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Ten Tax Facts You Should Know Before Moving to the US

Leah LeLoup, CPA

Are you an individual looking to move to the US? Or perhaps an employer needing to send your employees overseas?  Either way, here are ten tax facts that I hope will help you avoid some common mistakes and let you know what to look out for.

 
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1.
US Residents are taxed on their worldwide income.
If you are not a US citizen, your residency is determined by either 1) the “lawful permanent residence test” (also known as the “green card test”) or 2) the “substantial presence test.” The green card test states that if you have a US green card, then you are considered a resident for income tax purposes. The substantial presence test is a bit more involved and looks at the number of days that you were in the US for the past 3 years. To meet this test, you must be physically present in the US for a weighted average of 183 days over a three-year testing period including the current year. If you meet either of these two tests, then you are considered a “resident alien” and will be taxed in the US on your worldwide income. If you do not meet either of these tests, then you are considered a “nonresident alien” and are taxed only on US sourced income. It may be important to note that your tax residency and immigration status are not the same, so you can potentially trigger US tax residency before you even receive your visa. Additionally, long term green card holders may be subject to an exit tax. So, if you have a US green card for at least 8 out of 15 years, then you might face a tax on your worldwide assets if you later decide to give it up.
 
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2.
Tax treaties with the US may offer some relief from double taxation.
For many resident aliens, the burden of US tax can be reduced by tax treaties between the US and your home country. This can take the form of income tax credits. For example, if you are paying tax on a specific item of income in your home country, as a US resident you must also report that income on your federal tax return. However, you are typically allowed a credit against your US tax liability for the tax you have already paid on that income in your home country. The treaty can also modify certain items of US income taxation, such as your residency status. For example, if you happen to be a resident of both the US and your home country under their domestic laws, you can look to the treaty for certain tiebreaker rules that will help determine your country of residence and override domestic law. 
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3.
Some transactions that are not taxable in foreign countries are taxed in the US.
This can include certain capital gains, such as the sale of a vacation or summer home, or even foreign exchange gains on the payoff of a mortgage. Sometimes current earnings in non-US pension accounts are taxable in the US even if they are tax deferred in your home country. Another common item is taxation on foreign holding company income.  This applies to individuals who own personal holding companies that contain either investments or interests in other foreign companies. What happens in this situation is if the company is more than 50% controlled by US tax residents, it is considered a “Controlled Foreign Corporation” and the current earnings within the company are taxed, regardless of whether they were distributed to the owner. (In situations such as this it is highly recommended that you consult with a US tax accountant prior to moving, as there are various tax planning opportunities that can be implemented to help mitigate this effect!)
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4.
US and state taxes combined may be more than expected.
US individual income tax is calculated using two parallel methods: regular and alternative minimum tax (AMT) and you pay whichever one comes up with the highest tax. Federal income tax is assessed at graduated rates that can range from 10% to 37% depending on your level of income. On top of that there is also a 3.8% Net Investment Income Tax that is assessed on investment income such as interest, dividends, capital gains, rents, etc. State income tax rates vary depending on your state of domicile. My home state of California, as an example, taxes between 1% and 13.3%, which is one of the highest of any state in the US. Therefore, between both federal and state taxes you can see how this can add up very quickly.
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5.
US taxes are complex. 
As a frame of reference my personal tax return (which is very simple) is 14 pages long, and one of the longest individual tax returns I’ve prepared was over 250 pages long (no, it is not a joke!). In the US there is no automatic calculation of tax by the government, and you are entirely responsible for the filing of your own return. Unlike in many countries, you can file a joint tax return with your spouse, so there is only one filing between the two of you. You can choose to file separately from your spouse if you wish, although this may be impacted by community property laws in your state of domicile. Also, immediate family members, such as your spouse and children might be allowed as deductions on your state filings.
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6.
States have different tax rules
