Tax returns and compliance
Termination of residence
Economic employer approach
Types of taxable compensation
Salary earned from working abroad
Taxation of investment income and capital gains
Additional capital gains tax (CGT) issues and exceptions
General deductions from income
Tax reimbursement methods
Calculation of estimates/pre-payments/withholding
Relief for foreign taxes
General tax credits
Sample tax calculation
When are tax returns due? That is, what is the tax return due date?
April 15, or the following business day if April 15 falls on a weekend or holiday (but see discussion of extensions following).
What is the tax year-end?
What are the compliance requirements for tax returns in the United States?
Individual income tax returns for residents are generally due on or before the 15th day of the fourth month following the close of the taxable year (April 15 in the case of a calendar-year taxpayer, which is the required year for nearly all taxpayers). The time for filing can be automatically extended for six months by filing Internal Revenue Service (IRS) Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. However, the time for payment of tax cannot be extended.
A non-resident who has compensation subject to withholding must file his or her income tax return on or before April 15. In the case of a non-resident who does not have compensation subject to income tax withholding, the tax return is due on June 15.
Non-residents generally must file income tax returns on time to be permitted to claim deductions. In addition, non-residents who claim the benefits of treaty provisions, or otherwise modify an internal revenue law of the United States, may be required to disclose this position on the tax return for the tax year. A failure to disclose could lead to substantial penalties, including possible disallowance of the treaty benefit claimed.
Generally, the tax shown on an income tax return must be paid at the time fixed for filing the return, determined without regard to any extension of time for filing the return. The tax is self-assessed and is due without government assessment or notice and demand.
Individuals pay tax either through withholding or by making payments of estimated tax. Residents are subject to withholding of income tax on wages paid by their employer. Wages include cash and non-cash payments for services performed by an employee for his or her employer, unless an exception applies.
Estimated tax payments
A taxpayer must pay a certain amount of tax (through withholding and estimated installment tax payments) during the current year to avoid penalties for under-payment. However, an individual is exempted from estimated tax payment requirements if the tax for the current year, after credit for withholding tax, is less than USD1,000.
See Calculation of Estimates/Pre-payments/Withholding below for further discussion of estimated tax payments.
Non-residents are subject to withholding of income tax on wages paid by their employer for services performed in the United States (i.e., income effectively connected with a U.S. trade or business).
A non-resident may also be subject to withholding on U.S . source income that is not effectively connected with a U.S. trade or business (generally, investment income). The withholding rate is 30 percent imposed on gross income, unless lowered by treaty.
Estimated tax payments
A non-resident who earns income that is effectively connected with a U.S. trade or business (other than personal service income, e.g., wages) is subject to the same estimated tax payment requirements as residents.
For non-resident taxpayers, the estimated payment schedule is the same as for residents. See Calculation of Estimates/Pre-payments/Withholding below for further discussion of estimated tax payments.
What are the current personal income tax rates in the United States?
There are four types of tax status that may apply to a resident:
Each filing status is subject to a different graduated tax rate scale. The tax rates for 2016 are shown in the tables on the next page. A couple will be considered to be married for U.S. federal tax purposes if they were legally married in a jurisdiction that recognizes their union; however they may be considered single in some U.S. states.
Income tax tables for 2016
|Income Tax Tables for 2016|
|Taxable Income Bracket||Filing Status||Tax Rate|
Married filing jointly
Married filing separately
Head of household
Long-term capital gain / qualified dividend rate*: If a taxpayer is in the 10% or 15% tax bracket, the capital gain / dividend rate is zero. For taxpayers whose taxable income is below the 39.6% tax bracket, the rate is 15%. For taxpayers whose taxable income is in the the 39.6% bracket, the rate is 20%.
* For a capital gain to be considered long-term, it must have been held for more than one year. Qualified dividends include dividends from domestic corporations, and certain foreign corporations.
