Common Tax Traps for Foreign Nationals Residing in the U.S.

When the US government issues you a green card or visa, it welcomes you into its borders; however, immigration services provide little guidance on the unique US tax and reporting obligations that can ensnare unsuspecting immigrants and result in large fines and even criminal charges.  U.S. visa holders need to be particularly careful to comply with the tax laws, as even minor infractions can result in deportation or denial of your citizenship application.

US income tax rules apply to non-US citizens if either:

  • You are a legal permanent resident (i.e., a green card holder) or
  • You are present in the US for a certain number of days out of the year.

If you fall into either of these categories, the following tax rules may catch you off guard.

Worldwide Income Taxation

First, you are subject to US tax on your income no matter where in the world the income is earned. If you maintain a bank account in your home country, interest earned on it must be reported on your yearly US income tax return. The same goes for any brokerage account you have. If you have a green card, you continue to be subject to US income taxation on a worldwide basis, even if you return to your home country, unless you officially relinquish your green card (which may trigger tax in itself).

IRS Form 8938

Second, you may be required to file Form 8938, Statement of Specified Foreign Financial Assets, with your US income tax return if you own foreign financial assets with a value exceeding $50,000 on the last day of the taxable year or $75,000 at any time during the taxable year. Filing thresholds vary depending on your filing status. The IRS website “Do I need to file Form 8938” can help you determine whether you must file Form 8938.

FBAR Reporting

Third, you must file a Foreign Bank and Financial Accounts (FBAR) form in any year in which you have financial accounts abroad with an aggregate value that exceeds $10,000 at any time during the year. You must file this report even if the account earned no income. Like US income taxation, if you have a green card, you must continue to file an FBAR form even if you return to your home country, unless you officially relinquish the green card.

Estate Taxes

If you return to your home country to live, you may nonetheless be subject to US estate taxes on any US assets you may have purchased while here. Any US real estate or other assets owned by a non-US resident are subject to an estate tax of 40% upon the death of the owner. Unlike US residents who enjoy an estate tax exemption of $5.25 million, non-US residents are entitled to an exemption of only $60,000. Therefore, any US assets are subject to a 40% tax to the extent their value exceeds $60,000. Those assets are also subject to the U.S. gift tax. (The U.S. estate tax applies even if the owner never visited the US and purchased the property from his or her home country).

Suppose you purchase a house for $500,000 and decide to keep it for a vacation home when you return to your native country. If you die owning the house, your heirs will receive a tax bill for $176,000! Does this mean you shouldn’t purchase US real estate? No, it simply means that you should get expert tax law advice before purchasing the property or, at the latest, when you decide to leave the U.S.

Whether you’re living in the US permanently or are here on a temporary visa, it is important to get expert advice on your tax obligations. The best way to avoid trouble with the IRS while minimizing your taxes is to consult with a tax professional with knowledge of international tax rules in advance of encountering any problems or making any major financial decisions.

Expatriation Tax

If you have become a US citizen or have held a green card for 8 of the preceding 15 years, certain tax rules may be triggered if you decide to give up your citizenship or legal permanent resident visa.  These rules apply only if:

        1. Your average annual income for the past five years exceeds $155,000 (as of 2013);
      1. Your net worth exceeds $2 million as of the date of your expatriation; or
      2. You fail to certify that you have complied with all your U.S. tax obligations for the preceding five years.

If you fall into one of these categories, you will be subject to the U.S. expatriation tax rules. Under these rules, the expatriate is deemed to sell all of his or her assets, triggering a capital gains tax, and to withdraw all tax-deferred retirement funds, triggering ordinary income.  There is an exemption from the tax of the first $663,000 (as of 2013).  Unfortunately, even paying the expatriation tax does not fully release an expatriate from the US tax regime, as any assets gifted to U.S. beneficiaries or left to U.S. beneficiaries in the expatriate’s estate will be subject to the estate tax.

 

 

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