Expatriate tax ebook - United States - Inbound

Basis of taxation

Charge to tax
Residence
Income from employment
Source of employment
Benefits (in kind)
Expatriate concessions
Relief for foreign taxes
Deductions against income

Charge to tax
Resident aliens are taxed under the same rules as those that apply to US citizens. They are subject to tax at graduated rates on all income from worldwide sources.

Residence
The green card test
An alien who is admitted as a lawful permanent resident (green card holder) will generally be treated as a resident of the United States for income tax purposes. Residency status is effective from the first day the foreign national is present in the US while possessing a "green card.” An individual remains a US resident the entire time he/she possesses a green card even if the US assignment ends and the person returns to the home country.

Substantial presence test
The substantial presence test is based upon the number of days of physical presence in the US (part days count as full days). To meet the substantial presence test, an individual present in the US for at least 31 days in the current year will be considered a resident alien if the sum of the following equals or exceeds 183 days:

Number of days present in the US in the current year + 1/3 of the days present during the first preceding year + 1/6 of the days present during the second preceding year.

Residency end date
Residency under the substantial presence test continues until the foreign national no longer meets the substantial presence test. The individual’s residency terminates on the last day of the calendar year that the test is met. US residency will terminate at the time he/she moves away from the US, if at that time a tax home is established in another country and the individual has closer personal and business connections to that country. In addition, to break US residency, the individual must remain a nonresident for the next calendar year.

Income from employment
Generally the following types of compensation are taxable in the US to both residents and nonresidents (subject to the rules discussed later). Please note that this list is not meant to be all inclusive: base salary, bonus, cost of living allowance, housing allowance, education allowance for children, home leave reimbursements, reimbursement of host/home country taxes, personal use of company car, certain moving allowances and stock options.

Source of employment
The source of employment is generally determined by the place where services are performed.

Benefits (in kind)
Generally, the individual is liable to pay tax on any benefits (in kind) received. Some benefits, including moving expenses, may have special tax treatment.

Expatriate concessions
Nonresident aliens are taxed only on US source income, which is categorised under two distinct definitions: income which is effectively connected with a US trade or business (ECI), and income which is not effectively connected with a US trade or business (Non-ECI).

A nonresident alien’s ECI is taxed under rules similar to those which apply to US citizens (i.e., income can be offset by certain deductions and personal exemptions and the resulting taxable income is taxed at normal graduated rates).

Depending on the length and terms of the US assignment, tax relief may be available under the provisions of a bilateral tax treaty between the US and the home country. Generally, treaty relief for compensation is only available if the individual is not present in the US for more than 183 days during that year and the compensation is paid and borne by an offshore (i.e., non-US) entity. It is critical that the treaty provisions of the particular country be examined.

Non-ECI (which typically includes investment income such as interest, dividends, rents and royalties) is taxed to the extent that it is deemed to be derived from US sources. Non-ECI is taxed as gross income (i.e., no deductions are allowed), generally at a flat rate of 30 percent, but if the nonresident alien is resident in a country with which the US has a tax treaty, a lower rate may apply.

Relief for foreign taxes
Resident aliens are also allowed either a deduction or credit against US income tax for qualified income taxes paid or accrued during the tax year to any foreign country or US possession.

In determining the amount of the foreign tax credit allowed, the taxpayer is subject to an overall limitation that prevents him/her from taking a foreign tax credit against the portion of US tax liability associated with US-source income. Essentially, the foreign tax credit is limited to the portion of US income tax related to foreign-source income (income associated with services performed outside of the US).

Taxpayers who are unable to utilise the full amount of foreign taxes available for credit due to limitation, will carry back unused foreign taxes one year then carry forward for up to ten years.

Deductions against income
As a US resident, several deductions may be taken against gross income to arrive at an individual’s taxable income. Unlike nonresident aliens who are limited to very few specific deductions, a US resident has the option of deducting the greater of the standard deduction or total itemised deductions.

The standard deduction is a predetermined amount that varies according to an individual’s filing status. The standard deduction amounts for 2008 are as follows:

• Single – $5,450
• Married filing jointly – $10,900
• Married filing separately – $5,450
• Head of household – $8,000.

Some examples of nonbusiness expenses referred to as itemised deductions include: state and local taxes, real and personal property taxes, interest on home mortgages (with restrictions), and contributions of cash or property to US charities, up to statutory limitations.

In addition, a resident may deduct a personal exemption for himself or herself, a spouse and their children if they qualify as dependents to the taxpayer. The amount of the exemption is predetermined and adjusted each year for inflation. The exemption amount for the 2008 tax year is $3,500. Personal exemptions are phased out for taxpayers with an adjusted gross income in excess of certain thresholds.

Information about United States - Inbound:

introduction

facts and figures

basis of taxation

what taxes?

tax planning opportunities