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- Q: After being resident in USA for 30+ years, I am planning on leaving. I have a house, retirement funds and other assets here.How do I sell & transfer them without penalties or further tax obligations to the USA? In the country I am moving to one can withdraw from retirement funds at 55.
- A: You should be aware there are very specific administrative requirements having to do with the surrender of a green card and the certification of compliance with US tax law prior to that surrender. If you don’t properly follow the rules, you will be subject to an “exit tax” under new Internal Revenue Code Section 877A. Likewise, you will be subject to the “exit tax” if your US tax liability has been more than approximately $145,000 for each of the last five years, or if you have a net worth in excess of $2,000,000 on your expatriation date. I recommend that you arrange a consultation with a US CPA or tax attorney who can guide you through the expatriation process and explain your US tax obligations to you.It would also be advisable for you to do some planning regarding your US assets– and your US real estate in particular– as your US source income and assets will be subject to a different tax and withholding regime once you become a non-US person for US tax purposes. In general, at this point, there’s very little you can do to change the “source” of any funds withdrawn from your retirement accounts. For this reason, there’s not much you can do to escape eventual US taxation on those assets, unless you’re moving to a country that has a tax treaty with the US. You may, however, be able to save yourself a fairly significant tax withholding headache when it comes to the sale of your US real estate, so long as you time the sale properly.
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- Q: Hi, I have an opportunity to be a equal sharing partner in a new LLC that is to be formed soon. I am however clueless as to how taxation works? All the income for the LLC will originate from the US.
Will I be taxed as part of US Taxation rules? If so, how is it determined? Does my percentage of partnership play a role.I understand that finally money will be flowing between two countries, so I just want to get as much information as I can.
- A: If you’re a U.S. nonresident alien (in general, a nonresident alien is a person who is neither a U.S. citizen nor greencard holder and who does not spend a substantial amount of time in the U.S.– speak with a CPA or tax attorney if you have questions about your U.S. tax residency status), then you are subject to U.S. tax on your share of the LLC’s income, and Section 1446 of the Internal Revenue Code directs the LLC to withhold this tax from the LLC’s distributions of its profits to you. So, for example, if you own 50% of the LLC, and the LLC earns $200 in U.S. source profits in 2010, then (1) the U.S. considers you to have made $100 in gross U.S. income in 2010, and (2) the LLC must withhold U.S. tax from your $100 share.The LLC must withhold at the highest marginal U.S. individual tax rate, which is currently 35%. So, in our example, the LLC is required to withhold $35 from your $100 profit share, and you will receive the remaining $65. Then at the end of the year, you can file a U.S. nonresident tax return– a Form 1040NR– and request a refund of any excess withholding. To continue with our example, if it turns out that you only owed U.S. tax at the rate of 25% rather than the 35% rate, then the U.S. will owe you a $10 refund in April of 2011.Keep in mind that LLC taxation is a very complicated subject, and the example I’ve sketched out above is quite simplified. You’ll certainly want to hire a U.S. accountant or tax attorney who can file U.S. tax returns for the LLC, determine the correct amount of withholding for your distributions, and identify any potential places where a tax treaty could save you on your U.S. taxes.
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- Q: Hello, thank you for your assistance with this confusing topic.I wish to set up a software development LLC for liability protection and to facilitate doing business with American companies. I will be the sole member of the company, and will operate the company from outside the United States. As far as I know, this is supported by the LLC structure.My question relates to taxation on income paid to the company, and then in turn paid to me as a US non-citizen and non-resident. I am a former WA state resident and have filed personal income tax in the US since 2005, but no longer reside there. How can I operate the business legally while not getting double taxed on corporate income, and then on my own hours billed to the company? Am I required to pay federal personal income tax?
