Tax Compliance, Voluntary Disclosure & Litigation
U.S. tax law has strict foreign income tax compliance obligations.
Regarding International tax matters, there are various federal and state tax returns that are due throughout the year. Failing to file the tax returns, will result in harsh penalties that get progressively worse if they are not paid within the specified time frame.
If a taxpayer has outstanding tax obligations, it’s advised that they file the returns on a voluntary basis as soon as possible. A proliferation in monitoring by the IRS, means that Foreign Income Tax Reporting is vital, as they now have the means to determine foreign holdings of US citizens for tax purposes.
Foreign Income Tax Exclusion
Some foreign taxpayers are eligible for the exclusion of certain foreign income tax, in addition to housing expenses while working abroad. However all taxpayers must remember that exclusion benefits can only be claimed if their federal tax return is filed within the specified timeframe. Some taxpayers incorrectly assume that they do not need to file returns if their income is below the exclusion thresholds, however in these cases they risk losing all related benefits if they do not file their tax returns.
Foreign Tax Compliance Disputes
When foreign tax disputes occur, litigation may be necessary. Sanders Associates LLP has been assisting clients with international tax matters and representing them before the IRS when audited. Our expertise in negotiating these matters is unrivalled and has saved clients significant sums which would otherwise have been passed to the government.
Our ability to negotiate disputes is underpinned by our in-depth knowledge of both Foreign Tax Compliance Law, and International Tax Accounting. Only by structuring your tax exposure properly, can you legally minimize your tax obligations.
For further information on the complexities of structuring foreign investments for international tax compliance, please contact us.
Tax Consequences of a U.S. Green Card
Green Card Tax Returns (Resident Alien Tax Obligations)
Acquiring a U.S. green card authorizes a foreign national to become a resident alien and the right to make the U.S. their permanent home. If you acquire a U.S green card, you will also be exposed to world-wide taxation and extensive IRS reporting obligations
The notion of worldwide taxation even extends to foreign income and gains that have been accumulated prior to the establishment of their U.S. residency, but was then realized once they had already become a U.S. resident. The applicable Federal tax rates are set at 39.6% with additional surcharges for certain types of overseas income.
A green card holders’ domestic and foreign assets are also taxable, falling under the U.S. gift and estate tax system with rates reaching 40%.
Once a foreign national has been living in the U.S. and has laid foundations, it is imperative that a U.S. based, cross border estate plan be implemented. Without a cross border estate plan, their family is exposed to significant U.S. gift or estate tax assessment.
When considering retirement or if residency termination occurs for another reason (e.g. divorce, employment reassignment, etc.) it may warrant the relinquishment of the green card. In these circumstances a comprehensive plan in necessary in order to address the “exit tax” obligations which are applicable to certain former green card holders.
A former green card holder will need to adhere to these new tax rules (classified as “covered expatriate”), as relinquishment of their green card will result in a deemed sale of their appreciated assets (i.e. an exit tax).
Green card holders require specialist advice beyond basic immigration law, in order to avoid any unexpected surprises.
Structuring Foreign Investment in the U.S.
Structuring Foreign Investments
Foreign nationals are able to achieve favorable income tax benefits on income and gains earned on their investments. A detailed summary of the applicable rules for foreign investors residing outside of the U.S. are outlined below. These rules are only applicable to an individual investor and not a business entity except indicated below.
- • Gains made when an individual investor is selling corporate stocks (including portfolio assets) is not subject to U.S. capital gains taxes (however, special rules may apply if real estate is held within certain corporate structures).
- • The Interest paid on portfolio debt obligations (i.e. corporate bonds) to a foreign individual investor is not subject to U.S. tax.
- • The dividends paid to a foreign national are subject to a 30% withholding tax (which can be reduced if a tax treaty applies).
- • Any Income connected to U.S. trade or business is subject to tiered income tax which can reach 40%.
- • Gains made on the sale of U.S. property (including real estate holding companies) are subject to 10% withholding tax. The aforementioned gains must be reported as income on a non-resident tax return which will be subjected to tiered tax rates. Long term capital gains are subject to the maximum tax rate of 20%. Short term gains are subject to tax rates which can reach 39.6%. Once the tax level is calculated it is offset by withholding tax.
- • Corporate structures are subject to tax rates, which can reach 40%. The dividend withholding taxes and branch profit taxes also fall within the corporate structure tax obligations.
- • U.S. estate and gift tax affects foreign individual investors and can also apply to their U.S. based investments.
