US TAXATION OF

FOREIGN NATIONALS

Be adventurous.
Making your tax world easier to travel.

SEE ALSO OUR BOOKLET “TAXATION OF US EXPATRIATES”

https://www.gtn.com/files/Taxation_of_US_Expatriates.pdf

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CONTENTS

Introduction 1

1. Residency 3
• Lawful Permanent Resident Test 3
• Substantial Presence Test 5
• Which Test Prevails? 9
• Special Considerations 9

2. Case Study Background 11

3. Income Taxation of Residents 13

• Income Tax Overview 14
• Filing Status 15
• Gross Income 15
• Deductions from Gross Income 16
• Itemized Deductions / Standard Deductions 16
• Exemptions 17
• Tax Credits (Foreign Tax Credit and Other Credits) 18
• Filing Requirements and Procedures 23

4. Sourcing Rules 23
• Personal Services Income 23
• Interest Income 24
• Dividend Income 24
• Rental and Royalty Income 25
• Income from Sale of Personal Property 25
• Income from Sale of Real Property 25
• Partnerships 25

5. Taxation of Nonresidents 25
• Trade or Business Income 26
• Passive Income 29
• Filing Requirements and Procedures 32

6. Dual-Status Taxpayers 33
• Overview 33
• Joint Return Election 37
• Filing Requirements 38
7. Other Taxes and Filing Requirements 39
• General Application of Social Security Tax 39
• Totalization Agreements 40
• Other Benefits 40
• State Income Taxes 41
• Gift and Estate Taxes 41
• Expatriation Tax 43
• Filing Requirement on Departure 43
• Foreign Bank Account Reporting Requirement 44
• Specified Foreign Financial Assets 44
• Form 5471 45
• Passive Foreign Investment Corporation (PFIC) 46

8. Income Tax Treaties 46

9. Other Income Tax Considerations 48

• Exchange Rate Issues 48
• Moving Expenses 49
• Foreign Earned Income and Housing Exclusions 49
• Capital Gains 50
• Dispositions of US Real Property Interests 51
• Sale of Principal Residence 51
• Rental of a Residence 53
• Investments in Foreign Corporations 54

Appendix A. 2018 US Individual Income Tax Rates 55

Appendix B. List of US Tax Treaties 56
Appendix C. Visas 57
Appendix D. Checklist for Foreign Nationals 59
Appendix E. US Withholding Tax Compliance Checklist 61

This booklet is based upon tax law in effect as of January 1, 2018. The information contained in this
booklet is general in nature, and is not a substitute for professional advice about individual tax situations.
Please consult with a professional tax advisor whenever specific questions arise.

Any US tax advice contained in the body of this booklet was not intended or written to be used, and
cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the
Internal Revenue Code or applicable state or local tax law provisions. Our advice in this booklet is limited
to the conclusions specifically set forth herein and is based on the completeness and accuracy of the facts
and assumptions as stated. Our advice may consider tax authorities that are subject to change,
retroactively and/or prospectively. Such changes could affect the validity of our advice. Our advice will not
be updated for subsequent changes or modifications to applicable law and regulations, or to the judicial
and administrative interpretations thereof.

Global Tax Network US, LLC (GTN) can be reached by e-mail at [email protected]. Please call us or visit
our website at gtn.com for information about our services and fees
Introduction

Life in the United States can be unusually complicated. This is especially true for a
foreign national (a citizen or national of a country other than the US) who
relocates to the US or earns income from US sources. This book addresses the
US tax impacts of accepting an assignment in the US and earning US source
income, and provides you with a basic understanding of the US tax system and its
application to foreign nationals.

The first and probably most important issue encountered by a foreign national is
residency. Whether or not you are considered a US tax resident will have a large
impact on your US tax liability. The first chapter of this book is devoted to US tax
residency rules.

Since many of the concepts presented in this book will be new to the reader, we
have included examples which are based on real-life situations and which apply the
rules discussed throughout this book. These examples are based on the case study
information contained in Chapter 2. It is our hope that such examples will allow
for a clearer and faster understanding of the US tax system.

When you meet the criteria established for tax residency in the US, the scope of
your income and activities that are subject to US tax reporting increase
substantially. Chapter 3 of this book is an overview of the US taxation of
residents.

Before moving on to the taxation of US nonresidents, it is important to gain a

basic understanding of the US rules that determine whether an item of income is
US source or foreign source. Chapter 4 outlines these rules and how they are
applied to the more common types of income earned by individual taxpayers.

The fact that a foreign national does not meet the residency requirements does
not mean that the individual escapes US tax reporting requirements or a US tax
liability. Chapter 5 is dedicated to the US taxation of nonresident foreign
nationals. It discusses the different types of income earned by nonresident
taxpayers, how each type of income is taxed, and how the tax is collected.

Often, the busiest and most stressful periods of a US assignment are the first and
last years of the assignment. These transition years can also be the most
complicated from a US tax perspective. Chapter 6 deals with these years and
some of the special considerations that require attention.

The majority of this book discusses the federal income taxation of foreign
nationals. Besides federal income tax, foreign nationals may encounter state
income taxes, social security taxes, estate and gift taxes, and miscellaneous filing

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requirements. We take a break from federal income taxes in Chapter 7 and
address some of these other tax-related concerns.

The US has executed tax treaties with many different countries. Chapter 8
outlines the general terms of a typical tax treaty, how a tax treaty works, and the
potential benefits available to many foreign nationals.

Chapter 9 discusses the US tax treatment of activities that are commonly an issue
with foreign nationals. These include the tax treatment of home sales, moving
expenses, rental activities, US real estate investments, and non-US activities.

This book is based on US tax law as of January 1, 2018 and contains a number of
general tax planning tips and suggestions for reducing tax. Due to the complexity
of foreign national tax matters and the ever-changing US tax law, you should seek
assistance from a US tax professional. This book is intended only to give the
reader a basic understanding of the US tax system. It is not intended to be a
substitute for the advice and counsel of a professional tax advisor. We strongly
recommend that all foreign nationals seek such counsel before, during, and after
an assignment in the US.

Global Tax Network US, LLC (GTN) provides tax return preparation and
consulting services to foreign nationals. E-mail us at [email protected] if you have
questions or need tax advice. You can also visit our website at gtn.com for a full
description of our services.

Back to Table of Contents

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1. Residency

As a foreign national working in the US, the first question that must be
addressed to determine your US income tax liability is whether you are a US
income tax resident. Note that we refer to “tax resident” as opposed to
“resident” or “legal resident.” The concepts discussed in this chapter and
throughout the book relate only to income tax residency. A determination of
tax residency may not bear any relationship to your legal or immigration status.
It is possible, and quite common, for a foreign national to be a nonresident for
legal or immigration purposes and yet be a resident for tax purposes. Further,
residence status for income tax purposes may be different than residency for
estate tax and social security tax purposes.

The residency determination is vital in calculating the US income tax liability

related to an assignment in the US. Tax residents are taxed on worldwide
income while nonresidents are taxed only on US source income. A casual
reading of the preceding sentence would lead one to believe that it is always
better to be considered a nonresident. However, this is not always true. In
some cases it may be more beneficial for an individual to be treated as a US tax
resident.

There are two tests used to determine whether you are a US tax resident.
These two tests are:

• The lawful permanent resident test

• The substantial presence test

If you meet the requirements of either of these two tests, you will be treated
as a US tax resident. These two tests are discussed in greater detail below.

Lawful Permanent Resident Test

A foreign national is considered a US lawful permanent resident taxpayer if he
or she has been issued the official privilege of residing permanently in the US.
This occurs when the foreign national receives an alien registration card or
“green card.” In the initial year that a “green card” is issued, the individual
becomes a US resident from the first day of actual physical presence in the US
after the “green card” is issued.

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 Maria, a citizen and resident of Spain, is offered a position with ABC
Company (a US company). The position requires that she live and work
in the US—specifically Denver, Colorado. Maria applies for permanent
residence status and is issued a green card on December 15, 2017. Prior
to December 15th, she made a preliminary trip to the US in November of
2017. She spent 6 days in the US on this preliminary trip looking for
housing. She moves to the US on January 1, 2018 and begins her new
job on January 5, 2018.

Maria is considered a tax resident in the US under the lawful permanent

resident test from January 1, 2018 forward. January 1 is the first day she
is physically present in the US while possessing a green card.

After Maria begins her duties with her new US employer, she is put in
charge of a project. This project requires engineering expertise that
neither Maria nor anyone else in the US company possesses. Maria
contacts a former colleague in Spain named Pablo who works for a
Spanish engineering firm (XYZ, SA). The Spanish firm agrees to a
short-term contract of 4 months and makes arrangements for Pablo to go
to the US Pablo is granted a US visa and arrives in Denver on August 1,
2018.

The lawful permanent resident test does not apply to Pablo as he is

working in the US on a visa and not a “green card.”

If you achieve tax residency under the lawful permanent resident test, this
status continues until one of the following three events occurs:

• You voluntarily surrender the “green card” to immigration authorities; or

• The US immigration authorities revoke the “green card”; or
• A judicial body officially finds that you no longer qualify as a lawful
permanent resident under the immigration laws.

If you have surrendered your green card, this does not necessarily mean that
your status as a lawful permanent resident has changed. Your status will not
change unless and until you get an official notice from the US Citizenship and
Immigration Service (USCIS) that there has been a final administrative or
judicial determination that your green card has been revoked or abandoned.
You can contact the USCIS to check the status of your card.

If one of these conditions apply and you do not meet one of the residence tests
in the next year, the general rule states that you are resident through the last
day of the calendar year in which the event occurs. For example, if you
surrender your green card in June of 2018 and you do not meet either
residence test in 2019 the general rule results in your US tax residency ending
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on December 31, 2018. There is an exception to this general rule. If you have
established a tax home in a country other than the US and you have closer
connections to that other country on the date your green card status ceases,
your US residency is deemed to end on that date rather than the end of the
calendar year. This exception often allows a foreign national to terminate
residency prior to the US tax year-end of December 31.

Due to family matters, Maria decides in April of 2019 to resign her

position and return to Spain. She returns to Spain on May 1, 2019. At the
same time, she decides to voluntarily surrender her “green card.” She
begins this process and her “green card” status is officially abandoned on
June 15, 2019. Maria takes a job with a new Spanish employer on July 1,
2019. This job requires her to make a subsequent business trip to the US
in 2019. This trip to the US begins on October 5 and ends on October 11
which results in Maria spending 7 additional days in the U.S during
2019.

For 2018, Maria is considered a US tax resident under the lawful

permanent residence test from January 1 through December 31.

For 2019, Maria is a US tax resident for the period January 1 through
June 15. Maria qualifies for the exception to the general rule for her
residency termination date. After surrendering her green card, Maria
established a tax home in Spain and has closer connections to Spain as of
June 15, 2019. As a result, this is deemed to be the date her US tax
residency ends, rather than December 31, 2019.

Substantial Presence Test

The other tax residency test is the substantial presence test. This test is more
complicated than the lawful permanent resident test. The substantial presence
test looks at the number of days you are actually physically present in the US
for any purpose over a three-year period of time. If the number of days you are
physically present in the US equals or exceeds 183 days in the current tax year,
or 183 days during a three-year period, which includes the current year and the
two years immediately prior to the current year, you are treated as a US tax
resident. The three-year period works as follows:

• For the current year, count all of your days physically present in the US;
• For the first year preceding the current year, count one third of your days
physically present in the US;
• For the second year preceding the current year, count one-sixth of your
days physically present in the US

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For this purpose, a day of actual physical presence in the US is any day that you
spend any amount of time in the US Therefore, days of arrival and departure
each count as a full day of US presence. However, a day of presence does not
include time spent in the US under the following circumstances:

• Time spent in the US while in transit between two non-US locations. This
time cannot exceed 24 hours, nor can you conduct any business while in
the US;
• Days spent commuting to work in the US from a residence in Canada or
Mexico if you regularly commute from Canada or Mexico;
• Days that you are unable to leave the US due to a medical condition that
you developed while you were in the US;
• Days spent in the US as an exempt person. Exempt individuals include
certain government officials, teachers, students and athletes.

Maria first came to the US in late 2017 to look for housing. She spent 6
days in the US on this trip. She moved to the US permanently on
January 1, 2018. She left the US on May 1, 2019. She also spent an
additional 7 days in the US on business after May 1, 2019. Applying the
substantial presence test to her situation results in the following:

2018 Tax Year

2018 days (1 X 366) 365 days

2017 days (1/3 X 6) 2 days
2016 days (1/6 X 0) 0 days

Total days for substantial presence test 367 days

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 2019 Tax Year

2019 days (1 X 128) 128 days

2018 days (1/3 X 365) 122 days
2017 days (1/6 X 6) 1 days

Total days for substantial presence test 251 days

Maria meets the substantial presence test for the years 2018 and 2019.
Considering the substantial presence test only, Maria would be a US tax
resident in 2018 and 2019.

