U.S. Tax compliance advice for resident aliens, nonresident aliens and dual status aliens

U.S. Tax compliance advice for resident aliens, nonresident aliens and dual status aliens

Congratulations! You have been granted lawful permanent resident status in the United States by way of the U.S. Citizenship and Immigration Services issuing you an alien registration card (i.e., a “green card”), and as such, your tax status will become one of a U.S. “resident alien” when you arrive in the U.S. An “alien” is simply the name given to non-U.S. citizens. Your resident alien status remains intact unless or until such status is taken away or abandoned (e.g., the conditional green card status under the EB-5 program).

In certain circumstances, you will be considered a dual status alien for tax purposes (i.e., you are both a resident alien and a nonresident alien during the same tax year). For example, in the year in which you immigrate to the United States under the EB-5 program, you are likely to have such status. Assuming you did not become a tax resident under the U.S.’s “substantial presence” test (generally a rolling three-year test based on the number of days you are in the United States to determine your U.S. tax residency status), your residency starting date with the green card will be the first day you are present in the United States as a lawful permanent resident. During this dual status alien year, you will be a dual resident taxpayer.

Income Tax Expectations of Resident Aliens

But what should investors expect as a resident alien/green cardholder in the United States from an income tax perspective?

Resident Aliens Should Expect

  1. Taxation on worldwide income
  2. Transfer taxes (gift, estate and inheritance) on worldwide assets
  3. Complex tax filings

Resident aliens are taxed in the United States as if they were U.S. citizens, resulting in taxation on worldwide income, whereas nonresident aliens are usually only subject to U.S. income tax on U.S. source income. Consider all of your revenue in a given year – interest, dividends, rents, royalties, wages, other compensation such as partnership distributions, etc. For resident aliens, the source of the income becomes irrelevant – foreign source income is taxed right alongside U.S. source income. As a resident alien by way of the green cardholder status, all of this worldwide income will be taxed in the United States starting on the first day you arrive in the country.

Certain items can be excluded from your worldwide income, but such exclusions are generally dependent upon facts and circumstances. For example, resident aliens may be able to qualify for the foreign earned income exclusion and certain housing deductions associated with working and living in a foreign country for 330 days over a rolling 12-month period. Further, a resident alien may be eligible for the exclusion of gain from the sale of a main home. As another example, where you are a candidate for a degree, certain qualified scholarship monies may be excludable from your income. Careful consultation with a U.S. tax professional is recommended to ensure proper analysis of these potential exclusions.

Once your taxable income is determined, generally over a calendar year ending Dec. 31, a resident alien will determine a filing status (e.g., single, married filing jointly, head of household, etc.) and claim personal exemptions (e.g., exemptions for each person who qualifies as a dependent; qualification as a dependent is not cut and dried). Claims can also be made for relevant itemized deductions, including medical and dental expenses, state and local income taxes, mortgage interest, charitable contributions, etc., or a standard deduction. Your tax professional can assist with helping you maximize these deductions, which reduce your taxable income and liability.

Calculated taxable income is taxed based on your filing status and the graduated tax rates, which currently range from 10 percent to 39.6 percent. The 39.6 percent rate is for taxable income amounts above $415,000 for taxpayers filing as single (and above $467,000 for joint filers). Resident aliens can claim tax credits against taxes due. Credit topics include taxes paid to foreign countries, child and dependent care, adoption, qualifying child, elderly or the disabled, education, retirement savings contributions and earned income. As you can see, the credit opportunities are broad in nature. No credit is assumed, however, and it is important to note that such credits are generally subject to certain limitations and/or qualifications. Resident aliens can also offset taxes due with taxes withheld and/or with payments made throughout the calendar year.

Individuals will secure a Social Security number for taxpayer identification purposes on tax-related submissions to the Internal Revenue Service. Administered by the Social Security Administration, Social Security numbers are used for purposes of reporting your wages to the U.S. government, determining eligibility for any Social Security benefits and for receiving some other government benefits. Social Security and Medicare (medical insurance) taxes are withheld from your wages or paid directly by you if you are self-employed.

Resident aliens file the Internal Revenue Service Form 1040 filings regarding U.S. individual income tax. Filing a tax return as a lawful permanent resident is critical; failing to file a tax return may jeopardize an individual’s green cardholder status.

Timing of U.S. individual tax return filings is generally April 15 of the year following the calendar year at issue (i.e., April 17, 2017, for the calendar year 2016). An extension of time to file is available for a six-month period thereafter (i.e., Oct. 16, 2017, for the calendar year 2016, as extended). An additional extension may be available at the discretion of the Internal Revenue Service.

