US High Net Worth Distinctive. International. Insight.

Transcription

1 US High Net Worth Distinctive. International. Insight. US tax return and financial reporting obligations. Are you at risk? The US government s enactment of the Foreign Account Tax Compliance Act (FATCA) has been reported by news publications across the globe in recent years. FATCA reporting has highlighted the large amount of individuals who reside outside the US but have a continued exposure to US tax and financial reporting obligations. US citizens and Green Card holders are required to file resident US tax returns and pay tax on their worldwide income even if they reside outside the US. They are also required to annually report details of their non-us assets and bank accounts. There can be severe civil and criminal penalties imposed on individuals who do not file tax returns or foreign asset disclosure forms regardless of whether any taxes are due. Our below Frequently Asked Questions (FAQ) guide provides some general guidance about your US tax exposure. If you believe that you have a US connection (whether because of US citizenship, a 'Green Card' or just because of US income or gains generating assets) and so may be required to file either US tax returns or financial disclosure forms we would recommend that you contact a US tax professional to ensure that you are compliant. We have included contact information below for members of our team who can discuss your situation and assist you with the next steps. US High Net Worth - FAQs

2 US Income Tax Return Filing Requirement Who has to file US tax returns? US citizens, US resident aliens (i.e. green card holders and/or foreigners living in the United States) and US Non-Resident Aliens (i.e. foreigners living outside the United States) who receive certain US sourced income (e.g. rental income) in excess of filing income threshold. (For 2015, this is $10,300 of gross income for a single taxpayer). I am a US Green Card holder living outside the US, do I still need to file US tax return? A US green card holder is generally subject to US tax on their worldwide income and gains during the entire time they hold the green card, even if residing outside the US. Complex tax statutes govern individuals who abandon lawful permanent residence status, therefore, you are more than likely required to file a US tax return as well as a financial account reporting form. Revoking a green card can subject the individual to an expatriation exit tax regime which may serve to tax the individual on their net wealth. For further details please refer to our "US Expatriation" flyer. Consultation with a professional adviser specializing in the area is strongly recommended when considering potential tax consequences and other legal implications associated with surrendering a green card. Can I be a US citizen if I don t have a US passport and don t live in the US? Yes, persons may gain U.S. citizenship in one of three ways: (1) birth in the United States and its possessions; (2) birth abroad to U.S. citizen parent(s); (3) through an application process referred to as naturalization. US Income Tax do I need to pay? I don t live or work in the US so presumably I am not subject to US tax on any of my income? No, as a general rule, all income received by a US citizen (as defined above) or Green Card holder, derived from any worldwide source is subject to federal income tax. A Non-Resident Alien (a non-us person) is taxed only on certain types of US source. Generally, the source of income is the geographic location, e.g. where the related services are performed and where the income producing asset is located. I have heard that foreign income can be excluded from US tax is this true? Qualifying US taxpayers with a place of business or employment outside the US, under certain conditions, are entitled to elect two possible exclusions to reduce their US taxable income: (1) Foreign Earned Income Exclusion (FEIE) (2) Housing Costs Exclusion The exclusions are available only if the taxpayer maintains a foreign tax home and lives abroad, and only applied for employment or self-employment income, not investment income or gains. The FEIE is currently $101,300. How do I qualify for the exclusion, are there tests to meet? Yes there are a couple of ways to qualify for these exclusions, either because you are deemed a "bona fide resident" of a single foreign country for a calendar year or spend enough time outside of the US (less than 36 days) in a 12 month period. 2

3 Foreign earned income exclusion (FEIE) A qualifying taxpayer may elect to exclude up to $101,300 of foreign earned income for the 2016 tax year. The exclusion amount is indexed for inflation. The exclusion is allowed in full only if the taxpayer qualifies for the entire tax year. Otherwise, the exclusion is reduced proportionately for the number of days during the tax year that the taxpayer does not qualify for the exclusion. Housing cost exclusion / deduction A qualifying taxpayer may make an additional election to exclude from their gross earnings an amount equal to certain non-us housing costs, as long as these costs are not considered extravagant. A taxpayer is generally subject to US income tax on the value of accommodations, meals and most other living expenses paid for or provided by the employer. Note that the maximum amount of housing costs allowed are limited dependent on your location, and also the first $16,208 of cost provide no benefit. Qualifying housing expenses exclude the cost of a house purchase, domestic labour expenses (maids, gardeners etc.) as well as a number of other housing costs. If the taxpayer s family is required to reside in a separate abode overseas because the living conditions in the location where the taxpayer is employed are not safe or healthy for the family, the reasonable housing expenses of maintaining the second foreign household may be eligible for the housing cost exclusion. Do I need to elect these exclusions? Yes, the exclusions for foreign earned income and for housing costs may be elected for by the taxpayer. The elections must be made on a tax return with Form 2555 attached, that is filed no later than one year after the original due date. It may not always be to the taxpayer s advantage to elect one or both of the exclusions. However, once elected, the exclusions must be applied in all later years unless they are revoked. Should the taxpayer decide to revoke either election, the revocation would be binding for that year and at least five subsequent tax years. I work for a US employer abroad; do they need to withhold US tax from my salary? Generally a US employer is required to withhold US income taxes from US citizens and residents regardless of where the services are performed. However, a US employer is not required to withhold US income tax on foreign earned income if: - the income is earned in a foreign country, and the employer must withhold foreign income taxes on that income, or - if it may be reasonably anticipated that the income will be excluded under the aforementioned foreign exclusion rules. Can I claim foreign tax credit relief on my US tax return? A US taxpayer may either deduct foreign income taxes in arriving at taxable income or claim them as a credit against US income tax. Note that computation of these credits can be extremely complex. If my income is covered by the foreign earned income exclusion and/or foreign tax credits, do I still need to file a US tax return? Yes, you are still required to file US tax return even if there is no US tax liability, if the exclusion(s) are not claimed on a timely return you are not entitled to them and they may become taxable if the Internal Revenue Service become aware that you have not filed a return. 3