As you probably know, the US has 50 states, and most have their own separate income tax returns which are very different from one another. As stated previously, state tax rates can vary, and some states like Florida, Texas, Washington and a few others do not even have an individual income tax. One important thing to know is that some states do not offer treaty relief. As mentioned earlier, if you paid tax on income in your home country, you can sometimes take it as a credit on your federal income tax return. However, certain states, like California for example, do not follow federal tax treaties and therefore do not allow for income tax credits. In fact, many states do not conform to certain federal tax laws.  Also, it is possible for you to have filing requirements in more than one state, since income is sourced to where services are provided, or your income is generated. For example, if you are making frequent business trips to another state, even though you do not live there, you may have to file a separate state tax return reporting the income earned while working there. Another thing to keep in mind is that your state tax residency can begin before your US tax residency. This could lead to certain items of income being taxed for state purposes, even if they were excludable from your federal return.
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7.
International reporting forms typically have $10,000 penalties for non-filing.
This includes forms such as a Foreign Bank Account Report (FBAR), Statement of Foreign Financial Assets (Form 8938), and US ownership of certain foreign entities (Forms 5471, 8865, or 8858), among others. The FBAR is an informational report filed separately with the US Department of the Treasury and requires a listing of all non-US owned bank accounts and their highest balances for the year. The Statement of Foreign Financial Assets is submitted with your tax return and lists much of the same information as the FBAR, plus a few other non-US assets and investments. The other aforementioned reports of US ownership are informational filings required of US owned foreign entities such as corporations or partnerships.
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8.
Non-US mutual funds are taxed in a burdensome way.
These are called “Passive Foreign Investment Companies” or PFICs and the required reporting to account for them is onerous. The earnings from these investments is deemed to have been earned over the life of the investment, and the tax is calculated for each year of ownership at the highest possible rate for that year. On top of that, there is interest charged for the deferred tax. Typically, it is better to get rid of them before moving to the US, as the taxes, interest, and fees for compliance usually far exceed any income generated from these investments.
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9.
Due to the high cost of tax compliance, companies will often pay for the tax planning and accounting fees for their executives’ tax returns.
The year of entry into the US is particularly complex for individuals, as it can be considered a dual status year. What happens in these cases is essentially two returns get filed. One for the first half of the year where you are a nonresident alien and only taxable on any US sourced income, and the other half of the year where you are a resident alien and taxable on worldwide income. The dual status year offers opportunities to calculate tax in the manner which will have the smallest liability. Accounting fees vary widely depending on your circumstances which is why many companies take the position that it is a necessary business expense for them to obtain the expertise of the transferred individual. This also ensures the employee works with a knowledgeable international tax advisor which can help minimize potential problems down the line.
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10.
The totalization agreement between the US and your home country may be used to prevent payments in the US social security system.
This benefit is typically available for individuals that are going to be working in the US for three years or less. It allows you to continue paying into your home social security system without having to pay US social security taxes since you probably will not be retiring in the US. This saves both yourself and your US employer the cost of US social security taxes. To take advantage of the totalization agreement between the US and your home country, you must apply for a certificate of coverage. This certificate is then given to your US employer indicating that you are already covered in your home country and that no social security withholding is required from your US payroll.
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Hopefully I haven’t scared you from moving to the US!  While there are many pitfalls in the US tax system, it can be easy to navigate if you have an advisor who knows what they are doing.  In summary, make sure to plan ahead, seek advice from international tax advisors in both the US and your home country, and just keep it simple.  Wishing you the best of luck in the USA!

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Leah LeLoup is a Certified Public Accountant (CPA) and International Tax Manager at Hutchinson and Bloodgood LLP, in San Diego California.

HBLLP is a full-service CPA firm and a member of two international accounting firm organizations facilitating access to professionals around the world. Leah works with a large group of European inbound businesses in the US and their executives.

Leah can be reached at:  lleloup@hbllp.com or 1-619-849-6527.

ZLeah LeLoup, CPA
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