- A: What country are you currently resident of? The U.S. has a fairly far-reaching network of income tax treaties, and if your country of residence has entered into one of these treaties with the U.S., then you will most likely be shielded from double taxation. Also, not every country imposes tax on its residents’ foreign income (for example, Australia doesn’t seek to tax many kinds of foreign income).If you are the sole owner of a U.S. LLC, the existence of the LLC is ignored for U.S. tax purposes, and the income of the LLC flows through to your Federal individual tax return. This means that any U.S.-source income earned by the LLC is reported on your Federal individual income tax return, which would be your Form 1040 (NR), assuming that you’re a U.S. non-resident alien for tax purposes. Then, if your country of residence also seeks to tax the income which the LLC has earned in the U.S., certain international tax rules come into play: basically, the U.S. gets first dibs at taxing the U.S.-source income. Then, if your country of residence has entered into a tax treaty with the U.S., that residence country would have to give you a dollar-for-dollar credit for any taxes imposed by the U.S. This foreign tax credit would offset your foreign taxes and eliminate the possibility of double taxation. (Note, however, that, if your country of residence has a higher individual tax rate than the U.S., you may still owe some residual tax to your residence country).Finally, if you’re resident of a country that has a tax treaty with the U.S. and you don’t maintain any kind of physical presence in the U.S. (and, in general, a physical presence means an employee or office of some kind), then ignore most of the above paragraph because the U.S. will give up its right to “first dibs” at your U.S. source income. In this case, you would simply pay taxes to your country of residence and claim treaty benefits in the U.S.Please note that all of the above is a very quick bird’s eye overview of your cross-border tax issues. I strongly recommend that you consult with a U.S. attorney or CPA who has significant experience working with bilateral income tax treaties and other foreign tax issues.
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- Q: I’m a new Green Card holder, my father is not a US resident and he even never been to the US. He has a business in my home country. He owns 100% of the stocks of this business, I own zero stock of it, but I’m the only child of him, so I have the right to inherit all his asset.Now, I’m residing in the US, I don’t have a job at this moment, but I planning to start my own business here soon. Since I don’t have any income at this moment, so my father sends me money for my life expense every month.My question is, does my father’s business will be considered a ‘Controlled Foreign Corporation’ of mine? I just curious to know, since the law says stocks owned by parents will also be considered owned by himself, it’s called ‘indirect ownership’, is that true? Do I need to report it?
- A: You are under no obligation to report any of the cash gifts which you receive from your father. First, a gift is not income and is not taxable in the U.S. Secondly, you need not worry about the controlled foreign corporation rules. Given your facts, you are not a “United States Shareholder” in your father’s corporation, and the corporation is not a controlled foreign corporation, because Internal Revenue Code Section 958(b) specifically blocks the application of the indirect ownership rules to U.S. persons in your situation.
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- Q: Hi, I want to borrow some money (between 100K and 200K) from a foreigner relative (he has no ties with US). He does not want to charge me any interest.
I assume the Applicable Federal Rate does not apply to him because he’s not paying taxes to US (he pays taxes in his country). My question is: Are there any taxes that I would pay in this case? I assume he would not owe anything to IRS. I want to make sure I’m not overlooking any taxes, and of curse I don’t want to pay taxes that I don’t have to 
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Just in case it matters: I want to use the money as part of the down payment for a new house. I will keep the money in a market account up to the moment when I’ll need them (this can be months because I’m still looking for the house). Thanks a lot!
- A: Despite the fact that your foreign relative won’t be charging interest, a portion of the payment that you’ll be making to him will, in fact, be interest. The U.S. imputes an interest component into every zero interest loan, and this component is called “original issue discount” (“OID”). Because you’re a U.S. person, the interest that you will be paying is U.S. source interest.Sourcing is a bit of a tricky concept in international tax, but, in general, the source of income determines which country gets first dibs at taxing the income. Thus, because your foreign relative is receiving U.S. source interest income, the U.S. gets the “first chance” to tax him on that income. The fact that your relative is paying taxes in his country is irrelevant with respect to this rule.Luckily for your relative, the U.S. has chosen to let him off the hook. The U.S. specifically exempts from tax most U.S. source interest income. The Internal Revenue Code creates a category of interest called “portfolio interest” for these types of interest payments. So long as an interest payment is portfolio interest, the recipient is not subject to U.S. tax on that payment. Just be careful to comply with tax regulations concerning the registration of these types of interest obligations, and your foreign relative should be able to receive the payments free and clear of U.S. tax. It would be advisable for him to consult with a U.S. attorney as far as setting up an OID schedule, drafting a promissory note, and properly registering the debt instrument.You won’t have any taxes of your own to pay because (1) you’re the payor and not the payee with respect to this loan and (2) because you have an obligation to repay the debt, it’s not considered income to you.
