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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22704
Experience:  Taxes, Immigration, Labor Relations
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US citizen living in Japan. Daughter 18 in college in Japan

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US citizen living in Japan. Daughter 18 in college in Japan now and will go to USA to study one year starting fall 2012. Have a Custodial/UGMA - Fidelity Advisor Equity Growth Fund. This Mutual FUND is in both our names. Under the USA/Japan Tax treaty I do not have to pay tax to USA up to $91,000 since I pay Japan Tax. As a part-time worker I make only $16,000 USA dollars when I file so I am well below this. I have claimed my daughter as a dependent though for me does not really make a difference....QUESTION: Now I want to liquidate the mutual fund to pay for her college expenses for her year in the USA -- the fund is in both our names...can I liquidate and list this on my tax form 1040 (and what line do I list it on) and form 2555-EZ and still enjoy the Tax treaty benefits? OR does my daughter need to (or should she) file her own tax return (she is US citizen with SS#) and hopefully not get taxed very high on paying for college? What is the best way to handle this?
Submitted: 3 years ago.
Category: Tax
Expert:  Lev replied 3 years ago.

LEV :

Hi and welcome to Just Answer!
Under the USA/Japan Tax treaty I do not have to pay tax to USA up to $91,000 since I pay Japan Tax.
That is no a provision of the USA-Japan Tax treaty. As an US citizen you are required to report all your worldwide income. However, because you are bona fide resident of a foreign country - you are qualified for a foreign earned income exclusion. Maximum foreign earned income exclusion in 2010 is $91,500. The foreign earned income exclusion is not granted automatically – you need to file your tax return to claim the exclusion. Only earned income may be excluded. Investment income may not be excluded.
QUESTION: Now I want to liquidate the mutual fund to pay for her college expenses for her year in the USA -- the fund is in both our names...can I liquidate and list this on my tax form 1040 (and what line do I list it on) and form 2555-EZ and still enjoy the Tax treaty benefits?


Most likely, a Custodial/UGMA is under your child's name and all income is reported using your daughter's SSN – thus that will be her taxable income.
If you liquidate that account – means you will sell shares of Fidelity Adviser Equity Growth Fund – your daughter will be issued the form 1099-B – www.irs.gov/pub/irs-pdf/f1099b.pdf - reporting the total proceeds.
To determine the capital gain – you need to determine the basis. That is your original purchase price plus all dividends and capital gains that were added to the basis over years your owned that account.
The capital gain = (selling price from 1099-B) - (basis)


OR does my daughter need to (or should she) file her own tax return (she is US citizen with SS#) and hopefully not get taxed very high on paying for college?


Yes – your daughter will require to file her own tax return – she still may be your dependent.


If the capital gain is less than $1900 and your daughter will not have any tax liability. If the capital gain is more than $1900 - your daughter might owe some income taxes.
The fact of using the money for tuition will be irrelevant in this case. However - you might be eligible to claim an educational credit for your dependent.
Let me know if you nee3d any help or clarification.

Customer:

Just to let you know...I always file my taxes every year to get my exclusion.

Customer:

Ok, I need to determine the basis. To clarify: We originally paid $5000 for this and put it in 100% growth when my daughter was 3 years old. We got some capital gains over the years but it was too little (less than 950) to file anything about it. The fund is now worth $15,800 or so now.

Customer:

So the basis is 15,800 - $5,000 = capital gain? And if we liquidate that account we pay tax on the difference?

Customer:

Also, by the same token, would my daughter (who has USA passport ) be elligible for the Tax Exclusion as I am?

LEV :

That would be correct - if the fund did not distributed dividends.
But the fund did paid dividends and made capital distributions - that were reported to your daughter each year.
These should be added to the basis.
Here are some information - http://finance.yahoo.com/q/hp?s=EPGAX&a=00&b=27&c=1998&d=05&e=2&f=2011&g=v

LEV :

Your daughter would be eligible for exclusion of earned income. Investment income may not be excluded.
Most likely - that will be a long tern capital gain - taxes at reduced rate.
Because your daughter is a full time student - her investment income above $1900 will be taxed at your tax rate. However if $16,000 your only income - you might be eligible for zero percent tax rate on long term capital gain.
So - most likely - there will not be any tax liability - but still she will be required to file a tax return.

Customer:

This is what I understand so far:

Customer:

1. capital gains (plus any dividends) are the basis

Customer:

2. My daughter should file taxes when we liquidate and report this.

Customer:

3. She can claim the tax exclusion (?) under the US/Japan tax treaty like myself

Customer:

4. On what line on the 1040 does she list this income..what is it called? Line 13..capital gain? Does she attach Schedule D and also 2555-ez (for the exclusion?)

Customer:

5. where do we list this "income" on my tax form and on hers?

LEV :

1. capital gains (plus any dividends) are the basis





basis = whatever you r original investments plus dividends that were added.
capital gain = (selling price) - (basis)



2. My daughter should file taxes when we liquidate and report this.






that is correct



3. She can claim the tax exclusion (?) under the US/Japan tax treaty like myself
she may not claim exclusion because that is not earned income.
4. On what line on the 1040 does she list this income..what is it called? Line 13..capital gain? Does she attach Schedule D and also 2555-ez (for the exclusion?)
Yes - schedule D and line 13 on the form 1040 (or Form 1040A). No need to file 2555EZ. You will also need to use the form 8615 - http://www.irs.gov/pub/irs-pdf/f8615.pdf
5. where do we list this "income" on my tax form and on hers?
You should not report her income on your tax return. This is reported on her tax return as mentioned above.



Customer:

SO given all that you said, is there anyway now, to reduce tax liability for this poor college student?

LEV :

So - most likely - there will not be any tax liability - but still she will be required to file a tax return.

Customer:

sorry, to bother, but why will there not be any tax liability? For what reasons? Can you number them easily for me as in 1. 2. 3. I understand better that way! sorry....

LEV :

Because your daughter is a full time student - her investment income above $1900 will be taxed at your tax rate. However if $16,000 your only income - you might be eligible for zero percent tax rate on long term capital gain.
So - most likely - there will not be any tax liability - but still she will be required to file a tax return.

Customer:

so how does the IRS know my income from looking at my daughter's tax form...how do they KNOW how to tax at my rate? Is there a space on the form where she lists MY INCOME?

LEV :

She will use the form 8615 to calculate her tax liability and report your income - http://www.irs.gov/pub/irs-pdf/f8615.pdf

Customer:

OH! ok got it. you have been MORE than patient with me and I thank you....I imagine it is quite late there! Thank you!

LEV :

Yes - are welcome. I am glad to be helpful.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22704
Experience: Taxes, Immigration, Labor Relations
Lev and 3 other Tax Specialists are ready to help you

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