Pablo, like Maria, arrived in the US for the first time in 2018. He arrived
on August 1 and completed the short-term project on November 15.
Pablo left the US on December 2, 2018 and returned to Spain. As
calculated below, Pablo does not meet the substantial presence test.

2018 Tax Year

2018 days (1 X 124) 124 days

2017 days (1/3 X 0) 0 days
2016 days (1/6 X 0) 0 days

Total days for substantial presence test 124 days

Pablo is not considered a resident under the substantial presence test.

There are certain exceptions to the substantial presence test.

31-Day Exception
If you are present for less than 31 days in the current year, the substantial
presence test is not applied to determine residency. The test is not applied
even if the 183-day threshold is met when the two preceding years are
considered. Remember that this does not mean that you automatically qualify
as a nonresident. If you have a “green card,” under the lawful permanent
resident test you are generally a tax resident regardless of the number of days
spent in the US.

Maria cannot use the 31-day exception for 2018 or 2019, as she was
present for more than 31 days in each of these years.

Closer Connection Exception

If you meet the substantial presence test it is still possible to argue that you are
a full-year nonresident if the following conditions are satisfied:

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• You are present in the US for fewer than 183 days in the current year; and
• You maintain a “tax home” in another country during the entire current
year; and
• You maintain a closer connection to the foreign country in which you have
a tax home during the current year.

In order to show that you maintained a “tax home” in another country, you
must demonstrate that you have a “regular or principal place of business” or a
“regular place of abode” in that country. To meet the closer connection
requirement, it is necessary to show that you have more significant contacts
with the foreign country as compared to the US. These are rather subjective
determinations that consider personal as well as business connections.

Maria could not use the closer connection exception for full-year
nonresident status for 2018 or 2019. She is present for more than 183
days in 2018. Although she spends less than 183 days in the US in 2019,
she did not maintain a tax home in Spain for the entire year. As such,
Maria would be a US resident for at least part of the 2019 calendar year.

When Does Tax Residency Begin?

If you qualify as a resident under the substantial presence test in the current
year and you did not qualify in the prior year, your residency period begins on
the first day that you are physically present in the US However, certain days
can be ignored when determining a residency start date. These days are
referred to as “nominal” days of US presence. A “nominal day” is a day spent in
the US while you have a tax home in another country and while you maintain a
closer connection to that other country. Up to 10 days of “nominal” presence
can be ignored. An example of a “nominal” day is one during a pre-assignment
house-hunting trip. However, it is important to note that these days are
ignored only for purposes of establishing a residency start date. All days of
presence in the US are considered when determining days under the substantial
presence test.

Maria’s residency for the substantial presence test is deemed to begin on

January 1, 2018 – the day she moved to the US. Although she was in the
US prior to January 1, these days can be ignored as they are not current
year days. These days also qualify for the exception outlined above as
they are “nominal” in nature and are fewer than 10 days.

When Does Tax Residency End?

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Like the lawful permanent resident test, the general rule for termination of US
tax residency is the last day of the calendar year. However, there is an
exception to this general rule. Under this exception, your residency is deemed
to end on the last day that you are present in the US in the year that you move
from the US and establish a residence in another country. You must establish a
tax home in another country and also a closer connection to that country from
this day forward. Similar to the determination of the residency start date, up to
10 “nominal” days of US presence can be ignored after you move from the US.

Maria’s residency terminates under the substantial presence test on May

1, 2019. This is the day Maria moves back to Spain. She establishes a
tax home in Spain and closer connections to Spain from this day
forward. Although she spends some additional time in the US on a
subsequent business trip, these days of US presence are ignored for the
purpose of fixing her residency ending date. These days qualify for the
“nominal” presence exception outlined above.

Which Test Prevails?

It is common for a person to meet both the lawful permanent resident test and
the substantial presence test. This raises the question—which test is used to
determine when residency begins and when it ends? The answer is the test that
results in the earliest starting date is used to determine the start date. The test
that results in the latest ending date is used to determine the residency ending
date.

According to the substantial presence test, Maria’s resident status begins

on January 1, 2018 and ends on May 1, 2019. Under the lawful
permanent resident test, her resident status begins on January 1, 2018
and ends on June 15, 2019.

Both tests result in the same start date so in this case either test can be
used for her start date. The lawful permanent resident test results in a
later ending date so this test prevails for that purpose. Maria’s US tax
residency begins on January 1, 2018 and ends on June 15, 2019.

Special Considerations
First Year Election
Sometimes it is better to be treated as a resident rather than a nonresident.
There is an election available that allows foreign nationals to be taxed as a
resident in the initial year of a US assignment even if one of the residency tests
is not met for that year. To qualify for this election, the following requirements
must be satisfied:

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• You must have been a US nonresident in the year immediately proceeding
the initial year of the US assignment.
• You must satisfy the substantial presence test in the year following the
initial year of the US assignment.
• You must be present in the US for at least 31 consecutive days in the initial
year of the US assignment.
• During this initial year, you must be present in the US for at least 75% of
the days from the start of the 31-consecutive-day period (see above)
through the end of the year.

Whether or not this election makes sense for you depends on the specific facts
of your individual situation. If this is the initial year of your US assignment and
you will not meet either of the two residency tests, you should consult with a
tax professional to determine whether this election will reduce your US tax
liability. If the election is beneficial, a professional tax advisor can also ensure
that a valid election is made.

It is also important to consider your foreign tax liability during the first and last
years of a US assignment. Your tax advisor must take into account both your
US and foreign tax matters to minimize your total worldwide tax burden.

No Lapse Rule
If, after terminating residency in one year, a foreign national returns to the
United states and resumes residency at any time during the following year, the
residency shall be considered as never having lapsed between the two
residency periods.

Break in US Residency for Period of Less Than Three Years

If an individual interrupts their period of US residence with a period of non-
residence, there are special rules that apply. If you were in the US for the last
three years, leave the US, but become a resident again within the next three
years, you may be subject to US tax under the special rule if the tax is more
than it would have been as a nonresident alien.

Impact of Tax Treaties

This chapter has covered the general rules used to determine whether a
foreign national is treated as a tax resident in the US. Please note that this
discussion has not considered the impact of tax treaties on the question of
residency. The United States has implemented numerous income tax treaties
with other countries. The purpose of a tax treaty is to minimize double
taxation which may arise due to differences in the tax laws of each jurisdiction.
It is quite possible that you could meet one of the residency tests for the US
(outlined above) and also be considered a tax resident in your home country

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or other country. As a result, both countries could treat you as a resident and
you could be subject to double taxation. Income tax treaties usually contain
residency tie-breaker rules which can be utilized in this type of situation. These
rules determine which of the two countries possess the right to tax you as a
resident. Income tax treaties and their impact are discussed in greater detail in
Chapter 8.

Back to Table of Contents

2. Case Study Background

This chapter provides additional information about Maria and Pablo’s US

assignments. If you recall from Chapter 1, Maria is a US resident taxpayer in
2018, and a part-year resident in 2019. Pablo is a nonresident taxpayer in 2018.
These conclusions and the information outlined below are used in later
chapters to provide examples of the US taxation of foreign nationals.

Maria

Maria’s income, expenses, and a brief description of her living and work
situation for 2018 and 2019 are outlined below.

2018

Maria’s job in the US started on January 5, 2018. Her salary from this
job through the end of 2018 totaled $80,000. Maria had Colorado
income tax withholding of $3,500 and US federal income tax
withholding of $18,500 deducted from these wages. Maria also made
$4,000 of charitable contributions to a qualified US charity in 2018. In
addition to her employment income, Maria earned the following income
in 2018.

Dividends from stock held in a US corporation $ 1,600

($400 paid each quarter on March 15, June 15,
September 15, and December 15)

Interest Income from US bank accounts $ 800

Interest Income from Spanish bank accounts *$ 800

* This represents total 2018 interest income from Spanish bank accounts.
$100 of Spanish tax was withheld from this amount so Maria actually
received $700.

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2019

Maria worked for her US employer through April 30, 2019. After
leaving the US, she accepted a job with a Spanish employer (effective
July 1, 2019). Her wages from her US employer for 2019 were $35,000.
US federal income tax of $6,000 and Colorado income tax of $1,200 was
withheld from these wages. The wages from her Spanish employer
amount to $65,000 of which $3,500 relates to her services performed in
the US. Spanish income tax of $13,500 was withheld from these wages.
Maria made charitable contributions of $2,500 to a qualified US charity
in 2019. In addition, Maria earned the following income in 2019:

Dividends from stock held in a US corporation *$ 1,600

($400 paid March 15, June 15, September 15, and
December 15)

Interest Income from US bank accounts $ 800

Interest Income from Spanish bank accounts **$ 800

* This represents the gross dividends paid to Maria in 2019. There is

$180 of US federal tax withheld from these payments so Maria only
receives a net amount after withholding of $1,420.

** This represents gross interest paid to Maria in 2019. There is $100 of

Spanish tax withheld from this interest so Maria receives the net of $700.

Pablo

Following is a summary of Pablo’s income and expenses in 2018.

2018

Pablo earned a total of $70,000 in 2018. Of this amount, Pablo earned

$30,000 for the services provided in the US during the short-term
project. Pablo was paid by his Spanish employer (XYZ, SA) for the
services performed in the US. No US taxes were withheld from Pablo’s
wages. While in the US, Pablo incurred transportation expenses and
temporary living expenses (meals, lodging, etc.) of $6,500. These
expenses were reimbursed by XYZ, SA.

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 In addition to his wage income, Pablo earned the following income:

Dividends from stock held in a US corporation *$ 400

($100 paid March 15, June 15, September 15,
and December 15)

Dividends from Spanish investments $ 2,000

Interest Income from US bank accounts $ 600

Interest Income from Spanish bank accounts $ 2,500

* This represents the gross dividends declared by the US corporation.

The corporation withheld $60 of US tax from the amount actually paid
Pablo.

Chapters 3, 5, and 6 contain an analysis of the US tax rules associated with

Pablo’s and Maria’s activity in the US. Chapter 3 discusses the taxation of full-
year residents so Maria’s tax situation for 2018 will be discussed first. Pablo’s
2018 US tax situation is analyzed in Chapter 5. Chapter 5 covers the taxation
of full-year nonresidents. Maria’s 2019 tax year is addressed in Chapter 6 which
discusses the taxation of part-year resident taxpayers, also referred to as “dual-
status” taxpayers.

Because this case study includes tax year 2018 (tax rates and tax law have yet
to be determined), we have applied US tax law and tax rates that are in effect
as of January 2018. The intent of this case study is to illustrate the mechanics of
the current law. Please keep in mind that changes in tax law could occur that
would alter the outcome of this analysis.

Back to Table of Contents

3. Income Taxation of Residents

If you are a resident taxpayer, you are taxed in the United States as if you are a
US citizen. You are taxed on the worldwide income that you earn during your
period of residence. Following is a general discussion of the US tax law and
how it applies to resident taxpayers. This chapter covers the taxation of a
resident taxpayer who is tax resident for the entire year.

Where appropriate, the concepts discussed are applied to the case study
information outlined in the previous chapter (Chapter 2).

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Income Tax Overview
The flowchart below outlines the major steps in calculating federal taxable
income and the federal tax liability for an expatriate taxpayer:
Gross Income
(includes salary, wages and other income less expatriate exclusions)

minus

Adjustments to Gross Income

(includes deductions for moving expenses, IRA contributions, alimony
paid, etc.)

equals

Adjusted Gross Income (AGI)

minus

Itemized Deductions or
Standard Deduction

and minus

Exemptions (Suspended until January 1,

2026

equals

Taxable Income

Calculated Tax*
(Taxable Income subject to Tax Rates)

minus

Tax Credits
(such as the foreign tax credit)

equals

Net Tax Liability

*It is important to note that under the current tax laws, the tax is computed after
adding back the section 911 exclusion, so the higher income tax rates will apply.

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Filing Status
Your filing status is important in the calculation of many items that affect your
tax. Some of these items are the amount of standard deduction available to
you; the phase-outs of itemized deductions, exemptions and certain credits (all
discussed later); as well as the tax rate schedule which dictates your marginal
tax bracket. Following are the filing statuses to choose from:

• Single Individual
• Married Filing Jointly
• Married Filing Separately
• Head of Household
• Qualifying Widow(er) with Dependent Child

IN OUR CASE STUDY, Maria will file as a single individual as she is not
married and has no children or other dependents.

