America is known around the world for being the land of opportunity but newcomers are surprised to learn that it’s also a tax-payer’s land. Foreign nationals moving to the U.S. can mitigate large U.S. tax liabilities with meticulous planning before they arrive. Take a look at our top tax strategies that can result in reductions in taxes and fewer unpleasant unexpected tax-related surprises during tax season.
Determination of U.S. Residency
If you are a foreign national, the method of taxation within the U.S. depends on whether you are a resident or not. U.S. residents are taxed on their global income (income from any source within and outside the U.S.), just as U.S. citizens. However non-residents are taxed only on U.S. sourced income or income that is tied to a business or trade within the United States, which is often known as ECI (Effectively connected income).
Foreign nationals who haven’t received a visa for residency must pass an eligibility requirement known as the Substantial Presence Test (SPT) to be considered as resident for U.S. tax purposes. In order to pass the test, for this year’s tax season, the foreign citizen must reside within the U.S. for 183 days or more in a 3-year period, which comprises counting every day during the current year,one-third of the days in the first preceding year, and one-sixth of the days in the second preceding year.
The time of arrival is essential, since the reporting requirements and compliance of residents and non-residents can be very different. For instance, a non-resident citizen who came to the U.S. on March 1st and was awarded a bonus in April and then lived throughout the year in the U.S., then he must report all earnings received since the date of arrival, including the bonus.
In this instance they have passed the Substantial Presence Test until December 31st and is considered to be a permanent resident (Dual-Status) within the U.S. They might also be required to report their investment income (interest, capital gains, dividends) in addition to the financial details of foreign accounts as well as assets and ownership interests in foreign entities, if they own them and meet the reporting requirements.
If a foreign national entered the country on September 1, instead, they will be considered to be a non-resident from the U.S and would only be required to report earnings from the U.S. for the period between September 1st and December 31st. Non-residents are not required to file the financial details of foreign funds, accounts or ownership stakes in foreign entities, which makes the initial calendar year for U.S. tax compliance much easier. This is very beneficial because it can take time for adjusting in accordance with U.S. taxes, filing obligations and the overall life in the U.S.
Sale of Foreign Home
U.S. residents are generally taxpayers of capital gains tax upon the sale of their residence. However, taxpayers might be able to exempt the maximum amount of $500,000 ($250,000 for a single person and other fillers) of capital gains arising from selling their primary residence in accordance with Section 121 of the Internal Revenue Code. To be eligible, the property must have been owned and used by the taxpayer as their principal residence for a minimum of 2 years prior to the 5-year period before the sale. If a tax payer intends selling their house in a different country, it might be wise to check whether they qualify to be exempted from this condition prior to completing the sale. If the exclusion is not available, it might be better to sell the property before moving into the U.S. or before becoming a U.S. resident. Although the gain from selling your house can be tax deductible, it’s crucial to keep in mind that losses are typically not deductible.
Foreign Asset Reporting
In addition to the income tax reporting, the U.S. has several information tax returns that could require filing. These are a couple of most frequent informational reports that could be required:
- Report of Foreign Bank Account and Financial Accounts: This is reported on Form FinCEN 114. This form (also known as FBAR) is required to be filled out in the name of U.S. citizens and residents with a financial stake in or a signature authority on the foreign financial account (bank, securities or other financial accounts) when the total amount of these accounts exceeds $10,000 at any point in the course of taxation.
- Statement of Specified Foreign Financial Assets: Form 8938. This form should be submitted in the case of U.S. citizens and residents with overseas financial investments that are greater than certain thresholds, based on the status of their filing, as well as regardless of whether the taxpayer resides in the United States. The foreign financial assets that must be reported could include investments, pensions, bank accounts, and various other assets of financial nature.
It is vital to keep in mind that tax payers might have additional obligations to report information other than ones mentioned above. The time frame for setting up U.S. residency should be carefully planned to ensure that taxpayers report correct and complete data. A mistake could lead to substantial penalties.
Ownership Interest in Foreign Entities
U.S. taxpayers who are owners or hold an interest in foreign corporations and foreign partnerships might be required to declare their portion of the earnings from the entities they own on the U.S. tax returns. However, in the case where the earnings of these entities were subject to taxation in a foreign country, taxpayers would be able to receive credits on the U.S. returns for foreign taxes paid. They could also be exempted from the tax inclusion of income. Foreign ownership interests can also trigger certain types of reports on information within the U.S., which is complex and may carry substantial penalties for non-compliance.
Understanding Treaty Rules
Fortunately, it is a good thing that the U.S. has income tax treaties with various nations. One of the major advantages of a tax treaty for income is the ability to reduce double taxation as well as to lower the overall U.S. tax liability. Taxpayers are able to leverage the treaty to establish where they reside, deduct the income tax-paying income from U.S. taxation, and deal with other tax concerns. In the process of planning, taxpayers should look to determine if their nation has an income tax treaty or a totalization agreement to make plans accordingly, set expectations, and avoid unwelcome tax surprises.
The facts and the circumstances aren’t identical for every taxpayer, so it is crucial to select the strategy that will correspond to your specific circumstances. We at Parr & Ibarra CPA firm in Keller, TX, recognize that the most important factor to achieving excellent results is a well-planned strategy and preparation. So, start early! We are specialists in international taxes and will help you ensure that your move towards America is as smooth as possible. Contact us via email for a free consultation or call us at the number below.
