Doing business in the United States: Individual tax issues

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The United States levies tax on its citizens and resident aliens on their worldwide income. Nonresident aliens are taxed on their US-source income and income effectively connected with a US trade or business (with certain exceptions). For discussion of how the United States determines the residence status of an alien, see section VI.D. Residence, below.

A. Personal income tax rates

For individuals, the top income tax rate for 2019 is 37%, except for long-term capital gains and qualified dividends (discussed below).

Tax readiness insight: The Act reduced individual tax rates, but the number of tax brackets remains at seven. The Act sunsets after 2025 many individual tax provisions, including the lower rates.

2019 income tax rates and brackets

Single taxpayers

Taxable income

Tax rate:

$0-$9,700

10%

$9,701-$39,475

12%

$39,476-$84,200

22%

$84,201-$160,725

24%

$160,726-$204,100

32%

$204,101-$510,300

35%

$510,301+

37%

Married taxpayers filing jointly

Taxable income

Tax rate:

$0-$19,400

10%

$19,401-$78,950

12%

$78,951-$168,400

22%

$168,401-$321,450

24%

$321,451-$408,200

32%

$408,201-$612,350

35%

$612,351+

37%

Head-of-household taxpayers

Taxable income

Tax rate:

$0-$13,850

10%

$13,851-$52,850

12%

$52,851-$84,200

22%

$84,201-$160,700

24%

$160,701-$204,100

32%

$204,101-$510,300

35%

$510,301+

37%

Married taxpayers filing separately

Taxable income

Tax rate:

$0-$9,700

10%

$9,701-$39,475

12%

$39,476-$84,200

22%

$84,201-$160,725

24%

$160,726-$204,100

32%

$204,101-$306,175

35%

$306,176+

37%

Standard deduction amounts

The 2019 standard deduction amounts are as follows:

  • Single or married filing separately: $12,200
  • Married filing jointly: $24,400
  • Head of household: $18,350

Taxpayers who have reached age 65 (or who are blind) receive an additional standard deduction of $1,300 for married taxpayers or $1,650 for unmarried taxpayers who are not a surviving spouse.

The Act eliminated personal exemptions and dependent exemptions.

Notes

  1. Long-term gains from capital assets held for more than one year are taxed at rates of 0%, 15%, or 20%. Short-term gains from capital assets held for one year or less are taxed as ordinary income. The maximum federal income tax rate on capital gains is 20% for assets held for more than one year (23.8% if the net investment income tax discussed below applies). The maximum federal income tax rate on ‘qualified dividends’ received from a domestic corporation is 20% (23.8% if the net investment income tax discussed below applies). See Section VI.E.2 below.
  2. Nonresident aliens may not take advantage of head-of-household status or joint return rates, nor are they entitled to the standard deduction. However, a US citizen or resident with a nonresident alien spouse may qualify for head of household status in certain circumstances.
  3. Elections may be made by couples if one spouse is a nonresident alien at the end of the tax year and the other is a US citizen or resident, whereby no nonresident alien period is recognized and the couple may file jointly as full-year US citizen/resident.
  4. The Act adjusts the individual tax brackets and certain other individual provisions for inflation based on a concept known as ‘chained CPI.’
  5. A ‘head-of-household taxpayer’ is a person who pays for more than half of the household expenses, is considered unmarried for the tax year, and has a qualifying child or dependent.

B. Alternative minimum tax (AMT)

In lieu of the tax computed using the above rates, the individual AMT may be imposed under a two-tier rate structure of 26% and 28%. For tax year 2019, the 28% tax rate applies to taxpayers with taxable incomes above $194,800 ($97,400 for married individuals filing separately).

Under the Act, for tax years beginning after December 31, 2017, and before January 1, 2026, the AMT exemption amount is increased to $109,400 for married taxpayers filing a joint return (half this amount for married taxpayers filing a separate return), and $70,300 for all other taxpayers (other than estates and trusts). The phase-out thresholds increase to $1 million for married taxpayers filing a joint return and $500,000 for all other taxpayers (other than estates and trusts).

These amounts are indexed for inflation. As a result, for 2019 the AMT exemption amount is $111,700 for married taxpayers filing a joint return (half this amount for married taxpayers filing a separate return), and $71,700 for all other taxpayers (other than estates and trusts), and the phase-out thresholds are $1,020,600 for married taxpayers filing a joint return and $510,300 for all other taxpayers (other than estates and trusts).

The AMT is payable only to the extent it exceeds the regular net tax liability. The foreign tax credit is available for determining AMT liability to the extent of the foreign tax on the foreign-source AMT income (AMTI), subject to certain limitations.

AMTI generally is computed by starting with regular taxable income, adding tax preference deductions (claimed in the computation of regular taxable income), and making special adjustments to some of the tax items that were used to calculate taxable income. For example, the taxpayer must add back all state and local income taxes deducted in computing regular taxable income.

For nonresident aliens with a net gain from the sale of US real property interests, the AMT is calculated on the lesser of AMTI (before the exemption) or the net gain from the sale of the US real property interest.