4 US Income Tax Return Due Dates & Potential Penalties When should US tax returns be filed? US Tax returns for individuals are due 15 April following the close of the tax year which for most taxpayers is usually 31 December. However, taxpayers who live outside the US have an automatic extension of 2 months (to 15 June). An additional 6 months extension is available by filing extension forms (so, if the taxpayer lives outside the US, their return due date can be extended up to 15 December). These extensions will not excuse a taxpayer from interest accruing on their outstanding tax liability unless they have paid at least 100% of their US tax liability by 15 April. Do I need to make estimated tax payments? Estimated tax payments are required if the amount of taxes due with the return after withholding is expected to exceed $1,000. No estimated tax payments are required if there was no tax liability in the preceding year. Estimated tax (if due) should be paid in four equal instalments due on 15 April, 15 June, 15 September and 15 January. What filings should be made? Due to the complexity of US tax and reporting requirements, there can be a variety of forms to complete together with your tax return depending on for example whether you: hold certain investments; have shares in certain business entities; are a partner; have settled or received gifts; have rental income etc. A taxpayer s exact filing needs can only be determined on an individual basis. I have heard the US requires separate reporting of foreign financial accounts. What forms do I need to file and what do I need to report? There are 2 such reporting forms that may be required depending on the aggregate value of includable assets / accounts: (1) foreign bank and financial accounts (Form 114) (2) specified foreign financial assets (Form 8938) Note that the FBAR form is also required for non-us accounts even when you only hold a signature of authority over the account, or if the accounts are held by companies or partnerships you control, as well as certain interests in trusts. Failure to file Form 114 may result in the imposition of civil and criminal penalties which can be extremely significant. What is FinCEN 114 and do I have to file one? Department of the Treasury requires that every US citizen alien with an interest in or signature authority over foreign bank accounts, securities, or other financial accounts that exceed $10,000 in aggregate value at any time during the calendar year must report that relationship no later than 30 June of the following year (from 2016 this form is due on the same day as the individual tax return, therefore 15 April 2017 subject to return extensions). The report is made electronically. The FinCEN 114 form is also referred to as the Report of Foreign Bank and Financial Accounts (FBAR). Failure to file Form 114 may result in the imposition of civil and criminal penalties which can be extremely significant. 4

5 What is Form 8938 and do I need to file one? Additional reporting of specified foreign financial assets may be required as part of the individual s tax return regardless of whether the interest is also reported on the FBAR, by attaching Form 8938, Statement of Specified Foreign Financial Assets. From 8938 applies to certain individuals holding an interest in specified foreign financial asset(s) over the applicable Form 8938 reporting threshold for the underlying tax-year. What are specified foreign financial assets? Any depository, custodial, or other financial account maintained by a foreign (non-us) financial institution; Any stock, security, financial instrument or contract issued by a person other than a US person held outside of a financial institution, and; Any separate interest in a foreign entity not held in a US institutional account. What are the applicable reporting thresholds? The table below summarizes the Form 8938 reporting threshold for each type of individual classified as a specified person and is based on the aggregate total value of all specified foreign financial assets held on either the last day of the tax year, or at any time during the tax year: Not living abroad Living abroad Not filling jointly Filling jointly Not filling jointly Filling jointly Last Day of tax year $50,000 $100,000 $200,000 $400,000 Anytime during tax year $75,000 $150,000 $200,000 $600,000 Other Considerations I have investments in non-us businesses or non-us investments, are there any issues I need to be aware of? Yes, the US operate two anti-deferral regimes that can cause taxation regardless of the distribution of income or penal intentions and tax charges. The Controlled Foreign Corporation (CFC) relates to businesses controlled by US taxpayers while the Passive Foreign Investment Company (PFIC) can apply to any non-us company with significant investments. Both regimes may require additional US reporting obligations which can also trigger penalties and interest. Are there any US tax implications if some of the shareholders in my family business are US shareholders? If more than 50% of the shares held by family members or other shareholders who are US persons, then the corporation may be considered to be a Controlled Foreign Corporation. The consequence of this classification is that undistributed Earnings and Profits are subject to US tax (i.e. irrespective of whether dividends are issued). This could mean that shareholders would be subject to their pro-rata share of the underlying profits in spite of potentially not having physically received any distributions. Issues may also arise if the company acquires US assets or even makes a loan to a US shareholder. I am thinking of giving a family member some shares in my company. Could this give rise to any US tax implications? Generally the transfer of shares by a US person would be subject to US Gift Tax, unless to a US citizen spouse. Depending on the fair market value (FMV) of the asset transferred, if it is less than the Federal Estate lifetime exclusion (see below) then no tax would immediately be due. However the donor's lifetime threshold would be reduced by the FMV of the asset transferred and the donee would inherit the donor's cost basis. Where taxes are due, it is the donee's responsibility to settle the liability. 5

