DENVER NUGGETS OF GOLD: WHERE TAXATION AND IMMIGRATION MEET TAX ISSUES FOR IMMIGRATION LAWYERS. Why U.S. Tax Residency Matters

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1 DENVER NUGGETS OF GOLD: WHERE TAXATION AND IMMIGRATION MEET Samuel C. Rock (DL), Lexington, KY Elise A. Fialkowski, Philadelphia, PA Paula Noyes Singer, Newton, MA Kevin J. Mullin, Tax Attorney, Denver, CO TAX ISSUES FOR IMMIGRATION LAWYERS Resident v. Non-resident Gift, Estate, and Disclosure Ability to Pay Income tax issues Why U.S. Tax Residency Matters TAX RESIDENTS WORLDWIDE INCOME Same as U.S. Citizens Residents Green card test Substantial presence test (SPT) W-4/W-2 Standard wage withholding W-9/ % backup withholding $600 threshold for independent compensation and most payments TAX NONRESIDENTS U.S.-SOURCE INCOME Not U.S. citizens or tax residents W-4/W-2 Special wage-withholding rules Special Form W-4 rules (only single) Phantom gross-up to eliminate effect of standard deduction in wage tables W-8s/8233/1042-S 30% withholding (14% on scholarships) No minimum dollar threshold for payments 1

2 Why U.S. Tax Residency Matters TAX RESIDENTS WORLDWIDE INCOME Cont. No treaty benefits (except students and scholars) Form 1040 (or simpler 1040A or 1040EZ) even if living abroad Disclosures required FBAR (for financial accounts) Many other possibilities TAX NONRESIDENTS U.S.-SOURCE INCOME Cont. Can claim treaty benefits to avoid or reduce U.S. tax/withholding if qualify Form 1040NR or Form 1040NR-EZ No standard deduction Few deductions and credits allowed Single or married filing separately April 15 only if have wages subject to wage withholding, otherwise June 15 Determining Tax Residency Status Green Card Test From 1st U.S. day in greencard status until status is revoked or abandoned Substantial Presence Test (SPT) 31 countable U.S. days and U.S. presence for 183 countable days or more in the calendar year based on a weighted formula All in the current year, 1/3 in the prior year, and 1/6 in the year before For any purpose (including vacation) Including partial days of arrival and departure Some U.S. days do not count Determining Tax Residency Status Do not count days of an individual exempt from counting days A and G-status foreign-government related individuals F, M, and J Students (including Student Interns) Exempt from counting days for any part of 5 calendar years in F, J, M, or Q Years beginning with 1985 (absences do not restart count) J and Q-status nonstudents (called teachers and trainees by the IRC) Do not count U.S. days for 2 out of the current 7 calendar years in F, J, M, or Q status Can get some unusual results because of prior visits in F, J, M, or Q status some of which were exempt from counting and some not When status changes in the year, use the applicable rule for counting U.S. days in each status 2

3 Tax Treaty Impact A tax resident might also be a resident of a country with a tax treaty with the U.S. ( dual resident ) Might be a treaty country resident under the treaty residency tiebreaker rule Those traveling to U.S. frequently on business might be treaty U.S. nonresidents Those who move to U.S. will be U.S. treaty residents Must timely file 1040NR/8833 or 8833 separately to be a treaty nonresident Being a treaty nonresident does not change requirement to submit U.S. disclosure forms! IRS International Tax Enforcement IRS focus on enforcing reporting of worldwide income by USCs/tax residents disclosures Requirement for disclosure forms (see list in practice advisory) Huge penalties for not submitting disclosures Voluntary Compliance Initiatives Many issues for former LPRs who did not follow IRS rules Employment tax audits/uscis now sends info on sponsored employees to IRS I-140 Ability to Pay The Regulation 8 CFR 204.5(g)(2) Ability of prospective employer to pay wage. Any petition filed by or for an employment-based immigrant which requires an offer of employment must be accompanied by evidence that the prospective United States employer has the ability to pay the proffered wage. The petitioner must demonstrate this ability at the time the priority date is established and continuing until the beneficiary obtains lawful permanent residence. 3

4 I-140 Ability to Pay Evidence of this ability shall be either in the form of copies of annual reports, federal tax returns, or audited financial statements. In a case where the prospective United States employer employs 100 or more workers, the director may accept a statement from a financial officer of the organization which establishes the prospective employer's ability to pay the proffered wage. In appropriate cases, additional evidence, such as profit/loss statements, bank account records, or personnel records, may be submitted by the petitioner or requested by the Service. I-140 Ability to Pay Yates Memo (5/4/04), AILA InfoNet Doc No Required evidence: Federal tax return or Annual report Audited financial statement Discretionary evidence: Statement from financial officer Profit/loss statement Bank account records Personnel records, etc. Three tests: Net income test Net current assets test Actual payment test I-140 Ability to Pay I-140 Standard Operating Procedures Case law Matter of Sonegawa, 12 I&N 612 (BIA 1967 financial losses can be overlooked if created by unexpected and uncharacteristic events such as one bad year Recent decisions Service Center trends Creative Evidence 4

