Not a US Citizen? .. There Are Things You Need To Know
Millions of foreign nationals are resident and pay taxes in the US. To the IRS, they are not the same as Americans.
Many non-citizens do not realize the extent to which they are not always treated by the Internal Revenue Service (IRS) in the same way as American citizens. And most financial institutions think the same way. Here are a few of the issues that you might well face if you are not a full US citizen:
INCOME TAX .. Anyone who earns any income here and is subject to US taxes, regardless of their citizenship or immigration status, must declare ALL income they receive from anywhere in the world. In other words, all income from any accounts overseas (interest, dividends, profits, rent received etc.) or compensation received from outside the US must be included on the annual US tax return (form 1040). You will not pay double-tax in most cases, since the US will give you a credit against your US taxes for taxes you may have already paid to a foreign government, but it is an offense not to include ALL this worldwide income on your tax return, even if the money is never brought into the United States.
ESTATE TAXES .. All US citizens and resident aliens are granted an exemption from federal estate taxes, currently $5.34m. In other words, if the value of your estate is lower than that (including property, accounts, life insurance payments etc. etc.), you are not subject to any federal estate tax (although individual states can and do impose their own estate taxes with lower exemptions). A US citizen married couple is also granted an unlimited marital deduction which means that a spouse can leave as much as they like to their husband or wife, free of any federal estate taxes (this deduction is now also available to same-sex married couples), but only as long as both parties are US citizens.
However, if you are not a citizen and your spouse dies, you may not be entitled to either the $5.34m exemption or the unlimited marital deduction. If your deceased spouse was a citizen, you will get the $5.34m exemption, but in no case will you get the marital deduction if you are not a US citizen, even if your spouse was. Remember also, that the estate tax is due on ALL assets, no matter where in the world they are located. If both you and your deceased spouse are non-resident aliens, then you can be subject to federal (and possibly state) estate tax on all US-based assets valued at over $60,000. This can be very significant since federal estate taxes alone can be as high as close to forty percent in some cases.
GIFT TAX .. Gift taxes are paid in the form of a reduction of the $5.34m exemption to estate taxes mentioned above. In other words, if you give significant gifts during your life, then you get a correspondingly lower exemption upon death. Once again, the rules are different for non citizens. Anyone — citizens, resident aliens or non-resident aliens — can gift up to $14,000 per year each to as many people as they like without incurring any gift tax. However, any amount over $14,000 gifted to any one person (with the exception of a spouse) is subject to gift tax in the form of a reduction of the exemption and a special form must be included to show this when filing your annual tax return.
US citizen married couples may gift an unlimited amount to their spouses without incurring any gift tax. However, if the receiver of the gift is a spouse but not a full US citizen, then gift tax is due on any amount of the gift over $145,000. While this may sound like a lot of money to gift even to a spouse, remember that if someone buys a property with their own money and then titles it as equal joint ownership with their spouse, the IRS will consider that as a gift of half the value paid for that property. Not a problem between two Americans, because of the spousal exemption. But if the spouse receiving that “gift” is not a full citizen, then gift tax can be due on the portion of that value over $145,000.
S CORPS .. Many businesses are created under S Corp status (other options include sole proprietorships, C Corps or LLCs). A non-resident alien is not legally permitted to be a shareholder of an S Corp. This can be an issue when either trying to start a business, buy a business, or when inheriting one.
MORTGAGES, LIFE INSURANCE ETC. .. Non-citizens can face difficulties when it comes to taking out mortgages and life insurance policies, particularly if they are on visas with expiry dates. Some firms offer programs specifically for non-residents and it would be wise to find such a program.
CREDIT .. Normally, credit records built up outside the US are not taken into account by credit agencies or lenders. Often assets held overseas will not be taken into account when assessing credit-worthiness. The recently-arrived non-citizen usually has to build a credit history from scratch here in the United States. There are credit development specialists that can help you accomplish this in the most efficient manner.
OVERSEAS ACCOUNTS .. As mentioned earlier, income from any accounts held outside the US must be declared on the annual income tax return. If, however, you have signature authority on any overseas accounts (even if it is a joint account held with other people) that, when all added together, come to more than a total of $10,000 at any time during the year, there is a second step that you must follow, regardless of whether the accounts generated any income or not or were included on your regular 1040 tax return. You have to separately disclose them electronically every year, giving details of the accounts, where they are located and how much is in them. This is under what is called FBAR regulation. And if the total of all the accounts was ever over $50,000 at any time during the year, then there is yet another form that must be completed (in addition to the FBAR and the 1040), under FATCA rules: IRS form 8938. These disclosures are simply informational, you are simply letting the US authorities know that you have signature authority on these accounts.
All these regulations apply to everyone; US citizens, green card holders, visa holders .. anyone who pays any US income taxes is subject to FBAR and FATCA, even if they live outside the US in most cases. Remember, also, that if you file jointly with a spouse with these kind of accounts you become “infected” by your spouse’s situation since the IRS treats those who file jointly as being “one economic unit”.
The penalties for failing to complete these forms are extremely high. For FBAR violations, a minimum of $10,000 or fifty percent of the value of the account for each account not disclosed for each year of non-disclosure. And that is if the non-compliance is deemed non-willful. If you are unable to prove that your failure to file was an oversight, the penalties are far worse. Failure to complete the FATCA forms carry even higher penalties and can even carry terms of imprisonment for those deemed to have willfully not disclosed.
The US authorities also now have agreements with most countries in the world that the financial authorities in those countries will inform them of accounts held there by US taxpayers, so it is becoming more and more likely that the US Treasury will eventually come to learn of most of these accounts.
The rules about what kind of accounts are liable to be disclosed are extremely complex (and can differ under FBAR rules and FATCA rules) and it is important that you discuss this with a competent accountant when you do your taxes every year. If your accountant does not appear to know about these requirements, then change your accountant! The penalties are way too harsh and the rules way too complex for you to take the risk of your tax professional not understanding them properly.
I have just covered the main issues in this piece and in a very high-level, thirty-thousand-feet kind of way. And these rules are dynamic and can change quite frequently. As you can see, the regulations might change for you as your immigration status changes. When you move from visa to green card holder, some issues may drop away but other responsibilities can arise. The same when you move from green card status to full US citizen. Remember, too, that the IRS definition of who is a resident alien can differ from the immigration authorities’ definition.
Many of these issues can remain with you, even if you return permanently to your home country, retaining your green card or US citizenship. The reporting responsibilities might not just go away because you decide to live elsewhere, depending on what status you hold. And don’t imagine that you can easily give up your US citizenship (or even green card in some cases) just to make all the problems go away. But that’s perhaps the subject of another article.
It is important to remember that you cannot rely on your immigration attorney to give you any advice in this area or bring these issues to your attention. It is not their field of expertise and they are usually understandably reluctant to offer any kind of financial or tax advice.
If you have questions on these issues, try these resources ..
- Find a Certified Financial Planner
- Find an accountant who is competent in the field of international taxation
- Contact your consulate or embassy and ask for information
- Ask your immigration attorney for a referral to a tax professional
- Use the IRS website (www.irs.org) to find out more
- Educate yourself through internet articles, attending seminars etc.
(Information good as of October 2014)