Turning in my tax returns

While most folks get their taxes done in April, I’ve only file extensions  The real work comes in September, when the fiscal year closes for the BV and the personal returns can be completed.  The job has gotten easier as more banks and brokerages move historic records online, and I’ve worked with Dutch and US accountants to get records complete ahead of the October 15 filing dates.

Nonetheless, expat taxes are never simple, especially for US citizens.

• Compile the January 1 balance sheet.

I survey all of the year-end statements and get the current positions of all the accounts, investments, assets (house and autos) and deductible payments (children, charities, mortgage, government fees).  The biggest items as an expat entrepreneur are health insurance payments, foreign living expenses, and unreimbursed business expenses. Even if I don’t get credit from the Dutch, it has a big impact on my US returns.

I also compare against last year’s entries: it gives me a check ad validation that I haven’t missed anything and some idea of whether my overall fiscal health is improving or declining.  Unfortunately, stocks are down another 7% for 2011 compared with 2010 <sigh>.

• Complete the Dutch business returns.

Corporate tax returns in the Netherlands are fairly straightforward if records are complete.  I clear all of my business revenues and expenses, no matter the global source, through the BV.  Each month, I update business records and review them quarterly with my accountant.  I keep expenses in the business where they are taxed at 25% and I get VAT refunds, only paying myself a flat monthly salary (taxed at around 38% net). 

As a result, tax payments are usually pretty modest.  But there’s still some back and forth with the accountants to clear up minor discrepancies before we’re ready to file.  This year’s scramble for documentation was set off when I got paid in stock rather than cash by a couple of clients.

• Complete the Dutch personal return

Dutch personal taxes are very streamlined, but I still rely on my Dutch accountants prepare the return properly.  It’s a “3-box” form where you enter personal income, business income, and investment income, respectively, then take a couple of modest deductions and calculate tax on the remainder.  The 30% Rule Exemption simplifies even this, preventing me from paying Box 3’s 1.2% tax on savings and investments.

In the end, my monthly Payroll Tax Deductions add up to be close to my personal taxes owed.

• Complete the US personal return.

US citizens are required to complete a tax return on their worldwide income, unlike Europe where only money earned in Europe needs to be reported.  It’s duplicate expense and effort, but I get credit for foreign taxes paid much like I do for state taxes paid.  If the foreign tax exceeds the US tax owed, then I owe nothing (no credit for going over, though).

This gets very complicated because the US wants exhaustive documentation of all foreign income, investments, expenses, and taxes in addition to all of the usual W2 and 1099 forms.  Further, my Dutch corporation is treated like a sole proprietorship in the US, which means that revenue, expenses, profits, and losses roll into my personal tax return. This is the main reason I can’t file until the fall, when everything else is done.

My accountant filed a 56 page tax return for me last year.

Annual costs for the process are around $5000, mostly for managing and filing the Dutch corporate returns.  The two personal filings are less than 1K$ each.

My advice is to keep good records, have knowledgeable Dutch nd US tax help, and get flat fees negotiated up frot.  Usually you can keep costs down by doing your own record-keeping and reconciliation, but the money saved more than offsets the fees paid. There are many services, such as Taxes for Expats and Global Tax Help, who’s websites offer good current advice and who will give you free review of your situation and ways to save money.

Destiny, taxes, and founding equity

I watched The Adjustment Bureau with Matt Damon the other night – diverting and touches on some good philosophic issues. Are our actions determined (predestination), or our outcomes determined (destiny), or neither (free will)? And how could we ever know?  The movie’s “Adjusters” keeping people on track towards their destiny, at one point justifying their actions by revealing

If you leave her, she will become a legendary dancer and a world-renowned choreographer. If she stays with you, she will spend her life teaching dance to sixth-graders.

That is absolutely haunting; is it true? Can our lives be determined to that degree by our choice of affections? I want to believe that our talent ultimately carries us, modulated by partners who can help or hinder (and who we facilitate in return, who we mutually grow and flourish with).

==================

More prosaically, Barclays started withholding tax on my UK bank accounts, even though I’m resident in the Netherlands.  They gave me HMRC form R85: Getting your interest without tax taken off, but then returned the completed form to me, saying that it only applies to UK residents. 

