Five Tax Traps for Resident Noncitizens (and Their Attorneys!)

More and more people from different countries are moving to Florida for better opportunities. But when they become residents in the U.S., they have to be careful about taxes. They might have to pay taxes on their income and assets from their home country, which can be a surprise. They also have to follow specific rules to become a resident. It’s important for them to work with advisors who understand these issues. If you live in the U.S. for a certain amount of time or have a green card, you have to pay taxes on all your income, no matter where it comes from. The rules for paying taxes on money and property you give away are a little fuzzier. They depend on where you consider your permanent home to be, which can be a bit tricky to figure out. If you’re a non-U.S. citizen moving to the U.S. and own stock in a non-U.S. corporation, you could be hit with unexpected U.S. taxes. This is because the U.S. has rules that can make you pay taxes on certain types of income from that corporation, even if you don’t actually receive that income. This could leave you with a big tax bill, but no money to pay it. So, if you’re moving to the U.S., it’s important to understand how owning stock in a non-U.S. corporation could affect your taxes. A Passive Foreign Investment Company (PFIC) is a non-U.S. corporation that makes most of its income from passive sources, like interest, dividends, or rent. If you own stock in a PFIC, special tax rules apply. Once a non-U.S. corporation is classified as a PFIC during your ownership, it stays a PFIC for all future years. However, if you are already subject to the rules for Controlled Foreign Corporations (CFC), the PFIC rules don’t apply to you. Unlike the rules for CFCs, you don’t count the stock of a PFIC that you might be considered to own indirectly. If you own stock in a foreign corporation called a PFIC, you might have to pay extra taxes on certain distributions or when you sell the stock for a profit. There are certain ways to avoid this, like electing to be taxed differently or making a special election if the stock is publicly traded. It’s important to understand these rules to avoid paying extra taxes. The “throwback rules” apply to certain distributions from trusts outside of the US to people in the US, including RNCs. These rules are meant to stop people from avoiding paying US income tax through a non-US trust. A trust is considered foreign if it doesn’t meet the requirements to be a US trust. These requirements include that the trust is not directed to be administered outside of the US, that it is actually administered only in the US, and that it doesn’t have a provision to move out of the US if a US court tries to control it. It also must be controlled by US persons, meaning they have to make all the important decisions about the trust. If a non-US person has the power to veto any decision, the trust will be considered foreign. When a foreign trust is involved, the rules for taxes and distributions can be complicated. If a U.S. beneficiary receives more money from the trust than it earned in a year, they may have to pay additional taxes. This can be a problem for married non-citizens, who may not be able to use the same tax benefits as married U.S. citizens. It’s important to be aware of these rules when planning for estate taxes. The gift tax “marital deduction” doesn’t actually apply to non-U.S. citizen spouses. Instead, they can receive a larger annual gift exclusion amount of $134,000. This is important to remember when creating trust provisions for non-U.S. citizen spouses, as they are entitled to the larger exclusion amount, not the standard amount. If a person who is not a U.S. citizen inherits property from their spouse who passes away, they may not be able to avoid paying estate taxes. However, there is an exception called a qualified domestic trust (QDOT) that allows the surviving spouse to receive an unlimited deduction for the property. To qualify as a QDOT, the trust must have at least one trustee who is a U.S. citizen or a domestic corporation, and they must be able to withhold a special tax from any distributions to the surviving spouse. The trust must also meet certain requirements under U.S. regulations and the decedent’s executor must elect treatment as a QDOT. If all these conditions are met, the surviving spouse can avoid paying estate taxes on the inherited property. Some RNCs can face unexpected and heavy taxes under the U.S. expatriation regime, even though they are not giving up their citizenship. “Covered Expatriate” refers to a person who gives up their U.S. citizenship or green card and meets certain financial requirements. If they are classified as a covered expatriate, they are subject to an exit tax on their property and have to report their income to the IRS. They may also have to pay taxes on their deferred compensation and on money from certain trusts. When someone gives or leaves property to someone else, the person receiving the property may have to pay a special tax if the person who gave or left the property renounced their U.S. citizenship. This tax applies to U.S. citizens or residents who get this property, and can be quite high. This can be a problem for people who used to live in the U.S. but then returned to their home country, and their beneficiaries or heirs are U.S. citizens. For example, if someone had a green card for nine years and then left the U.S., and later gave property to their child who was born in the U.S., the child might have to pay this tax when they receive the property. This can be a surprise and a burden for people who don’t know about it. Basically, when people from other countries move to the U.S., they can run into some tricky tax issues. These problems can be avoided with the right planning, but many people don’t get the right advice. This can make things more complicated and more expensive. So, it’s important for people moving to the U.S. and their lawyers to watch out for these potential problems. These are sections of the tax code and regulations that deal with estate planning and expatriation.

Source: https://www.floridabar.org/the-florida-bar-journal/five-tax-traps-for-resident-noncitizens-and-their-attorneys/