Tax Questions: Schedule B, 8854 and more......

This is my second year of filing US taxes from the UK, and I thought it was going to be simple.  Apparently not.  I'm not even sure if I filed mine correctly last year after reading some of this stuff.

Here are my questions:

1)  I've read something on the IRS website about a Form 8854, Expatriation Information Statement.  I didn't know about or fill this out last year, so now I'm worried I'll be fined.   My husband and I are going through debt management in the UK because of his redundancy, so we don't have money for rent much less a $10000 fine from the IRS.  Does anyone know anything about this?

2)  I have had a current account in this country since I moved here, but I doubt I've ever had much interest gained on it.  Do I need to file a Schedule B?

Last year, I filed a 1040 and a 2555, and that was all I did.  I didn't file a Schedule B or an FBAR, so I'm not sure what I need to do.  I have no large sums of money anywhere; we're pretty much broke, but I do still have a 401K in the States that I have never touched.  Can anyone give me some advice?  I'm confused and afraid I'm going to file this one incorrectly and may have filed last year's incorrectly, as well.

Thanks!

1)  I've read something on the IRS website about a Form 8854, Expatriation Information Statement.  I didn't know about or fill this out last year, so now I'm worried I'll be fined.

DO NOT file Form 8854 unless you intend to renounce your U.S. Citizenship. This is the form used for individuals who wish to leave the U.S. permanently, and relinquish either their citizenship or, for non-US citizens, a long term residency. The assumption is that you are exiting the US to avoid taxation. Not a good thing unless you really mean it.

Thanks, TheOAP.  I definitely don't want to renounce my citizenship, so I will strike that one from my list.  However, I didn't file a Schedule B last year on the current checking account I have in the UK.  I haven't had much more than £1000 in it at any one time; do I need to worry about that?

From what I've read, I know I need to file a 1040, a 2555EZ (since I filed a 2555 last year and qualify for both the physical presence and tax home tests as I was in the UK for the whole of 2009 less 10 days at Thanksgiving), and I think a Schedule B.  My question is how do I know how much interest my account accrued?  They don't send you notices here like in the US.  Also, how do I know if I need to fill out a FBAR?  I didn't fill out a Sch B or a FBAR last year - I'm concerned they will fine me even though I had no idea I needed to file those.

Help? 

Schedule B is necessary if you've earned any interest at all on your current account. This figure can be obtained by speaking to your bank, but if you keep your statements the simplest way is to just add up the interest payments for the year - your net interest - and add in the tax taken out by the bank (20% of the total) - to get the gross interest.

So if the amounts on your statements add up to £80, the full amount of interest to be reported would be £100, as 20% of £100 is £20, and £100 - £20 = £80. It's easiest to multiply your net interest by 1.25, which will give your gross which needs to be reported.

As for FBAR, you have to file if at any time in 2009 the amount in one of your accounts exceeded $10,000. There are different ways that people calculate this, but the two that make the most sense are:

1) multiply the maximum balance in your account at any time in 2009 by the exchange rate for the day that that balance existed (you can look that up at http://www.x-rates.com/cgi-bin/hlookup.cgi), or

2) multiply the maximum balance in your account at any time in 2009 by the IRS "unofficial exchange rate" for the pound for 2009, which was 1.57.

Strictly speaking, 1 is probably the most "proper" way to calculate the amount, but I would wager that most people use method 2.

The instructions to the FBAR tell one to report based on the 12/31 "official" exchange rate - even though there is no such thing.

Most people file FBARs reporting every possible foreign financial account right down to the M & S giftcard because the penalties written in law could be truly horrid if the form is not complete when filed.  The trouble is that no-one knows what is actually supposed to be reported or how.

Okay, so the way I'm understanding this is that I should file a Schedule B only since my current account never exceeded more than £1000 let alone $10000.

However, I didn't file a Schedule B last year:  should I be concerned?  My current account (the only one I have) has never had $10000 equivalent in it.

The conundrum you've encountered is shared by many. Let’s start with Schedule B for 2009. If the amount in your current account is £1,000 (and using the unofficial rate for 2009), then you must file Sch. B. (£1,000/.641=$1,560 which is over the $1,500 that requires you to file Sch. B.) If the amount is £961 or less (£961/.641=$1,499), then you have a decision to make. You will find opposing viewpoints on this forum. Some contest that since it is below $1,500, you do not file Sch. B and just list the interest on Line 8a of Form 1040. Some contest, including myself, that even if it is below $1,500 the instructions for Sch. B clearly indicate that anyone with a Foreign Bank Account, no matter how small the amount, should file Sch. B, Parts I and III. You’ll have already worked out the amounts for 1040 and it only takes about 10 minutes if doing it by hand. Complete Part I, and if you are certain that the combined value of the accounts (read guya's comment above) is not over $10,000, then according to the exceptions in the instructions, you check the “NO” box for Line 7a in Part III and stop there. By doing so, you’ve informed the IRS/(Treasury) that you’re not required to file an FBAR. It’s confusing, and it’s your decision.