Gross Income
For federal income tax purposes, “gross income” means all income from
whatever source, except for those items specifically excluded by law. Gross
income includes such items as:
• Wages, salaries and other compensation
• Interest and dividends
• State income tax refund (if claimed as an itemized deduction in prior years)
• Income from a business or profession
• Alimony received
• Rents and royalties
• Gains on sales of property
• S Corporation, trust, and partnership income

IN OUR CASE STUDY, Maria’s gross income for 2018 consists of the
following:

Compensation (salary) $ 80,000

Interest Income $ 1,600 ($800 + $800)
Dividend Income $ 1,600

Total Gross Income $ 83,200

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Deductions from Gross Income
Deductions from gross income are used to arrive at your adjusted gross
income (AGI). These deductions apply even if you use the standard deduction
rather than itemizing your deductions. Your AGI will be important in many of
the phase-out calculations that are discussed later. Available deductions from
gross income include:

• IRA contribution deduction

• Student loan interest deduction
• Tuition and fees deduction
• Medical and health savings account contribution deduction
• Penalty incurred on early withdrawal of savings
• Alimony paid
• Self-employed health insurance
• Self-employed SEP, SIMPLE, and qualified plans
• One half of self-employment tax

IN OUR CASE STUDY, Maria does not have any of these items in 2018 and
has no deductions from gross income.

Itemized Deductions / Standard Deduction

Taxpayers may reduce AGI by the greater of the appropriate standard
deduction or their allowable itemized deductions. The amount of the standard
deduction varies depending on your filing status. For 2018, the standard
deduction amounts are as follows:

• Single Individual / Married Filing Separately ........................................ $12,000

• Married Filing Jointly / Qualifying Widow(er) .................................... $24,000
• Head of Household .................................................................................. $12,000

If the sum of your allowable itemized deductions is greater than the standard
deduction allowed based on your filing status, you should itemize. The
following are examples of amounts that can qualify as itemized deductions:

• Greater of state and local income taxes or general sales taxes

• Foreign taxes (if you elect to deduct rather than take a credit)
• Real estate taxes
• Personal property taxes

Page 16
• Qualified home mortgage interest and points
• Mortgage insurance premiums, if applicable
• Charitable contributions to qualified US charities
• Investment interest, if applicable

The Tax Cuts and Jobs Act enacted January 1, 2018, changed how itemized
deductions are calculated. Beginning with calendar year 2018, itemize
deductions for state and local income taxes is capped at $10,000. These taxes
include state and local income taxes, sales, real estate, and property taxes.

IN OUR CASE STUDY, Maria has the following 2018 expenses which
qualify as itemized deductions:

Colorado Income Tax $3,500

Charitable Contributions 4,000

Total Itemized Deductions $7,500

It appears that Maria should take the standard deduction of $12,000

versus the itemized deductions of $7,500.

Exemptions
Prior to January 1, 2018, you could deduct $4,050 (indexed annually for
inflation) for each allowed exemption. You were allowed one exemption for
yourself, and if you are married and file a joint tax return, one exemption for
your spouse. You were also allowed one exemption for each person you are
able to claim as a dependent.

Beginning January 1, 2018, the deduction for exemptions has been suspended.
Therefore, you are no longer allowed a deduction for exemption(s). Under
current law, the exemption will be allowed again beginning January 1, 2026.

Page 17
 IN OUR CASE STUDY, Maria can not claim one exemption (for herself).
Starting in 2018, the deduction for exemptions is not allowed.

Case Study Summary

Adjusted Gross Income $ 83,200

Standard Deduction (12,000)
Exemptions 0
Taxable Income $71,200

Once you have calculated your taxable income, the next step is to calculate
your tax. The Federal tax rate schedules for 2018 are included in Appendix A.

Maria’s tentative US federal income tax liability for 2018 is $11,604.

This is calculated using the “single individual” tax rate schedule
provided in Appendix A.

New Medicare Tax as of 2013

Starting with tax year 2013, a new 3.8% Medicare tax on net investment
income will be assessed for Single and Head of Household filers with AGI
exceeding $200,000 and Joint filers with AGI exceeding $250,000 ($125,000
MFS).

A .9% incremental Medicare tax on earned income will be assessed for Single
and Head of Household filers with wages, compensation or self-employment
income exceeding $200,000 and Joint filers exceeding $250,000 ($125,000
MFS).

Tax Credits
Foreign Tax Credit
The US allows for a credit against the US income tax paid on income that is
also subject to foreign income tax. This is referred to as the foreign tax credit.
To qualify for the credit, the foreign tax incurred must be imposed on you and
levied on your income.
The foreign tax credit is limited to the lesser of the actual foreign tax paid or
accrued or the US tax liability associated with the income that attracts the

Page 18
foreign tax (foreign source taxable income). This limitation is calculated by
applying the following formula:

Foreign Source
Taxable Income Foreign
_______________
Total Taxable Income
X US Tax Liability = Tax Credit
Limitation
Before Exemptions

Please note the use of the phrase “foreign source” in the above formula.
Income sourcing and the rules for distinguishing US source income from foreign
source income are covered in Chapter 4. Also, note that the formula considers
foreign source taxable income rather than foreign source gross income.
Foreign source taxable income is calculated by allocating a portion of the
various deductions used to arrive at overall taxable income to your foreign
source gross income. If the total foreign taxes incurred in a given year cannot
be used as a credit due to this limitation, the unused portion must be carried
back one year and then carried forward to the next ten years.

To further complicate matters, the foreign tax credit limitation is applied

separately to statutorily defined classifications of income. These classifications
are often referred to as “baskets” in discussions regarding the US foreign tax
credit. Two common classifications encountered by foreign nationals are the
“general” basket which includes business income, salary, and wages, and the
“passive” basket which includes dividends, interest, capital gains and retirement
income.

Page 19
 In 2018 – Maria does pay some foreign tax. This is the Spanish tax of
$100 that is withheld on the interest income from Spanish bank
accounts. All of her foreign source income falls within one basket so it
will only be necessary to perform one calculation for her foreign tax
credit. Maria’s total 2018 foreign source income consists of the interest
earned from her Spanish bank accounts. This item falls within the
passive basket.

The first step in the overall computation is calculating her foreign source
taxable income. We know that her gross foreign source income is $800.
It is necessary to allocate a portion of the deductions used to arrive at
taxable income to her gross foreign source income. We will do this
based on her ratio of gross foreign source income to total gross income
that equals $800/$83,200 or .0096%. Applying this ratio to the standard
deduction of $12,000 results in $115. Maria’s foreign-source taxable
income equals $685 ($800 - $115).

The next step is calculating Maria’s 2018 foreign tax credit limitation.
Using the formula provided above, Maria’s 2018 limitation is calculated
as follows:

$685 / $71,200 X $11,604 = $ 112

Maria’s 2018 foreign tax credit is $100. The foreign tax credit is the
actual foreign tax she paid because it is less than the US tax ($112) on
the foreign source taxable income. This assumes that the $100 Spanish
tax withheld is equal to her actual Spanish tax liability on that income.

Another important aspect related to the foreign tax credit is an election to

deduct the foreign taxes as an itemized deduction. If this election is made, the
taxes are no longer available for credit. In most cases, it is more beneficial to
elect the credit as this can provide a dollar-for-dollar benefit. However, in
limited cases, deducting the taxes results in a greater benefit. You should
always consult a tax advisor before claiming the foreign tax credit or before
making the deduction election to help ensure you receive the maximum
available benefit.

Other Credits
Child Tax Credit and Additional Child Tax Credit
For tax year 2018, you may be entitled to a child tax credit of $2,000 for each
of your qualifying children. To qualify, the child:

• must be under age 17 at December 31, 2018,

• must be a citizen or resident of the US,
• must be someone you have claimed as a dependent,
• must be your child, stepchild, grandchild or eligible foster child,

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• did not provide over half of their own support, and
• must have lived with you for more than half of 2018

PHASE-OUT OF CHILD TAX CREDIT

The amount of your child tax credit starts to phase-out once your AGI
exceeds a threshold amount for your filing status. The threshold amounts for
2018 are as follows:

• Single individuals / Qualifying widow(er)........................................... $200,000

• Married filing jointly ................................................................................ $400,000
• Married filing separately .......................................................................$ 200,000
• Head of household.................................................................................. $200,000

If your modified AGI is above the threshold amount for your filing status, you
must reduce your credit by $50 for each $1,000, or part of $1,000, that your
modified AGI exceeds the threshold amount. Unlike other phase-outs in the
tax law, the income level at which the child tax credit is completely phased out
is higher for each additional child. For the additional child tax credit, if the
usable child tax credit is greater than your tax liability and taxable income is
greater than $2,500, or if you have three or more children, and the Social
Security and Medicare tax you paid is more than your Earned Income Credit, a
portion of the credit may be refundable. New for 2018: The child must have a
valid Social Security Number to claim the nonrefundable and refundable credit.

IN OUR CASE STUDY, Maria has no children and therefore cannot

claim any child tax credit.

Higher Education Tax Credits

There are two federal tax credits available to help you offset the costs of
higher education for yourself or your dependents.

The American Opportunity Credit (AOC).

• The maximum amount of AOC is $2,500 per student. The credit is phased
out (gradually reduced) if your modified adjusted gross income (AGI) is
between $80,000 and $90,000 for single and head of household filers
($160,000 and $180,000 if you file a joint return).
• The credit can be claimed for the first four years of post-secondary
education.
• Generally, 40% of the AOC is a refundable credit for most taxpayers,
which means that you can receive up to $1,000 even if you owe no taxes.
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• The term “qualified tuition and related expenses” has been expanded to
include expenditures for “course materials.” For this purpose, the term
“course materials” means books, supplies, and equipment needed for a
course of study, whether or not the materials must be purchased from the
educational institution as a condition of enrollment or attendance.

The Lifetime Learning Credit

The Lifetime Learning Credit is not limited to students in the first four years of
post-secondary education. Qualified expenses for this credit include the cost of
instruction taken to acquire or improve existing job skills, if taken at a qualified
educational institution. The amount of the credit is 20% of the first $10,000
you pay for qualified expenses. The maximum Lifetime Learning Credit you can
claim per year is $2,000 (20% x $10,000).

PHASE-OUT OF LIFETIME LEARNING CREDIT

The allowable credit is reduced for taxpayers who have AGI above certain
amounts. For 2018, the phase-out begins for single individuals, and head of
household filing statuses when modified AGI reaches $56,000. For “married
filing jointly” taxpayers, the credit begins to be phased-out range when AGI
reaches $112,000.

IN OUR CASE STUDY, Maria did not incur any costs related to higher
education and cannot claim any higher education tax credits.

Case Study Summary

Adjusted Gross Income $ 83,200

Deductions from AGI ( 0)
Standard Deduction ( 12,000)
Exemptions ( 0)
Taxable Income $ 71,2000

Tentative Tax Liability 11,604

Foreign Tax Credit ( 100)

Net Federal Tax Liability $ 11,504

Federal Tax Withheld from Salary (18,500)
Federal Tax Refund due Maria $ ( 6,996)

Page 22
Filing Requirements and Procedures
As a full-year US tax resident, you are required to file Form 1040 and pay any
taxes due with the return by April 15 of the year following the reporting year.
If you are not ready by April 15 to file your return because of missing
information, you can get an automatic extension of six months (to October 15)
to file your return. This extension only applies to the filing of your Form 1040
and not to the payment of any tax liability. Therefore, it is necessary to
estimate your tax liability by April 15 and pay any remaining tax owed in order
to avoid penalties and interest charges. The automatic extension can be
obtained by filing Form 4868 by April 15. Any estimated tax liability should be
remitted with Form 4868. A separate extension request may be required if you
have a state tax filing requirement.

In most cases, there are no available extensions beyond October 15. Note that
if you are residing outside the US on April 15, you are allowed an automatic
two-month extension of time to file your US federal tax return. It is not
necessary to file any forms to receive this extension.

Your tax advisor can file extension requests on your behalf, so this process can
be relatively easy and pain-free, unless, of course, you owe money.

Where you file your US tax return depends on where you reside in the US
Check with your tax advisor or with the Internal Revenue Service for the
locations of the service centers where you should send your tax return,
extension requests, and any necessary tax payments. In many cases, the
relevant forms can be e-filed.

Back to Table of Contents

4. Sourcing Rules

Before we get into the rules regarding the taxation of nonresidents, it is

necessary to spend some time on the topic of “sourcing”. Up to this point, we
have mentioned that nonresidents are generally taxed in the US only on US
source income that they receive. We have also referred to the concept of
foreign source income in our discussion of foreign tax credits. How does one
determine what constitutes US source income versus that which is treated as
foreign source income? This chapter will go over the sourcing rules for the
most common types of income.

Personal Services Income

This category of income includes wages, salary, bonuses, and deferred
compensation such as pensions that are paid by an employer. It also includes
fees and other compensation earned by self-employed individuals.

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The determining factor for the source of this type of income is typically where
the services are physically performed. Compensation earned for services
physically performed in the United States is considered US source income,
regardless of who the employer is or what payroll the income is paid from.
Likewise, compensation for services physically performed outside the United
States is considered foreign source income. If compensation is related to the
work performed both in the US and outside the US, the compensation is
typically sourced based on the relative workdays in the various locations. For
example, if you worked 50% of the time in the US, then 50% of your
compensation would be US source income. In certain cases, exceptions may
apply (e.g., certain compensation may be sourced based on geographical
location).