It is generally more beneficial for married taxpayers to file using the status ”married filing jointly” versus ”married filing separately.” However, married individuals wishing to file a joint tax return generally may not do so if either spouse is a nonresident at any time during the tax year. Certain elections may be available to allow a married couple to use the married filing jointly status when one or both of the individuals is a non-resident during part of the year.
A taxpayer may also be subject to an alternative minimum tax. The alternative minimum tax is payable to the extent it exceeds an individual’s regular tax liability. The alternative minimum tax is figured using lower rates, but allows fewer deductions.
A non-resident is subject to tax at graduated rates for income that is effectively connected with a U.S. trade or business, such as compensation for services rendered in the United States. A 30 percent flat tax (or lower treaty rate) applies to U.S . source income that is not effectively connected to a U.S. trade or business, such as U.S . source dividend income, certain interest, and royalties income.
In most cases, nonresidents must file their U.S. income tax return using single or married filing separately status.
For the purposes of taxation, how is an individual defined as a resident of the United States?
As a general rule, a foreign citizen is treated as a non-resident for U.S. tax purposes unless the individual qualifies as a resident. Under US domestic law, a resident is defined as an individual who either is a lawful permanent resident (the “greencard” test), or meets the “substantial presence” test.
A lawful permanent resident is an individual who has been officially granted the right to reside permanently in the United States. These individuals are often referred to as greencard holders.
An individual who meets the substantial presence test is an individual who has been present in the United States for at least 31 days in the current calendar year and an aggregate of 183 days during the current and two preceding years, counting all the days of physical presence in the current year, one-third of the days in the first preceding year, and one-sixth of the days in the second preceding year. In general, a partial day of presence in the United States is counted as one day of US presence for purposes of applying the substantial presence test.
An individual may be both a non-resident and a resident at different times during the same tax year. This may occur in the year a foreign citizen arrives in or departs from the United States. For an individual who meets only the greencard test, residence begins on the first day of the calendar year in which the individual is physically present in the United States as a lawful permanent resident and will generally cease on the day the lawful permanent resident status officially ends.
Residence under the substantial presence test generally begins the first day during the year on which the individual is physically present in the United States. An individual generally will cease to be a resident following his or her last day of physical presence in the United States provided certain conditions are met.
Is there a de minimis number of days rule when it comes to residency start and end dates? For example, taxpayers cannot come back to the host country for more than 10 days after their assignments end and they repatriate.
A period of up to 10 days of presence in the United States will not be counted for the purpose of determining an individual's residency start and end dates; those days of presence will be counted, however, for the purpose of determining whether the 183-day component of the substantial presence test has been met.
What if the assignee enters the country before his or her assignment begins?
If the taxpayer has multiple short visits to the United States prior to commencing residency, the residency start date is deemed to be the first day of the visit during which the individual’s cumulative presence for the year exceeds 10 days. An individual may be present in the United States for 10 days in total (for example, on a short business or house-hunting trip) and not trigger residency under the substantial presence test (discussed above), if the individual has a tax home in a foreign country and a closer connection to the foreign country during those days. The purpose of a visit to the United States is not relevant for determining whether a person is a U.S. resident, nor for determining the residency start date. Under the rules of the substantial presence test, residency is a function of presence rather than intent.
Are there any tax compliance requirements when leaving the United States?
Generally, all foreign nationals departing from the United States are required to first obtain tax clearance – commonly known as a “sailing permit” – from the IRS by filing either Form 1040-C, U.S. Departing Alien Income Tax Return, or Form 2063, U.S. Departing Alien Income Tax Statement, and, in most cases, to pay any tax due or post a bond. Form 2063 should be filed with the IRS if there is no taxable income for the year of departure and the preceding year or, in the case of a resident, if the IRS is satisfied that the departure will not jeopardize collection of tax. The departing foreign national should make the application for the sailing permit with the IRS at least two weeks, but not more than 30 days, before departing the United States. If the IRS deems all requirements have been met, the foreign national will be issued the sailing permit. Certain categories of individuals, students, trainees, exchange visitors, and certain foreign nationals temporarily in the United States, may be exempt from the sailing permit rules if specific requirements are met.
