The problem for the non-resident alien is that their estate tax exemption is $60,000 and not $5.3 million (as it is for Americans). And there is one more problem… the U.S. estate tax planner. While the U.S. has a tax on the estate, other countries tax the recipient. This tax is called an “inheritance tax.”
Thus the American tax planner also must know “international inheritance tax planning” for the foreign country of the investor.
They advise the nonresident alien (the term for estate and gift taxes is “nondomiciled“) to own their U.S. investments and U.S. real estate through a foreign corporation (such as a Panamanian company or a British Virgin Island company).
Since the 1950’s, this tax plan has failed. The U.S. courts have ruled for the IRS (more on these cases on this link). These court cases focused on the power to revoke (section 2038) and the right to the corporate dividends (section 2036). These tax laws required the assets owned by the foreign entity to be included in the deceased’s U.S. taxable estate
The best estate tax planning method for the foreign investor involves a trust. Here is a link on the basics. In Europe and the United Kingdom have an inheritance tax. Estate taxes and inheritance differ. This difference challenges international inheritance tax planners. Continue reading →
Citizens of Canada, the U.K., Australia, New Zealand, the European Community, have a unique tax advantage while living in the U.S. Tax treaties with these countries provide a unique and little-known tax savings.
This video is an audio clip from my tax radio show, Tax Talk. You will learn why resident aliens are paying more in taxes than they should.
They pay tax on their worldwide income including income from interest, dividends, wages, other compensation for services, rental property, and royalties. The resident alien must report these amounts whether from sources within or outside the United States. Depositing of income outside the U.S. is taxable.
If you are a citizen of a country with a tax treaty, the treaty decides if you are a resident or non-resident. Otherwise, if you have a green card or spend too many days in the U.S., you are a resident alien.
Nonresident aliens are usually subject to U.S. income tax on U.S. source income. In some cases, foreign source business income can be subject to U.S. tax. You will learn more in my book, International Taxation in America for the Entrepreneur.
A dual-status alien is an individual that is both a resident alien and a nonresident alien in the same tax year. This can occur when you obtain your green card.
U.S. Investment income is taxed at a flat 30% of the gross income. If the non-resident alien resides in a treaty country, the tax rate is usually between zero and 15%.
Business income is taxed on a net income basis. The alien has the same tax rates as an American. In some cases, an NRA’s foreign business income is taxed by the U.S. This occurs when the NRA has an office or some other type of business facility or is in the U.S. on a business trip.
Tax Withholding on Foreign Persons
Payments of U.S. income to foreign persons are subject to the withholding tax rules. In particular, foreign athletes and entertainers are subject to substantial withholding on their U.S. source gross income. This withholding can be reduced by entering into a Central Withholding Agreement with the Internal Revenue Service.
The NRA that comes to the U.S. for business meetings owes U.S. tax on his foreign salary if he or she is paid more than $3,000 by his employer.
Taxpayer Identification Numbers (TIN) for the non-citizen
Anyone (including aliens) who files a U.S. federal tax return must have a Taxpayer Identification Number (TIN). Also, non-citizens who request tax treaty exemptions or other exemptions from withholding must also have a TIN.
Sale of Real Estate
Non-Resident Aliens are hit with a fifteen percent withholding tax on the sale of U.S. real estate. In some cases, the withholding tax applies to refinancing. The withholding tax does not replace the income tax. Aliens must file an income tax return. The tax withheld is a credit towards the total tax. If the total tax exceeds the tax withheld, they get a refund.
Saving Taxes with Tax Treaties
The U.S. tax liability of non-resident aliens is determined primarily by the provisions of tax treaties. If the non-citizen is not a national of a treaty country, then the U.S. Internal Revenue Code applies.
Many foreign countries have tax treaties with the U.S. Tax treaties override or modify the provisions of the Internal Revenue Code. Tax treaties allow you to pay less tax.
All though you are a resident alien for income taxes you may be a non-domiciled alien for estate (death) taxes. Non-domiciled aliens are subject to estate taxes on all of their U.S. property (including stocks, bonds, and property) except bank accounts and life insurance. They are not entitled to the $5,000,000+ exemption that is allowed for Americans. Accounts with brokerage firms are frozen upon the alien’s death. Tax treaties may allow the alien to avoid U.S. gift and estate taxes.
Become an Expert
Become an expert with my book, International Taxation in America for the Entrepreneur, available on this link and feel free to call me with any questions that you have.
Saving taxes with an IRS approved tax plan is called a private letter ruling.
The IRS did a great job in making certain states, such as Nevada, a great location for estate planning. The newest IRS approved trust planning method is the family owned trust company. These are called a “private trust company.”
