Part 1 of this blog post introduced readers to some of the issues surrounding US taxation of foreign persons and discussed the pitfalls of tax ignorance. This 2-part series identifies areas of potential US tax exposure for foreign nationals and examines the questions the foreign person and his advisors should be asking before taking a dip in American waters.
Foreign nationals are often unsure if they have any US tax issues to be concerned about under one or more of the three distinct US tax regimes, discussed in Part I. Below continues a series of questions that help identify US tax issues, identifying major areas of risk. Follow-up with a US tax professional should be undertaken once an area of risk is identified.
Gifts / Transfers Without Full Consideration in Return
The gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The gift tax can be imposed on foreign persons. The tax is assessed on the donor (giver) of the gift. It applies whether the donor intends the transfer to be a gift or not. The gift tax applies to the transfer by gift of any property. You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift. All of these situations may carry US gift tax exposure and this often comes as a shock to foreign individuals.
- Understand the gift tax basics as applied to foreign individuals and some common gifting scenarios. Foreign persons can be subject to US Gift tax in unexpected ways.
- Did you ever sell anything in the US at less than its full value or did you make an interest-free or reduced-interest loan in the US?
- Have you ever made any gifts of tangible property where the transfer took place in the US? This could include, for example, a transfer of funds from your non-US bank to a person in the US (e.g., to your child so he could pay his tuition). The transfer can be by wire or check drawn on your bank account, as well as cash.
- Have you ever funded a trust with any US assets?
- Gift tax can often be prevented if you work with an advisor who knows how to navigate the tax rules.
Activities of all kinds can lead to US tax exposure. Here are some issues to look out for:
- You or a foreign entity you represent may be engaged in a US trade or business and this carries US tax consequences. Learn the basics.
- Have you ever been looking for business opportunities or acting in any way in the US on behalf of a non-US employer or non-US entity (for example, for a non-US partnership or corporation)?
- Do you, or any entity in which you have an interest, make sales of any products or provide services to the US (include current and past time periods)?
- Does your non-US business have any US employees or agents?
- Are you renting out any US real property?
Income from US Sources
- Are you currently receiving, or have you in the past received income from US-sources? For example, this can include US rents, income (in cash or in kind) for services carried out in the US; pension or similar payments related to services performed in the US; interest income from a loan made to a US resident individual or entity; interest income earned on US accounts; dividends or distributions from US entities; capital gain income from sales of US assets such as real property, US stocks or securities. My blog post here gives details.
- US source income can include surprises – gambling winnings from US casinos, alimony income if your former spouse is a US resident and the agreement is older and has not been modified to take into account tax law changes enacted in December 2017 pursuant to the Tax Cuts and Jobs Act.
- If you are renting out US real estate are you reporting the rental income properly and have you structured the activity tax efficiently? By obtaining an “individual taxpayer identification number” (ITIN) and completing IRS Form W-8ECI, foreign owners of US real estate will not be subject to a 30% withholding tax on the gross rental income. Filing annual tax returns reporting the income means the owner can take allowable deductions (for example, depreciation, mortgage interest, homeowner association fees, repairs and maintenance). It is often the case that the foreign owner will not owe any US tax.
- Are you a beneficiary of any US trust?
- Have you ever filed a US income, excise, employment or any other kind of US tax return?
US tax issues can be notoriously complicated. Despite the complexities, the tax rules cannot be ignored. Foreign persons often view the US as a “safe” place to make significant investments or to do business. While this may have merit, the tax issues can have a huge impact on that plan, so do the tax planning legwork beforehand.
Posted December 8, 2022
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