What if the assignee comes back for a trip after residency has terminated?
If an individual who qualified as a U.S. resident under the substantial presence test returns to the United States for short visits which total more than 10 days later in the same year, U.S. residency may be extended until the last day of actual presence in the United States.
Do the immigration authorities in the United States provide information to the local taxation authorities regarding when a person enters or leaves the United States?
Formal information sharing among U.S. authorities can occur.
Will an assignee have a filing requirement in the host country after he or she leaves the country and repatriates?
If U.S . source income is received after an assignee ceases to be a U.S. resident, the assignee must file a non-resident income tax return in order to report the income, remit any tax due, or claim any refund due.
Additionally, because the tax return is due April 15 of the year following the close of the tax year, the assignee will have to file the tax return for the year of departure in the year following departure.
Do the taxation authorities in the United States adopt the economic employer approach to interpreting the Income from Employment article (article 15) of the OECD treaty? If no, are the taxation authorities in the United States considering the adoption of this interpretation of economic employer in the future?
The United States does not explicitly adopt the economic employer approach. Rather, under the 2006 U.S. Model Income Tax Convention,1 the United States may not tax employment income if three conditions are satisfied: (a) the individual is present in the United States for a period or periods not exceeding 183 days in any 12-month period that begins or ends during the relevant tax year; (b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the United States; and (c) the remuneration is not borne as a deductible expense by a permanent establishment that the employer has in the United States.
If a foreign person pays the salary of an employee who is employed in the United States, but a U.S. corporation or permanent establishment reimburses the payor with a payment that can be identified as a reimbursement, neither condition (b) nor (c), as the case may be, will be considered to have been fulfilled.
Is there a de minimis number of days before the local taxation authorities will apply the economic employer approach? If yes, what is the de minimis number of days?
However, under U.S. tax law, a non-resident alien performing personal services for a foreign employer in the United States, who is present in the United States for a period of 90 days or less, and whose compensation for those services is no more than USD3,000, will not be subject to U.S. tax on the income earned.
What categories are subject to income tax in general situations?
The following is a list of typical items in an international assignment compensation package that are fully taxable (to a resident or non-resident) unless otherwise indicated. Please note this is not a comprehensive list:
Are there any areas of income that are exempt from taxation in the United States? If so, please provide a general definition of these areas.
Below we highlight the most common items that are exempt from income tax. Please note this is not a comprehensive list.
Generally, contributions to profit sharing or pension plans paid by the employer on behalf of the employee are not currently taxable (that is, they are tax deferred) if the plan is a U.S. qualified plan. Certain tax treaties may provide favorable treatment for similar foreign plans.
Medical expense reimbursements and employer-paid accident and health insurance premiums for U.S. qualified plans.
Meals and lodging provided for the employer’s convenience, on business premises, and as a condition of employment.
Certain employee benefits of nominal value.
Moving expenses such as transportation of household goods and personal effects, storage expenses associated with a foreign move (that is, out of the united states), and travel and lodging expenses incurred in moving from the old location to the new location, providing certain requirements are met.
For a discussion of away-from-home travel expenses, see Special Considerations for Short-Term Assignments.
Are there any concessions made for assignees in the United States?
Generally, the United States does not offer any expatriate concessions to foreign citizens working in the United States. However, holders of F, J, and Q visas may be exempt from income tax on compensation under certain circumstances.
Is salary earned from working abroad taxed in the United States? If so, how?
A U.S. citizen or resident who has a tax home4 in a foreign country and who is physically present in a foreign country or countries for at least 330 full days during any period of 12-consecutive months may elect to exclude a portion of his or her foreign earned income from gross income. The amount that may be excluded in 2016 is USD 101,300. This amount is adjusted annually for inflation. An exclusion or deduction for certain housing costs may also be claimed subject to limitations.