Tax readiness insight: The individual AMT had a significant effect for taxpayers living in states with high income taxes because the deduction for state and local income taxes was excluded from the AMT computation. Due to certain provisions of the Act, including the increased AMT exemption, the $10,000 limitation on the state and local tax deduction, and the repeal of miscellaneous itemized deductions, it is expected that fewer taxpayers will be affected by the AMT.

C. State and local income taxes

Most states, and a number of municipal authorities, impose income taxes on individuals working and/or residing within their jurisdictions. (For more information, see section II, State and local tax issues, above.)

D. Residence

The determination of an alien individual’s residence status for federal income tax purposes is made using a set of relatively objective tests. These rules generally treat the following individuals as residents:

  • Lawful permanent residents (i.e., 'green card' holders). Resident alien status generally continues until the green card is formally relinquished. Thus, individuals who hold green cards but leave the United States to live abroad indefinitely or permanently generally will continue to be classified and taxed as resident aliens until the green card is relinquished and Form I-407 is filed (expiration of the green card by itself has no impact for tax purposes). Complex rules apply to individuals who relinquish their green cards if they held the green card in at least eight of the 15 years prior to relinquishment. In light of these rules, professional advice should be sought prior to obtaining or relinquishing a green card, or if eligible to claim nonresident alien status under a treaty.
  • Individuals who meet the 'substantial presence test.' An individual meets this test if present in the United States for at least 31 days in the current year and a combined total of at least 183 equivalent days during the current year and prior two years. For the purposes of the 183-equivalent-day requirement, any part of a day the individual is present in the United States during the current calendar year counts as a full day; each day in the preceding year counts as one-third of a day; and each day in the second preceding year counts as one-sixth of a day. Note that an individual who has less than 183 days of US presence in the current tax year and can establish a ‘tax home’ in, and a 'closer connection' to, another country for the entire year still may qualify to elect to be treated as a nonresident alien, even if the three-year, 183-equivalent-day requirement is met. Exceptions also are available for certain students, teachers, or trainees; crew members of foreign vessels; employees of foreign governments and international organizations; certain individuals with medical problems that arise while in the United States; and certain Mexican and Canadian residents who commute to work in the United States.

Special rules apply when determining the portion of the year an individual will be treated as a resident or nonresident in the first and last years of residency. Special rules also may apply to those who are nonresident aliens for a temporary period of time.

Inbound insight: Resident alien status often results in lower US tax than nonresident alien status, due to increased allowable deductions and credits and lower tax rates for certain married taxpayers. Consequently, certain nonresident aliens may choose to elect resident alien status, if specific requirements are met. Note that resident alien status triggers enhanced reporting requirements under FATCA (discussed above). For example, resident aliens may be required to file Form 8938, Statement of Specified Foreign Financial Assets.

The United States has income tax treaties with a number of countries for the purpose of eliminating double taxation. If there is a tax treaty in effect between the United States and an individual's country of residence, the provisions of the treaty may be used to effectively override US resident alien status determined under domestic law for purposes of calculating US income tax.

Under many of these treaties, a non-US-citizen individual classified as an income tax resident under the internal laws of both the United States and his or her home country who can show that a 'permanent home' is available only in the home country generally will be classified as a nonresident alien for purposes of calculating US income tax (or under a series of other tests, if necessary) if the individual chooses to utilize the benefits of the treaty. A form must be filed to claim nonresident alien status as the result of a tax treaty. (For more information, see Section III, US tax treaties, above, and Appendix A for a summary of certain investment income tax treaty benefits.)

E. Other taxes

1. Social security contributions

For 2019, social security tax (old-age, survivors, and disability) is withheld at 6.2% on the first $132,900 of wages paid to resident and nonresidents who work as employees in the United States. Medicare hospital insurance taxes are withheld at 1.45% of all employee wages with no dollar cap.

Social security tax for resident self-employed individuals equals 12.4% of the first $132,900; Medicare hospital insurance taxes equals 2.9% of all net self-employment income of residents. Nonresident aliens generally are not subject to social security and Medicare hospital insurance taxes on self-employment income.

For wages received in tax years beginning after December 31, 2012, the employee portion of Medicare hospital insurance tax is increased by an additional 0.9% on wages received in excess of $250,000 for a married couple filing a joint return, $125,000 for a married individual filing a separate return, and $200,000 for all other individuals (these thresholds are not indexed for inflation). Similarly, for tax years beginning after 2012, the Medicare portion of the self-employment tax rates is increased by an additional 0.9% (i.e., to 3.8%) for self-employment income in excess of those threshold amounts.

Social security and Medicare hospital insurance taxes are not deductible by employees when determining their taxable income for federal income tax purposes. However, for self-employed individuals, a deduction is allowed for an amount equal to one-half of the combined self-employment social security and Medicare hospital insurance taxes that are imposed.