An exception exists for certain amounts earned by foreign nationals. Under this
exception, compensation for services performed in the US is not considered
US source income if the following conditions are satisfied:

• The services must be performed by a nonresident taxpayer who is

temporarily present in the US for a period of 90 days or less.
• The total compensation for these services does not exceed $3,000.
• The services must be performed as an employee of or under contract (in
the case of a self-employed contractor) with one of the following:
o A nonresident individual, foreign partnership or foreign corporation
which is not engaged in a trade or business in the US, or
o A foreign office or foreign branch of a US resident, US partnership, or
US corporation.

Interest Income
The general rule for determining the source of interest income looks at the
residence of the payor. Interest that is paid by a US resident, partnership, or
corporation is deemed to be US source income. Interest paid on obligations
issued by the US government or by any political subdivision in the United States
such as a state government is also considered to be US source income.

Interest paid by a foreign entity (corporation, partnership, individual,

government, etc.) is classified as foreign source income.

Dividend Income
Similar to interest, the general rule for dividends looks at the residence of the
corporation paying the dividend. If the dividend is paid by a US corporation it is
deemed to be US source income. Conversely, dividends paid by a foreign
corporation are deemed to be foreign source income.

Page 24
Rental and Royalty Income
The source of rental and royalty income depends on the location of the
property that generates the income. If the property is located in the United
States, the rental or royalty payment is deemed to be US source. For property
that is located outside the US, the rental or royalty payment is treated as
foreign source income.

Income from the Sale of Personal Property

Income generated from the sale of personal property is sourced according to
the residence of the seller. Personal property includes assets such as stocks,
bonds, cars, equipment, and furniture. Residence for this purpose is based on
the “tax home” concept which was discussed briefly in Chapter 1. Generally
speaking, gain from the sale of personal property by a US nonresident will not
be considered US source income.

Income from the Sale of Real Property

The source of this type of income depends on the location of the property.
Real property generally includes land and buildings. Gain on the sale of real
property that is located in the United States is considered to be US source
income regardless of the residency of the seller. The sale of real property
located outside the US generates foreign source income.

There are special rules related to the disposition of an interest in US real

property. Please see Chapter 9 for an analysis of these rules.

Partnerships
If you own an interest in a partnership, the source of the income is determined
at the partnership level. The income retains this source when it flows into your
individual tax return.

Back to Table of Contents

5. Taxation of Nonresidents

As a general rule, nonresident taxpayers are taxed in the US only on income

from US sources. There are limited situations where the US will also tax
certain types of foreign source income earned by nonresidents. However, this
is beyond the scope of this book, so the remainder of this chapter is devoted
to a discussion of US source income and the US tax impact to nonresident
taxpayers.

There are two separate classifications in US tax law for US source income. In
the previous chapter we covered the most common types of income earned by
nonresident individuals and the rules for determining whether it is US source
income or foreign source income. Once the source of each category of income

Page 25
is determined, it is necessary to further categorize all items which are US
source into one of the following two categories:

• Trade or business income, or

• Passive income (e.g., non-trade or business income)

The distinction between these two types of income is important because trade
or business income is taxed differently than income from other sources.

Trade or Business Income

Trade or business income is income generated in the US through an activity
which demands a certain level of active participation. Compensation for the
performance of personal services as an employee is an example of trade or
business income. In addition, compensation for the performance of services as
an independent contractor (self-employed individual) is trade or business
income. Other activities are also considered US trade or business income,
including selling products in the US through a US based office, ownership of a
US business, and ownership in a partnership with a US business.

Income which is trade or business income is taxed on a net income basis using
graduated tax rates. Net income is determined by accumulating the gross trade
or business income, and reducing it by allowable deductions that are
attributable to this gross income.

Allowable Deductions
Business Deductions
If you have a business in the US, you may typically deduct most ordinary and
necessary expenses that are directly related to the business. These business
deductions could include wages paid to employees, depreciation of assets,
marketing and advertising costs, taxes, insurance, interest, etc. Employee
compensation income is generally not considered “business” income for
business deduction purposes. Expenses incurred as an employee are considered
“itemized deductions”.

Any expense that is personal in nature is usually not deductible unless it

qualifies as an adjustment to gross income or is an itemized deduction.

Adjustments to Gross Income

Similar to US residents, nonresidents can claim certain deductions from gross
income. Allowable deductions from gross income include:

• Educator expenses
• IRA contribution deduction
• Medical savings account contribution deduction
• Self-employed SEP, SIMPLE, and qualified plans
Page 26
• One half of self-employment tax
• Domestic production activities deduction
• Student loan interest deduction
• Unreimbursed deductible moving expenses
• Penalty incurred on early withdrawal of savings
• Self-employed health insurance deduction
• Scholarship and fellowship grants excluded

It is uncommon for nonresidents to have these types of deductions. Also, note

that these expenses must relate to income earned from a US trade or business
to be deductible.

Itemized Deductions
Nonresidents can also claim the following itemized deductions:

• State and local income taxes

• Gifts to qualified US charities
• Casualty and theft losses
• Unreimbursed employee business expenses and miscellaneous deductions
(subject to limitations)

Please note that many of the itemized deductions which are available to
residents (see chapter 3) cannot be claimed by a nonresident taxpayer.
Nonresidents are also not allowed to take the standard deduction.

IN OUR CASE STUDY, Pablo cannot claim any itemized deductions as

he did not incur any of the above-mentioned expenses.

Personal Exemptions
Starting in 2018, the deduction for exemptions is not allowed.

IN OUR CASE STUDY, Pablo cannot claim the one personal

exemption.

Short-Term Assignments
Not all foreign nationals who accept a US assignment establish a tax home in
the US. In those cases where a US tax home is not established, the individual is

Page 27
treated for tax purposes as being on a “temporary assignment” in the US. A
temporary assignment is defined as an assignment where the tax home
(principal place of work or employment) does not change. If the intent of the
assignment is to return to the original work location within one year, the
assignment is considered a temporary assignment (all other assignments are
considered indefinite or long-term).

The tax advantage of a temporary assignment is that employer-provided

benefits such as lodging, meals, travel, and certain other items related to the
assignment might not be (if properly structured) considered taxable wages to
the employee. In the case of a long-term assignment, these items are typically
considered taxable wages.

IN OUR CASE STUDY, Pablo is on a temporary assignment in the US

The $6,500 of related meals and lodging that were reimbursed by XYZ,
SA are not taxable compensation and can be ignored when calculating
his US tax liability.

If these expenses are not paid or reimbursed by the employer, the individual
might be allowed to deduct those costs related to the assignment (lodging,
meals, transportation, etc.) as an itemized deduction (subject to certain
limitations).

IN OUR CASE STUDY, Pablo cannot deduct these costs as they are not
included in his compensation for US tax purposes.

Tax Rates
After reducing the trade or business income by any allowable deductions and
the personal exemption, the net trade or business income is subject to
graduated tax rates. The rates at which net trade or business income is taxed
depends on whether or not you are married. If you are a married nonresident,
generally the married filing separately rate schedule (see Appendix A) applies to
your net trade or business income.

Please note that the “married filing separately” tax rates must be used because
nonresidents are not allowed to file a joint tax return with a spouse. However,
if you find yourself in the situation that you are married to a US citizen or
resident and you do not meet the US residency requirements, you can elect to
be treated as a resident and therefore file a joint return with your spouse.

Page 28
If you are not married, you must use the ‘single taxpayer’ tax rate schedule (see
Appendix A).

IN OUR CASE STUDY, Pablo does have US trade or business income in

2018. The trade or business income is the compensation he receives while
working in the US on the short-term project. Note that this income does
not qualify for the personal services exception outlined on page 26 as it
exceeds the $3,000 threshold and Pablo is present in the US for more than
90 days. Pablo should file a US tax return and include this income in his
return. Pablo’s US tax return would include the trade or business
compensation of $30,000, but would not include the assignment related
expenses of $6,500 that are reimbursed by XYZ, SA.

Trade or business income $ 30,000

Less:
Business Deductions ( 0)
Deductions from gross Income ( 0)

Itemized Deductions ( 0)

Net Trade or Business Income $ 30,000

Taxable income from US trade or business $ $30,000

As Pablo is unmarried, this income is taxed according to the single

taxpayer rate schedule.

It is very important to note that this conclusion does not take into account
a more favorable treatment that might be available to Pablo under an
income tax treaty. We will revisit this when we discuss tax treaties in
Chapter 8.

Passive Income
Unlike trade or business income, US source passive income is taxed on a gross
basis at a flat tax rate of 30%. “Gross basis” means that no deductions or
exemptions are allowed against this income. For purposes of this discussion,
the most typical types of income which fall into the “Passive Income” category
are interest, dividends, royalty, rents, alimony, certain capital gains, and 85% of
US social security benefits.

The flat tax of 30% is usually collected through a withholding mechanism with
the burden to withhold placed upon the payor of the income. For example, a
US corporation is generally required to withhold the 30% tax from any
dividends it pays to nonresident taxpayers, and remit this withholding to the US
government on behalf of the individual.
Page 29
The 30% tax rate can be reduced (or in some cases eliminated) if a tax treaty is
in place between the US and the country of residence of the taxpayer. Please
see Appendix B to determine whether a treaty exists between your home
country and the US. A more thorough discussion of treaties can be found in
Chapter 8.

If you are a nonresident taxpayer and your only US source income consists of
passive income, you are not required to file a US tax return. The withholding
tax generally satisfies any US tax liability.

IN OUR CASE STUDY, Pablo does have US source income which meets
the definition of passive income in 2018. The income consists of the
dividends of $400 he received from the US corporation. US tax in the
amount of $60 was withheld from the actual cash paid to him. Why does
this tax not equal 30% of the gross amount? The answer is that the income
tax treaty between Spain and the US provides for a 15% withholding tax
rate on dividends. Again, see Chapter 8 for a more thorough discussion of
tax treaties.

Pablo also earned $600 of interest income from a US bank account in

2018. The reason that there is no tax withheld on these earnings is
discussed in the next section.

Special Rules for Passive Income

Portfolio Interest Exemption - For many nonresidents, interest earned
from certain debt instruments that have been issued by a US resident entity will
not be subject to the withholding tax. To qualify for this exemption, the
following requirements must be satisfied:

• The nonresident taxpayer cannot have a substantial ownership stake (10%

ownership or more) in the US entity paying the interest.
• The obligation that generates the interest income must have been issued
after July 18, 1984.
• The recipient of the income must not be a resident of a country which is
on a list issued by the IRS. This list includes those countries which do not
have an adequate system of information exchange with the US to prevent
tax evasion by US taxpayers. Most developed countries are not on this list,
so this will not present a problem in most cases.

US Bank Deposits - Interest earned by nonresidents from deposits in US

banking institutions is exempt from US income tax. This income must not be
connected to a US trade or business to qualify for this exemption.

Page 30
 IN OUR CASE STUDY, the interest Pablo earns from his US bank
account in 2018 qualifies for this exemption.

Real Estate Rental Income - This type of income is usually classified as

passive income. As a result, the gross rental income is subject to the 30%
withholding tax (unless reduced by a treaty). Because this could present an
undue tax burden on many nonresidents and discourage foreign investment in
US real property, there is an election available to treat the rental activity as
trade or business income. This allows the nonresident landlord to be taxed on
a net basis using graduated tax rates. Because the landlord is taxed on a net
basis (gross rental income less associated deductible costs) this will often result
in a lower US tax liability. If you own US real property and lease this property,
you should seek the advice of a US tax advisor regarding this election and
whether it is beneficial in your specific situation.

Disposition of US Real Property - Unlike other types of capital gains or

losses, any gain or loss from the sale of a real property interest located in the
US is automatically deemed to be trade or business income. The gain or loss is
therefore taxed on a net basis at graduated tax rates. Even though the gain or
loss is taxed on a net basis, in many cases a withholding tax of 10% is levied on
the gross receipts of the transaction. A more detailed discussion on the
disposition of US real property can be found later in this booklet.

Page 31
 Case Study Summary

$30,000
Trade or Business Taxable Income
$ 3,410
Tax (Using single rates at Appendix A)

Taxable Passive Income $ 400

15%
Tax Rate under Treaty
$ 60
Tax

$ 3,470
Total Tax

Less:
Withholding on Wages ( 0)
Withholding on Dividends ( 60)

$ 3,410
Pablo’s US Tax Due

Note again that this does not take into account more favorable treatment that might
result from the application of a tax treaty. Go to Chapter 8 for a discussion of tax
treaties as well as a case study update which applies the US / Spain treaty to Pablo’s
2018 US tax situation.

