US Tax Laws and the Foreign Resident

The tax laws in the United States (US) are complex and can be overwhelming to someone who is not a US Citizen. The US tax laws are drafted and enforced by the Internal Revenue Service (IRS). The purpose of this memo is to outline some basic IRS tax rules and some options for tax planning.

One of the first tax issues to consider when coming to the US is, how will you be taxed? The following are some points to consider:

INCOME

When you come to the US and become a resident or a citizen you will be taxed on your worldwide income. That sounds scary, but it is not as ominous as it sounds. First, let’s define income; “Income is what you earn from working or what the net income is from your investments”. It is not what you own. For example, rental property you own as an investment is not taxed by the IRS; however the rental payments you collect from the rental property are income.

DEDUCTIONS

There are deductions that are allowed against the income before it is taxed. For instance, you are allowed to deduct expenses that relate to your income. In the example above, you would be able to deduct any expenses that relate to the rental property, such as interest expense, property taxes, property insurance and maintenance on the property.

There are also general deductions that are allowed before the personal income tax rate is applied. You are given a deduction of $3800 (in 2013) for yourself and for each of your dependents. You can deduct your major medical expenses, property taxes, interest on your home and charitable contributions. After you subtract these deductions from your income, you are ready to apply the US tax rates to your income, and compute your tax.

TAX RATES

This chart shows some rates for a Married Couple filing jointly:

There is a misconception that the United States rates are high and that there is double taxation due to the fact that foreign residents may have paid tax in another country. As you can see from the chart above, the amount of the taxes paid are reduced due to the deductions that are allowed. Also, the lower the income, the lower the amount of US tax due.

TAX CREDITS

The United States taxation system allows a credit for income tax paid to another country. This credit can be used as an offset against the tax owed in the US. It is called the foreign tax credit. This foreign tax credit keeps residents from being double taxed in more than one country.

TAX PLANNING

There are other very effective and legal tax planning opportunities. There are also strict rules that must be followed in order to stay within the tax laws. Some of those tax planning options are:

- Trusts formed in off shore tax havens

- Income to a Child or Spouse

- Spouse with lower income apply for residency

- Child would be the applicant for residency

- Executive come to the US for residency

It is important that you have tax advice to help you with the planning and structure to allow you to take advantage of these planning opportunities. We will be glad to help you understand the US tax laws and to assist with tax planning within those guidelines.

There are a number of tax issues to consider when coming to the US as a resident or to gain citizenship. We will be glad to assist you with these matters.

Nancy Schulze lives in Dallas, TX where she is the shareholder of tax engagements and President of Chapman, Hext & Co., P.C., a Dallas based full service accounting firm. Nancy began her career in 1982 with Main Hurdman and joined Chapman, Hext & Co., P.C. in 1992, where she has been ever since. Nancy’s emphasis is in tax planning consultations as well as oversight for corporate and individual income tax preparation for federal and state. In Nancy’s spare time she enjoys volunteering for various organizations and spending time with her two grandsons.

nancy.schulze@chapmanhext.com | www.chapmanhext.com | 972.644.7112