Income tax filings also may be required from a state (e.g., Minnesota, New York) and local (e.g., city and county level) perspective as well.

Note that penalties exist for the failure to file timely tax returns or pay your tax due.

In addition to the Form 1040 filing, individuals need to consider the compliance required for (and underlying technical complexities associated with) holding foreign bank accounts and having an interest in foreign corporations, partnerships and other entity types. The Internal Revenue Service aims to keep track of certain foreign assets by way of these types of compliance requirements. Your qualified U.S. tax filing professional can help you maintain compliance with all U.S. tax deadlines and forms, while helping you only pay the minimum amount due.

Transfer Tax Expectations of Resident Aliens

Before obtaining the green card, consideration should also be given to any U.S. transfer taxes which may result with the transfer of assets in order to remove these assets from being subject to the potential transfers taxes in the United States, as the green card can equate to domiciliation (i.e., residence) in regard to these taxes. There is a federal-level gift and estate tax here in the United States, and every U.S. state has different rules concerning gift, estate and inheritance tax (note that 21 of the 50 states have some form of estate, inheritance or gift tax rules).

Potentially Applicable Transfer Taxes

  1. Gift Tax
  2. Estate Tax
  3. Inheritance Tax

From a gift tax perspective, tax is generally imposed on most transfers made by gift (versus transfers contemplated as “sales”), regardless of where the gifted property or the beneficiary of such gift is located. Annual and lifetime exemptions are available from the gift tax.

From an estate tax perspective, tax is imposed on worldwide property, with the highest rate of tax being 40 percent. The federal exemption amount is $5.45 million for resident aliens, but exemptions available for state purposes vary by state. Your U.S. tax professional can help you plan gifting before obtaining a green card and becoming subject to U.S. taxation in order to minimize your exposure to transfer taxes.

Planning Opportunities for Resident Aliens

With the objective of achieving the green card status via the EB-5 program, resulting in taxation of worldwide income thereafter, consideration of one’s personal tax situation in advance will be critical in maintaining an individual’s net worth/personal wealth. Overall objectives for such tax planning should be to minimize the future U.S. tax base and the cost of U.S. tax compliance. Such planning will only be effective if undertaken before the residency start date.

Individuals should consider accelerating any taxable gains and/or income streams before obtaining green card status as it may result in a lower tax burden, depending on the prevailing rates of the U.S. and country of migration. Such acceleration strategies could include negotiating an early bonus, exercising stock options and receiving rental income for future periods. Acceleration of dividends, pension plan distributions, royalties, dividends and interest should also be considered.

Planning for the sale and repurchase, or restructuring, of appreciated assets could also be done to trigger gain or a step-up in base cost of assets in advance of U.S. residency.

Further, individuals may wish to plan for the deferral of any foreign losses until such time that taxability of worldwide income is relevant, in order to benefit from netting such losses against the worldwide income.

It may also be necessary to restructure your portfolio holdings to avoid the U.S. passive income rules related to such investments and/or legally incorporate active foreign businesses to achieve deferral status on income generated from such businesses.

Individuals may want to give or sell assets to non-U.S. resident family members to remove the assets from the potential application of any gift, estate or inheritance taxes.

Essential Tax Planning Strategies

  1. Accelerate income recognition before becoming a U.S. resident alien
  2. Sell/restructure appreciated assets
  3. Defer recognition of foreign losses
  4. Restructure portfolio holdings to avoid the U.S. passive income rules
  5. Give or sell assets to non-U.S. resident family members

Taxable Insights

The guidance provided above is just the tip of the iceberg. It is critical that future U.S. resident aliens contact a local country and U.S. tax professional to successfully manage the anticipation of being subject to worldwide taxation, and provide full disclosure of all assets and sources of income to get the most accurate and comprehensive advice. This proactive approach will benefit the investor’s tax dollars paid and will manage the tax compliance complexities associated with U.S. resident alien status as you immigrate to the United States.

The Expatriate and International High Net Worth Tax team at Baker Tilly Virchow Krause, LLP, a full-service accounting and advisory firm ranked as one of the top 15 largest CPA firm in the United States, assists resident aliens and other foreign investors with international tax planning. Baker Tilly Capital, LLC is a wholly owned subsidiary of Baker Tilly Virchow Krause, LLP and is a FINRA broker-dealer that is approved to offer EB-5 investments. Baker Tilly Capital and its affiliates offer a full suite of EB-5 services, including independently selected investments, immigration tax consulting and transaction diligence to support EB-5 investors and regional centers.

For more information on this deal, or to learn how Baker Tilly Capital specialists can help, contact our team.

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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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