Filing Requirements and Procedures

The filing requirements for nonresidents depend on whether wages were
received that are subject to US income tax withholding. If you received wages
which were subject to US income tax withholding, then you should file your US
tax return (Form 1040NR) by April 15 of the year following the reporting year.
If you did not receive wages subject to withholding, you have until June 15 to
file Form 1040NR. If you cannot file your return by these due dates, you may
file Form 4868 to get an automatic extension until October 15th. Form 4868
must be filed by the original due date for your return to obtain a valid
extension. Note that this extension does not apply to the payment of any tax
due. If you owe tax, you must pay it by the original due date of your tax return
to avoid penalty and interest charges. Check with your US tax advisor if you
need additional time to file your tax return.

Back to Table of Contents

Page 32
6. Dual-Status Taxpayers

The US tax rules would be much simpler if everyone fit neatly into a certain
category such as a resident or a nonresident. Unfortunately, it is possible, and
quite common, for someone to be a US resident and a nonresident in the same
tax year. This can occur in the year that a foreign national moves to the US,
and in the year that he or she departs the US to resume residence in another
country. Individuals in this category are referred to as “dual-status taxpayers”.
This chapter covers the rules that apply to dual-status taxpayers and some
opportunities for these individuals to minimize their US tax liability.

Overview
If you are a dual-status taxpayer, you are treated as a nonresident for one
portion of the tax year and as a resident for the other portion of the year. The
tax rules for residents discussed in Chapter 3 apply to that part of the year that
you are considered resident. For the nonresident part of the year, the rules
covered in Chapter 5 apply.

Income
Your income for the entire year needs to be allocated between the residency
and nonresidency periods. You will be taxed on the worldwide income you
received in the period of residence. Only your US source income will be taxed
in the period of nonresidence. In addition, the US source income in the period
of nonresidence must be split between that which is “trade or business
income” and that which is “passive income” (see Chapter 5 for more details).

Maria is a dual-status taxpayer in the final year of her job with the US
company. Maria is a US resident at the start of 2019. Her residency ends
on June 15, 2019. She is taxed on her worldwide income from January 1,
2019 through June 15, 2019. Her worldwide income consists of the
following:
(continues)

Page 33
 (continued from page 33)

Salary from
US employer $35,000

Dividends from
US corporation $ 400 ($400 paid on March 15)
Interest from US
bank accounts $ 367 ($800 X 5.5 months / 12 months)
Interest from Spanish
bank accounts $ 367 ($800 X 5.5 months / 12 months)
Worldwide income
during US
residency in 2019 $36,134

The income Maria earned during her period of nonresidence needs to be

examined to determine which portion of this income is US source.
Clearly, the dividends she receives from the US corporation during her
nonresident period (June 16 - December 31, 2019) are US source income.
She earns no US source interest during this period (US bank account
interest is exempt from tax - see page 31). She does earn US source
compensation during this period. This is the $3,500 she earns for services
performed while on a business trip to the US in October. Note that this
compensation does not qualify for the exception outlined in Chapter 5 (see
page 24) as it exceeds $3,000. Therefore, her US source income during
the nonresident period consists of income which is trade or business
income (the $3,500 of compensation) and passive income (the $1,200 of
dividends from the US corporation).

The trade or business income earned in the period of nonresidence is pooled

with the worldwide income earned during the period of residence. This income
pool is taxed at graduated rates. The passive income earned during the
nonresidence period is taxed at the withholding tax rate of 30% (or lower rate
if a treaty applies).

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 Maria’s total 2019 income which is taxed at the graduated rates is
$39,634. This includes her worldwide income she earns during her
residence period of $36,134 and the trade or business income of $3,500
she earns during the period of nonresidence.

Note again that this does not take into account more favorable treatment
that might result from the application of a tax treaty. Go to Chapter 8 for a
discussion of tax treaties as well as a case study update which applies the
US / Spain treaty to Maria’s 2019 US tax situation.

The passive income that Maria earns during the nonresidency period is
potentially subject to the 30% flat tax. Again, the Spain/US tax treaty
provides for a reduced withholding rate of 15%. This tax is withheld by
the US corporation which pays the dividends.

Deductions
A dual-status taxpayer faces certain limitations related to deductions and
personal exemptions. Dual-status taxpayers are not allowed the standard
deduction, but instead are limited to actual itemized deductions that are paid in
the period of residency, and deductions attributable to trade or business
income earned during the period of nonresidency.

Unless a special election is made (discussed below), dual-status taxpayers are

not allowed to file joint returns. If you are married, you must use the “married
filing separately” tax rates.

Maria has the following itemized deductions in 2019:

State taxes $1,200

Charitable contributions 2,500

Total $3,700

The standard deduction ($12,000) is greater than the $3,700 of itemized

deductions, but Maria is not allowed to use the standard deduction in
2019 as she is a dual-status taxpayer. Due to the new tax laws in effect
for tax year 2018, Maria is not allowed to claim an exemption.

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 2019 Case Study Summary
(using 2018 tax laws and tax rate tables)

Worldwide income earned

during residence $36,134
Trade or business income - 3,500
nonresidence

Total Income 39,634

(see
Itemized deductions ( 3,700)
above)

Taxable income subject to

graduated rates $35,934

Tentative tax $ 4,122

(see single taxpayer rate schedule at

Appendix A)

Passive income $ 1,200

Treaty withholding tax rate 15%

Tax on Passive income $ 180

Credits
Dual-status taxpayers are allowed to take certain credits against the US tax
attributable to income earned during the period of residence. These credits are
discussed in greater detail in Chapter 3. The most important credit to dual-
status taxpayers is the foreign tax credit.

Maria has some foreign income tax withheld on the Spanish interest she
receives during her period of residence in 2019. These taxes total $100.
Maria has Spanish source income during this period of $367 related to
interest earnings.

Referring to the detailed discussion in Chapter 3, the first step in this

calculation is computing foreign-source taxable income.

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 To arrive at foreign-source taxable income we need to allocate a portion
of the deductions to her gross foreign source income. The deductions
allocable to this income and other Spanish income equal $11 ($367 /
$39,634 X $1,200). Maria’s foreign-source taxable income is therefore
$356 ($367-$11).

To arrive at Maria’s 2019 foreign tax credit limitation amount, it is

necessary to apply the formula outlined in Chapter 3. This is done
below.

$356 / $35,934 X $4,122 = $41

The actual foreign taxes that Maria paid are greater than her 2019
limitation of $41. As such, she can claim a foreign tax credit equal to the
limitation of $41.

Case Study Summary

Tax on Income subject to graduated tax rates $ 4,122

Less: Foreign Tax Credit ( 41)

Net Tax Liability on Trade or Business Income $ 4,081

180
Tax On Passive Income

$ 4,261
Total Net Tax liability

Income Tax withheld on Salary ( 6,000)

Withholding Tax on Interest ( 180)

$ 1,919
Federal Tax Refund Due Maria

Again, note that Maria may be able to claim tax treaty benefits to reduce
her US tax burden. See Chapter 8.

Joint Return Election

The general rule reads that a joint return is not allowed when either spouse is
a nonresident at any time during the year. However, an election can be made
to file a joint return if you are a nonresident during the year if the following
conditions are satisfied:

• You have achieved residency status at the end of the year; and
• Your spouse is either a US citizen or a US resident at the end of the year.

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This election can have profound effects on your US tax liability. If the election
is made, your worldwide income for the entire year (and that of your spouse)
is subject to US tax. The rules discussed in Chapter 3 would dictate your tax
treatment. It is also worth noting that the various limitations accompanying a
dual-status taxpayer disappear. For instance, the election not only allows you to
file a joint tax return and be taxed at the married filing joint rates, it also allows
you to claim the standard deduction or other deductions related to your
nonresident period.

So when is it appropriate for you to make the election? The only way to know
for sure is to calculate your tax under an election scenario and under a
scenario with no election and compare the results. This election can affect your
tax situation for future years so this must also factor into your decision. This is
another area where the advice of an experienced tax advisor can be especially
helpful.

Filing Requirements
The filing requirements for dual-status taxpayers depend on whether a joint
return election (discussed above) is made and whether it is the initial year or
final year of the residence period.

Initial Year of Residency

If you forego the joint return election or it does not apply to you, then you
have to file Form 1040 to report your income and deductions for the period of
residency. You will also need to attach a Form 1040NR statement to the Form
1040. The Form 1040NR is used to report any US source income and related
deductions for the period of nonresidence.

If it is the initial year of your US residence and you decide to make the joint
return election, you need only file Form 1040. However, you and your spouse’s
worldwide income for the entire year must be reported rather than just that
earned during the period of actual US residence. The joint return election is
made by attaching a statement to your return (Form 1040) which declares you
and your spouse’s intent.

Final Year of Residency

These filing requirements are very similar to those for the initial year of
residency. Your income and deductions for the period of residence are
reported on Form 1040. The US source income and deductions earned during
the period of nonresidence are reported on Form 1040NR. However, under
this scenario, Form 1040NR is the lead form which you need to file, with the
Form 1040 statement included as an attachment instead of the other way
around.

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When and Where to File
Regardless of whether it is the initial or final year of your assignment, you must
file your tax return by April 15 of the year following the tax reporting year. If
you are a dual-status taxpayer your return should be filed at the following
location:

Internal Revenue Service

Austin, TX 73301-0215
USA

If you make the joint return election, check with your US tax advisor or with
the Internal Revenue service to determine where your return should be filed.

If you are unable to file a complete and accurate tax return by April 15, you can
receive an automatic extension of six months (until October 15) to file your
return by filing Form 4868. Form 4868 must be filed by April 15 to receive the
extension. Please note that this extension only applies to filing the return. It
does not extend the due date for paying any tax liability. Therefore, it is
necessary to estimate your liability and balance of tax owing (if any) by April 15,
even if you can’t file a complete return. If you estimate that tax is due, you
should pay in the estimated shortfall along with Form 4868 by April 15. This
will avoid most of the unnecessary interest or penalties. If it is the initial year of
your assignment or transfer to the US, and you will make the first year election
described in Chapter 1, it will be necessary to file for the extension as you will
not meet the substantial presence test for the subsequent year until after April
15 (see page 9 for an explanation of the first year election).

Back to Table of Contents

7. Other Taxes and Filing Requirements

General Application of Social Security Tax

Expatriates who are employed by a US employer during the foreign assignment
generally remain subject to US social security taxes. Social security taxes will
continue to be withheld from compensation, including the expatriate
allowances and reimbursements that are included in taxable wages.
Expatriates who are employed by a foreign corporation are not subject to US
social security taxes (except in rare situations), but are usually subject to social
security taxes of the country in which they are working.

If an expatriate is employed by a US employer and is subject to US social

security, it is also possible for the expatriate to be subject to foreign social
security taxes. The application of foreign social security taxes must be
determined on a country-by-country basis. In order to avoid double social

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security tax obligations, the US has entered into Social Security Totalization
Agreements (“Totalization Agreements”) with a number of foreign countries.

Totalization Agreements
Totalization agreements have two principal purposes:

• Relief from double taxation - The agreements provide that a taxpayer

is subject to social security tax in one of the two countries that are party
to the agreement. Generally, if you are employed by a US employer
temporarily and sent on assignment (generally 5-year limit), you will only
be subject to US social security tax while on your foreign assignment. In
order to claim benefits under a totalization agreement, you must request
coverage from the Social Security Administration. Your employer and tax
advisors can help with these matters.

• Coordination of benefits - The totalization agreements provide

continuity of benefits for persons who have worked in multiple countries.
It may be possible to qualify for partial benefits through use of combined
coverage credits even if you would otherwise not meet eligibility
requirements under domestic rules.

At present, the US has totalization agreements with Australia, Austria, Belgium,

Canada, Chile, Czech Republic, Denmark, Finland, France, Germany, Greece,
Hungary, Ireland, Italy, Japan, Luxembourg, the Netherlands, Norway, Poland,
Portugal, Slovak Republic, South Korea, Spain, Sweden, Switzerland, and the
United Kingdom.

Other Benefits
Expatriates must also consider the effect of their foreign assignment on benefits
other than social security. Similar to social security taxes, the determination of
the other benefits that apply to you depends primarily on the company for
which you work.

Generally, expatriates on assignment will remain employees of the US

Company and will stay on the US payroll so that they can continue to
participate in the US benefit plans including 401(k) plans, pension plans, stock
option plans, health and dental plans, life insurance, etc. Employers may also
supplement health and dental plans to ensure that the expatriate has access to
health and dental care in the foreign country.

Note that benefit plans that have tax deferred status in the US, such as the
401(k) plan, may be subject to foreign tax on a current basis.

If you are on the payroll of a foreign corporation, you may be eligible to

participate in the benefit plans of the foreign corporation. These benefit plans

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may be substantially different than common US benefit plans and could be part
of the social security scheme. Many countries will have retirement savings plans
similar to the 401(k) plan. These retirement savings plans receive tax
advantaged status for tax purposes in the foreign country, but may be taxable in
the US on a current basis.

