Cross-border income tax considerations

If you and your family are thinking of joining the globalization trend and moving to the United States, have you asked yourself these questions:

• What are some of the tax considerations for non-US families making US investments?
• What are the potential issues for US families making investments in foreign countries?
• Do you understand how to comply with your US and foreign country tax obligations?
• Do you know what your overall tax position will be across the globe?
• Should potential estate taxes or inheritance taxes affect the structuring of your international investments?

 Inbound considerations

If you are not a US citizen and you are moving to the US, how you are taxed in the US is determined by your residency status. Obtaining a green card is one way to establish US residency. The other way to establish US residency is to meet the substantial presence test. The substantial presence test is defined as being physically present in the US on at least:

• 31 days during the current year, and
• 183 days during the three-year period that includes the current year and the two years immediately preceding the current year, by adding together the following:

» All the days you were present in the

US in the current year,

» One-third of the days you were present in the US in the first year before the current year, and

» One-sixth of the days you were present in the US in the second year before the current year.

Once you become a US resident, you will be subject to US tax on your worldwide income in the same way as a US citizen. You may still have significant economic ties in your home country (for example, bank accounts, investments, stockholding in companies, pensions, trusts, etc.). The US has certain “anti-deferral” rules and some of those investments, although they may be tax-favorable in a foreign jurisdiction, could give rise to adverse US tax consequences. You will also need to be aware of the various US information reporting obligations that may apply, as failure to fulfill these obligations could result in significant penalties.

Anyone who is not a US resident is referred to as a “nonresident alien”. As a nonresident alien, you are generally taxed in the US on income from US sources.

Most of the individual states in the US impose income tax. Some cities and localities also impose income tax. Given that states have varying definitions of residency, tax rules, and tax rates, it is important to understand the tax rules for the state where you move.   Generally, if you are tax resident in a state, you are taxed in the state on your worldwide income. If you are a nonresident, you are taxed only on your income sourced from the state.

Once you have moved the US, what happens back home? What is your residency status in your home country? Will you need to continue paying tax or filing tax returns there? If you have to pay tax in both your home country and the US, will you be taxed twice?  Does the state you are moving to give you the benefit of the tax treaty at the state level?

There are many issues to be considered when you want to move to the US. Various actions that you take may affect the amount of taxes you pay in the US and the reporting obligations you have. Tax planning, therefore, is not only essential from a US tax perspective but also crucial in determining a tax-efficient global tax position.