Tax Issues For Non-Citizens (and some Citizens): Ten Myths, and Some Reality. Stephen McDonald, Seattle, WA Margaret Stock, Anchorage, AK

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1 Tax Issues For Non-Citizens (and some Citizens): Ten Myths, and Some Reality Stephen McDonald, Seattle, WA Margaret Stock, Anchorage, AK

2 Outline Myths About US Taxes Tax Implications for Foreign Investors & Non- Citizens Generally Tax Issues for Lawful Permanent Residents Exit Tax Issues for Citizens and LPRs Questions

3 I don t live in the US, so I don t have to pay US income taxes, and I don t have to file a 1040 Myth #1

4 Reality A person is subject to US income tax regime when he/she meets US citizen test Green card test Substantial presence test Resident alien for tax purposes is different from a resident alien under immigration law

5 US Citizens Living Overseas May have to file a tax return May have to pay US income taxes on their worldwide income May sometimes benefit from treaty rules May be double-taxed (sorry about that)

6 I don t have to file a US income tax return until I get a green card Myth #2

7 A person is subject to the US income tax regime when he/she meets US citizen test Green card test Substantial presence test Resident alien for tax purposes is different from a resident alien under immigration law Reality

8 Even if I get a green card, I can still save money by claiming to be a nonresident for tax purposes Myth #3

9 Reality Green card test Abandonment of Lawful Permanent Residence issues N400 question ( have you ever claimed to be a non-resident for tax purposes? )

10 Myth #4 I don t live in the US, so I am exempt from FICA taxes, even though I have US income FICA = Federal Insurance Contributions Act, i.e., Social Security/Medicare

11 Reality FICA rules F, J, M, and Q visa status exemption from FICA if nonimmigrant employee is income tax resident

12 I m only in the US to work for a foreign business, so I don t have to worry about creating a US trade or business for tax purposes Myth #5

13 Reality US Trade or Business rules Internal Revenue Code (IRC) Section 864

14 Employees Entering the U.S. Keeping nonimmigrant employees on foreign payroll Income tax treaty 183-day exception Totalization agreement and coverage certificate Reed Longyear Malnati & Ahrens PLLC

15 Employees Entering the U.S. Performance of services establishing Trade or Business Two exceptions in Internal Revenue Code Treaty exceptions Withholding and reporting for worldwide U.S. employees Reed Longyear Malnati & Ahrens PLLC

16 I m a foreigner, so I don t have to worry about US estate and gift taxes Myth #6

17 Reality Estate & Gift Tax Considerations Pre-entry planning Important definitions Limitation with U.S.- sitused property for nonresident Exemptions

18 Staying in the U.S. Passive Foreign Investment Companies IRS Form 8621 Gifts of more than $100,000 per year from nonresident individual or foreign estate IRS Form 3520 Offshore Voluntary Disclosure Program Reed Longyear Malnati & Ahrens PLLC

19 I m a foreigner, so I don t have to worry about taxes on my interest income Myth #7

20 Reality Fixed or Determinable Annual or Periodic Income (FDAPI) Sub-part F rules

21 My only income is from a foreign corporation or foreign investment company, and that s not taxable in the United States Myth #8

22 Reality Controlled foreign corporation rules Passive Foreign Investment Company (PFIC) rules

23 Myths #9 & #10 If I give up my green card or US citizenship, I don t have to pay US taxes anymore I never had a green card or US citizenship, so I don t have to worry about the exit tax

24 Reality Resident alien for tax purposes is different from a resident alien under immigration law Exit tax

25 Exit Tax - General Enacted in 2008 and applies to former U.S. citizen or former long-term resident (LTR) LTR is an individual who has been an LPR in 8 of the last 15 years Tax is applied on the day before the Expatriation Date, which generally is: Former US citizen - the date of renunciation/relinquishment, documented on Certificate of Loss of Nationality Former LTR Date of abandonment on I-407 or date of revocation of LPR status

26 Covered Expatriate No exit tax on former U.S. citizen or former LTR if NOT a Covered Expatriate To be a Covered Expatriate, must satisfy 1 of the following tests: Net worth of at least $2 million (Tax Liability Test) Average annual U.S. tax liability for 5 years ending before Expatriation Date is greater than $151,000 (Net Worth Test) Do not certify on IRS Form 8854 that tax requirements for preceding 5 years were met (Certification Test)

27 Leaving the U.S. LTR Factors Do not count years for which a U.S. nonresident income tax return 1040NR is filed Expatriation Date (for tax purposes) Date of abandonment on DHS Form I-407 Date of revocation of LPR status Deemed expatriation for exit tax purposes by filing IRS Form 1040NR Reed Longyear Malnati & Ahrens PLLC

28 Imposition Mark-to-market deemed sale of all property on day before Expatriation Date Deemed Sale Exclusion - $651,000 maximum (adjusted for inflation after 2012) Covered Expatriate can elect, on Form 8854, to defer tax on any property item

29 Exit Tax Imposition (continued) Deemed Sale does not apply to (but taxable nonetheless): Deferred Compensation Item (not eligible ) taxed on value Eligible Deferred Compensation Item 30% US withholding tax on distributions Specified Deferred Tax Account (e.g., IRA) taxed on value Interest in Nongrantor Trust 30% withholding tax on distributions

30 Leaving the U.S. Type of income tax return due for the year of departure: Forms: 1040, 1040NR, or dual-status return Departure Permit Application of No Lapse Rule Reed Longyear Malnati & Ahrens PLLC

31 Excludability Issues IIRAIRA (Public Law ) added 212(a)(10)(E) and 22 CFR to INA INA 212(a)(10)(E) makes inadmissible any alien who is a former citizen of the United States who officially renounces United States citizenship and who is determined by the Attorney General to have renounced United States citizenship for the purpose of avoiding taxation. INA 212(a)(10)(E) applies only to individuals who officially renounced their U.S. citizenship on or after the effective date of the Act, September 30, (See 9 FAM N1 Applicability of INA 212(a)(10)(E). NIV INA 212(d)(3) Waiver is available

32 Questions?

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