You should consult with your employer to understand the benefits that apply
to you while you are on foreign assignment and how such benefits are taxed
while on assignment.

IN OUR CASE STUDY, Pablo would be subject to Spanish social

security taxes during his US assignment (due to his Spanish employer)
and Maria would be subject to US social security taxes (due to her US
employer).

State Income Taxes

In addition to federal income and social security taxes, foreign nationals who
are working and/or living in the US also have to contend with state and possibly
local (city or county) taxes. The rules governing income taxation vary from
state to state. There are some states, such as Florida, which do not have an
individual income tax, but these states are the exception.

The determination of your residency position is important in understanding

your state filing requirements and tax liabilities, with state rules potentially
differing from the US federal law. Also, even if you are not a resident in a
certain state, the fact that you perform services in that state is often enough to
subject you to some level of state taxation.

Gift and Estate Taxes

Foreign nationals working or living in the US also need to be aware of non-
income related taxes. Estate and gift taxes deserve careful attention. When is a
foreign national exposed to US gift and estate taxes? Unlike the income tax
rules covered earlier, estate and gift taxes are not based on the concept of
residence. Foreign nationals who are domiciled in the US are subject to gift and
estate tax rules. Domicile in the US occurs when a foreign national maintains a
permanent home in the US. A permanent home can exist, for example, when
the individual lives in the US and has no intention of leaving.

Gift tax can be levied any time that an individual, who has a US domicile,
transfers property for less than adequate consideration. Gift tax can apply
regardless of the type of property or where the property is located. Both
tangible and intangible properties qualify. Property which is located in a foreign
country qualifies as well as property which is in the US.

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In 2018, an individual is allowed to make $15,000 of annual gifts to a specific
donee without incurring gift tax. The number of donees can be unlimited as
long as each does not receive more than $15,000 in a given year. If the
individual has a spouse who is a US citizen, the individual and the spouse can
elect to pool their gifts and split the gifts evenly between themselves. Using this
election a couple can gift up to $30,000 annually to a specific donee without
incurring a gift tax. In addition to the $15,000 threshold, certain types of gifts
are exempt from the tax. These exemptions include an unlimited amount of
gifts made to a spouse who is a US citizen and gifts to qualified charitable
organizations. Gifts to non-citizen spouse have a limited exemption ($152,000
for 2018).

Any non-exempt gifts (those that exceed the annual thresholds listed above)
are then subject to gift tax. The gift tax is calculated by accumulating all taxable
gifts made by an individual during his or her lifetime. A tentative tax is
determined by applying this lifetime total to the estate tax rates (which are
separate from the individual income tax rates). A credit is allowed for any gift
tax paid by the individual in prior years. In addition, a unified credit is available
to reduce any remaining tax liability. For 2018, the lifetime gift and estate tax
exemption for US citizens and domiciliaries is $11,180,000. If you apply gifts
against this exemption during your lifetime, the available exemption available at
death will decrease accordingly.

If you are a foreign national and have a domicile in the US, you should always
consult a tax advisor before making a gift which exceeds $15,000.

Estate tax is based on the same rate schedule used to calculate gift tax. Estate
taxes are levied on an individual’s gross estate at the time of death. The
property which is included in a gross estate depends on whether the individual
is a US resident for estate tax purposes at the date of death (a nonresident
being defined as a non-US citizen, domiciled outside the US). For residents, a
gross estate takes into account all property of the individual regardless of
where the property is located. For nonresidents, only property located in the
US is considered. A gross estate includes property owned by the individual and
certain gifts of property made by the individual within the three year period
preceding death. After all property which is to be included in an individual’s
estate is accumulated, certain deductions are allowed to arrive at the gross
estate. These include deductions for obligations attached to the included
property, certain charitable contributions, funeral expenses, and costs related
to the administration of the estate. A marital deduction is allowed for the value
of any property which passes to a surviving spouse who is also a US citizen.
The marital deduction does not apply if the spouse is not a US citizen.

Once the gross estate is determined, the tentative estate tax is calculated using
the rates found at Appendix E. The tentative tax is reduced by the amount of
any unified credit which has not been used by the individual previously to

Page 42
reduce his or her gift tax in the case of a resident individual. For nonresidents,
a credit of $15,000 is available to reduce the tentative estate tax. Due to the
current uncertainty regarding the future of estate taxes, you should consult a
qualified tax advisor to obtain up-to-date estate tax advice.

The US has executed a number of estate and gift tax treaties with other
countries that may expand the exemption benefits available to foreign nationals
in the estate and gift tax area. A list of the countries with which the US has
executed both estate tax and gift tax treaties is included at Appendix B. State
gift and/or estate taxation may also need consideration.

Expatriation Tax
Resident taxpayers who meet the lawful permanent resident test (green card
test) should also be aware of the expatriation tax provisions. This tax applies to
long-term holders of green cards who voluntarily surrender the green card. A
long-term holder is an individual who has held a green card in at least 8 of the
last 15 years, ending with the year your residency ends. The 15-year period
ends on the date that the green card is surrendered. Individuals will be subject
to the expatriation rules if any of the following three conditions exist:

• The individual had an average annual US income tax liability which

exceeded specified amount that is adjusted for inflation ($165,000 for
2018) for the five year period preceding the expatriation or termination, if
you expatriated or terminated residency.
• The individual has a net worth at the expatriation or termination date of
$2,000,000 or more.
• The individual fails to certify on Form 8854 that they have complied with
all US federal tax obligations for the 5 preceding years.

The expatriation tax rules impose a tax on the net unrealized gain (or loss) of
the individual’s property as if the property had been sold at fair market value
on the day before expatriation.

This mark to market approach does provide an exemption of $711,000 for

2018. The mark to market approach does not incorporate deferred
compensation vehicles, but this income is captured in other ways.

If you are a long-term green card holder you should speak with a tax advisor
prior to surrendering your green card.

Filing Requirement on Departure

As a general rule, foreign nationals who work in the US must secure a tax
compliance certificate before leaving the US. This rule applies to both resident
and nonresident taxpayers. To receive this certificate, commonly called a

Page 43
“sailing” or “exit” permit, the individual must file a Form 1040C (Departing
Taxpayer Income Tax Return) or Form 2063 (Departing Taxpayer Income Tax
Statement).

In many cases, an employer will provide a letter that could be presented to the
appropriate authorities to assist the foreign national in departing the US
without an exit permit. This letter would state that the employer guarantees
the foreign national will comply with their US tax filing requirements.

Foreign Bank Account Reporting Requirement

Any US person having an interest in a foreign bank account or other foreign
financial account during the year may be required to report that interest on
FinCEN Form 114.

This form is used to report any foreign financial accounts (this includes bank
accounts, brokerage accounts, mutual funds, unit trusts, and other types of
financial accounts) with which you have a financial interest or have signature
authority. If the aggregate balance of these accounts does not exceed $10,000
at any time during the year no report needs to be filed. If the aggregate balance
does exceed $10,000 at any time during the year, this form must be completed
and filed by April 15th of the following year and can be extended until October
15th. This is merely a reporting requirement and will not result in any type of
tax liability. However, the penalties that can be imposed for failing to file this
particular form can be very severe (including potential jail time), so compliance
with this requirement is imperative.

Specified Foreign Financial Assets

Form 8938, Statement of Foreign Financial Assets, is a reporting requirement
effective for 2011 and future tax years and is required as part of the
implementation of the Hiring Incentives to Restore Employment Act (HIRE
Act). These provisions are part of a broad initiative by the federal government
to increase tax compliance, particularly by those with foreign accounts or
foreign assets.

This reporting requirement is in addition to the Report of Foreign Bank and

Financial Accounts, FinCEN Form 114.

Common examples of reportable foreign financial assets include the following:

• Any financial account from a foreign financial institution

• Stock or securities that are issued by a person that is not a US person
• Any interest in a foreign entity
• Any financial instrument or contract that has an issuer or counterpart that
is not a US person

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You will need to file Form 8938 if you have an interest in specified foreign
financial assets with an aggregate value that is dependent on whether or not
you are living in the US or living abroad and your marital and filing status.

If you are living in the US, the thresholds are as follows:

• Unmarried individuals must file Form 8938 if the total value of specified
foreign assets is more than $50,000 on the last day of the tax year or more
than $75,000 at any time in the year.
• Married individuals must file Form 8938 if the total value of specified
foreign assets is more than $100,000 if filing jointly ($50,000 if filing
separately) on the last day of the tax year or more than $150,000 if filing
jointly ($75,000 if filing separately) at any time in the year.

If you are living abroad, the thresholds are as follows:

• Unmarried individuals must file form 8938 if the total value of specified
foreign assets is more than $200,000 on the last day of the tax year or
more than $300,000 at any time in the year.
• Married individuals must file Form 8938 if the total value of specified
foreign assets is more than $400,000 if filing jointly ($200,000 if filing
separately) on the last day of the tax year or more than $600,000 if filing
jointly ($300,000 if filing separately) at any time in the year.

The IRS defines an individual as living abroad as a US citizen that either has a
tax home in a foreign country and qualifies for the bona fide residence test or
who is physically present in a foreign country or countries for at least 330 days
in a 12 month period ending in the tax year.

If you meet the requirements to file Form 8938 you must do so annually
together with your US federal individual income tax return.

Form 5471
“Information Return of US Persons
With Respect to Certain Foreign Corporations”
If you are a US tax resident and you are a 10% or more shareholder, officer, or
director in a foreign (non-US) corporation, you may have to file Form 5471
with your individual income tax return. This is an informational form that
discloses certain information about the foreign corporation, your relationship
to the foreign corporation, and any transactions that occurred between you
and the foreign corporation. If you think this requirement might apply to you,
check with your tax advisor to determine if disclosure is necessary and what
information needs to be disclosed given your specific situation. If required,

Page 45
Form 5471 should be attached to the individual income tax return that you file
(Form 1040 or 1040NR).

Passive Foreign Investment Corporations (PFICs)

A Passive Foreign Investment Corporation (PFIC) is a non-US company that
derives income from investments (passive income). A PFIC is defined as a
company where 75% or more of the company’s income is passive, or where at
least 50% of the company’s assets produce or are held for the production of
passive income (i.e., interest, dividends, and/or capital gains).

A US citizen, green card holder or resident who holds shares in a PFIC is

subject to arduous reporting and taxation rules on their share of the income
within the PFIC. These rules can be mitigated by making an appropriate
election (QEF election). This election enables the individual to report their
share of the company’s income on a year to year basis. Unfortunately, many
foreign companies are unwilling or unable to provide the necessary information
to allow the election to be made.

The most commonly seen PFICs are non-US based mutual funds. There will
often be a notice on such funds that they are not open to US residents for
these very reasons. This does not, however, provide protection for the non-US
individual who becomes a US resident after investing in such a fund.

It is beyond the limit of this document to provide a full description of the tax
implications of PFICs. If you believe you are invested in a PFIC, you should
contact your tax advisor to discuss your options.

Back to Table of Contents

8. Income Tax Treaties

Up to this point, this book has covered the US domestic tax law and how it
applies to foreign nationals. However, the US has executed numerous tax
treaties with various countries. The goal of these agreements is to eliminate
the double taxation of income which can occur due to differences between the
domestic tax laws of two countries. It is not uncommon for a foreign national
to find that income he has earned while in the US is subject to tax in both the
US and his or her home country. While many countries have integrated
mechanisms within their domestic law to alleviate this double burden, for
instance, the foreign tax credit, these mechanisms do not always completely
remedy the problem. This chapter presents an overview of income tax treaties
and how a treaty can be used to a foreign national’s benefit.

Tax Residence
One of the most important elements of an income tax treaty are guidelines
which are used to determine residency. These guidelines are often referred to
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as “tie-breaker rules” and can be implemented when an individual is considered
a tax resident in two or more countries. If a treaty is in place between the US
and another country, which have both determined that an individual is tax
resident, the individual may be able to implement the tie-breaker rules to his or
her advantage.

If an individual can argue that he or she is a resident of a foreign country and

not the US, then he or she would be taxed as a nonresident in the US. The US
would then only tax US. source income rather than worldwide income.
Remember, however, that it is not always better to be treated as a
nonresident.

Compensation
Income tax treaties often provide benefits for individuals who have trade or
business income such as compensation for personal services. These terms
usually do not include reduced tax rates but instead enlarge the potential pool
of trade or business income which does not attract any income tax at all. If you
will remember from the chapter on sourcing (Chapter 4), US domestic law
excludes certain personal services income from the definition of US source
income. This exclusion covers income that is less than $3,000, that is paid by a
non-US entity, and that is earned by an individual who is present in the US for
fewer than 90 days. Many treaties effectively expand this exclusion by providing
for larger amounts of allowable earnings and longer periods of US presence.

