Tax information: going to the U.S.A.

Before/once you arrive

Q. Do I need a work permit to work in the US?

A.  Yes. A valid work visa should be obtained prior to arrival in the US. Several categories of visa exist depending on the reason for entry and the length of stay required. You should obtain professional immigration advice accordingly.

Q.  Should I complete any documentation upon arrival in the US?

A.   If you are subject to United States tax you must obtain a taxpayer identification number or a social security number.  This number is used for all withholding and payment of taxes, as well as for correspondence with the Internal Revenue Service (IRS) and the filing of annual tax returns.  In some cases, you may be required to file a certificate to claim reduced withholding of taxes or applicable exemptions.

If you are a nonresident or resident alien and you do not have and are not eligible to get a social security number (SSN), you must apply for an individual taxpayer identification number (ITIN). Your spouse may also need an ITIN if he or she does not have and is not eligible to get an SSN.

Q. Is it beneficial to open an offshore bank account in comparison to an account on the US mainland?

A. Offshore accounts do not provide tax benefits for US purposes, however it may be advisable from a home-country tax perspective to open an offshore account.

Find out more about our offshore bank accounts    

Close

Tax – Basics

Q. What is the name of the US tax authority?

A. The Internal Revenue Service- http://www.irs.gov/

Q. What is the tax year?

A. 1 January to 31 December.

Q. How will I be taxed in the US?

A. In general, resident aliens are taxed on their worldwide income in the same manner as US citizens.

Non-residents are taxed on their income from US sources only, and on certain “effectively connected” income—that is, income that is effectively connected with a US trade or business. Individuals who receive income for services performed in the US are subject to tax unless (1) the services are performed for a foreign employer; (2) they are present in the US for not more than 90 days; (3) their income attributable to such activity is less than US$3,000. However, such income that would otherwise be subject to tax may in any event be exempt under the terms of any Double Tax Treaty that may exist between the US and the country in which the individual remains resident.

Q. How is tax residence determined?

A. Individuals will be treated as residents if they meet the requirements of any of the following tests:

• The lawful permanent resident test (having legal possession of a green card).
• The substantial presence test.
• The first-year election.
• “No lapse” rule.

Under the substantial presence test, if you meet both of the following tests you will be considered a resident:

• If you are physically present in the US for 31 days in the current year; and
• If you are physically present in the US for 183 days over a three-year testing period that comprises the current and two preceding years. The following weighting formula is applied in counting the days of presence in the three-year period: (1) All days in the current year, plus (2) One-third of the days in the preceding year, plus (3) One-sixth of the days in the second preceding year. Because of this weighting, you can spend up to 121 days each year in the US without becoming an income tax resident.

For the purposes of the above test, part days of presence count as whole days. If you otherwise satisfy the substantial presence test you may nevertheless be taxed as a non-resident if you are present in the US for fewer than 183 days during the current year and can establish a closer connection to a country other than the US and do not have an application for a green card pending.

Under certain conditions taxpayers may make a first-year election if they do not meet the lawful permanent residence or substantial presence tests and finds it advantageous to be treated as a resident in any event.

If a taxpayer meets only the green card test they become resident on the first day that you are physically present in the US as lawful permanent residents. Under the substantial presence test, the first date of residency is generally the first day of presence in the US during the calendar year. However, a nominal presence period of up to 10 cumulative days is disregarded so that expatriates may make pre-move business or house-hunting trips. The nominal presence period is excluded only for determining the residency start date; all of the days must be counted in determining substantial presence.

An alien, who would otherwise be considered to have ceased residence in one year, and resumes residence in the following year, is nevertheless treated as resident during the intervening period. This is the no-lapse rule.

Q. Are there any regional or state taxes?

A. Most states, the District of Columbia, and some municipalities levy personal income taxes that are separate and distinct from the income tax imposed by the federal government. The tax base may be broader or narrower than that used by the federal government. State and municipal income taxes are independent of each other as well as of the federal tax.

State income taxes generally are levied on the worldwide taxable income of residents of the state, and on income from sources within the state for non-residents. The states identify sources of income under a variety of rules, including pro-ration of worldwide income.

Residency may not be defined in the same manner for state tax purposes as for federal income tax purposes. Usually it is based on the concept of domicile in maintenance of a permanent place of abode within the state or on the number of days of physical presence within the state. US income tax treaties are not binding on states or cities. Some states define state taxable income by reference to federal taxable income and, therefore, treaty exemption of income flows indirectly through to the state.

Q. Can I file a joint tax return with my spouse?

A. US tax law provides for the filing of returns under four different categories, the availability of which depends on personal circumstances, including in some cases residence status. Non-residents must generally file either as ‘single’ or ‘married filing separate’ depending on their circumstances. Married residents may file either jointly with or separately from their spouses. Finally, certain individuals (including single, divorced and widowed individuals) who support qualifying dependents may file as the head of a household. Different tax rate bands apply to each of the four filing categories.

For state and regional income tax purposes, filing categories usually, but not always, parallel the federal filing status.

