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TA X AT I O N

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N AT I O N A L S

June 2015

WeiserMazars LLP is an independent member firm of Mazars Group.

F O R E I G N

INTRODUCTION

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When a foreign national enters the United States, he may be subject to two different types of

taxation depending on whether he is a resident or non resident. •

It is important for such an individual to be educated with the US tax law so that he may do proper planning to minimize his US tax liability.

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Prior to becoming a US resident alien, certain US tax saving opportunities exist which may not be available once residency begins.

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PRE MOVE  A foreign national may plan entry to the United States so that non resident status will apply. If the individual is present in the US for less than 183 days, he generally will be taxed on US Source income only.  A foreign national should arrange to receive any foreign source income, such as payments for bonuses for past services, or exercise stock options prior to becoming a US resident.  A foreign national may want to defer recognition of losses or pay any deductible expenses until he becomes a US resident.  A foreign national should evaluate his investments for US taxability differences. Selling appreciated assets and repurchasing the assets can establish a high tax basis so that US tax will be avoided on the gain. Also, consider ending life insurance contracts not exempt from tax under US law.

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PRE MOVE  A foreign national can avoid US tax by selling his personal residence before US residency begins, or within 2 years to claim US exclusion.  A foreign national should determine if certain assets still require filings in country – i.e. Real Estate, Deferred Compensation, Option Exercise.  Who will be employer? There may be differences in taxation if the employer is a foreign entity or an American company.  Timing and Length of assignment will impact on both Federal and state residency.

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D I F F E R E N C ES I N F E D E R A L A N D S TAT E RESIDENCY REQUIREMENTS  State Residency Requirements 1. Domicile 2. Whether a permanent place of abode is maintained within the state 3. The number of days physically present within the state  City residency or not – could be different from state

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TA X T R EAT I ES

 Can provide exemption from Social Security Withholding Tax if a Totalization Agreement is in effect.  Can have lower rates of withholding for interest and dividends.  Can have preferential treatment for capital gains and pension income

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E D U C AT I O N A B O U T U S TA X R EQ U I R E M E N T S    

Worldwide income reporting once a US Resident FINCEN 114 – Report of Foreign Bank and Financial Accounts Form 5471 – Information Return with Respect to a Foreign Corporation Form 8621 – Return by a shareholder of a Passive Foreign Investment Company or Qualified Electing Fund  Also Forms 3520, 8858, 8865, or 8938

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DURING THE MOVE When do you become a resident in the US? 1. Lawful permanent resident test (green card test) An individual who is a green card holder is generally considered a US tax resident from the time that he is admitted to the US until he gives up his green card. 2. Substantial Presence Test An individual is considered a US tax resident if he meets the following tests. a) He is physically present in the US for thirty one days in the current year. b) He is physically present in the US for a weighted average of 183 days over a three year period calculated as follows: – 100% of the days present in the current year – 1/3 of the days present in the preceding year – 1/6 of the days present in the second preceding year 3. Closer Connection Exception A foreign national may be taxed as a US nonresident, even though he meets the substantial presence test, if he can prove that he has a tax home in a foreign country and has a closer connection to that foreign country than the United States. To claim this exception, the individual must file Form 8840 – Closer Connection Exception Statement.

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DURING THE MOVE  Special First Year Election to Be Treated as a Resident Alien If an individual does not meet the substantial presence test, he will be taxed as a nonresident on his US source income. He may elect to be taxed as a US tax resident for the entire year.

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TA X AT I O N O F R ES I D E N T A L I E N S Income is taxed at graduated rates after allowance for deductions.  Examples of includible income – Wages and Salary – Interest and Dividends – Capital gains and Losses – Rental income after expenses – Partnership Income – Other miscellaneous income

Examples of Allowable Deductions  State and Local taxes  Real estate taxes  Donations to US charitable organizations  Mortgage interest  Investment Interest Expense  Investment expenses  Employee business expenses  Personal Exemptions Income Taxes paid by a resident alien to a foreign country may be deducted as an itemized deduction or may be credited against the resident alien’s US tax liability.

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TA X AT I O N O F N O N R ES I D E N T A L I E N S  Income Not Effectively Connected with a US Trade or Business A non resident’s US Source income that is not effectively connected with a US trade or business is subject to tax at a flat rate of 30% or at the lower treaty rate. Income includes dividends, royalties, rents, etc. Interest income from bonds and bank accounts are excluded. Capital Gains (other than gains on US real estate) are generally not subject to US tax unless the individual is considered a US resident. There are US withholding requirements on such income.  Tax Treaties o Can reduce withholding requirements and the flat tax rate on income not effectively connected. o Can exempt non resident aliens from US Taxation on certain types of income.  Effectively Connected Income US Source Income that is effectively connected with a US trade or business is subject to US taxation at graduated rates. Tax treaties can reduce the burden of double taxation and may override the US Income Tax Laws for specific items covered by the treaty.

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POST MOVE

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Review of compensation and other history Deductibility of Child Care Spouse’s work Annual tax filing requirements Taxation of Income from US Real Estate Gains from disposition of US Real property are taxed to both resident and nonresident aliens effectively connected taxable income. There may be US tax withholding requirements on the sale. Estate and Gift Taxation Nonresidents are taxed on certain US Assets Residents and US Citizens are taxed on worldwide assets Marital Exclusion is limited for noncitizen spouse Green card implications

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CONCLUSION The facts and circumstances of each individual are different and US taxation has a different impact on each situation. Therefore, proper tax planning considerations are essential for the reduction of US Taxation. Upon departure from the United States, there are additional taxes planning considerations. Each individual must evaluate his tax situation and seek tax advice accordingly.

WeiserMazars LLP is an independent member firm of Mazars Group.

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CONTACT Michael N. Schwartz Partner (P) 212-375-6681 (E) [email protected]