IN OUR CASE STUDY, Pablo can use the US/Spain income tax treaty to
his advantage in 2018. The US / Spain income tax treaty places no limit
on the amount of compensation and provides for a period of presence up
to 183 days in any 12-month period. Since Pablo is in the US for less than
183 days in any 12-month period, and because he is paid by XYZ, SA, a
non-US entity, he can exclude the compensation he earns during the short-
term project in the US under this treaty provision. This will almost
eliminate his 2018 US tax liability. The only item that would continue to
attract US tax is the US source dividends that he receives.

Maria may be able to apply the US/Spain tax treaty to her advantage in
2019. This is the year that she is a dual-status taxpayer. She earns some
trade or business income in 2018 during the period of nonresidence. This
is the $3,500 of compensation related to services performed in the US
while on a business trip in late 2019. This income is taxed in the US under
US tax law because it does not qualify for the US source exclusion. Maria
left the US on May 1, 2019 and returned on October 5, 2019 for 6 days on
business. Although the US/Spain tax treaty is based on 183 days in any 12
month period, the US would disregard days while US tax resident for
purposes of counting days for this treaty provision. Depending on factors,
such as her US presence in 2019 and the Company’s intra-company
handling of her expenses, an exemption from US taxation for the income
relating to this business trip may be possible. Maria should consult her
tax advisor..
Passive Income
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Another important aspect of treaties is that they often provide for a reduced
withholding tax rate on certain types of income. These reduced withholding tax
rates apply to income which is sourced in one of the treaty countries and is
earned by a resident of the other treaty country. These rates typically apply to
income which is of the type that is considered “passive income” for US tax
purposes (see Chapter 5).

IN OUR CASE STUDY, both Pablo and Maria earn dividends from a US
corporation during periods when they are considered Spanish tax
residents. This income would normally be taxed, through withholding by
the payor, at a flat rate of 30%. The US/Spain income tax treaty reduces
this rate to 15%.

If you are a citizen or resident of a country which has executed a treaty with
the US, you should seek the advice of a professional tax advisor to determine
whether you can benefit from the provisions of the specific treaty which may
apply to your situation. Although most treaties are very similar in structure, the
specific terms, such as reduced withholding rates, vary from treaty to treaty.
Back to Table of Contents

9. Other Income Tax Considerations

Exchange Rate Issues

When a foreign national prepares a US tax return, the income and expenses
reported on the tax return must be stated in US dollars regardless of the
currency in which income was earned or expenses were paid. As such, it is
important that you track taxable income and deductible expenses that are paid
in anything other than the US dollar. We recommend tracking the amounts
paid in foreign currency and the date paid so that your tax advisor can
accurately prepare your US tax returns using applicable exchange rates.

Further, when a US resident taxpayer enters into lending arrangements,

purchases, sales, or other agreements that are denominated in a currency
other than the US dollar, taxable exchange gains or non-deductible exchange
losses may result. These taxable gains and non-deductible losses can arise due
to changes in the relative value of currencies. You should consult your tax
advisor if you enter into a large transaction that is denominated in foreign
currency, particularly the purchase or sale of a foreign home and payment of a
mortgage.

Moving Expenses

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Beginning January 1, 2018, the deduction and/or exclusion of moving expenses
has been suspended until January 1, 2026. Any moving expenses paid to your
or on your behalf must be included in taxable compensation. In addition, any
moving expenses paid directly by you and not reimbursed by your employer
are no longer deductible for U.S tax purposes.

Taxable Moving Expense Reimbursements

All moving expenses that a company reimburses directly to the employee or
pays on behalf of the employee, will be included in the employee’s gross
income as taxable wages.
Some of the common taxable moving expense reimbursements include:

• Transportation of you household goods and personal effects

• Storage fees
• Travel expenses from your old residence to your new residence
• House hunting expenses
• Temporary living expenses
• Expenses for meals
• Expenses of selling or buying a home
• Reimbursement of loss on the sale of your home
• Spousal assistance programs
• Tax assistance or gross-up payments
Taxable moving expense reimbursements will be reported in Box 1 of your
Form W-2.

Lump Sum Payments

Some companies will pay you a lump sum from which you must pay your own
moving expenses. In this case, the entire lump sum payment is included in your
taxable wages.

Foreign Earned Income and Housing Exclusions

Under certain circumstances, the US grants tax privileges to US citizens and
residents who are living and working in foreign countries. Taxpayers who
qualify for these privileges are allowed to exclude foreign source earned
income (up to $103,900 for 2018). In addition, a qualifying taxpayer can claim
an exclusion for eligible foreign housing costs (over a defined base amount) but
the exclusion is generally limited to 30% of the maximum foreign earned
income exclusion ($31,170 [30% x $103,900]). This limitation amount will be
adjusted to the extent that a qualifying taxpayer resides in certain high-cost
geographic areas. These exclusions generally do not apply to resident taxpayers
living and working in the US (i.e., residents of the US under the Substantial
Presence test).

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Some foreign nationals are US resident taxpayers solely because they hold a
“green card” (they meet the lawful permanent resident test). In certain cases,
these individuals are able to claim these exclusions. If you are a US tax resident
because you hold a “green card” and your principal residence and place of
business is in another country, you should consult a US tax advisor to see if
you qualify for these benefits. More information on these exclusions can be
obtained in our booklet Taxation of US Expatriates. Please contact GTN if you
want a copy of this booklet.

Capital Gains
Capital gains are gains from the sale of capital assets such as stocks, bonds, real
estate, and other investment property. The US taxation of capital gains depends
on the length of time that a taxpayer holds the property. If you hold the asset
for more than one year before you dispose of it, your capital gain or loss is
long-term. If you hold it one year or less, your capital gain or loss is short-
term. All long term capital gains and losses are netted together and all short-
term capital gains and losses are netted together. If there is a net long-term
gain and this gain exceeds any net short-term loss, this excess is subject to the
capital gains tax instead of being taxed at the normal graduated rates. For 2018
the maximum rate on long-term capital gains is 20% and applies to those in the
top income tax bracket. Individuals in the 22% to 35% brackets will be subject
to a 15% long-term capital gains rate. Those in the 10% and 12% brackets have
a 0% capital gains rate. If net short-term capital gains exceed net long-term
losses (if any), the excess is subject to income tax at the normal graduated
rates.

If there is a net overall capital loss, the taxpayer is allowed to take a deduction
of $3,000 per year. Any unused loss can be carried forward to be used in
future years.

Nonresident taxpayers are not subject to US tax on gain resulting from the sale
of a capital asset. An exception to this rule is when the property that is sold is
an interest in US real property. This is discussed in more detail below.

It is also important to note that, unlike other countries, the US generally does
not allow a step-up in the basis of assets as of the day you begin or cease tax
residency. Therefore, you will be taxed on the entire gain associated with an
asset rather than the portion of the gain related to appreciation during the
residence period.

If you will be accepting a US assignment or will be coming to the US to live and

you anticipate selling certain capital assets in the near future, you may want to
consider selling the assets before you become a US tax resident.

Dispositions of US Real Property Interests

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Foreign nationals who own an interest in real property located in the US
should be aware of special US tax rules that can affect the sale or other
disposition of real property. If you do own an interest in US real property, you
will want to pay particular attention to this section. An interest in US real
property includes any ownership in US real estate, ownership in a mine, well,
or other natural deposit, and ownership in certain corporations that have a
substantial investment in US real property. Ownership not only includes direct
investments but indirect investments held through a partnership or trust.

These rules only apply to dispositions by nonresident taxpayers. As stated in

the chapter on the taxation of nonresidents, any gain is treated as if it is trade
or business income. It is taxed on a net basis at the appropriate graduated tax
rates. However, similar to passive income, these transactions are often subject
to a US withholding tax. This withholding tax is collected by the purchaser of
the property and remitted on behalf of the nonresident seller. The tax is
withheld at a rate of 10% of the gross sale proceeds. The nonresident seller
should also file a US tax return (Form 1040NR) to report the gain. Any
additional tax due on the transaction is paid with the return or, if the 10%
withholding exceeds the actual liability, the taxpayer will receive a refund of this
excess. It is necessary to file a return to claim any refund.

It is possible to reduce or eliminate the 10% withholding tax. However, you

must make certain filings prior to the sale to obtain permission to not have the
tax withheld.

If you are a nonresident taxpayer who owns a US real property interest, you
should always consult a US tax advisor before disposing of the interest to gain a
full understanding of how these rules will impact the transaction and your US
tax situation.

Sale of Principal Residence

Foreign nationals should be aware of the US tax consequences of selling a
foreign principal residence or a principal residence in the US. If a sale of a
residence results in a loss, whether located in a foreign country or in the US,
the loss is treated as a personal loss and no deduction is allowed for US tax
purposes. Any gain resulting from a sale of a principal residence can be subject
to US tax. Whether or not such gain is subject to US tax largely depends upon
whether you are a resident or nonresident, the amount of the gain, and the
length of time that you occupied the home as your principal residence. We first
address the sale of a residence located in the US and then move on to the sale
of a foreign residence.

US Residence
For sales after May 6, 1997, gain on the sale of a US residence constitutes
taxable income in the US and is subject to US tax. However, the US grants an

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exclusion from income for gain up to $500,000 on the sale of a principal
residence if you meet the following conditions:

• You file a joint return with your spouse in the year of the sale.
• You have owned the home for two of the last five years prior to the date
of the sale.
• You have occupied the home as your primary residence for two of the last
five year prior to the date of the sale.
• During the entire period you have owned the property, it has not been
used for business purposes (such as office-in-home) or as a rental
property.
• You or your spouse has not claimed this exclusion on the sale of another
home within two years prior to the date of the sale of the current home.

Please note that if any of the conditions above are not met, it may still be
possible to claim a pro-rated portion of the $500,000 maximum exclusion
amount. It may also be possible (depending on your exact circumstances) to
fully exclude the entire gain, if the gain is less than $500,000.

As of 1/1/2009, additional limitations were added which restrict the ability to

exclude gain relating to periods of “nonqualified use.” Nonqualified use consists
of any period after 2008 when the property is not used as the principal
residence of the taxpayer or spouse. In general, the gain allocated to periods of
nonqualified use is not excludable. However, there are a number of exceptions
to the nonqualified use rule. If your home has been left vacant, rented or
otherwise not used as your principal residence, you should consult with a US
tax advisor in advance of selling the property to understand the rules that will
apply for your specific disposition.

If you are a nonresident taxpayer at the time that you dispose of the US
residence, you may be subject to US tax on the sale of the residence. This tax
will be collected through the withholding provisions described in the section
above on “Dispositions of US Real Property Interests.” However, if the buyer
of the home is an individual who will use the home as a residence and the sale
price does not exceed $300,000, no withholding is necessary (but the gain will
still be subject to tax). In any case, the sale by a nonresident should be
reported on Form 1040NR. Any additional tax owed above and beyond the
amount withheld is paid with the return. Likewise, any excessive withholding
will be refunded after filing the return. If you purchase a US home while you
are on a US assignment, you should consider the home and host tax position
relating to the timing of any sale prior to departure from the US.

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Foreign Residence
The US taxation of the sale of a foreign principal residence depends on
whether or not you are a US resident on the date of the sale. If you are a US
nonresident when you sell a foreign residence, there are no US tax
consequences as a result of the transaction. Any gain is considered foreign
source income and completely escapes US taxation. If you are considering the
sale of a foreign principal residence or, for that matter, any foreign property, it
is best (from a US tax perspective) to sell at a time when you are a
nonresident.

If you are a US resident at the time the foreign home is sold then any gain
could be taxed in the US. The gain exclusion (discussed above) is available for
foreign residences as well as US residences, so if you meet the requirements
above, you may be able to exclude up to $500,000 of the gain. Any taxable gain,
as a result of not qualifying for the exclusion or exceeding the exclusion
threshold, is reported on the resident portion of your tax return (Form 1040).
Note that even though the gain would be taxed, it would represent foreign
source income and any foreign tax paid on the gain will be available for foreign
tax credit in the US. Note also that the gain related to depreciation during a
rental period cannot be excluded and will be subject to tax at graduated tax
rates, not to exceed 25%.

Finally, note that exchange gains and losses need to be considered on the sale
of a foreign residence and the retirement of a mortgage denominated in a
foreign currency. See page 48 for a discussion regarding exchange rate gains
and losses.

Rental of a Residence
It is common for foreign nationals to rent their foreign residence while on
assignment in the US It is also possible that a foreign national may own a
residence in the US which is rented out while away from the US.

