13 Tax Planning For Foreign Nationals in TheU.S.

U.S.
Tax Planning for

Foreign Individual Residing
in the U.S.
December 9,, 2010
Jinho Park Sarah Rodgers

Director, Global Employer
p y Services Manager,
g Global Employer
p y Services
Deloitte Tax LLP Deloitte Tax LLP
Copyright © 2010 Deloitte Development LLC. All rights reserved.

Agenda
•Taxation Model
•U.S.
US T Taxation
ti off Foreign
F i Individuals
I di id l
•Residency Determination – Inbound
•Elections and Options
•Income Tax Planning in the Year of Arrival
•Residency Determination – Outbound
•Departure Planning
Expatriation Tax Rules
•Expatriation
1 Copyright © 2010 Deloitte Development LLC. All rights reserved.

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)
‒ Elections
El ti and Choices
d Ch i
‒ First year election
‒ Full year election (married individuals only)
‒ Residency end date – last day of the tax year, unless:

‒ Closer connection
‒ Tie
Ti breaker
b k underd th the iincome ttax ttreaty
t

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

U.S.
S days

Substantial Presence Test – Case Study
• Case 1: Current Year 122 US days in 2010

1st Preceding
g Year 140 US days
y in 2009
2nd Preceding Year 150 US days in 2008
• Case
C 2
2: C
Currentt Y
Year 60 US d
days iin 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 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:

– Jan.
J 1 — Jan.
J 5 5 days
d
– Mar. 1 — Mar. 3 3 days
– May 1 — May 4 4 days
– July 1 — Dec. 31 184 days
– Total U.S. days 196 days
• When would residency begin?

• May
M 1stt provided
id d th
thatt 10
10-day
d d de minimus
i i statement
t t t iis attached
tt h d

SPT - Exceptions
• Exceptions
– Commuters
C t ffrom Mexico
M i or C
Canada
d
– Regular (>75% of work days)
– In 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 vsvs. Itemized (availability of deductions both U

U.S.
S
and foreign)
‒ Personal exemptions
‒ Filing
g status
‒ 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
• Later
L t off
– first day no longer holding Green card
– 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
q y – IRC Section 7701(b)(4)
( )( )
There are two elections that allow married taxpayers to be treated as

full-year residents:
•Section 6013(h) – Dual-status residents

•Section 6013(g) – Nonresident spouse
•These elections change the residency start date to January 1st
Combining Elections: We may combine the 7701(b) election with the

(g) or ((h))
6013(g)
•Elect part-year resident status, then

•Elect full year joint status

Residency Elections
Why?
•Additional
Additional exemptions
•Additional itemized deductions – home mortgage and real estate taxes
•Rental loss
•Married
Married Filing Joint Rate (vs
(vs. MFS)
Why not?
•Nonresident
Nonresident period income
–Low or non-taxed foreign source income, such as stock sale or real
property sale
–Spouse
p income
–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

(i.e.,
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
•Eliminate
Eli i t taxation
t ti where
h contact
t t is
i minimal
i i l (no
( Permanent
P t
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 p
personal and economic relations))
–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
•Report
R t off Foreign
F i BankB k and
d Financial
Fi i lAAccounts
t
•Informational return required if aggregate of maximum balances in

foreign accounts exceeded $10,000 at any point during tax year
•If filing not required, then check ‘No’ on bottom of Schedule B
•Due
D e date is JJune
ne 30th with
ith no e
extensions
tensions a
available
ailable
•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
are nott eligible
li ibl ffor a S
Social
i lSSecurity
it NNumber
b
•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)
AND
•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
•Certification U.S.
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”

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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Limited, a UK private company limited by guarantee,
guarantee and its network of
member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed
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for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.
Copyright © 2010 Deloitte Development LLC. All rights reserved.

Member of Deloitte Touche Tohmatsu Limited

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U.S.

Tax Planning for

Jinho Park Sarah Rodgers

Copyright © 2010 Deloitte Development LLC. All rights reserved.

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

Non residents – Only the income sourced from that country

•Citizenship Based Taxation

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

•Taxation based on Residency

‒ Resident – Worldwide Taxation

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

•Green Card Holder/Citizenship

•Substantial Presence Test (SPT) for non-green card holders and

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

•Impact of Certain Visa Types

•Treaty impact on Residency

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

•Substantial Presence Test (SPT) Determines Residency

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

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

•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

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

• Case 1: Current Year 122 US days in 2010

• Case 3: Current Year 30 US days in 2010

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

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

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

• Case 3: Does the taxpayer qualifies?

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

• Substantial Presence Test:

• When would residency begin?

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

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

‒ Standard deduction vsvs. Itemized (availability of deductions both U

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

•Residency end date

• Last day of year (12/31/xxxx), OR

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

“First -Year Choice” – elect to be treated as part-year resident from first

There are two elections that allow married taxpayers to be treated as

•Section 6013(h) – Dual-status residents

Combining Elections: We may combine the 7701(b) election with the

•Elect part-year resident status, then

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

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

First Year Election (Sec. 7701(b))

•Not a resident in the current or preceding year (i

•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

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

•Avoid double taxation

•Defeat tax evasion