In this series of articles, we will provide an overview of the tax consequences of relocating to the US.

As always, this article is provided for information purposes only and does not constitute legal advice. You should seek advice from a licensed tax attorney regarding your own unique set of circumstances.

Introduction

In his 1931 book entitled The Epic of America, James Truslow Adams advocated a concept described as “The American Dream”. The American Dream was the “dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement”. Ultimately, the American Dream was the notion that upward social mobility and success could be achieved by any individual through sheer hard work and merit, regardless of the circumstances of their birth.

In 2015, over one million people were granted lawful permanent residence in the United States, many of whom were seduced by the American Dream and the prospect of success. However when contemplating a move to the US, it is important to consider the impact a decision to relocate to the US will have on all of your personal circumstances, including your potential tax liability. In this article, we have addressed some frequently asked questions, in very simple terms.

#1 “I am applying for a green card. What will be my tax liability?”

Green card holders are generally taxed on their worldwide income, at the same graduated tax rates that apply to US citizens. Green card holders must report all sources of income on their US tax return from within and outside the US, including, inter alia, interest, dividends, wages, compensation for services, income from rental property and royalties.  Taxes are levied at both State and Federal level.

For high net worth individuals and individuals with multinational assets, the prospect of taxation on all worldwide income will be a very significant factor to consider when contemplating a move to the US. If you are in this position, please call us for advice on your visa application and potential tax exposure.

  

#2 “I’m applying for an L Visa, as an intracompany transferee. I have two questions: (a) Will I be liable to pay tax in the US? and (b) If so, will I be liable to pay tax on my worldwide income?”

In order to determine the tax liability of an L visa holder, the Internal Revenue Service (hereafter “IRS”) will apply the “substantial presence” test, to determine if the individual in question is deemed a “resident alien” or “non-resident alien” for tax purposes.

If the L visa holder is deemed to have been “substantially present” within the US either during the most recent tax year or over the past 3 tax years, he or she will be considered a resident alien for tax purposes (subject to exceptions) and is liable to be taxed on all worldwide income, in the same way as a US citizen or green card holder.

However, if the L visa holder is not deemed to have been “substantially present” within the US during the most recent tax year or over the past 3 tax years, he or she will not be considered a “resident alien” for taxation purposes and therefore will not be liable to pay tax on all worldwide income. However, he or she will remain liable to be taxed on the following:

  1. Income that is effectively connected with a trade or business in the US (which is taxed at the same graduated rates that apply to US citizens) and
  2. Income that is not effectively connected with a trade or business in the US (which is taxed at a flat rate of 30% or a lower treaty rate, if applicable).

It is important to note that income for personal services performed in the US is not deemed a US income source (and is therefore exempt from US taxation) if the following three requirements are met:

  1. An individual performs personal services as an employee of or under a contract with a non-resident alien individual, foreign partnership or foreign corporation not engaged in a trade or business in the United States; or works for an office or place of business maintained in a foreign country or possession of the United States by a US corporation, a US partnership, or a US citizen or resident.
  2. The individual performs the services in question as a non-resident alien temporarily present in the US for a period or periods of not more than a total of 90 days during the tax year.
  3. The remuneration for the services in question is not more than $3,000.

If you are contemplating entry to the US under an L visa, it is important to seek legal advice regarding your potential tax liability, to enable you to make an informed decision as to whether you wish to proceed and to ensure you do not unwittingly incur civil or criminal penalties for failing to declare income to the IRS. Call now for assistance with your L visa application and for general advice regarding your potential tax exposure.

 

#3 “I’m applying for an E-1 Treaty Trader Visa/an E-2 Treaty Investor Visa. What will my tax exposure be?”

In the first instance, the IRS will determine whether the E-1/E-2 visa holder is deemed to be a “resident alien” or a “non-resident alien” for tax purposes, by applying the “substantial presence” test.

If the E-1/E-2 visa holder is considered to be a resident alien for tax purposes, based on the number of days in which he or she has been present in the US either during the current tax year or in previous tax years, he or she will be liable to be taxed on his or her worldwide income, in the same way as a US citizen or green card holder (subject to exceptions).

However, if the E-1 or E-2 visa holder is not considered a resident alien for tax purposes, he or she will be liable only for taxation on the following:

  1. Income that is effectively connected with a trade or business in the US (which is taxed at the same graduated rates that apply to US citizens) and
  2. Income that is not effectively connected with a trade or business in the US (which is taxed at a flat rate of 30% or a lower treaty rate, if applicable).

If you are considering an application for an E-1 Treaty Trader visa or an E-2 Treaty Investor Visa, please do not hesitate to contact us for assistance with your visa application and general taxation advice.

Conclusion

US tax law is a very complex area of law, in which there are a myriad of general rules and exceptions.

If you are in any doubt whatsoever over your potential tax liability, it is imperative to seek professional advice regarding your current circumstances from a licensed tax attorney, a US-based accountant or the IRS.

In the event an individual is found to have negligently or fraudulently failed to disclose income to the IRS, the penalties range from simple financial penalties to prosecution for tax evasion, which is punishable by up to 5 years in prison and a fine of not more than $250,000 for individuals or $500,000 for corporations, plus the costs of prosecution. Moreover, any failure to disclose income to the IRS will jeopardize any future application for a green card or US citizenship.

At Davies Legal, we have collectively over 50 years’ experience of providing legal and business advice. We consider each case carefully on its merits and provide practical, commercially sensible advice designed to maximize your chances of success. Call now for advice on how we can assist you with your visa application and business needs and potentially facilitate your American Dream.

 

Published: 7th March 2017

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