The rental of a foreign residence will only be taxed in the US during the time
that a foreign national is a US tax resident. Referring back to the rules on
sourcing, the rental of foreign real property is foreign source income.
However, US residents are taxed on worldwide income so this activity is
subject to US tax while the owner/lessor is a resident. Rental activity is taxed
on a net basis in the US. You are allowed to deduct ordinary and necessary
expenses incurred on the rental property. These expenses include mortgage
interest, property taxes, repairs, and maintenance costs. A deduction for
depreciation of the house and furniture and fixtures is also allowed. Rental
activities are subject to the US passive loss rules. These rules usually only allow
a taxpayer to recognize passive losses to the extent of any passive income.
However, the rules do contain an exception for rental activities. If you actively
participate in a real estate rental activity you are permitted to deduct related

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excess passive loss up to an annual maximum of $25,000. This $25,000
maximum is completely phased out if your modified AGI exceeds $150,000.

The rental of a US residence will always be taxed in the US regardless of

whether you are a resident or a nonresident because this is considered US
source income. If you are a resident, you are taxed on a net basis as described
above. The activity is also subject to the passive loss rules as described above.

If you are a nonresident, you are only taxed in the US on the rental of a US
residence. The taxation of this activity depends on whether you make the
election described on page 31. If you do make the election, you are taxed on a
net basis at the graduated income tax rates. If you forego the election, you are
taxed at the flat withholding rate that applies to passive income on the gross
rental income.

If you have rental properties in the US or you are a resident and have foreign
rental property, seek the advice of a US tax advisor to ensure that you comply
with the law concerning this activity and take the right course of action to
minimize any resulting tax liability or maximize the use of any resulting loss.

Investments in Foreign Corporations

If you are a resident in the US, and you own shares in a foreign corporation, it
is possible that you may have to pay US tax on your share of the corporation’s
current year earnings even if these earnings are not distributed to you. These
rules apply to foreign corporations that earn a high proportion of passive type
income such as dividends, interest, and royalties or other types of transitory
income. If you have invested in a foreign corporation you should consult with a
professional to see if these rules will apply to you. If so, you may want to sell
these shares or restructure your investment prior to becoming a US resident.

Please note that you might also have to file Form 5471 or other forms if you
have an interest in a foreign corporation. Please see page 45 for a discussion of
Form 5471 and to whom it applies.

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Appendix A

2018 US Individual Income Tax Rates

SINGLE INDIVIDUALS
TAXABLE INCOME
If Over But Not Over Tax Is
$ 0 $ 9,525 10%
9,526 38,700 12%
38,701 82,500 22%
82,501 157,500 24%
157,501 200,000 32%
200,001 500,000 35%
500,001 No limit 37%

MARRIED FILING JOINTLY

TAXABLE INCOME
If Over But Not Over Tax Is
$ 0 $ 19,050 10%
19,051 77,400 12%
77,401 165,000 22%
165,001 315,000 24%
315,001 400,000 32%
400,001 600,000 35%
600,001 No limit 37%

MARRIED FILING SEPARATELY

TAXABLE INCOME
If Over But Not Over Tax Is
$ 0 $ 9,525 10%
9,526 38,700 12%
38,701 82,500 22%
82,501 157,500 24%
157,501 200,000 32%
200,001 300,000 35%
300,001 No limit 37%

HEAD OF HOUSEHOLD
TAXABLE INCOME
If Over But Not Over Tax Is
$ 0 $ 13,600 10%
13,601 51,800 12%
51,801 82,500 22%
82,501 157,500 24%
157,501 200,000 32%
200,001 500,000 35%
500,001 No limit 37%

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Appendix B

List of US Tax Treaties

US Income Tax Treaties US Income Tax Treaties (cont’d)
Armenia Pakistan
Australia Philippines
Austria Poland
Azerbaijan Portugal
Bangladesh Romania
Barbados Russia
Belarus Slovak Republic
Belgium Slovenia
Bulgaria South Africa
Canada Spain
Peoples Republic of China Sri Lanka
Cyprus Sweden
Czech Republic Switzerland
Denmark Tajikistan
Egypt Thailand
Estonia Trinidad & Tobago
Finland Tunisia
France Turkey
Georgia Turkmenistan
Germany Ukraine
Greece United Kingdom
Hungary Uzbekistan
Iceland Venezuela
India
Indonesia US Estate and Gift Tax Treaties
Ireland Australia
Israel Austria
Italy Canada*
Jamaica Denmark
Japan Finland
Kazakhstan France
Korea, Republic of Germany
Kyrgyzstan Greece
Latvia Ireland
Lithuania Italy
Luxembourg Japan
Malta Netherlands
Mexico Norway
Moldova South Africa
Morocco Sweden
Netherlands Switzerland
New Zealand United Kingdom
Norway
*Included in Canada Income Tax Treaty
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Appendix C

Visas
The main thrust of this book is aimed at the US tax concerns of foreign
nationals. However, it is also worthwhile to spend a few minutes on the various
types of visas available to foreign nationals. The various types of visas not only
govern the type of activity that is permitted and the length of stay but also
carry varying tax implications. Following is a brief description of the most
common work visas available and the general tax characteristics associated with
each.

L Visa
L visas are the preferred visas for employees who are entering the US to work
for extended periods of time. L visas are issued to intracompany transfers -
those employees who are transferred from a foreign company to a related US
entity. Depending on the type of L visa that is issued, individuals who secure an
L visa can stay in the US for a period of 5 to 7 years.

To qualify for an L visa, both the individual and the employer must meet certain
requirements:

• The individual must be an executive, or in a management position, or have

specialized skills or knowledge.

• The individual must have worked for the foreign company for at least 1 out
of the 3 years previous to the transfer.

• The foreign company and the US company to which the employee is

transferred must have a certain level of common ownership.

B-1 Visa
Foreign nationals who are visiting the US on a temporary basis are often issued
a B visa. For those who are on short term business assignments, a B-1 visa is
available. The difference between a B-1 visa and an L visa relates to the length
of stay and purpose of work. A B-1 visa is issued to employees who remain on
a foreign payroll and who are in the US for reasons such as business meetings,
conferences, seminars, and training courses, whereas an L visa is issued to
individuals who will be performing services similar to actual local employment
in the US.

Stays in the US under B-1 visas cover very specific periods of time which
depend on the business purpose for the visit.

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H1-B Visa
H1-B visas are issued to foreign nationals who will be employed in the US in
certain types of professions. A successful applicant for an H1-B visa must have a
certain level of education or experience that is relevant to the position that the
visa holder will be assuming. An H1-B holder may remain on a foreign or US
payroll during his or her employment in the US.

J-1 Visa
Foreign nationals who will be visiting the US as a student, teacher, or a trainee
in certain types of training programs is usually issued a J visa. Individuals who
hold J visas are allowed to work for limited periods of time in the US. These
periods of work, which are referred to as academic training, are usually limited
to a period of 18 months. In certain cases the period can be extended to 36
months. J visa holders from certain countries or in specific cases are required
to return to their home country for a period of at least two years before they
can apply for long-term work visas (L or H visas) or for permanent resident
status.

In some cases, J visas can be an attractive option because a J visa holder is

exempt from US social security tax on income received during the period of
academic training. Subject to certain limitations, individuals may also be able to
disregard presence in the US while holding the J visa for US federal tax
residency determination and may also be able to obtain an exemption from US
federal income tax for compensation paid by a foreign employer (exemption
may also apply for state purposes for states that follow the US federal tax
treatment).

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Appendix D

Checklist for Foreign Nationals

Below is a list of items that a foreign national may want to consider before
coming to the US for a work related assignment.

1. Gather copies of the last 2 years of foreign tax returns and US tax returns
(if any) and bring these with you to the US. Your US tax advisor may need
these to properly prepare your US income tax returns.

2. During the assignment, keep a daily log that records where you are
physically present on each day and whether the day is a work day, non-
work day, or a travel day. This information will be used to determine
whether you are a US tax resident and also for certain tax calculations.

3. If you continue to earn income from foreign (non-US) sources during your
assignment, keep careful track of the amounts earned, the currency in which
they are paid, and the exact date received. This is especially important if you
remain on a foreign payroll and continue to be paid in non-US currency.

4. If you will remain on a foreign company payroll, carefully keep track of the
various components of your compensation (the type and amount of each).
The foreign payroll reporting practices may not be set up to track all of the
various items that are needed to correctly file your US income tax return.

5. If you rent out your foreign home during your assignment or you have
other foreign rental properties, gather information related to the cost basis
in the property (purchase price plus subsequent improvements). Your tax
preparer will need this information along with records of income received
and costs incurred to accurately prepare your US return.

6. During your move to the US keep detailed records of the expenses you
incur such as transportation, storage, lodging, meals, and other incidentals.
Also keep track of those expenses which are reimbursed by your employer.

7. If you are on a temporary assignment in the US, keep track of all assignment
-related expenses that you incur. These could include transportation,
lodging, laundry, utilities, meals, and other incidental expenses. Most
reimbursed temporary assignment expenses will not be taxable in the US.
Generally speaking, a temporary assignment is one that will last less than
one year.

8. Before coming to the US, you may want to make a list of bank accounts,
investments, and other income producing activities that you possess. It is
often easy to forget about certain accounts or investments while on

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 assignment. Making a list and keeping it updated will help ensure that all
relevant items are addressed when it becomes time to prepare your tax
returns.

9. Speak with your foreign and US tax advisors prior to relocating to the US
to gain a complete understanding of the foreign country tax implications of
your US assignment, as well as gain an understanding of your US tax
situation and to discuss any available tax planning techniques. It should be
noted that some planning techniques can only be accomplished if done prior
to your arrival in the US.
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Appendix E

US Withholding Tax Compliance Checklist

US withholding tax is one concern that the majority of foreign nationals,
whether resident or nonresident, will have to deal with when living in the US
or when earning income from US sources. Following are some of the more
common US tax compliance forms. This list will help ensure that you comply
with the US withholding tax rules and minimize the impact of withholding tax.

• Form W-7
If you are a nonresident taxpayer or a resident foreign national who is not
subject to the US social security system, it is necessary to apply for an
individual taxpayer identification number (ITIN). The ITIN is used only for
tax purposes and does not have any effect on your social security status,
employment status, or immigration status. Form W-7 “Application for IRS
Individual Taxpayer Identification Number” is the form through which an
ITIN is obtained. This form is also used to apply for ITINs for any
dependents that will be listed on your tax return.

• Form W-4
If you are a nonresident or a resident who is employed and is providing
services in the US, your income from these services will be taxed as trade
or business income according to the appropriate graduated tax rates. This
statement assumes that income from these services is not covered under
the exception outlined on page 24 and that this income is not covered
under any treaty exemption. If you are employed by a US employer, your
wages or salary will be subject to the US income tax withholding. Form W-
4 “Employee’s Withholding Allowance Certificate” will provide the
necessary information to your US employer to ensure that a proper
amount of tax is withheld. You should complete this form according to the
provided instructions and submit it to your employer. Note that
nonresidents should also consult the special instructions provided in IRS
Publication 519, “US Tax Guide for Aliens,” when completing this form.

• Form W-9
If you are a foreign national who has become or will become a US tax
resident, and you previously earned US source income which was subject
to withholding tax (because of your prior nonresident status) you will need
to inform the payors of these income items of the change in your status
and of your correct social security or tax identification number. This can
be done by completing Form W-9 “Request for Taxpayer Identification
Number and Certification” and submitting this form to the payor(s) of
these income items.

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• Form W-8ECI
If you are a nonresident taxpayer who has a US trade or business you can
use Form W-8ECI to inform the payor(s) of income items which are
connected to this trade or business of this fact. This will allow the payor to
remit payment of this income without withholding any tax based on the
premise that you will report this income on your annual return and will
pay tax on any net income resulting from the trade or business. Form W-
8ECI “Certificate of Foreign Person’s Claim for Exemption from
Withholding on Income Effectively Connected with the Conduct of a
Trade or Business in the United States” should be completed and sent to
each payor of an income item which is connected to your US trade or
business.

• Form 8233
If you are a nonresident who earns self-employment income or
compensation for dependent personal services in the US, you can use
Form 8233 “Exemption from Withholding on Compensation for
Independent (and Certain Dependent) Personal Services of a Nonresident
Alien Individual” to inform the payor of any treaty exemption from
withholding that applies to your situation. See Chapter 8 for a discussion of
treaties and when such benefits apply. If you can claim a treaty benefit for
withholding on such earnings, this form should be completed and given to
the payor of your earnings. The payor will review the form, sign it, and
send it to the IRS for final approval. Note that Form 8233 can also be used
to claim a treaty exemption that may apply if you are a student, trainee,
teacher, or researcher working in the US.

• Form W-8BEN
If you are a nonresident who earns income from US sources other than
income from personal services, this form is used to inform the payor of
such income that you are entitled to a reduced withholding rate under an
income tax treaty (see Chapter 8 for a discussion of treaties). This income
includes US sourced income from interest, dividends, rents, royalties,
premiums, annuities, compensation for services performed, and other fixed
or determinable annual or periodical gains, profits or income. Form W-
8BEN “Certificate of Foreign Status of Beneficial Owner for United States
Tax Withholding,” should be completed and filed with each payor of
income items for which a reduced treaty rate applies.

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