Processing Tax Equalization

Employees who work in a foreign country are subject to global taxes that may be higher or lower than what they would pay working domestically. Tax equalization (also referred to as hypothetical tax) adjusts an employee's tax rate so that no financial gain or loss occurs due to the international assignment. Expatriate employees pay a tax amount that is approximately the same as if they had worked domestically.

After an employee's Individual return is completed, a tax equalization return can be created to negotiate taxation for employees who are on foreign assignment. A comparison can then be made with the company withholdings to determine if the employer owes any compensation or if the employee must pay a tax liability.

If your firm is licensed for tax equalization and you have permission to add tax returns, you can create a tax equalization return as a new version of an Individual return for tax year 2012 or higher. You can also override an existing return, if needed.

Note: The Individual source return must have fewer than nine versions.

Create an initial tax equalization return.

1. Open or create an Individual tax return for tax year 2012 or higher.
2. Select Prepare tax equalization on the Federal > Tax Equalization > Tax Equalization worksheet.
3. Complete the return input according to what should be included and excluded from the tax equalization return.
4. Calculate the return.
5. Click Tax Equalization in the Activity group on the Manage tab.
6. Click Yes to confirm creation and calculation of the tax equalization return version.

Note: If you changed common client data in the return, you are prompted to apply or bypass the updates in the client profile.

The source return and tax equalization return are saved. A new authorization is not needed for the tax equalization return unless a Social Security Number is changed or units are added. Authorization information, as well as lists and notes, are copied from the source return to the tax equalization return. On initial creation, the tax equalization return contains the same input as the source return, with the following exceptions:

• The tax equalization return contains the results from adjustments and overrides, but the detail forms do not. This exception applies to all detail forms, not just Schedule B - Interest and Ordinary Dividends.

Example: For example, an entry to override taxable interest income overrides Form 1040, line 8a, but does not appear on Schedule B, line 4. Likewise, an adjustment to dividend income adjusts Form 1040, line 9a, but does not appear on Schedule B, line 6.

• Printing Forms 1116 and 2555 is suppressed when not in tax equalization calculation, but the calculations are still viewable even though they are not used in the tax equalization return.
• Some Form 1040 items are not used in tax equalization calculations, such as payments. However, the payments section of Form 1040 is completed.
7. If needed, click Yes to open the tax equalization return.

Create a new version of an existing tax equalization return.

1. Open the tax return.
2. Click Tax Equalization in the Activity group on the Manage tab.
3. Select to either overwrite an existing tax equalization return version or to create a new return version. If you select to overwrite an existing version, you also must select the version to overwrite in the version selection list.

   Note: By default, the most recent version of the tax equalization return displays in the version selection list. If you have previously overwritten an earlier version of the return, the most recent version might not be the one that has the highest number. For example, if you have nine versions of a return, and you overwrite version 2, then version 2 will be the most recent version of the return.

4. Click Continue.
5. Click Yes to open the tax equalization return version.

Note: If you changed common client data in the return, you are prompted to apply or bypass the updates in the client profile.

The source return and tax equalization return are saved. A new authorization is not needed for the tax equalization return unless a Social Security Number is changed or units are added. Authorization information, as well as lists and notes, are copied from the source return to the tax equalization return.

The following two settings in tax equalization returns cannot be changed or removed:

• Version description. Tax Equalization Return
• Print watermark. Do not File

Note: In Batch Manager, you can create multiple tax equalization returns in one batch process.