Q. What rate of tax will I pay in the US?

A. The following Federal tax rates apply for 2009:

Married Filing Jointly

Single

Q. What tax allowances and deductions are available in the US?

A.   Allowances

Personal exemptions are available for you and your spouse and dependents.  Each individual is entitled to a personal exemption (in 2009, the amount is US$3,650).  The personal exemption is partly phased out above certain levels of Adjusted Gross Income.  Under current law this phase-out is to be completely repealed in future years however. A resident expatriate may also claim personal exemptions for dependents that are US residents or citizens, or are residents of Canada or Mexico.

If you are a non-resident you are entitled to your own personal exemption, but no exemption is available for your spouse or children, except in certain cases.

Deductions

If you are a resident you may also take a standard deduction from Adjusted Gross Income in calculating your taxable income. This varies according to your status and is indexed annually for inflation. In 2009, the standard deduction for a taxpayer filing a Married Filing Joint return is $11,400. Non-residents and dual status taxpayers may not claim the standard deduction.

Alternatively you may itemize your deductions. A full-year resident may claim itemized deductions if they exceed the standard deduction.  Allowable deductions include medical expenses not reimbursed by insurance (subject to very restrictive thresholds; also not available to non-residents), state and local income taxes paid, interest expense on loans secured by a resident’s first and second residence (subject to generous limitations but not available to non-residents), charitable contributions to US charitable institutions, and casualty and theft losses. If your Adjusted Gross Income exceeds US$250,200 as Married Filing Joint with your spouse, then a part of itemized deductions is phased out.

Q. Is my home country pension plan tax efficient for US purposes?

A. Probably not. It is likely that your home country scheme does not qualify under US law and therefore your employers' contributions will be included in your taxable salary. Similarly, your contributions will not be deductible for US tax purposes.

It may be possible to obtain some tax relief if a tax treaty exists between the US and your home country.

Q. I will also be paying tax in my home country. Am I being taxed twice?

A. No. The United States has entered into income tax treaties with many countries providing for an exemption or reduction in the statutory tax rates for certain types of income. It may also be possible to claim a foreign tax credit on your home country return for the US taxes paid on doubly taxed income. The method of avoiding double taxation will depend upon your situation, and the nature of the treaty agreement between your home country and the US.

Close

Tax – Administration

Q.  Do I need to file a US tax return?

A.   If you are a full year resident you are required to file an income tax return once your total income exceeds the sum of your personal exemption ($3,650 for 2009) and standard deduction ($5,700 for singles in 2009).

As a non-resident or part-year resident you can generally claim only one personal exemption and must file a US return when total US income exceeds this exemption ($3,650 for 2009).

Q. When does it need to be filed?

A. The tax return is due on 15April . For alien taxpayers who are out of the country at 15 th April, they automatically get a further two months to file their return (provided they did not receive US wages subject to US tax withholding), so their deadline is 15 June.

Q. Can the filing deadline be extended?

A. The deadline may be extended until 15 October if an application is made. Please note that these extensions affect only the filing deadline, not the deadline for payment of tax. Interest is applied from 15 April and late payment penalties are also generally charged from the same date.

Where any due date, extended due date, or date for payment of tax falls on a weekend, a US public holiday, the relevant date is extended to the next business day.

Q. What is the procedure for paying tax?

A. The IRS collects tax by withholding at source and by payments of estimated taxes during the tax year.  When the withholding taxes are insufficient, you must make estimated tax payments to cover the residual tax liability.

In general, you must prepay at least 90% of the current year’s tax liability or 100% (110% for high income earners) of the prior year’s tax liability; whichever is less, in order to avoid an underpayment penalty. 

Estimated tax payments are due 15 April, 15 June, and 15 September in the tax year, and 15 January following the year-end.

Close

Tax – Income from employment

Q. Will non-cash compensation be taxable (e.g. housing)?

A. Generally, benefits such as employer-provided housing, assignment premiums, cost-of-living allowances, primary or secondary school tuition for children, language lessons for family, cash allowances, and tax-equalization reimbursements are included in gross income.

Certain expenses may not be included in gross income, as follows:

• Reimbursement by employer of direct moving expenses (household goods, taxpayer and family travel, visas, medical, etc.).
• Reimbursements for language lessons for the employee for a business purpose.
• Tax preparation fees paid by the employer, if the primary benefit is to the employer (for example, as part of a tax-equalization plan).
• Business-trip related tickets (but only for the employee, not any accompanying family).
• Subsistence allowances and company-provided housing for expatriate employees away from their tax homes for less than one year (per diem amounts so long as they do not exceed published maximums).  The test is more subjective than actual in determining whether the assignment is short-term i.e. the intent at the very start of the assignment is more important than the actual outcome.

A special exemption may be available if a taxpayer is assigned to the US for up to one year only.

Q.  I will be working in different countries while living in the US. Will all of my employment income be taxable in the US?

A. If you are determined to be a U.S. resident for tax purposes, either for part of the year or the entire calendar year, you will be subject to tax on worldwide income for the portion of the year that you are a U.S resident. However, if you work outside the U.S during your resident period, and pay tax in another location in respect of the income relating to those workdays, you will be able to claim a foreign tax credit on your U.S tax return in respect of the doubly taxed income.

