In a famous quote Benjamin Franklin said that there are only two things that are certain in life: taxes and death. Indeed, from our birth to our death (and sometimes even after), the tax provisions accompany us every step of the way.
This is all the more true when it comes to the American taxation system – a system with many rules, instructions and forms. While there is a great deal of certainty regarding the imposition of the tax, there is a great deal of uncertainty regarding the bureaucratic procedures concerning the issue. In the article before you we will try to put things in order and focus on one of the most common forms, that is Form 1040.
What is Form 1040?
Form 1040 is the annual income reporting form for individuals filing tax returns. The corresponding form is Form NR 1040 – an annual tax reporting form intended for individuals who are not U.S. citizens but must file a tax return as well.
What is the tax reporting obligation?
The U.S. taxation system distinguishes between the obligation to report tax and the tax liability itself. The obligation to report is an independent obligation that does not depend on tax liability, according to which a person to whom the reporting obligation applies and whose income is higher than the income thresholds set by law will be obligated to report his annual income to the U.S. Tax Authority. In fact, a person may be obligated to report even if his tax liability is $0.
Who is required to file a tax return?
American taxation is personal and applies to the person regardless of his place of residence. Therefore, the reporting obligation applies to American citizens and permanent residents even if they do not reside in the United States. This means that many Israelis who have dual Israeli citizenship may be unknowingly required to report to the U.S. Tax Authority.
Furthermore, foreign citizens who generate income originating in the United States are also required to file an annual tax report. Thus, Israelis who do not also hold U.S. citizenship but have any income originating in the United States must file an annual tax report.
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What are the income thresholds that require tax a tax return?
In the previous section, we realized that the obligation to report tax is a broadly applicable obligation. However, the applicability of the liability is not in itself binding in the submission of the report. The obligation to report will only be established given compliance with certain income thresholds. A total income below the income thresholds does not require filing a report, even if the person in question is a U.S. citizen.
Self – employed
Any income above $400 will establish an annual tax reporting obligation.
Employees
The tax provisions set a different income threshold according to the personal status of the submitter.
There are a number of recognized personal statuses:
- A single person – single or divorced / widower without children.
- A married person who files separately and independently from a spouse.
- Married people filing a joint report.
- A head of a household – an unmarried taxpayer that manages a household and supports dependents.
- A widower with children for the first two years after the death of a spouse.
As mentioned above, each personal status has a different income threshold that requires him or her to submit a tax report. These income thresholds take into account social and other considerations. Thus, the income thresholds for ” underprivileged” populations that the state seeks to alleviate will be higher, while the income thresholds for “strong” populations will be lower. Similarly, for populations that the state seeks to incentivize so they will change their filing status, a particularly low income status is set.
The tax provisions also provide relief to the elderly population (over the age of 65) and the blind population. For these populations, it is determined that a total of $1,650 will be added to the income threshold set by the law.
| Status (2008) | Income threshold |
| Single | 12,200$ |
| Married Filing Jointly | 24,400$ |
| Married Filing Separately | 5$ |
| Head of Households | 18,350$ |
| New Widower | 24,400$ |
If the income of the taxpayer exceeds these income thresholds, he will have an annual tax reporting obligation that will be done through Form 1040 or Form 1040 NR.
What does the report include?
You have come to the conclusion that you have to file an annual income tax report – what does the report include?
As mentioned above, the tax report is done using form 1040 or 1040 NR for foreign citizens who are required to file a report.
As far as U.S. citizens or permanent residents are concerned, the report will address their global income. That is, their income in Israel or anywhere else in the world. In contrast, as far as foreign citizens are concerned, the report will include only their local income in the United States.
What are the details required to fill out the form?
The first sections of the form include personal information like the social security number (SSN) or tax identification number (TIN) and details regarding the status of the submitter. After the sections including the basic information, the form includes a number of sections about the submitter’s income. Within the framework of these sections, the taxpayer must report all sources of income – active or passive.
For example, the form will include details regarding income from wages, Social Security benefits, pensions, income from private businesses, dividends, interest, etc. The third part of the form includes references to possible tax deductions to which the taxpayer is entitled. In this section, the person must specify the deductions to which he is entitled. The last part of the form is also informative and aims to provide information regarding separate legal entities owned by the assessee.
When should the report be submitted?
U.S. citizens living within the United States will submit Form 1040 by April 15 of the following year. An extension to submit the report can be obtained until June 15, when a special request is submitted. U.S. citizens who do not reside within the United States automatically receive an extension to submit the report as of June 15. In both cases, an additional extension can be requested in special circumstances, and the report can be submitted by October 15.
Citizens of foreign countries will submit Form 1040NR by June 15.
| Deadline | Extension | Extra extension | |
| American citizens | April 15th | June 15th
Citizens residing outside the United States will receive the automatic extension. |
October 15th |
| Foreign citizens | June 15th | December 15th |
What are the sanctions for the lack of reporting?
In order to incentivize the reporting debtors to comply with this obligation, the U.S. government has imposed sanctions and hefty fines for lack of reporting and inaccuracy in reporting.
Delayed reporting may result in fines of up to 25% of tax liability.
Inaccurate reporting my result in a fine of about 20% of the tax liability.
The tax liability itself will carry an interest rate of 6% during the aforementioned period.
Beyond civil sanctions, the lack of reporting and partial reporting may be considered as a criminal offense and may result in criminal sanctions.
In summary
The U.S. taxation system has broad applicability and influence. The complexity of the tax provisions regarding the manner of reporting, its scope, and the submission dates, together with the heavy sanctions that may be imposed on the taxpayer, require professional assistance.
The MasAmerica team consists of accountants and lawyers with knowledge and experience in both Israeli and American tax provisions.
At MasAmerica, we will be happy to advise, accompany you and help you reduce your tax liabilities and maximize revenue.