A U.S. citizen who establishes that he or she has been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire calendar year may also elect to exclude a portion of his or her foreign income from gross income, subject to the same limitations noted above. A housing deduction or housing exclusion may also be claimed subject to certain limitations.
Are investment income and capital gains taxed in the United States? If so, how?
A citizen or resident is subject to U.S. tax on worldwide income. Thus, a resident is subject to tax on investment income (wherever paid) including interest and dividend income, capital gains, and income (less expenses) from partnerships and rental properties.
For a non-resident, U.S . source investment income that is not effectively connected with a U.S. trade or business is generally taxed at 30 percent (or the lower treaty rate, if applicable). The tax applies to gross income without deductions. Items of investment income subject to tax include, in part, dividends, certain interest (including original issue discount), rents, royalties, and certain capital gains.
Certain investment-interest income and certain capital gains are exempt from U.S. taxation.
In general, non-residents are not taxed on net capital gains, except for any dispositions of a U.S. real property interest and sales of assets used in a U.S. trade or business.
Generally, U.S. residents are subject to tax on dividend, interest, and rental income (net of deductions).
Non-residents are generally subject to tax on U.S . source income. Dividend income is U.S. source if paid by a U.S. corporation. Interest income is U.S. source if paid by a U.S. corporation or other entity that is a U.S. resident. However, interest on U.S. bank deposits received by a non-resident is specifically exempt from tax.
Non-residents are taxed on gross rental income from U.S. real property held for investment at the flat 30 percent (or, if applicable, the lower treaty) rate. This rental income is not considered effectively connected with a U.S. trade or business, so no deductions (such as interest, taxes, and depreciation) are allowed. An election can be made to treat rental income as effectively connected with a U.S. trade or business. The election permits rental income to be reduced by expenses allocable to the income (such as interest, taxes, and depreciation). The election also causes the net income from the property to be taxed at graduated rates. An income tax return must be filed to make this election, which in most cases is beneficial. Gain recognized by a non-resident from the sale or disposal of U.S. real property is generally subject to tax at the regular graduated U.S. tax rates, including the applicable capital gains tax rates.
A stock option is the right granted to an employee or to an independent contractor to purchase shares in his or her corporate employer or a related company. The option agreement usually specifies the purchase price and time period during which the option may be exercised. The taxation of stock options to an individual depends on whether the options are incentive stock options or nonqualified options.3
An incentive stock option (ISO) is an option that meets certain statutory requirements. If all requirements are met and an option is considered an ISO, no income is recognized upon grant or exercise of the option;6 instead, capital gain is recognized when the acquired stock is sold.
A nonqualified stock option (NQSO) is generally any option other than an ISO that is granted to acquire employer common stock. Unless the option has an ascertainable fair market value, an individual is not taxed when granted a nonqualified stock option. Upon the exercise of the NQSO, the individual is treated as receiving taxable compensation measured by the excess of the fair market value of the stock received over its purchase price. The subsequent sale of the stock will result in a capital gain or loss. In determining gain or loss, the basis of the option stock is the purchase price plus the compensation recognized at exercise.
Although this is generally not the case with compensatory options, if an option has a readily ascertainable fair market value at the time of grant, the individual recognizes income at the time of grant, or at the time of vesting if later, instead of at the time of exercise of the option.
U.S. residents are taxed on the entire amount of compensation income , while non-residents are taxed only on the portion of the income that is from U.S. sources. Generally, this is determined by applying the ratio of all U.S. work-days between the grant and vesting dates to the total number of work-days over the same period to the total stock option income recognized at exercise.
|Residency status||Taxable at:|
* Assumes a NQSO with no readily ascertainable fair market value on the grant date.