A bit of research followed, and the correct form is IR 105: Application for a not normally resident saver to receive interest without tax taken off.

I do like the clarity of British labeling: the comparable US form is called “Request for Taxpayer Certification”

And, yes, too much time is spent managing this kind of trivia.  But if you don’t, it’s death by a thousand small cuts.

=================

When starting a  new company, there is always the question of how to divide the starting shares.  The easiest thing is to simply split the equity equally, or in proportion to contribution.  Now, Norm Wasserman, a Harvard business researcher looked at 500 US startups and found:

• The more varied the team is in entrepreneurial experience, idea generation, and capital contributions, the lower the probability of equal splitting.
• The larger the founding team, the less likely it is to divide shares equally.
• The more combined work experience a team has, the less likely the team will split the shares equally.
• Teams where founders are related through family are more likely to split the equity equally.
• An equal split is associated with a lower valuation than an unequal split, especially in cases of quick negotiations.
• Founders who split equally when they should split unequally may be giving up a substantial amount of financial value. (Related research suggests that such teams may also be less stable.)

It’s interesting research: in my experience, I’ve found that folks contributing money often want a disproportionate share, arguing that they are ”the only ones with something to lose”.  They also tend to be more sensitive to having their proportion or terms challenged.  Work experience, entrepreneurial experience, and contribution to the founding idea should also count alongside the amount of capital invested into the venture.

And the negotiating tactics of contestants on Dragons Den and the Apprentice are absolutely miserable. They beg rather than trade and, predictably, the Alan Sugar’s of the world call their bluff every time and walk away with the deal.  It’s painful to watch.

Paying my income taxes

Remember Steve Forbes' pitch that your tax return should fit on the back of a postcard?

My US and Dutch tax returns arrived from the Deloitte last week, and they were a study in contrasts. The US return weighed in at 71 pages of dense pose, boxes, exhibits, and supporting declarations. In all fairness, a typical year runs about a third of that, and I did manage to avoid the dread Alternative Minimum Tax this yes. The foreign earnings declarations and various tax equalization qualifications bulked it up considerably; I appreciate having good help to get all of this information organized. Still, the instructions to "Review and approve" the transactions and reports in the forms, many of which were hidden all year, is an exercise in trust and faith. Beyond the obvious mistakes, there's little to argue with.

Contrast that with my corresponding Netherlands tax return.

The Dutch divide income into three groupings, called Boxes.

Box 1 captures wages, with a progressive tax for each earnings band up to the maximum of 52% above 55,000 euro. Mortgage interest and savings plan contributions are deducted from this number.

Box 2 is a flat 25% tax on business income, including dividends and capital gains.

Box 3 is a flat 1.2% on the total value of savings and investment (not just interest).

In practice, it makes for a very simple return, even for a complicated person like me.

     Two pages.

         Steve Forbes would be proud.

(and, no, seriously, I never voted for Steve)

Cross-border banking, taxes, investments (and learning to read)

'Clearing out a few notes of advice before the start of the new week...

Disclaimer: This essay describes my personal knowledge and experiences with cross-border finances. It is not intended to substitute for getting personal advice from a professional advisor. Getting started, I also recommend reading the US-Expatriate-Handbook, available on-line from the West Virginia University College of Business and Economics.

Banking: Some time back, I wrote of the perils of trying to get transfer accounts set up between US and Dutch banks. A change in our company's payroll system required me to set up a US-based direct-deposit system that could transfer monthly stipends out of the US each month. Washington Mutual and CitiBank could not reliably make regular transfers, and neither Fortis nor Barclay had the necessary US connections.

My solution was an HSBC Premier account, their globally linked accounts system. Once I set it up, it has worked work flawlessly with competitive exchange rates. The account requires a hefty minimum balance with HSBC or a monthly fee, but if your company or employer uses the bank, you can probably access the program for much less.

Taxes: The Economist reports that a new law, signed June 16, will require payment of asset penalties if a US expat renounces citizenship in order to avoid double taxation. This comes on top of earlier changes to the law, limiting US credit for foreign taxes paid.

The net effect is to make life more expensive for working expatriates. There are also much greater chances to make a mistake if you try to do your own taxes. My 2007 tax return is the size of a small novel: to the extent that you can negotiate the benefit, support for preparing and offsetting US taxes should be an essential part of an expatriate contract (or local work agreement).

