Tax Considerations For Nonresident Aliens Working in the U.S.
U.S citizens, permanent residents (green card holders) and individuals who pass the substantial presence test (183 days over a 3-year period, counted using a special formula) are taxed on worldwide income and are subject to complex disclosure requirements relating to financial accounts held abroad. Nonresident aliens are subject to U.S. taxation on U.S.- sourced income only, and are not required to disclose foreign financial accounts. It’s important to consider your status when building your long-term financial plan.
COMING TO THE US
Non-resident aliens considering an opportunity to live and work in the U.S. should consider pre-immigration tax planning. Once the substantial presence test is met, the taxpayer is taxed on worldwide income. It may be beneficial to sell appreciated assets before becoming a U.S. person, so that gains aren’t subject to U.S. taxation, especially if the tax rates in the home country are favorable. Consideration should also be given to selling all non-U.S. mutual funds. These are considered Passive Foreign Investment Companies and the related income is taxed at the highest marginal rate. If income isn’t reported annually, there is also an interest charge imposed when selling the asset.
Individuals who are non-residents for part of the year have several tax filing options. Explore them all to see which yields the best result. Consider hiring a professional to help sort through your reporting requirements and potential tax liability.
CONSIDERATIONS FOR GREEN CARD CANDIDATES
People in the U.S. on work visas often apply for green cards, which provide additional rights similar to those afforded to U.S. citizens. Without a green card, aliens are highly dependent on their employers and could be forced to leave the country if they quit their job or are fired.
However, green card holders lose some financial choices available to non-residents, which requires additional planning. Non-U.S. assets often do not receive the same preferential treatment as they would in the home country. Tax-free income or accretion to wealth may be taxable in the U.S. In addition, U.S. persons who receive substantial gifts or inheritances from non-U.S. persons must disclose this to the IRS. Penalties for non-compliance are very harsh.
WHO ARE U.S. RESIDENT ALIENS?
Green card holders
A green card holder, or lawful permanent resident, is taxed as a U.S. resident from the date they receive the green card or, if the card is received outside the U.S., from the date they enter the U.S.
Aliens who meet the “substantial presence test”
A person who has been in the U.S. for at least 31 days in the current year, and 183 days over a three-year period (measured using a special formula) meets the substantial presence test.
People who elect for resident alien status
Some people choose to be taxed as a U.S. person, which can be beneficial in some circumstances.
Solely from a tax perspective, forgoing the green card may be a better option, especially if your employment situation is stable and satisfactory, and you don’t plan to stay in the U.S. permanently.
On leaving the U.S., a green card holder should relinquish the card at a U.S. embassy and notify the IRS. Otherwise, the person will remain subject to U.S. taxation – even if he no longer has U.S. immigration status. Green card holders who reside in the U.S. for eight out of 15 years, and meet certain financial thresholds, are subject to the exit tax. This affects individuals with assets of more than $2 million, average tax liabilities in the previous five years of over $160,000, or failure to certify tax-compliance.
Estate taxes vary depending on whether the taxpayer is domiciled in the U.S. For a citizen or green card holder, the assumption is U.S. domicile, and the estate tax exclusion is a generous $11,200,000 per person. Other resident aliens may be subject to U.S. estate tax on worldwide assets if their intention was to remain permanently in the U.S. If the taxpayer’s domicile is outside the U.S., then only U.S. situs assets – those physically located in the U.S. – will be subject to estate tax, but the threshold is much lower. In fact, for non-U.S. domiciled individuals, the exemption is only $60,000 and the tax rate is 40%. The U.S. has entered into estate tax treaties with several countries. which can mitigate this tax, but it can be a big surprise to persons holding U.S. property without making the long-term commitment to stay in the U.S.
TAX STATUS AND YOUR FINANCIAL PLAN
As you can see, immigrating to the United States or changing your immigration status can impact your financial plan in a variety of ways. Take the time to understand those impacts and how you can minimize the costs. If you or a family member have questions about the best path forward, your Paracle advisor can help you understand your choices and update your plan accordingly. We can also refer you to other professionals for help with tax, legal and estate planning issues.
WHAT HAPPENS TO YOUR 401K IF YOU LEAVE THE U.S.?
You can leave the 401k invested for as long as you like. Any withdrawals will be subject to U.S. income tax (and standard penalties if you are younger than 59 ½). You could also withdraw the balance when you leave the U.S. and pay taxes and penalties (if applicable) on the balance.
Consider whether the amount received in employer match and potential investment growth outweigh the penalties incurred if you close the account. The answer depends on how long you are likely to stay in the U.S.
We’d like to thank Mary Hawkins (CPA) for helping us prepare this article.
Disclaimer: This article has been provided for informational purposes only and should not be considered as investment advice or as a recommendation. This material provides general information only. Paracle Advisors does not offer legal or tax advice. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, this notice is to inform you that any tax advice included in this communication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of avoiding any federal tax penalty or promoting, marketing, or recommending to another party any transaction or matter.
Paracle Advisors is an investment advisor registered with the Securities and Exchange Commission.