Foreign exchange gain is generally taxable. Whether the gain is considered ordinary and taxed at the graduated tax rates, or capital and taxed at a lower tax rate, depends upon whether the gain is related to a trade or business, in which case it will be ordinary gain. If the gain is related to investment activity or a personal transaction, it will be capital gain. If the foreign exchange transacation results in a loss, it will be deductible against all other income if it is ordinary loss, but if it is capital loss it can only be deducted against other capital gains.
Up to USD250,000 of gain realized on the sale of a principal residence (USD500,000 for a married couple that files their tax return jointly) may be excluded from income if certain conditions are met. To qualify for this exclusion, the individual must have owned and used the property as a principal residence for periods that total at least two years in the five-year period ending on the date of sale. The ownership and use requirements may be satisfied during non-concurrent periods provided both tests are met during the five year period ending on the date of the sale. Once claimed, this exclusion cannot be claimed again for two years. If the “two-out-of-five-year ownership and use” tests are not met due to certain specified unforeseen circumstances (such as change in place of employment, health, or divorce), a pro rata exclusion may be allowed.
If a property is used for a purpose other than as a principal residence (e.g., as a rental property or vacation home) after 31 December 2008, and is subsequently used as a principal residence, then upon sale, the gain attributable to the period of time that the property was not used as a principal residence is not eligible for the exclusion. Certain exceptions to this rule may apply.
Generally, capital losses are deductible only against capital gains. However, residents may deduct up to USD1,500 (USD3,000 on a married filing joint return) of net capital loss against other income. Unused capital losses may be carried forward indefinitely to be used in future years.
For non-residents, capital losses from the sale or exchange of capital assets effectively connected with a U.S. trade or business are taxed under the same rules that apply to U.S. residents.
Gain realized on the sale of assets held for personal use is generally taxed as capital gain. Loss on such assets is not deductible (however, a deduction is allowed in connection with personal losses suffered due to casualty or theft).4
Recipients of gifts are not subject to tax upon receipt of the gift. The donor of a gift may be subject to gift tax, which is based on the value of the gift. Annual and lifetime gift tax exemptions apply to the donor. See Gift, Wealth, Estate, and/or Inheritance Tax below for further discussion.
Are there additional CGT issues in the United States? If so, please discuss?
Are there CGT exceptions in the United States? If so, please discuss?
Generally not applicable. However, a deemed disposition tax could apply for individuals subject to an exit tax upon expatriation. See Other Taxes below for more information.
What are the general deductions from income allowed in the United States?
Ordinary and necessary business expenses generally are deductible from gross income. In addition, deductions are available for certain expenses of a personal nature. Listed below are some of the deductions available.
In lieu of the foregoing itemized deductions, an individual who has been a resident for the entire taxable year may claim the standard deduction. The amount of the standard deduction is determined according to the filing status of the taxpayer
|Married filing jointly and surviving spouse||12,600|
|Married filing separately||6,300|
|Head of household||9,300|
In addition, residents of the United States may claim a deduction, called a personal exemption, for themselves and for dependents who are U.S. citizens or residents of the United States, Canada, or Mexico at some time during the year. On a joint return, exemptions for both spouses are allowed. If a joint return is not filed, an exemption may be claimed for a spouse even if the spouse is a non-resident, if the spouse has no gross income for U.S. tax purposes and was not a dependent of another taxpayer. The exemption amount is adjusted for inflation each year. For 2016, each exemption is USD 4,050. A non-resident engaged in a trade or business in the United States is allowed only one exemption unless he or she is a resident of Mexico, Canada, or South Korea (in which case, additional exemptions may be taken for a spouse and dependents)
What are the tax reimbursement methods generally used by employers in the United States?
The current-year gross-up method is most commonly used.
How are estimates/pre-payments/withholdings of tax handled in the United States? For example, Pay-As-You-Earn (PAYE), Pay-As-You-Go (PAYG), etc.
Employers are required to withhold taxes from each payment of wages and other compensation. Taxes withheld include federal income tax, social security tax, and Medicare tax. Most states and some localities also require withholding of income tax, and some states impose additional withholding taxes.