5 US Gift and Estate Tax What are Estate and Gift Taxes? Tax on Transfers of Assets by RA and NRAs During Life (Gifts) Gift Tax On Death (Estate) Estate Tax Calculated on FMV of Asset at Time of Transfer Note: Income Tax is only on appreciation not FMV Maximum Tax Rate (2013)* = 55% Exemptions (2013)* Estate Tax - $1M Gift Tax - $1M *Current ET/GT Rates and Exemptions Return to pre-2001 levels unless new legislation is enacted Test for RAs and NRAs (Domicilary/Non-Dom) Who is a Resident for ET/GT Purposes? No Statutory Tax Definition, i.e, No Substantial Presence or Green Card Test Factual/Subjective Test (Presence + Intent to Stay) NRA acquires RA status for GT/ET purposes if person is living in the U.S., for even a brief period of time, with no definite present intention of leaving Will not become a RA if in the U.S. but no intention to remain indefinitely Once becoming a RA, will not change domicile unless leaves U.S. Permanent Resident can be NRA Undocumented or G-4 World Bank Employee - Can be RA GT/ET Tax Treaties (only 17) can clarify RA Status ESTATE AND GIFT TAX FOR RA AND NRA How Does the ET and GT Impact RAs and NRAs? RESIDENTS (DOMICILIARY) TYPICALLY A PERMANENT RESIDENT ALL ASSETS LOCATED WORLDWIDE Transfer of asset acquired prior to or after becoming RA Same ET/GT rates as USC (2013 max 55%) Same Exemption as USC (2013 $1m E+G) ET - No unlimited marital deduction unless spouse USC or Spousal Trust GT No unlimited marital deduction limited to $136k annually to spouse NONRESIDENTS (NON-DOM) TYPICALLY AN INVESTOR ONLY ASSETS DEEMED TO BE IN US Same ET/GT rates as USC (2013 max 55%) BUT, PALTRY ET/GT exemption v USC $60k NRA v $1m USC (2013) Treaty may increase exemption No ET/GT marital deduction unless USC or Spousal Trust Assets deemed to be in US US real estate Stock in US corporation for ET Stock in US corporation no GT Treaties can clarify if asset is deemed to be in US or 3rd country 5

6 US Estate/Gift Tax Planning vs. No Planning What Difference Does Advance ET/GT Tax Planning Make? ESTATE/GIFT TAX - RA $5M in Chinese bank account transferred to daughter by Death or Gift (2013) o No Planning prior to RA status $2,161,500 Estate or Gift Tax o Planning Make $5m Gift to daughter prior to RA No Estate Tax No Gift Tax ESTATE/GIFT TAX NRA $5m US real estate transferred to daughter by Death or by Gift (2013) o No Planning prior to acquiring US real estate $2,161,500 Estate or Gift Tax o Offshore Planning prior to acquiring US real estate No Estate Tax No Gift Tax IRS/Treasury Disclosures for RA and NRA The IRS has an Inquisitive Mind! RESIDENTS (DOMICILIARY) NONRESIDENTS (NON-DOM) Disclosures required (whether any tax is due) FBAR Form TD F Report Foreign Bank Account Form Report Foreign Financial Assets Form Report Ownership Foreign Corporation Form 8865/8621 -Report Ownership Foreign Partnership/Disregarded Entity Form Report Foreign Gifts and Distributions from Foreign Estate/Trust Other Forms Penalties Criminal/Civil OVDI program ended 8/31/11 Disclosures required Form Report Ownership of US Corporation Form Election of Treaty Benefits Form Claim of Closer Connection to 3rd country Other Forms Penalties Criminal Civil Big Picture Low Income Tax Issues Recognize risks, defend appropriately and recognize opportunities for post-ssn refunds In cancellation cases, returns can lead to challenges to good moral character of your client Ethical duties of attorney to the court ABA Model Rule 3.3 Candor to Court High rate of error/fraud in returns prepared in undocumented communities (notarios) SSNs via EADs can save your client big $ and may result in refunds (?? EITC) 6

7 The Usual Suspects Improper claims to dependents Improper claims to Child Tax Credit for ITIN filers on the 1040 in 6(c)4 is a representation that dependent lived with client Spouse USC/LPR who has SSN spouse files as Head of Household/Single with SSN children to preserve EITC when married and living together with ITIN spouse Tax returns that don t show dependents may indicate SSNs sold Not stating cash income Rules for Dependency Definition is very broad and can include, sons/daughters, nieces/nephews, brothers/sisters, grandparents, and in-laws Can live in MX/U.S. or Canada if one of listed family relationships Must pay more than 50% of financial resources (easy for MX per USAID/CIA reports) Dependency is a red herring just gets the preparers to the Additional child tax credit $1,000 per child (must live with taxpayer) no me conviene Earned Income Tax Credit A = USC spouse with SSN files HH or single to claim EITC Disqualified if files with ITIN spouse or Married Filing Separate Q = Retroactive Claims to EITC after client has SSNs If not claimed then can go back for 3 years Can be $6,000 per year 7

8 Questions & Answers 8