13 Tax Planning for Foreign Nationals in TheU.S

U.S. Tax Planning forForeign Individual ResidingForeign Individual Residingin the U.S.December 9, 2010,

Jinho Park Sarah RodgersDirector, Global Employer Services Manager, Global Employer Servicesp y g p yDeloitte Tax LLP Deloitte Tax LLP

Copyright © 2010 Deloitte Development LLC. All rights reserved.

Agenda

•Taxation Model

U S T ti f F i I di id l•U.S. Taxation of Foreign Individuals

•Residency Determination – Inbound

•Elections and Options•Elections and Options

•Income Tax Planning in the Year of Arrival

•Residency Determination Outbound•Residency Determination – Outbound

•Departure Planning

•Expatriation Tax RulesExpatriation Tax Rules

Copyright © 2010 Deloitte Development LLC. All rights reserved.1

Taxation Model

•Territorial -Remittance Basis

Based on Sourcing

•Residency -Residents – Worldwide Income taxation

Non residents – Only the income sourced from that country

Tiers of residency

•Citizenship Based Taxation


U.S. Income Taxation of Foreign Individuals

•Taxation based on Residency

‒ Resident – Worldwide Taxation‒ Non-Resident – Taxed only on U.S. Source Income‒ Full year resident


Determination of U.S. Residency

•Green Card Holder/Citizenship

•Substantial Presence Test (SPT) for non-green card holders and non-U.S. citizens

•By election via IRC Sec. 7701(b) first-year election

•Impact of Certain Visa Types

•Treaty impact on Residency


U.S. Residency Determination

•Substantial Presence Test (SPT) Determines Residency

‒ Residency start date – first day physically present in the U.S., except nominal presence of 10 days (all or nothing rule)

El ti d Ch i‒Elections and Choices‒ First year election‒ Full year election (married individuals only)

‒Residency end date – last day of the tax year, unless:‒ Closer connection

Ti b k d th i t t t‒ Tie breaker under the income tax treaty


Substantial Presence Test

•Must have 31 actual days in the U.S. in the current year, and

•183 equivalent days in the U.S. as follows:

•100% of current year U.S. days

•1/3 of first preceding year U.S. days

1/6 of second preceding year U S days•1/6 of second preceding year U.S. days


Substantial Presence Test – Case Study

• Case 1: Current Year 122 US days in 2010

1st Preceding Year 140 US days in 2009g y

2nd Preceding Year 150 US days in 2008

C 2 C t Y 60 US d i 2010• Case 2: Current Year 60 US days in 2010

1st Preceding Year 360 US days in 2009


• Case 3: Current Year 30 US days in 2010

1st Preceding Year 360 US days in 20091st Preceding Year 360 US days in 2009



Substantial Presence Test – Solutions

• Case 1: Current Year 100% = 122 US days

1st Preceding Year 1/3rd = 46.67 US days

2nd Preceding Year 1/6th = 25 US days

Total = 193.67 Days

• Case 2: Current Year 100% = 60 US days

1st Preceding Year 1/3rd = 120 US days

2nd Preceding Year 1/6th = 3 US days

Total = 183 US Days

• Case 3: Does the taxpayer qualifies?


Determining Residency Start Date

• Substantial Presence Test:

J 1 J d– Jan. 1 — Jan. 5 5 days– Mar. 1 — Mar. 3 3 days– May 1 — May 4 4 daysMay 1 May 4 4 days– July 1 — Dec. 31 184 days– Total U.S. days 196 days

• When would residency begin?

M 1 t id d th t 10 d d i i t t t i tt h d• May 1st provided that 10-day de minimus statement is attached


SPT - Exceptions

• Exceptions

C t f M i C d– Commuters from Mexico or Canada– Regular (>75% of work days)

– In transit – in U.S. for < 24 hoursIn transit in U.S. for 24 hours– Medical Condition– Form 8843


Income Tax Planning Considerations - Inbound

•Filing Possibilities

‒ Non-resident‒ Dual status‒ Full year resident

•Optimization Process

‒ Standard deduction vs Itemized (availability of deductions both U S‒ Standard deduction vs. Itemized (availability of deductions both U.S. and foreign)

‒ Personal exemptions‒ Filing statusg‒ Foreign tax credit opportunity‒ Appreciated assets outside the U.S.‒ Intended length of the U.S. stay


Departure Planning - Outbound

•Residency end date

• Last day of year (12/31/xxxx), OR

• Where closer connection to foreign country

L t f• Later of

– first day no longer holding Green card– last day of presence in the U.S.last day of presence in the U.S.