If withholding is not expected to cover the individual’s annual tax liability, estimated tax payments may be required of the individual. Failure to pay sufficient tax through withholding and estimated tax payments may result in assessment of penalties
When are estimates/pre-payments/withholdings of tax due in the United States? For example, monthly, annually, both, etc.
Estimated tax payments, if required, should be made quarterly. For a calendar-year taxpayer, payments of federal estimated taxes are due quarterly on April 15, June 15, and September 15 of the current year, and on January 15 of the following year. States and localities generally follow the same payment schedule, but some of the due dates may vary.
Is there any relief for foreign taxes in the United States? For example, a foreign tax credit (FTC) system, double taxation treaties, etc.?
U.S. citizens and residents may claim a credit against U.S. tax for foreign taxes paid or accrued on foreign source income. The amount of the credit is the lesser of the amount of foreign tax paid or accrued, or the amount of the U.S. tax on the net foreign-source taxable income. Excess foreign tax credits can be carried back one year, and forward 10 years.
Residents of countries with which the United States has income tax treaties may be eligible for certain benefits. Generally, most treaties provide a lower rate of withholding tax on certain types of income, including dividends, interest, and royalties. Many tax treaties provide that a non-resident will not be taxed on compensation for services rendered in the United States if the individual is present in the United States for a short period of time (generally not more than 183 days during a calendar year, or relevant 12-month period, depending on the treaty) and is rendering services for a foreign employer that is not engaged in business in the United States. For more information, see section above titled Economic Employer Approach.
In some treaties, specified income or income below a certain level is also exempt from tax in the United States. A foreign citizen who is resident in two countries at the same time may also be able to invoke the tie-breaker provisions of a treaty to determine the appropriate primary taxing jurisdiction.
What are the general tax credits that may be claimed in the United States? Please list below.
The most common tax credits available to a resident individual taxpayer include credits for:
This calculation assumes a married taxpayer resident in the United States with two children whose three-year assignment begins January 1, 2014 and ends December 31, 2016. The taxpayer’s base salary is USD 100,000, and the calculation covers three years
|Moving expense reimbursement||20,000||0||20,000|
|Interest income from non-local sources||6,000||6,000||6,000|
Calculation of Taxable Income
|Days in the United States||365||365||365|
|Earned income subject to income tax|
|Net housing allowance||12,000||12,000||12,000|
|Moving expense reimbursement||0||0||0|
|Total earned income||151,000||156,000||151,000|
|Total taxable income||128,800||133,400||128,200|
Calculation of tax liability
|Taxable income as above||128,800||133,400||128,200|
|U.S. federal income tax||23,913||24,938||23,593|
|Alternative minimum tax*|
|Foreign tax credits||0||0||0|
|Total federal income tax||23,913||24,938||23,593|
|Social security tax (FICA)||9,444||9,609||9,537|
|Total U.S. federal taxes***||33,356||34,547||33,129|
* Many U.S. states also impose income taxes. This calculation is for federal tax only.
1November 15, 2006. The U.S. Model Income Tax Convention serves as the basis for the U.S. negotiating position for income tax treaties. The Model draws from a number of sources, including the OECD Model, existing treaties, and recent U.S. negotiating experience.
2For example, an employee can be physically present in the country for up to 60 days before the tax authorities will apply the economic employer approach.
3I.R.C. § 56(b)(3).
4An individual may generally establish that the tax home is in a foreign country by showing that his or her principal place of business and/or abode is located in such foreign country.
5I.R.C. § 165(c).
6The difference between the fair market value of the stock on the exercise date and the exercise price (the spread) represents a tax-preference item subject to the alternative minimum tax at exercise.
7Sample calculation generated by KPMG LLP, the U.S. member firm of KPMG International, based on the Internal Revenue Code as enacted at December 31, 2013.
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