What are the tax consequences of arriving in USA and becoming tax resident?
The consequence of becoming a U.S. Person (a U.S. tax resident) is that you are taxed on your worldwide income. That is income and gains sourced anywhere in the world are taxable in the U.S., subject to reduction by foreign tax credits or exclusions.
What is the minimum time I can remain in USA without being tax resident?
The U.S. is one of only two countries in the world to tax extraterritorially, that is to tax its citizens and permanent residents (Green Card holders) on their worldwide income regardless of how much time they spend in the country. So if you are a citizen or you hold a Green Card you are taxable on your worldwide income even if you spend 0 days within the U.S. in a calendar year. If however, you reside in the U.S. on a non-immigrant visa, you need to apply the Substantial Presence Test to your circumstances.
The Substantial Presence Test determines if you are physically present in the US at least 31 day during the current year and 183 days during the 3-year period that includes the current year and the previous two years by applying the following formula:
Days in U.S. in current year x 1 (Year 1) + Days in U.S. in year immediately preceding current year x 1/3 (Year 2) + Days in U.S. in year preceding the Year 2 (Year 3) x 1/6;
If you exceed the minimum 183-days under this formula, then you will be a resident for purposes of U.S. tax law.
Students, teachers and trainees are exempt from substantial presence test. Please contact our office regarding more details.
Does USA tax its residents on a world wide or territorial basis?
The U.S. taxes on a worldwide and extraterritorial basis.
Is foreign income taxable in USA e.g. foreign rental income, foreign interest income and foreign dividend income?
Yes, foreign sourced income is taxable in the U.S., subject to reduction by foreign tax credits and exclusions.
Does USA have a sales tax or VAT tax on purchases?
Yes, the U.S. does have a sales tax on the sale of goods. Sales tax rate is determined by the state and local governments and thus varies from 5.5% to 9.45%. California state sales tax rate is 8.41%. Few states do not have sales tax.
Does USA have a capital gains tax that taxes me when I sell foreign assets?
Yes, the U.S. taxes its residents on gains realized on the sale of foreign assets.
What is the top tax rate in USA?
Currently highest federal tax rate is 39.6%. The highest state rate of tax in California is 12.3% and 8.82% in New York
Does the tax rate vary for different types of income and if so what are the rates?
Yes, long term capital gains (gains realized upon the sale of an asset that has been owned for 12 months or more) are taxed at the rate of 20%, as are qualified dividends. All other forms of income are taxed at full tax rates.
What are the common tax deductions available in USA?
Passive property losses (negative gearing) are deductible if you earn less than $100,000. If you earn between $100,000 and $150,000 the losses are partially deductible. If you earn more than $150,000 the losses are not deductible currently but may be carried forward and offset against future passive income or capital gains. Contributions to qualifying pension plans are deductible provided they do not exceed statutory limits. Home mortgage interest on up to $1M of debt for your principal residence is deductible as is property tax. Contributions to Health Services Accounts are deductible.
Does USA require joint tax returns to be filed for me and my spouse or are separate tax returns required?
Married taxpayers usually file married joint tax returns. Married separate tax returns may be filed as well.
If I have a foreign company or foreign trust before I arrived in USA is the income of that company or trust taxable?
If the trust is a grantor trust or the company is a controlled foreign company and the income it derives is Subpart F income, the income will be taxable in the U.S., even it is earned in another country. Most European and English common law trusts are grantor trusts.
Do children under 18 pay a higher rate of tax on certain types of income?
Yes, there is a so called “Kiddie” tax in the U.S.
Is there a gift tax in USA?
Yes, there is a gift tax in the U.S. 2014 annual exclusion gift amount is $14,000.
What are the personal tax exemptions in USA e.g. a gift from an overseas relative or a foreign insurance payout?
Most earned and passive investment income in taxable in US, however there are types of receipts that are excluded from taxable income. Examples are life insurance proceeds received by the qualified beneficiary, tax-exempt interest, property acquired by bequest, devise, or inheritance.
If I receive shares as part of my salary is this taxed in USA?
Yes, compensation received via the issuance of shares is taxable (in the year of the grant or later, depending on type of the grant) in the U.S.
When I leave the country is a 'termination payment' taxed by USA before I leave?
Yes, if a termination payment is received in consequence of the termination of employment in the U.S., the income derived will be sourced to the U.S. and taxable in the U.S.
What are other tax consequences of leaving the country?
Since the United States taxes its citizens and residents on their worldwide income, the only way to avoid paying U.S. tax is to expatriate or terminate residency.
If you are a “covered expatriate”, you might be subject to income tax on the net unrealized gain as if all property that you had as of the day before the expatriation or residency termination has been sold for its fair market value. Any net gain on the deemed sale is recognized to the extent it exceeds $680,000 (2014 exclusion amount).
With certain exceptions, “covered expatriates” include U.S. citizens who relinquish their citizenship or certain long-term U.S. permanent residents who terminate their residency if such individuals: (a) have relatively high tax liability (a 5-year average income tax bill of at least $147,000, adjusted annually for inflation thereafter); (b) have relatively high net worth ($2 million or more); or (c) either have not certified under penalties of perjury that they have complied with all U.S. federal tax obligations for the previous five years or have not submitted the requisite evidence of compliance.