This is a Nevada corporation owned by you and your family. Nevada does not require you to obtain any particular license.
Nevada is the leading state with their new and easy to use private trust company law. The IRS guidance is on this link.
Most importantly, this trust can eliminate state income taxes. Residents of California and New York have found Nevada the best way to avoid income taxes and inheritance taxes.
Keeping Control while Eliminating State Income Taxes
Trusts have protected families for more than a thousand year (starting with the Great Crusade). A Nevada trust can last up to 365 years. A Nevada trust is known as a dynasty trust. These trusts can also move offshore. A private trust company allows an orderly succession of asset management upon your death. It allows you to keep control and save taxes.
Stop paying State Income Taxes with the IRS Designer Trust is discussed in this related blog posting. Does it seem odd that the IRS would specifically design a trust to allow you to avoid state income taxes legitimately? The Federal Government loses $Billions in taxes because of the state income tax deduction. Since the 1986 Tax Reform Act, the Feds have been trying to repeal the deduction for state income taxes.
Your private trust company is the trustee of the IRS Designer Trust.
Managerial & investment control retained by you. The courts approved this in Alexander v. Commissioner, 190 F.2d 753 (5th Cir. 1951).
International business headquarters
The Department of Treasury is attempting to attract foreign investors to America. The Nevada tax haven status is the perfect location for the foreign investor.
The State of Nevada understands that business needs asset protection trusts. Nevada’s sophisticated and flexible trust laws make it the best state for asset protection.
Nevada’s family trust company laws allow you to keep control of your assets
Many clients have mistakenly used a relative as trustee. This can invalidate their estate planning. Section 2036 to 2038 prohibit a family member or an employee acting as trustee. More importantly, the family member may be inflicted with dementia. Removing by the court is costly and emotionally painful.
If you need to up the quality of your tax planning, then contact me, Brian Dooley, CPA, MBT, [email protected]
Best International Tax Structure of the non-Citizen doing Business and Investing in the United States.
“When in Rome do as the Romans’ do” is the mantra for the foreign investor. The U.S. has different concepts in taxation (for both income tax and inheritance tax, which we call the “estate tax”) than the U.K. and Europe.
To avoid high taxes in the U.S., the European needs to avoid using European and U.K. tax concepts.
Wealthy Americans use trusts to avoid taxes legitimately. The diagram on this blog shows the typical structure of the Wealthy American.
A domestic holding company causes income to be taxed two times. They also have a higher tax rate on capital gains. In the U.S., the preferred entity for investors and business owners is the limited liability company. The U.S. has fifty nations (called states) each with their legal system. The two states with the best business legal systems are Delaware and Nevada.
They have a higher tax rate on capital gains. In the U.S., the preferred entity for investors and business owners is the limited liability company. The U.S. has fifty nations (called states) each with their legal system. The two states with the best business legal systems are Delaware and Nevada. These states do not have an income tax.
The state with the best trust law is Nevada. In the diagram above, the trust should be in Nevada. This state allows you to own a Nevada corporation to be your trustee. This is known as a “private trust company.”
American income tax planning wants to maximize capital gains tax. In the diagram, each entity is a single member LLC. The IRS has favorable tax laws. With these statutes, the LLC does not file a tax return. This keeps down your tax accounting cost.
U.S. tax law has four choices in your trust taxation. One option allows foreign income to be never be taxed. Your foreign income can be earned by a Nevada trust and never pay U.S. or state income tax (Nevada has no state income tax).
For example, you own a U.K. company. You want to avoid U.S. estate taxes. You also do not want to pay U.S. income taxes on the U.K. income. A Nevada trust is ideal for this. You can be the trustee (with your Nevada private trust company). You gift the shares of the U.K. company to the Nevada trust. You name your non-U.S. spouse as the current income beneficiary. U.S.income tax law sees her as the owner of the U.K. shares. The result: No U.S. estate tax or U.K. inheritance tax; no income tax on the U.S. company’s profits and strong asset protection.
Another choice allows you to pay tax on U.S. income. This is good if you are in a nation with a treaty with the U.S. Treaties can reduce the U.S. tax rate to 5% to 15%.
Two other tax laws allow the trust to be the taxes. If your trust is going to own U.S. real estate, then this is a good method. It avoids the “Foreign Investor Property Tax Act” also known as FIRPTA.
Inheritance tax planning trusts are used by the wealthy to avoid the estate tax. The IRS will give you a tax guarantee. This is known as a “private letter ruling” (more on this link).
If you need more information, then please give me, Brian Dooley, CPA, MBT a call for a free one-hour consultation at 949-939-3414.