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- Q: Hello and thank you for a chance to post this question for some clarification. If I am a US nonresident alien and set up an LLC in Delaware, Oregon or Wyoming for example, and derive all my income from consulting arrangements from outside the US, do I reduce my federal tax liability to zero, since neither LLCs nor nonresident aliens pay tax on income outside the US? Likewise, if I contract WITHIN the United States under this LLC structure, I believe I will have to pay tax using IRS form 1040NR, but will I be required to make estimated tax payments quarterly?
- A: If your U.S. LLC derives 100% of its income from sources outside of the U.S., you, as a non-resident alien, will have no Federal tax liability. This is because LLC members who are non-resident aliens are taxable only in respect of business income that’s “effectively connected” with the conduct of a U.S. business. In the case of consulting income, only income earned from consulting services actually performed within U.S. borders is “effectively connected”.Be aware that merely executing a contract within the U.S., or with a U.S. business or individual as counter-party, does not generate effectively connected income: the consulting work must actually be performed within the U.S. (One caveat: if the LLC has a U.S. bank account which generates interest, or if it holds U.S. investments, or has other, similar, U.S. source income, that particular income will be subject to U.S. tax).If a single-member LLC has any effectively connected income, that income is both taxable by the U.S. and subject to the quarterly estimated payment requirement. You, as a non-resident alien, would file your quarterlies on an IRS Form 1040-ES (NR) and your annual return on a Form 1040 (NR).Also be aware that, should an additional member join the LLC, distributions from the LLC to you will become subject to U.S. withholding under Section 1446 of the Internal Revenue Code. This is the Section dealing with withholding on payments to foreign partners or members of U.S. partnerships and LLCs. Under Section 1446, you, as a non-resident alien, would not pay quarterly estimated taxes. Rather, the LLC would be required to withhold 35% of your share of the LLC’s effectively connected income and pay this over to the U.S. Treasury. (Note, however, that if you are a resident of a country that has a tax treaty with the U.S., the tax treaty may reduce your withholding rate to less than 35%).
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- Q: I currently have a greencard, married to a U.S. citizen for 7 years and plan to apply for U.S. citizenship. My family is from a caribbean country. If I receive an inheritance from family in that country will I be A) taxed on “foreign” inheritance as a green card holder B) taxed on “foreign” inheritance if I am a U.S. citizen C) is taxation rates higher as a U.S. citizen vs green card holder on “foreign” inheritance.
- A: Your foreign inheritance isn’t taxable by the U.S., regardless of your U.S. citizenship status. Depending on the size of the inheritance and the kind of property you’ll be receiving, you may, however, have to file a Form TD F 90-22.1 (an “FBAR”) and an IRS Form 3520 and check a box on your Form 1040 indicating that you have a foreign account. Be sure to check with a tax attorney or CPA in order to confirm your specific filing responsibilities and deadlines, as failure to file these items may result in substantial IRS penalties as well as possible criminal prosecution.
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- Q: Paying alimony internationally: I’m living in the US (green card) , my ex-wife is moving back to the UK. Is the alimony I will pay deductible? Does she pay UK or US tax on what she receives?
- A: Alimony paid by a U.S. citizen or resident is U.S.-source income, deductible by the payor and reportable by the recipient. You may deduct the alimony, and your ex-wife must pay U.S. taxes on it. You should also be aware that, because alimony is considered “Fixed or Determinable Annual or Periodical” income (“FDAP”), the IRS requires you to withhold 30% of the gross payout and pay this amount over to the U.S. Treasury. The income tax treaty between the U.S and the U.K. may change the above result, so you or ex-wife may wish to consult with a tax attorney or CPA who can perform a tax treaty review for you.