Investments: US anti-terrorism and money-laundering laws have made it impossible to have European share accounts to invest in stocks, bonds, or mutual funds if you are a US citizen. US brokerages have closed offices, and local brokers screen out US expatriates. This makes it hard to make spare money work for you: European checking accounts pay virtually no interest.

Nonetheless, there is an alternative. Time deposit savings accounts, which pay an interest premium for limiting withdrawals, pay over 7% in the UK at the moment, and have very low minimums. (Barclay's Monthly Savings account is typical). And, as long as the dollar is falling, you get a boost by simply holding pounds and euros.

Learning to Read: Although I am still not able to think fast enough on my feet to keep up a conversational Dutch exchange, I am getting more confident by the month at reading and writing. Not surprisingly, children's books are a great source for getting started.

I have purchased used storybooks from the bookseller, either the "checkerboard" books or others of similar heft. Even better have been the WinklerPrins books sold at discount: the Kinder Woordenboek and Encyclopedie have been great. And I always have the Prisma Miniwoordenboek, available at Schiphol bookstores, close to hand.

Doing taxes and choosing causes

I'm deep into preparing my 2007 taxes: the assignment provides Deloitte to help out, who come with a small army of accountants and an absolutely impenetrable personal information collection system. I swear that it takes me twice as long to fill in their on-line system as it would to just do the taxes: this weekend is, thus, spoken for.

The tax filings have also gotten breathtakingly larger since I started living overseas. Where my taxes used to run about 15 pages, they now easily top 40. The Dutch filing probably adds another 20. It feels like a small novel, well beyond the capacity of unassisted expatriates to get things right.

Do we?

It's also a time that I become aware of the past year's charitable spending and think about where to send contributions in the future. The two traditional US recipients are churches and United Way (a big US charity hub that takes in payroll deductions and distributes them across a wide selection of worthy causes). I feel like I should take the time to understand and choose during the year, rather than just make it automatic and thoughtless.

So, my list:

I always like to "give back" my time to education: I used to organize and support a lot of science, math, and career day talks and demonstrations in local schools when I lived in the US. It's not so easy in the Netherlands, so this year I focused on student supervisions in England.

I still support my schools with donations too, sending some targeted funds to my college alumni organizations. It tickles me that Cambridge is asking for contributions to support their 800-year anniversary. It's really an eternal golden chain through ages of scholars there, isn't it?

Since I work in health care, I support the American- and European- Heart Associations. These groups have been getting increasingly commercial in recent years, though, especially in charging for access to scientific information (Guidelines) and training courses. I think that everyone is better served by making these materials as widely and cheaply available as possible. So I've switched to supporting the International Red Cross and the Scripps Research Institute (who is doing solid basic biomedical research that can address many diseases).

I like to support international understanding, and feel like the Experiment in International Living did a lot to put my feet on the right path when I was 17. (The farm that I stayed in is shown, left) More understanding for direct, global interactions among young people is the surest path to a better world. Multiplayer internet computer games and chat rooms don't cut it, sorry...

I support the Blue Cranes at the Chester Zoo in England. People don't treat animals and habitat well at all, and this is a direct way to conserve endangered species until societies finally learn some ecologic wisdom. Chester does a good job with natural settings and a strong educational mission and conservation message. My birds are a beautiful breeding pair, and it's nice to give them a little extra bedding and treats now and then. (Unfortunately, they have yet to produce any little blue baby birds.)

After six long years of the Bush crowd, I've become increasingly concerned about free speech and privacy issues, so when I get completely fed up, I send something off to the Electronic Frontier Foundation. I don't always agree with their choice of cases to support, but I think that they are philosophically correct in general.

It troubles me that art has become so politicized and that artists are not held in higher esteem. The aesthetic and creative arts need patrons and creative freedom, not critics and moralists. I think that the best way to support that is to support the colonies that give artists time and space to create works: The MacDowell Colony is one of the oldest.

I would have liked to have contributed to a group that recognizes individual achievement, like the MacArthur Foundation, but I just haven't found one that I like yet.

It's not a lot; hopefully it all helps to make the world a bit better.

Charitable links can be found on my web site

Tax photo credit to Howstuffworks