Tax Planning for Non-U.S. Citizens

Posted by Matthew McClintock
Category:

Individuals from all over the world are investing in the U.S. in record numbers. Many are buying or forming new companies in the U.S., adding jobs and boosting the economy. Many seek to educate their children in America’s superior universities. Many are buying real estate and seek the privacy, stability, and security of the U.S. economy and political system. Many more spend significant time in the U.S. visiting family, vacationing, or tending to their U.S. investments.

Unfortunately, many of these foreign investors are creating an unnecessary U.S. tax nightmare for themselves by investing or purchasing property in their own names and failing to engage in tax planning before they establish a U.S. tax residency. Unless non-U.S. persons take proactive steps before they buy, or promptly take corrective steps after they’ve bought, they can face massive U.S. income and transfer tax consequences. The rules are confusing and are full of traps for the unprepared.

Estate tax: U.S. citizens and noncitizen “tax residents” (a tax term defined in the Internal Revenue Code) are subject to estate tax on their worldwide assets. This means that someone who is classified as a U.S. resident for tax purposes and who owns vacation property or business interests in another country must report the full value of those international holdings when he or she dies.

Individuals who are not U.S. tax residents are subject to estate tax only on the assets they have inside the U.S. BUT

The estate tax exemption for noncitizen/nonresidents is extremely low: Tax liability can begin with only $60,000 in U.S. assets! (At a 40% tax rate!)

Thoughtful planning in advance can completely eliminate this unnecessary tax.

The issues become even more complex when individuals change their tax residency, or when one or both spouses is a non-U.S. citizen.

Income tax: Like the estate tax, U.S. citizens and residents are subject to income tax on their worldwide income. Nonresidents are only taxed on what’s called U.S. “source” income. The problem is, many non-U.S. persons unknowingly become U.S. residents because they don’t fully understand how the IRS determines “residency” for income tax purposes. Many individuals have massive unrealized income tax liability (facing heavy penalties and interest) for improperly failing to report their full worldwide income after accidentally becoming a resident for tax purposes.

The rules can be tricky to navigate because tax treaties between the U.S. and other countries can change the default rules, creating different tax rates and offsetting credits or deductions. The end result is a maddening maze of tax rules that few people know how to navigate.

We are highly experienced estate planning and asset protection attorneys with a special focus on proactive planning for inbound international investors looking to buy U.S. real estate. Contact us today to see how we can help you or your clients potentially save millions of dollars of unnecessary tax liability, enjoy greater privacy, and protect important U.S. property.

WordPress Video Lightbox