Foreigner asks: “Can I breathe American air without being subject to US tax?” Right now, the answer to that question is a big, fat MAYBE. For starters, it depends how long you were in the US breathing that air. While the question might sound funny, there is absolute truth in the answer.
Many of my non-US clients have become increasingly concerned about the long arm of the US Taxman. Even though many have no US connections whatsoever, they are receiving certain forms from their banks asking about their US status (usually this is Form W-8BEN). Both US and non-US banks are asking for documentation of such status. Often, clients do not understand why they must complete the form or provide information about their US status. The posts here and here will help.
Frightened individuals are reading in the press about FATCA and worry about its potential implications for themselves or their family members . This is particularly true for those who recently learned they are in fact US citizens or those who thought they had expatriated years ago, but are now unsure that the prior expatriation will be recognized under the US tax laws. The question haunts them – “Even though I am no longer a US citizen, am I still a US ‘tax citizen‘?”
A Questionnaire: Some Guidance for the Perplexed
I’ve attempted to help identify areas of potential US tax exposure for foreign nationals. To this end, I’ve compiled a list of questions to give some structure to an area of ever-growing concern for this group of people. Tax and wealth management professionals should understand the basics and know which questions they should be asking their clients. Other tax professionals shall feel free to contact me should they wish to add to this list. I will then re-publish it after having received feedback.
Three Major US Tax Regimes
The US tax laws are extremely complex and consist, in part, of three major regimes: US Income Tax, US Estate Tax and US Gift Tax. Foreign nationals are often unsure if they have any US tax issues to be concerned about under one or more regime. Quite often US tax issues are simply not identified by their tax advisors. While it is not feasible to compile a questionnaire that will cover every possible aspect of potential US tax exposure under these three regimes, following below is a series of questions that help identify US tax issues under each, in an attempt to identify major areas of risk. Follow-up with a US tax professional should be undertaken once an area of risk is identified. For married family members, each spouse should answer the questions separately. If the answer to any question below is “yes”, full details should be examined with appropriate tax counsel.
US Citizenship or US Residency Status
- Were you ever a US citizen and expatriated by renouncing or relinquishing that citizenship?
- Did you submit paperwork to the Department of State and the Internal Revenue Service documenting your expatriation?
- Do you currently have, or have you ever had, the legal right to reside permanently in the US – more commonly known as holding a US ‘green card’?
- Did your green card expire and if so, did you formally relinquish it by letter or using Form I-407?
- Did you notify the Internal Revenue Service (IRS) of your green card relinquishment (not everyone has to, but you must understand the rules)?
- If you are a former American citizen or former green card holder, you should seek advice about making gifts or leaving inheritances to any US persons since these can be harshly taxed in the hands of the American recipient.
You will still be subject to US income tax on your worldwide income if you have not properly relinquished your green card. You may also be subject to very harsh “Expatriation” tax rules when you give up the card or have it pulled from you at the airport!
- How many days were you (or do you intend to be) physically present in the US in the current calendar year (2015)?
The day of arrival and day of departure count as two separate days (unless they were on the same day). Your entry to and departure from the US is being carefully monitored!
- Over the past three calendar years (2014, 2013 and 2012), did you spend any time in the US?
List the number of days you were physically present in the US for each year. Again, arrival and departure days count as two separate days (unless on the same day).
- Over the past ten years, did you have any years with significant US physical presence (anything over 120 days per year)?
If yes, please provide details (e.g., type of visa, general reasons for the stay etc.)
- Are you a foreign student or trainee in the US?
- Have you received scholarships or grants while studying in the US?
- Have you ever had any communication from either any agency of the US government or any other government regarding the status of your citizenship or residency?
- Were you, or either of your parents, born in the US? (Who can qualify as a US citizen may surprise you)
- Do you have any children born in the US? Even if you don’t want them to be US citizens, they are! You will not be permitted to relinquish the US citizenship of your child, but you can undertake proper tax planning.
US Assets and Potential US Estate Tax Exposure
- Do you currently own, or have you ever owned (whether directly or indirectly through a nominee arrangement or otherwise) any US assets?
US assets include but are not limited to items such as loans with a US debtor; US real estate or tangible property in the US; US stocks; financial accounts with US brokerage firms or US banks; US mutual funds; US partnership interests. You should understand the basics of the US Estate Tax.
You or an entity you represent may be engaged in a US trade or business and this carries US tax consequences. Learn the basics.
- Are you currently conducting, or have you in the past carried out any activities in the US (for example, business activities, investment activities, marketing activities, sales activities)?
- Have you ever been looking for business opportunities or acting in any way in the US on behalf of a non-US employer or non-US entity (for example, for a non-US partnership or corporation)?
- Do you, or any entity in which you have an interest, make sales of any products or provide services to the US (include current and past time periods)?
- Does your non-US business have any US employees? You may be in for a tax shock as a foreign employer.
Income from US Sources
Are you currently receiving, or have you in the past received income from US-sources? For example, this can include US rents, income (in cash or in kind) for services carried out in the US; pension or similar payments related to services performed in the US; interest income from a loan made to a US individual or entity; interest income earned on US accounts; dividends or distributions from US entities; capital gain income from sales of US assets such as real property, US stocks or securities. It also includes gambling winnings from US casinos. It can also include alimony income if your former spouse is a US resident.
Have you ever received or are you currently receiving from the United States Government or any US corporation or other US business entity: any regular pension, or Social Security payments?
Are you a beneficiary of any US trust?
Have you ever filed a US income, excise, employment or any other kind of US tax return?
Gifts / Transfers Without Full Consideration in Return
The gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax is assessed on the donor (giver) of the gift. It applies whether the donor intends the transfer to be a gift or not. The gift tax applies to the transfer by gift of any property. You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift. All of these situations may carry US gift tax exposure.
Understand the Gift Tax basics.
- Did you ever sell anything in the US at less than its full value or did you make an interest-free or reduced-interest loan in the US?
- Have you ever made any gifts of tangible property where the transfer took place in the US?
This could include, for example, a transfer of funds from your non-US bank to a person in the US (e.g., to your child so he could pay his tuition). The transfer can be by wire or check drawn on your bank account, as well as cash.
- Have you ever funded a trust having any US beneficiary?
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