6 There is no estate tax in the country I live in on my death on the assets I own. As a US citizen, will I be subject to US Gift Tax, or US Estate Tax on my death? US citizens and US resident aliens living abroad are generally subject to US Estate and Gift Tax taxes under the same rules that apply to those living in the United States meaning that a charge may arise on the transfer of US funds and / or assets in life or on death. The US does exclude certain small transfers in life and also has an overall lifetime exclusion free charge ($5.45m for 2016). Non Resident aliens are generally subject to estate and gift tax on transfer of US situs property, including tangible and intangible property located in the United States and stock or debt issued by US persons. Not all of the situs rules are self-evident careful estate planning should be undertaken to limit potential tax consequences related to wealth transfers. Care should be especially taken when US citizens married to non-us citizens transfer their wealth because the tax laws severely limit the availability of martial deductions when property passes to a non-citizen spouse. In my will I am thinking of leaving some of my assets to a family member who I know is a US citizen. Will there be any US tax implications for them? When a non-us person is considering leaving assets to a US person, there are 2 main considerations: (1) There will be a reporting requirement if the asset in question is in excess of the value of $100,000 at the date of inheritance. (2) The asset will fall inside the US Estate Tax net on the death of the US person to whom the asset has been left too. It is possible with the appropriate planning to mitigate the effects of this through a variety of means. I am a trustee or a beneficiary of a non-us trust, are these reportable to the US tax authorities? Foreign trusts (i.e. non-us trusts) have complex US reporting requirements, which are different from the reporting requirements imposed on US domestic trusts. The US taxation of the income and distributions from a foreign trust depends on the type of foreign trust and the status of the trust s beneficiaries at the time of distribution. Please see our US Taxation of Foreign Trusts and their US Beneficiaries' leaflet for further details. Correcting the Past & Looking Ahead What can I do to bring my US tax affairs up to date? Following previous successful disclosure programs, the 2012 Offshore Voluntary Disclosure Program (OVDP) was introduced by the IRS to encourage taxpayers to bring their tax affairs up to date in cases where failure to file was as a result of wilful or negligent actions. In tandem with the main program a simplified streamlined filing compliance procedure was also introduced by the IRS on 1 September This allowed certain eligible (low risk) taxpayers to file amended or delinquent returns with reduced or no penalties, provided that the failure to file was not due to wilful actions on the part of the taxpayer. On 18 June 2014 the IRS announced an extension to both the main and streamlined programs. A number of significant changes to the streamlined filing compliance program were also introduced. These programmes have been considerably expanded to ensure more individuals will potentially be eligible to participate. Please see our US High Net Worth US Tax Alert - 'Changes to Streamlined/OVDP Filing' leaflet for further details about the disclosure programmes available. 6

7 Can I renounce my US citizenship (expatriate)? US citizens and certain long-term green card holders residing overseas sometimes consider relinquishing their US citizenship or green card. However, giving up US citizenship or a long-term green card may cause the expatriating individual to be subject to an Exit Tax. This treats them as though all their assets were sold on the day before the expatriation date and any deferred income was received. Furthermore, US persons receiving gifts from persons expatriating for tax reasons may be subject to tax charges. Certain individuals may be eligible for an exemption from these potential charges, but regardless the individual will need to have filed their prior 5 years of US tax returns before they are able to expatriate. Please see our US HNW Expatiation rules flyer for further details about the procedure and tax implications. Contacts For more information please contact: London Lynne Rennie Tel: +44 (0) lrennie@deloitte.co.uk London Alex Jones Tel: +44 (0) alexjones@deloitte.co.uk London Chris Horton Tel: +44 (0) chorton@deloitte.co.uk London - Harry Swift Tel: +44 (0) hswift@deloitte.co.uk London Michael Lewis Tel: +44 (0) miclewis@deloitte.co.uk London Miroslav Filip Tel: +44 (0) mfilip@deloitte.co.uk London Nick Watson Tel: +44 (0) nwatson@deloitte.co.uk Switzerland - Alex Saluveer Tel: asaluveer@deloitte.ch Parsippany USA - Anna Chapman Tel: annamchapman@deloitte.com For further information, visit our website at Middle East representation Dubai, DIFC Fiona McClafferty Tel: fmcclafferty@deloitte.com Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited ( DTTL ), a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of DTTL and its member firms. Deloitte LLP is the United Kingdom member firm of DTTL. This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte LLP would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication Deloitte LLP. All rights reserved. Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Tel: +44 (0) Fax: +44 (0)