Have a foreign account? There may be more reporting forms to fill out than you think!
In the past few years, the IRS has been closely tracking and punishing those who hold unreported financial accounts. New requirements state that it is mandatory to not only report those assets on your tax return, but also though a yearly statement known as Report of Foreign Bank and Financial Accounts (or FBAR).
Penalties for not doing either may extremely be harsh. You could face jail time or the contents of your accounts seized. To read more about the FBAR and the requirements, visit the IRS’ website.
Does my parent’s debt become my responsibility when they pass?
Assuming that your mother’s credit card accounts are in her name alone, any obligation on her death will become a liability of (i.e. payable by) her estate. Ordinarily, amounts owed by her estate in excess of estate assets will not transfer to heirs or beneficiaries. Keep in mind though that credit card debt will ordinarily have to be paid before the distribution of any monies or assets to beneficiaries and could potentially directly reduce any and all estate distributions. Therefore, although you and your sister would not be responsible for your mother’s credit card debt, the debt may be paid from estate assets you may have otherwise inherited. The same result is generally true for other debts and obligations. The answer could be different for your stepfather especially in a community property state.
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We interviewed someone to take care of my parents, but they want to be paid off the books. What does that mean?
You should start by asking her what she means by that because it can mean different things to different people. What it really means is that there is no formal record kept of payments and no reporting of payments to the IRS or state taxing authorities, which in most cases would not be legal and is inadvisable for many reasons. She could be meaning instead that she does not want to be treated as an employee and have payroll taxes withheld although she will report the earnings on her personal tax returns as an independent contractor. This may be permissible, but there are very specific rules regarding household employment that need to be considered.
The rules on household employment can be quite involved since you need to consider the federal (IRS) and state requirements. You first need to determine if the care provider should be treated as an employee. Generally, the IRS says that if you are able to control what work he or she did and how he or she did it, you have a household employee. This is true even if you give the employee freedom of action. What matters is whether you have the right to control the details of how the work was done. If they are not technically an employee they would ordinarily be considered an independent contractor who you would issue a Form 1099 to and report the payments to the IRS. There may also be state reporting requirements.
If they are an employee you need to look carefully at all the federal and state employment tax and reporting requirements. A good starting point for federal is IRS Form Schedule H, the Schedule H instructions and Publication 926 – Household Employer’s Tax Guide. You will need to contact state taxing authorities to determine their requirements. There may be multiple agencies which handle employment taxes in your state.
Although employment tax reporting can be burdensome and add significantly to the cost of household help, it is advisable to “go by the book” on these matters. There are substantial penalties for not following the rules as well as other reasons such as personal liability for employment injuries which might otherwise be avoided.
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