If you are a non-resident you must report on your US tax return only the amount of income relating to your US workdays.

Close

Tax – Other income

Q. How is my dividend income taxed in the US? 

A. Section 302 of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) and further recent acts reduced the tax rate for qualified dividend income to 15% (5% in some cases). Dividend income is treated as qualifying if certain complex holding requirements are met.  This applies to US tax years from 2003 to 2009.  For now the form 1099-DIV and the broker should be relied on to provide the information that can help identify this qualified dividend income.  The determination of the holding period requirements is ultimately the responsibility of the taxpayer.  Taxpayers who enter into risk-reducing activities such as ‘collar transactions’ may not be able to qualify for the lower dividend rates.
 

The criteria to be regarded as ‘qualifying’ are that the individual must have held the stock for more than 60 of the 120 days surrounding the ex-dividend date.  Other finer details may also have to be examined in each individual case. Special rules also apply to dividends from countries other than the US.

Q. Will my home-country tax efficient savings be effective in the US?

A. Probably not. Most non-US savings vehicles are not tax efficient for US purposes and it is usually necessary to report the growth in savings accruing throughout each year on your US tax return.

Q. Will I pay US tax on investments and rental income generated in my home country?

A. Yes if you are a resident of the U.S., worldwide dividends and interest are taxed at the normal graduated rates.  Interest from certain securities (primarily US municipal bonds) is exempt for federal (though not always for state) purposes.

Rents and royalties are taxed at the normal graduated rates, after expenses are deducted.  Some restrictions apply to the use of certain rental losses.

Q. Is there a Capital Gains Tax regime in the US?

A. Yes. Capital assets are broadly defined as property held by you, such as shareholdings, patents held for investment, goodwill in the sale of a going business, household furnishings, personal residence, and automobiles.

In any one year, net overall capital losses for the year of up to US$3,000 ($1,500 if you are married filing separate) may offset other taxable income.  The losses in excess of this US$3,000 are carried forward.
 
Although a gain on a sale of personal property (assets not specifically held for investment purposes or to produce income) is a taxable gain, a loss from such a sale is not generally recognized for income tax purposes. This includes the loss on a personal asset such a primary residence where any recognized gain will be taxed by the authorities, but any loss incurred at sale will not be deductible.

Assets are classified as either short- or long-term and different rules apply to each class.  The length of time that a capital asset is held determines whether the capital gain or loss is short- or long-term, and tax rates depend on the classification.

The maximum tax rate for long-term gains of individuals is limited as follows:
 
The maximum rate of tax on the sale of long-term capital assets is 15%. For purposes of determining the capital gains tax rate, an asset is long-term if it is held for more than 12 months.

Under US law, capital gains are sourced to where you are resident, therefore capital gains realised by a non-resident alien are generally exempt from U.S. tax unless effectively connected with a U.S. trade or business or from the sale of U.S. real estate.  Further, simple stock sales are generally not considered effectively connected with a U.S. trade or business or from the sale of U.S. real estate.

Q. What do I need to know about any other tax regime, e.g. Inheritance, Estate or Wealth tax?

A. Estate Taxes
The United States imposes a unified transfer tax on the worldwide estates and gifts of property of its citizens and residents.  The US also taxes US-situs property transferred on death or by gift from non-residents.  The tax liability falls entirely on the estate or donor.

The term residence does not have the same meaning for estate and gift tax purposes as for income tax purposes.  Expatriates on temporary US assignments are likely to be considered non-residents for estate and gift tax purposes, even though they may be US residents for income tax purposes.

Transfers by a US citizen or resident to his or her spouse are free of estate and gift taxation through the marital deduction, provided the recipient’s spouse is a US citizen.  Certain steps can be taken to defer the taxation of transfers to spouses who are not US citizens.

Gift Taxes
As covered above, all transfers of property to a US spouse would be eligible for 100% marital deduction and therefore not trigger a gift tax.  Up to US$13,000 can be so transferred to any other individual.  Annual gifts in excess of those amounts are subject to the unified estate and gift tax rates.

Non-resident aliens are subject to gift tax only on transfers of tangible personal property and real property located in the US.  Gifts of intangible property (including gifts of US shares) by non-resident aliens are not subject to gift tax.

Estate and gift tax treaties sometimes offer increased deductions and exemptions.

Wealth Tax
Wealth tax is not imposed in the United States.  Some states, however, impose an intangibles tax on certain investments, for example “Property Tax”.

You are strongly advised to seek professional advice if any of the above taxes may be applicable to your circumstances.

Close

Social security

Q. Will I be required to pay US Social Security? How do I register with the US Social Security authorities?

A. You may be exempt under the conditions of a social security agreement, and holders of certain classes of visa are unilaterally exempt.

International social security agreements often stipulate that employees who are sent abroad contribute to their home country’s social security system, and are exempt from host-country social security contributions.  The exemption is commonly limited to transfers lasting not longer than five years, though it is sometimes possible to extend the period.

Close