Bob Beck, a principal in the municipal bond department at
, an investment services firm in St. Louis. Come tax time, you'd receive OID forms and would have to report the interest income on your tax return.
A friend of mine just inherited a lot of money from his mother's estate. His mother lived in England, and he lives in New York. He's already paid the death tax in England on the inheritance and he's hoping he won't have to pay inheritance tax in the U.S. I told him he'd probably still have to pay the tax here. Is that correct? -- John Miller
Though the Queen took her cut from your friend's inherited estate in England, Uncle Sam will leave him alone here.
In the U.S., the person inheriting property pays no inheritance taxes, regardless of where the property originated, says Joe Parker, tax research analyst at
. The taxes, if any, are paid by the estate.
Your friend will have to worry about taxes if he sells any of the inherited property, though. Remind him that he'll get a step-up in the basis of his inherited property. That means everything will be priced at fair market value on date of his mom's death, rather than valued at her original cost.
See a previous
Tax Forum for more inheritance tax details.
Tax Perk for Seniors
If you are 60 or older and have a difficult time getting around, the
Internal Revenue Service's
Tax Counseling for the Elderly program may be perfect for you.
If you qualify, the program will send an IRS volunteer who will prepare your tax return and file it electronically. And the best part: It's free.
To get an application, call 202-283-0189 or click
here to get the info off the IRS Web site.
Applications for the April 15, 2000, tax deadline are due Aug. 27.
TSC Tax Forum aims to provide general tax information. It cannot and does not attempt to provide individual tax advice. All readers are urged to consult with an accountant as needed about their individual circumstances.