Sanders Associates LLP can assist foreign investors in minimizing their income tax obligations relating to their investments, as well as eliminate the U.S. gift and estate tax, where possible.
Receipt of Foreign Gifts & Inheritances
Receiving Foreign Gifts and Inheritance
If a U.S. residents receives foreign gifts and/or inheritance there is potential for both IRS disclosure obligations and U.S. tax obligations.
Recipients’ of gifts or inheritance from a non U.S. person or estate in excess of certain threshold amounts must disclose the transaction to the IRS on an informational form.
Once disclosed, the transaction is then reviewed to determine if there are any U.S. tax considerations to be paid.
We have a wealth of experience in dealing with internationally based families and their descendants. We work closely with each family to insure that they comply with the informational forms, filing deadlines, and remain legally compliant at all time, with minimum exposure to tax payments and penalties.
Moving to the U.S.
Coming to the U.S.
Tax planning is extremely important to those planning on moving to the U.S.A.
The U.S. taxes its residents on a global scale. Tax assessment applies to all income and gains accrued outside the U.S. even prior to the foreign national’s arrival in the U.S. (foreign tax credits may provide relief).
The U.S. gift and estate tax obligations apply to all foreign nationals living in the U.S. These rates can reach up to 40% of the property. IRS liens can prevent the property from being transferred prior to the tax payment. Sanders Associates LLP can help clients’ achieve significant savings by recognizing gains and completing gifts prior to moving to the U.S.
Foreign Nationals Living in the U.S.
Foreign Tax Returns
It is possible for foreign nationals to pay favorable income tax on income and gains earned on their investments. A brief summary of the applicable rules for foreign investors residing outside of the U.S. are outlined below:
Reducing Your Foreign Income Tax Obligations
- • Gains made on the sale corporate stock (including portfolio assets) is not subject to U.S. capital gains tax (however, certain rules apply when real estate is held within the corporate structure).
- • The interest paid to foreign investors on portfolio debt obligations, such as corporate bonds, is not subject to U.S. tax.
- • Dividends paid to foreign nationals will be subject to 30% withholding tax (this can be reduced if a tax treaty applies).
- • Income connected to U.S. trade and/or business is subject to tiered income tax rates that can reach 40%.
- • Gains made on the sale of U.S. real estate (including real estate holding companies) are subject to 10% withholding tax. The gains must be reported as income, on a non-resident tax return. Long term capital gains are subject to 30% tax. Short terms gains are subject to tax rates which can reach 35%. Once the tax has been calculated it is then offset by the applicable withholding tax.
- • Corporate structures are subject to the general corporate tax rate, which can reach 40%. The dividend withholding taxes and branch profit taxes will also be subject to corporate tax.
- • Foreign Individual investors should note that U.S. estate and gift tax can also apply to their U.S. based investments.
Sanders Associates LLP can assist foreign investors minimize their income tax obligations and where possible eliminate U.S. gift and estate tax.
Departure from the U.S.
Termination of U.S. residency requires careful planning.
U.S. citizens and U.S. green card holders must formally terminate their citizenship or permanent residence status in order to free themselves from U.S. tax obligations. If not, the individual will continue to be taxed as a U.S. resident even though they now live abroad.
Once the individual’s immigration status has been established, they will then need to take the ‘substantial presence test’ to determine the U.S. residency termination date.
It is also important to consider the likelihood of future visits to the U.S, as it might be necessary to prevent future visits from triggering the “anti-lapse rule” which would result in continued U.S. residency and therefore tax obligations.
The rules concerning departure from the U.S are complex and require careful planning. Sanders Associates LLP have helped many international clients successfully navigate the rules and therefore reduce their exposure to the incurred taxes.
Cross Border Matrimonial Matters
Cross Border Matrimonial Matters
In a domestic context, it’s not uncommon for a spouse to cross state borders searching for a favorable jurisdiction in which he or she has sufficient ties, in order to file for divorce.
In a marriage situation, it’s important for the both parties to be aware that the U.S. has developed a set of rules that can trigger unforeseen tax consequences once a marriage is officially terminated. Many equitable rules that apply in a domestic context, can result in tax liabilities if non-residents are involved. These tax obligations can occur when payments are made during the divorce to a party who is no longer a U.S. resident taxpayer. For example, if a property that has appreciated in value, is then transferred to a non-resident as part of a divorce settlement, it can trigger U.S. income tax obligations. Alimony payments to a non-resident are also subject to 30% withholding tax.