Being a foreigner and complying with the tax rules of another country can be time-consuming and stressful, but it is necessary in order to avoid fines and penalties. AG Tax professionals have put together a general overview of several U.S. tax obligations one should be aware of as a foreign national residing in or doing business in the U.S.
Are you a U.S. Person?
• The Internal Revenue Service (IRS) income tax rules apply to foreign nationals if they are considered to be a U.S. Person as defined by the IRS (by fulfilling the green card or substantial presence test for example), or if there is income effectively connected with a U.S trade or business.
o Resident aliens are required to report worldwide income in their annual tax filings in the U.S.; irrespective of the country from which the income was earned.
o Non—resident aliens, however, only need to report the income effectively connected with a U.S. trade or business. They are not required to disclose the income earned in their native country, or any other Non-US country.
Foreign (Non-U.S.) Bank Reporting Requirements
• If a taxpayer considered to be a U.S. person owns specific foreign (Non-US) assets (accounts, mutual funds), they may need to file the ‘Statement of Specified Foreign Financial Assets (Form 8938) along with their US income tax return. The threshold depends on whether or not the taxpayer is located within the United States, and the filing status of the taxpayer.
• If a U.S. person has financial accounts in other countries, they may need to file a ‘Foreign Bank and Financial Accounts’ (FBAR) form in years during which the total value of these accounts exceed $10,000. As long as the taxpayer is considered to be a U.S. Person, they will need to file an FBAR form even if they return to their home country.
Additional Reporting Requirements
• U.S. persons who are a direct or indirect shareholder of ‘Passive Foreign Investment Companies’ (PFICs), may need to file Form 8621 to report any distributions and/or capital gains received from the PFIC. Please be advised that non-registered mutual funds (a common financial investment tool) qualify for PFIC reporting.
• Additionally, if a taxpayer is a Canadian (that is considered to be a U.S. person) and has a Tax Free Savings Account (TFSA) or Registered Education Savings Plan (RESP), they are most likely required to file form 3520 and form 3520A to satisfy foreign trust reporting requirements enforced by the IRS. Please note that the failure to file penalty for these forms is $10,000 per form, per year.
• If a taxpayer is considered to be a U.S. person as defined by the Internal Revenue Code, expatriation tax may be triggered if the taxpayer chooses to cease being a “lawful permanent resident” of the U.S. or U.S. citizen. These rules apply if the taxpayer’s average annual net income tax liability for the past five years is in excess of $155,000 (for 2013), net worth exceeds $2 million on the date of expatriation, or if the taxpayer fails to prove that they have satisfied all of their U.S. tax obligations for the last five years.
• If a U.S. person owns assets (real estate, personal property, or investments for example) in the U.S, their beneficiaries may be liable to pay any U.S. estate tax liabilities to obtain these assets after the taxpayer’s death, even if the taxpayer permanently returned to their home country while alive. As a non-US resident, the estate may be subject to an estate tax of up to 40% upon the death of the owner, with an exemption of only $60,000 from taxes.
AG TAX LLP CAN HELP
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance.
Furthermore, as a full service accounting firm, AG Tax associates are dedicated to assist you with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.