On to 2008. If, by filing Sch. B, the amount of tax due for 2008 changes, or the amount of any refund changes, you are legally required to file a 1040X with the new amounts, and include Sch. B (2008) with the return. Also include your 2555 from 2008. If the amounts do not change, I will give no further friendly advice (I’m just a punter, and not a tax professional), and hope that someone with more expertise will comment.  

The conundrum you've encountered is shared by many. Let’s start with Schedule B for 2009. If the amount in your current account is £1,000 (and using the unofficial rate for 2009), then you must file Sch. B. (£1,000/.641=$1,560 which is over the $1,500 that requires you to file Sch. B.) If the amount is £961 or less (£961/.641=$1,499), then you have a decision to make. You will find opposing viewpoints on this forum. Some contest that since it is below $1,500, you do not file Sch. B and just list the interest on Line 8a of Form 1040. Some contest, including myself, that even if it is below $1,500 the instructions for Sch. B clearly indicate that anyone with a Foreign Bank Account, no matter how small the amount, should file Sch. B, Parts I and III. You’ll have already worked out the amounts for 1040 and it only takes about 10 minutes if doing it by hand. Complete Part I, and if you are certain that the combined value of the accounts (read guya's comment above) is not over $10,000, then according to the exceptions in the instructions, you check the “NO” box for Line 7a in Part III and stop there. By doing so, you’ve informed the IRS/(Treasury) that you’re not required to file an FBAR. It’s confusing, and it’s your decision.

Okay, so I will file a Schedule B for 2009, then.  You're right:  I'll already have the info for the 1040, so there's no reason not to, really.  However, I have to ask:  the figure you're going by is the amount in my account; the figure that dboone went by in their previous post was the amount of interest accrued in that account over the year minus 20%.  Which is correct, and how do I figure the total to note on my forms?

On to 2008. If, by filing Sch. B, the amount of tax due for 2008 changes, or the amount of any refund changes, you are legally required to file a 1040X with the new amounts, and include Sch. B (2008) with the return. Also include your 2555 from 2008. If the amounts do not change, I will give no further friendly advice (I’m just a punter, and not a tax professional), and hope that someone with more expertise will comment.

 

Okay, so here's a question:  I didn't pay out or receive a refund last year as I took the Foreign Earned Income Exclusion and didn't make anywhere near the threshold (something around $86,000) for last year.  All I did was file a 1040 and a 2555.

I'm sorry for all the questions.  This just confuses me, and I've never been good at taxes - I always had my mom do mine when I lived in the States.  I just want to make sure I'm doing this right.

--Modified:
Okay, I've read on the instructions for the Schedule B that it's ''over $1,500 of taxable interest or ordinary dividends''.

I haven't had $1,500 of taxable interest.  I've had more than that amount total in my current account more than a few times in 2009 but not in interest.

the figure you're going by is the amount in my account; the figure that dboone went by in their previous post was the amount of interest accrued in that account over the year minus 20%.  Which is correct, and how do I figure the total to note on my forms?

You're right, I wasn't clear. It's the gross amount in the account. The net amount is usually listed on UK statements, but please check your statements to be sure. (Net amount x 1.25 = Gross amount)

I haven't had $1,500 of taxable interest.  I've had more than that amount total in my current account more than a few times in 2009 but not in interest.[/i]

You say interest for 2009. You need to check the amounts of interest for 2008. If the same is true for 2008, then you need to make the decision (my last post, end of para. 1) as to how you want to treat Sch. B for 2008. You could decide that since it was under $1,500, you didn't have to file Sch. B for 2008 and your returns for 2008 would be complete and accurate (assuming no 2008 FBAR required). Or, you could decide that you should have filed Sch. B, as you've indicated above that you're doing for 2009, in which case you should wait for more expert advice than mine as to what action you might take for your 2008 return. I can't advise one way or the other. I don't know if one way or the other is correct. As I said above, it's disputed amongst us amateurs. Since I don't know the "correct" answer, it would be wrong to say.

But you get full points for determination. Don't give up yet. Mom would be proud.

Based on how much you reveal about your level of income, choosing to claim the foreign earned income exclusion in 2009 on Form 2555 may be a worse answer than revoking the exclusion and claiming the foreign tax credit on Form 1116.  The 1116 credit alternative will also probably allow you to also get the $400 Making Work Pay credit by filing Schedule M -- so you get some Federal money to spend on mothers day and holidays...

This is a higher risk game because once revoked you can't claim the foreign earned income exclusion for another 5 years - and the $400 refund may be taxable in the UK - but it could still be a better answer for you.

You're right, I wasn't clear. It's the gross amount in the account. The net amount is usually listed on UK statements, but please check your statements to be sure. (Net amount x 1.25 = Gross amount)

Is that the gross amount of interest or the highest gross amount of money in the account at any one time?  If it's the interest, do I add all of the interest on each statement together and multiply by 1.25?