• 10 days de minimus


Residency Elections

“First -Year Choice” – elect to be treated as part-year resident from first qualified day – IRC Section 7701(b)(4)q y ( )( )

There are two elections that allow married taxpayers to be treated asfull-year residents:

•Section 6013(h) – Dual-status residents •Section 6013(g) – Nonresident spouse •These elections change the residency start date to January 1st•These elections change the residency start date to January 1st

Combining Elections: We may combine the 7701(b) election with the 6013(g) or (h)(g) ( )

•Elect part-year resident status, then•Elect full year joint status


Residency Elections

Why?•Additional exemptionsAdditional exemptions•Additional itemized deductions – home mortgage and real estate taxes•Rental loss•Married Filing Joint Rate (vs MFS)Married Filing Joint Rate (vs. MFS)

Why not?•Nonresident period incomeNonresident period income–Low or non-taxed foreign source income, such as stock sale or real property sale

–Spouse incomep–Only income from work in the U.S. taxed and other U.S. source income


First Year Election

First Year Election (Sec. 7701(b))

•Not a resident in the current or preceding year (i e 2009 or 2008)•Not a resident in the current or preceding year (i.e., 2009 or 2008)

•Will satisfy substantial presence test in subsequent year (i.e., 2011)

•Is present in U.S. for 31 consecutive days in current year (2010)

•Satisfies a 75% continuous presence test

•NOTE: ‘Present in the U.S.’ = Any day on which an individual is physically present in the U.S. at any time during such day unless specifically excluded


Tax Treaties

•Avoid double taxation

Eli i t t ti h t t i i i l ( P t•Eliminate taxation where contact is minimal (no Permanent Establishment)

•Defeat tax evasion

•Define tax residents for treaty application–Tie breaker clause

•Modify source of income to eliminate withholding or can apply a reduced rate of withholding to certain income (1042-S)


Treaty Tie Breaker

Residency – Treaty “Tie Breaker” Rules

•Standard tie breakers, if resident of both countries (in order):–Permanent home–Center of vital interests (closest personal and economic relations)( p )–Habitual abode–Citizenship


Income Tax Treaties

•Unless disclosure is specifically waived, Form 8833 must be filed

•Disclosure may still be required on Form 1040NR, page 5

•Generally, a U.S. return is technically required in any case

–Exception, only not effectively connected income and proper withholding and proper reporting on Form 1042S by payer


Foreign Tax Credits

•May take a Deduction or a Credit for foreign taxes paid but not both

•Credit can be carried back 1 year and forward 10 years

•No deduction or credits for taxes paid that are associated with income that is not being taxed in the U.S.


Report of Foreign Bank Accounts

Form TDF 90-22.1

R t f F i B k d Fi i l A t•Report of Foreign Bank and Financial Accounts

•Informational return required if aggregate of maximum balances in foreign accounts exceeded $10,000 at any point during tax yearforeign accounts exceeded $10,000 at any point during tax year

•If filing not required, then check ‘No’ on bottom of Schedule B

D e date is J ne 30th ith no e tensions a ailable•Due date is June 30th with no extensions available

•Filed with Department of Treasury in Detroit, MI and not with IRS


Individual Taxpayer Identification Number (ITIN)

•All taxpayers and dependents must have an ITIN if they do not have and t li ibl f S i l S it N bare not eligible for a Social Security Number

•Must apply for ITIN with filing of the tax return (submit to Austin, TX)

•Form W-7 and notarized copy of passport of the applicant


Expatriation Tax Overview - History

•Abuses based on residency

•Introduction of IRC Section 877 under “AJCA” (10 year regime) – 2004

•IRC Section 877A under the “HEART Act” (exit tax concept) – June 2008


Who’s Subject to Expatriation Tax

•U.S. Citizens renouncing citizenship or

•Long-term residents (green card holders) – surrendering his or her green card (8 out of 15 years)

ANDAND

•Tax Liability Test – average tax of $139,000 (for 2008 subject to annual adjustment) for 5 years or;

•Net Worth Test – net worth of $2,000,000 or;

•Certification Test – fail to certify that he or she has complied with all U SCertification Test fail to certify that he or she has complied with all U.S. tax obligations.


General Tax Implications of IRC Section 877A

•Deemed sale of all assets

•Highest gift tax rate of 45% in excess of annual exclusion ($13,000 in 2009)

•30% withholding on “eligible” deferred compensation•30% withholding on eligible deferred compensation

•Deemed distributions on other deferred compensation


Eligible Deferred Compensation

•U.S. payer

•Notification of irrevocably waives reduced treaty rate claim


Exceptions to 877

•Dual citizenship

•Certain minors


U.S. Gift and Estate Taxation Overview

•Taxation based on Residency

•Resident – Worldwide assets subject to the U.S. gift and estate tax

•Non-resident – Taxed only on U.S. “situs” assets

•Residency Defined

‒ Based on facts and circumstances‒ Impact of green card


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13 Tax Planning for Foreign Nationals in TheU.S