Taxes for expats is something you will need to consider when making the big move. Relocating abroad is exciting, but it isn’t for everyone and you know this better than most. The US is a popular place to relocate, particularly for UK residents. The language barrier is nonexistent and there is already a strong connection between US and UK business.
There are many things to consider besides sipping cocktails on white sandy beaches and sunbathing on Miami Beach. Understanding taxes for expats can be a daunting task and if relocating to the US, it gets even more tricky.
We know this and have compiled a list of things you should know while considering your next life adventure:
1. File, file, file
If you made $1, file your tax return. Erring on the side of caution is better than unpleasant financial surprises. If your income and wages, which include wages and salary from both US and non-US sources, interest, dividends, and rental income, meet the filing threshold requirements, you should file a US tax return.
Individuals are treated as lawful permanent residents if they’ve been afforded the privilege of residing permanently in the US as an immigrant and that privilege has not been revoked. This is referred to as the Green Card Test.
Also, if you are not a green card holder or US citizen and you’ve been in the US longer than 31 days in the current tax year or 183 days during a 3 year period, you must file a tax return. This standard is referred to as the Substantial Presence Test and resident aliens use the same filing status as US citizens. Regardless, you are subject to all worldwide income, so it is best to report any and all income earned.
Dual status individuals are classified as being both a non-resident alien and a resident alien, and generally occurs in the year of arrival and departure. As an international, you will file the 1040EZ, 1040A or 1040 if on work or student visa, or a dependant, depending on your tax circumstances. Non-resident aliens will need to file 1040NR or a 1040NR – EZ if involved in international trade in the US.
2. Special first-year election
For foreign nationals who are unable to meet these residency tests but want to be taxed as a US citizen, a special election is available in the first year of arrival if certain requirements are met. Those requirements include:
- The foreign national must have been considered a non-resident for all of the preceding years.
- The substantial presence test is met in the following year.
- The foreign national is present in the US for at least 31 consecutive days from the date of arrival.
- The continuous presence test must be met during the year of arrival, which means that time must be spent in the US for at least 75% of the first day of the 31 consecutive days of arrival till the end of the year. Only 5 days outside of the US during this time period can be counted towards 75%.
As a foreign national, you must satisfy the substantial presence test for the following year before you file the US tax return containing the first-year election. You are eligible to file an extension of time to file until that period passes, but taxes should still be paid based on the satisfaction of the substantial presence test.
Again, all income earned either by a resident alien or citizen must be reported. However, a resident alien is taxed based on graduated rates after deductions and allowances.
3. Moving expenses
Were you relocated by your employer? Reimbursements that qualify as moving expenses are considered excludable from an employee’s gross income as fringe benefits. The criteria for moving expense reimbursement include any amounts directly or indirectly received by an employee from an employer as payment for, or reimbursement of moving expenses.
Those moving expense reimbursements that do not qualify will be included in the gross income as compensation. Some examples include temporary living expenses, meal expenses, house hunting trips, and home purchase and sale costs. These items are not deductible or excludable as qualified moving expenses.
Deductions are only applicable if the move is employment-related and the individual’s place of work is at least 50 miles farther than the old residence. Other qualifications include:
- An individual must continue to work as a full-time employee at the new location for 39 weeks in a 12 month period after the move.
- The full deduction, including transportation of household items and personal transport, can be used if this time limit is met.
- The taxpayer themselves must incur these costs.
- Those moving expenses not included are deducted from the individual’s gross income as an adjusted gross income or AGI.
- If US residency is terminated, these items are adjusted.
4. Foreign tax credit
As a resident alien, taxes paid to a foreign country may be deductible as itemized or credited against US tax liability. When used as a credit, this creates a lower US net tax liability than if it were itemized.
However, foreign taxes paid on one kind of income cannot be used as credits against US tax on another type of income. Unused credits can be carried back for one year.
5. Foreign investments & real property
The great news is that no federal restrictions are placed on foreign ownership of US property, but individual states may impose separate restrictions such as ownership of land or inherited property. For this reason, it is a good idea to check for the state’s foreign reporting ownership requirements before filing.
Taxation depends on liability, depends on the vehicle in which the property is purchased. For instance, corporate foreign owners would be subject to additional tax liability such as the US branch profits tax or US estate and gifts taxes.
6. Other taxes to be aware of
Net investment income tax is an addition to regular federal income tax and is targeted at higher income taxpayers unearned income. Net Investment Income includes 3 categories listed as gross income:
- interest, dividends, annuities, rents, and royalties
- Income from passive activities or a trade/business of trading of financial commodities and instruments
- Net gain recognized on dispositions of property
Non-resident aliens are not subject to this tax but dual resident aliens may be based on a portion of their residency period.
7. Miscellaneous ways to save on your taxes
The US tax system may be complicated, but with the right planning, there are many ways to save on your taxes. One way is to open an IRA or an individual retirement account.
Foreign nationals can make tax-deductible contributions that are subject to the same rules as US citizens. Taking advantage of the foreign-earned income exclusion can be helpful in reducing your tax liability if you are both a permanent resident of the US and considered a foreign resident under an income tax treaty. Lastly, selecting a fiscal-year accounting period could result in significant tax savings. Doing so allows you to shorten the period in which you are considered a non-resident or dual-status taxpayer.
As noted before, US taxes for expats can be complicated but not impossible to navigate. It’s always good practice to refer to a tax professional that specializes in foreign taxation.
For questions or resource, connect with our expat experts. We are more than happy to address any concerns you have. Until next time, safe travels!