You say interest for 2009. You need to check the amounts of interest for 2008. If the same is true for 2008, then you need to make the decision (my last post, end of para. 1) as to how you want to treat Sch. B for 2008. You could decide that since it was under $1,500, you didn't have to file Sch. B for 2008 and your returns for 2008 would be complete and accurate (assuming no 2008 FBAR required). Or, you could decide that you should have filed Sch. B, as you've indicated above that you're doing for 2009, in which case you should wait for more expert advice than mine as to what action you might take for your 2008 return. I can't advise one way or the other. I don't know if one way or the other is correct. As I said above, it's disputed amongst us amateurs. Since I don't know the "correct" answer, it would be wrong to say.

When I said that I had had $1,500 equivalent in my account more than a few times in 2009, the same would be for 2008, as well, since the job I had for 6 months in 2008 is the same job I had for 6 months in 2009.  I am about 99% certain, without looking at my bank statements, that I haven't accrued that much interest in either year.

I suppose I'll wait and see if anyone else tackles this ''conundrum''.

Thanks for the advice, guya.  However, here's my problem:  I need this mess spelled out as basic as possible and the way that's easiest as possible to do it that still covers what I need to do.  I don't mean to sound ungrateful for the advice given.  I'm just incredibly confused by all this and want it dealt with as quickly as possible.  If taking the exclusion each year that I qualify is the easiest way to do it, and it covers what I need it to in order to be legal, I'd rather stick with that.

The interest on taxable UK bank/building society account statements can be shown in one of two ways:
1) Interest          8.00
or
2) Interest         10.00
    Tax deducted   2.00

1) is interest paid net, 2) is interest paid gross, and then the tax deductions are made. They both end up with the same result (£8.00). Since it's a current account, it is probably shown as 1). If so, add up all of the interest payments made during the year and multiply by 1.25. In this case, the result (total x 1.25) is your Total Interest for the year and what you report.
If it's 2), then add up all the lines that say "Interest" only. In this case, the sum is your Total Interest for the year and what you report.  

Maybe one of the tax experts can do a post on the difference between Schedule B and the FBAR, since it seems like some people are confused.

They both refer to bank accounts but you report different amounts, (interest income vs. total amount in the account), they get reported to different places, and there are different rules regarding whether you have to file.

I think it would be a good idea for one of the experts to do an explanatory post and for one of the mods to sticky it.

Thanks the OAP.  That helps me a LOT. 

However, I have two more questions:

1) If I were to decide to file a Schedule B for 2008, how would I do it?

2) My address has changed twice since I filed in 2008 (my husband and I moved into a 3-bedroom house to rent but were only there about 7 months because he was made redundant and we had to move back in with his mother).  Should I fill out a change of address?  Do I need to notify them of both moves or just the most recent?

1) You would file a Form 1040X, form this site:
http://www.irs.gov/pub/irs-pdf/f1040x.pdf
The instructions are on this site:
http://www.irs.gov/pub/irs-pdf/i1040x.pdf

2) Yes, you should send a change of address for your current address only. The form is here:
http://www.irs.gov/pub/irs-pdf/f8822.pdf
For the “old address”, use the address from which you filed your 2008 Return. (Or if you have notified the IRS of a new address since you filed, use it.)

Let’s see if we can start your week out on a high note.
First, we need to know if you “declared” on the 2008 Form 1040, your interest earned in 2008. If you have a copy of what you filed, it would be on Line 8a of Form 1040.
A) Even if you didn’t declare the 2008 interest earned, you have 3 years from the time of filing (June 2009 for US taxpayers abroad, so June 2012) to correct the error of omission.
B) For 2008, you had a $5,450 standard deduction plus a $3,500 personal exemption. I am making the assumption that you didn’t receive more than $8,950 (5450+3500) in interest in 2008.
C) You did file a return for 2008, so you shouldn’t have any additional “interest” (due to late filing) owing even if you didn’t declare the 2008 taxable interest earned. (I stress “shouldn’t” do to the fact that IRS rules are changing even as I type this. It’s currently difficult to say anything is 100% true. For this reason, I can’t say what may arise in penalties, since the IRS/Congress are on a witch hunt regarding Foreign Assets such as Bank Accounts. That’s why many individual responses on this thread, and others, may seem vague. ) I’m basing this assumption on the level of income and 2008 interest you have indicated, and the fact that if it had been declared, you still would have owed $0 in tax.
D) All of this is an “assumption” based on a return that only involved excluding income below $87,000 on 2555 or 2555EZ, and with additional taxable interest (of the level you are indicating) requiring to be declared. Any other variation (income, deductions, other forms, etc.) on this voids the assumption.
E) From what you have indicated in all the posts above, I feel (and I must stress, my amateur opinion only) you have not done anything illegal. So don’t subject yourself to any needless worry.

We may get further posts which disagree with this.