Tax Traps for Non-Residents Moving to the United States
When nonresident aliens (NRA) relocate to the United States, one of the last things they tend to be concerned with are the tax implications of being considered a US resident. The United States tax laws are much different than nearly every other country on the planet in that United States follows a citizenship-based taxation model and not a residence base taxation model. Making matters more complicated, is the fact that citizenship-based taxation is not limited to just citizens, but it also includes lawful permanent residents (aka Green Card Holders) and other residents who reside in the United States a majority of the time and meet the Substantial Presence Test. Let’s take a look at five common tax traps for non-residents moving to the United States.
Substantial Presence Test
When a person is a non-resident and resides in the United States for a sufficient number of days each year, they may meet the substantial presence test. When a non-US citizen/non-lawful permanent resident meets the substantial presence test then they are subject to US tax on their worldwide income similar to someone who is a permanent resident or US citizen. For non-residents who do not want to become taxed on their worldwide income, it is important that they understand the specific residence rules so that they can try to plan around it.
If a person meets the Substantial Presence Test — or is otherwise considered a US Citizen or Lawful Permanent Resident then they are subject to US tax on their worldwide income — not just their US-source income. Therefore, even if a non-resident begins residing in the United States, meets the Substantial Presence Test, and earns all of their income from foreign sources, they will still be required to report this for an income on a US tax return.
The FBAR refers to Foreign Bank and Financial Account Reporting, aka FinCEN Form 114. For residents who meet the Substantial Presence Test, they are required to report the annual FBAR the same as if they were a Permanent Resident or US Citizen. It is important to keep in mind, that residents who are required to file the FBAR must include all of the accounts they have open at the time they file — and not just the accounts that may have been opened after becoming a US person.
GILTI refers to Global Intangible Low-Taxed Income. This is a very complicated tax requirement, but essentially if someone is considered a US person and they have foreign income generated in a Controlled Foreign Corporation, then that income may be taxable even though it was not distributed. The GILTI regime is very complex.
Form 5471, 8621, & FATCA Reporting
While the FBAR is usually the most common international information reporting form, there are actually several forms that a resident has to file if they are considered a US person. The reporting can be very complicated depending on the different categories of foreign assets, along with whether any of those assets are pooled funds (such as ETFs and Mutual Funds) — or other more complex investment schemes. For taxpayers who missed the proper reporting, they may be subject to extensive fines and penalties — but these penalties may be abated or avoided through offshore disclosure. You should consider speaking with a Board-Certified Tax Law Specialist to get an understanding of the different requirements and strategies for disclosure.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.