Great news, you received an offer to work in the U.S. and advance your career. While you are preparing for your relocation to the U.S., here are some key tax areas to consider prior to your move.
It is extremely valuable to have a discussion with a qualified U.S. tax advisor prior to your move. We recommend asking your new U.S. employer if they cover the cost of an income tax consultation and if they can make an introduction to a U.S. tax advisor. When you schedule a time to speak with a U.S. tax advisor, be prepared to explain your sources of income, financial and real estate holdings, and consider providing them with a copy of your home country’s income tax return for review. Your spouse’s and dependent children’s sources of income and financial holdings may be relevant in these discussions.
Important points to discuss with your U.S. tax advisor are:
- Expected arrival date in the U.S.
- The number of days you were present in the U.S. for any reason in the current calendar year and previous two calendar years.
- Your sources of income in the U.S. and outside the U.S.
- How long you expect to reside in the U.S.
U.S. Residency Start Date
Unless you are a U.S citizen, before filing your first U.S. individual income tax return you will need to determine if you are a U.S. nonresident alien, or a U.S. resident alien. U.S. nonresident aliens report income from U.S. sources, and conversely, U.S. resident aliens report their worldwide income. It is important to identify your U.S. residency starting date to understand when you are required to report your worldwide income.
- U.S. nonresident aliens are defined as individuals who are not U.S. citizens, who are not U.S. lawful permanent residents (green card holders), have not been substantially present in the U.S. for more than 183 days (calculated over a three year look-back period) and have not made an election to be treated as a U.S. resident.
- U.S. resident aliens are either U.S. citizens, U.S. lawful permanent residents (green card holders) or individuals who have been substantially present in the U.S. for more than 183 days (using the three-year look-back period).
If you are neither a U.S. citizen nor U.S. lawful permanent resident (green card holder), you will become a U.S. resident when you meet the substantial presence test. To meet this test, you must be physically present in the U.S. for at least 31 days during the current calendar year and more than 183 days during a weighted three-year look-back calculation. If you meet this test, your U.S. residency start date will be the first day you are physically present in the U.S. during the calendar year.
For example, if you are not a U.S. citizen or U.S lawful permanent resident (green card holder), you were physically present in the U.S. between Feb. 5 – 17, 2017 for interviews, you moved to the U.S. to commence work on March 15, 2017 and the three-year look-back calculation results in more than 183 days of presence, then your residency start date is Feb. 5, 2017, the first day you were present in the U.S. during calendar year 2017.
In this example, Feb, 5, 2017 is an important date. The period Jan. 1, 2017 – Feb. 4, 2017 you are considered a U.S. nonresident alien and will only report income from U.S. sources. From Feb. 5, 2017 – Dec. 31, 2017, you are a U.S. resident alien and will report your worldwide income. Depending on your foreign financial holdings and foreign sources of income, you may be required to attach various foreign informational reporting forms to your tax return as well as file a Foreign Bank Account Report (FBAR). Some of the common foreign informational reporting forms are listed at the end of this article.
There are special exceptions available affecting determination of tax residence, such as the nominal presence exception, a closer connection to a foreign country, and even residence articles in U.S. income tax treaties. There are also elections available where you can set your residency start date to the first day of the calendar year. Although these exceptions and elections are outside the scope of this article, speaking with a U.S. tax advisor and being proactive about moving to the U.S. is important to ensure your tax residency start date is well-planned.
You may be able to deduct certain moving expenses during the taxable year in connection with the commencement of work as an employee at a new principal place of work in the U.S. Generally, in order to take the moving expense deduction, you must meet the time test and distance test. To meet the time test you must be a full-time employee at your new U.S. employer for at least 39 weeks during the 12-months after you commence your U.S. employment. To meet the distance test, your new principal place of work must be at least 50 miles away from your former residence.
The moving expenses you can deduct include the cost of moving your household goods and personal effects. Costs of travelling (including one-way airfare, lodging and meals along the way) can also be deducted as long as they are incurred on the most direct route from your former residence to your new residence. The moving expenses of your family members (e.g. spouse and children) can be taken into account as long as your new U.S. residence will be their principal place of abode. There are some costs that are outside the scope of moving expenses and may not be deductible such as purchasing new furniture when you arrive and return trips to your former residence.
Moving expenses which you paid personally that were not reimbursed by your employer can generally be deducted. If your employer provides you a lump-sum relocation bonus to assist with moving expenses, you still may be able to deduct moving expenses. In the case where your employer reimburses you directly for moving expenses, you generally cannot deduct these moving expenses unless they exceed your employer’s reimbursement.
Moving expenses are a great deduction and are not limited the way certain itemized deductions are limited. Remember to keep track of your expenditures and provide them to your tax advisor.
Foreign Informational Filings
There are a variety of foreign reporting forms you may need to attach to your U.S. tax return or file independently. It is important to have a discussion with a U.S. tax advisor to identify any filing requirements as failure to file certain foreign informational filings carries significant penalties. We have listed some common foreign informational filing forms below with brief examples; however, the list is not all-inclusive:
- Form 3520/3520-A – Annual Return to Report Transactions with Foreign Trusts and Receipts of Certain Foreign Gifts: Example, a U.S. resident alien who is a beneficiary of a foreign trust may need to file these forms to report certain transactions with respect to the foreign trust.
- Form 5471 – Information Return of U.S. Persons with Respect to Certain Foreign Corporations: Example, a U.S. resident alien may need to file this information return if they own shares of a foreign corporation and meet other reporting thresholds not covered in this article.
- Form 8621 – Information Return by a Shareholder of a Foreign Passive Investment Company: Example, a U.S. resident alien may need to file this information return if they own certain foreign mutual funds.
- Form 8938 – Statement of Specified Foreign Financial Assets: May be required to report certain foreign investments and other foreign financial assets.
- Form 114 – Report of Foreign Bank and Financial Accounts: May be required to report certain foreign bank and financial accounts.
The three key takeaways from this article are (i) seek advice from a qualified U.S. tax advisor before relocating to the U.S. (ii) understand when your U.S. residency start date begins and (iii) keep track of your moving expenses. If you have any questions about relocating to the U.S., please contact me or your GHJ advisor at 310.873.1600.