As people live increasingly mobile lives, international tax rules have significant implications. Without proper planning, individuals with US-connections risk double taxation and costly tax planning mistakes.
Taxpayers who live, work, or own property in the US need to understand the implications of US tax and financial reporting rules. Even while living outside the US, non-US citizens may be subject to US obligations.
Taxpayers running afoul of such requirements may remedy their situation through existing regularization procedures. Now is a good time to identify risks and take advantage of the voluntary disclosure programs available.
Some common issues to consider:
Residency & Domicile
Unlike in Spain, under US tax law residency and domicile are distinct concepts for various tax types. For example, estate and gift tax domicile is different from income tax residence. Thus, you may be a US resident for income tax, but not US domiciled for estate and gift tax.
Generally, a person is domiciled in the US for estate and gift tax if they are a US citizen or reside in the US and have no present intention of leaving. Such taxpayers are subject to the estate and gift tax on worldwide assets.
For US income tax, an individual qualifies as a “US person”, when living outside the US if they are a:
- US Citizen.
- US Green Card holder.
- Foreign national meeting the Substantial Presence Test.
- Former Legal Premanent Resident not properly expatriated.
Once deemed a US person, a taxpayer is taxed on worldwide income and required to file an annual US income tax return.
Review Foreign Investments and Accounts
The Foreign Bank Account Report (FBAR), similar to the Spanish Modelo 720, is often overlooked because it is filed separately from the tax return. Failure to file an FBAR results in an automatic $10,000 penalty for each offense.
Individuals holding investments in offshore companies may face adverse consequences if they become US residents. Income from the foreign company could be taxed at the highest US rate, even if no income is distributed. Certain tax elections may reduce such exposure.
Accelerate or Defer Income Recognition
Individuals moving from a jurisdiction with lower tax rates than the US should consider recognizing income prior to establishing residency. However, if moving from a jurisdiction with higher tax rates, deferral of income may be advisable.
Estate Planning & Gifting
US domiciliaries are taxed on their worldwide assets at the time of death in the same way as US citizens. Effective in 2019, an estate tax return is required for any estate with combined gross assets and prior taxable gifts exceeding $11,400,000 (up from $11,180,000 in 2018).
Individuals with large estates who are entering the US for an indefinite period of time should consider gifting assets before establishing domicile to reduce their total estate below the $11,400,000 exclusion.
For individuals who are not US persons but have assets located in the US, estate tax applies only to US-sitused assets with a mere $60,000 exemption available.
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