Note that the United States has entered into ‘totalization agreements’ with several nations for the purpose of avoiding double taxation of income with respect to social security taxes and allowing individuals who participate in more than one social security system to qualify for benefits that would not be available under domestic law. These agreements must be taken into account when determining whether any alien is subject to US social security and Medicare hospital insurance taxes or is subject to the social security taxes of a foreign country. (For a list of countries with which the United States has totalization agreements, see Appendix B.)

The following visa classes of nonresident aliens typically are exempt from US social security and Medicare taxes: A, C-1/D, F, G, H, J, M, and Q.

For tax years beginning after December 31, 2012, a 3.8% 'unearned income Medicare contribution' tax applies on the lesser of (1) the taxpayer's net investment income for the tax year or (2) the taxpayer's excess modified adjusted gross income over a threshold amount (generally, $200,000; $250,000 for a married couple filing a joint return and surviving spouses; and $125,000 for a married individual filing a separate return). The tax, which is in addition to the regular income tax liability, applies to all individuals subject to US taxation other than nonresident aliens. Net investment income generally includes nonbusiness income from interest, dividends, annuities, royalties, and rents; income from a trade or business of trading financial instruments or commodities; income from a passive-activity trade or business; and net gain from the disposition of nonbusiness property.


2. Capital gains taxes

The maximum federal regular income tax rate on capital gains for assets held for more than 12 months is 20% (23.8% if the net investment income tax, discussed above, applies). Note: Nonresident aliens who have US-source capital gains or qualified dividends that are not ECI are subject to a 30% rate on such income. The graduated income tax rates apply to capital gains from assets held for 12 months or less. Note: Capital gains from the sale of certain types of assets, such as collectibles or ‘Section 1250 property,’ could be subject to higher rates. Long-term capital gains also are added to the income that is used for AMT calculations.

There are three capital gains income thresholds. Under the Act, these thresholds apply to maximum taxable income levels for 2019, as follows:

Long-term capital gains rate

Single taxpayers

Married filing jointly

Head of household

Married filing separately

0%

Up to $39,375

Up to $78,750

Up to $52,750

Up to $39,375

15%

$39,376-$434,550

$78,751-$488,850

$52,751-$461,700

$39,376-$244,425

20%

Over $434,550

Over $488,850

Over $461,700

Over $244,425


3. Consumption taxes

The United States does not have a federal-level consumption tax.


4. Net wealth/worth taxes

The United States does not have a federal-level net wealth/worth tax.


5. Inheritance, estate, and gift taxes

The United States imposes a federal estate tax on the fair market value of assets that an individual transfers or is deemed to transfer at death. The United States also imposes a federal gift tax as well as a federal generation-skipping transfer tax. The purpose of the gift tax is to prevent the lifetime transfer of assets without estate tax liability. The purpose of the generation-skipping transfer tax is to prevent avoidance of tax by skipping generations when making large transfers of assets.

Individuals who are US citizens or residents (domiciliaries) are subject to federal estate tax on their worldwide assets (usually including life insurance proceeds). Individuals who are nonresident aliens are subject to US federal estate tax only on US-situs assets; other special rules may apply. Nonresident in this context means a non-US citizen who is not domiciled in the United States for estate/gift tax purposes. It can be difficult to determine whether a particular individual is resident for estate tax purposes.

The estate, gift, and generation-skipping transfer per-person tax exemption amount was set at $5 million for 2011 and is indexed for inflation for later years. For 2017, the inflation-indexed exemption amount was $5.49 million.

The Act doubles the estate, gift, and generation-skipping transfer tax exemption amount for estates of decedents dying and gifts made after December 31, 2017, and before January 1, 2026. That is, the Act increases the basic exclusion amount from $5 million to $10 million. The $10 million amount is indexed for inflation occurring after 2011. For 2019, the inflation-indexed exemption amount is $11,400,000.

The top tax rate is 40%. Note that states may impose inheritance taxes with lower exemption levels.

Assets bequeathed or given to an individual's spouse are exempt from estate and gift tax otherwise imposed at death or the time of the gift, provided the spouse is a US citizen.


6. Property taxes

The United States does not have a federal-level property tax, but local property taxes (e.g., real estate taxes on residences) may apply.


7. Luxury and excise taxes

The United States does not have federal-level luxury taxes. However, federal and state governments impose excise taxes on a variety of goods. For example, federal and state excise taxes are imposed on gasoline and diesel fuel used for transportation. The excise taxes are levied item by item and lack any uniformity in rates.

F. Income determination

1. Employment income

Citizens and resident aliens are taxed on compensation earned for work performed anywhere in the world, regardless of where or when payments are made (with certain exceptions). Nonresident aliens are taxed on compensation earned for work performed in the United States, regardless of when or where payments are made, absent a treaty or Internal Revenue Code provision to the contrary.

Employees generally are not taxed on reimbursements (or direct provision of benefits) for either personal living expenses (i.e., food and lodging) or for travel expenses while ‘away from home’ for business purposes, subject to various limitations and substantiation requirements. However, reimbursements for similar expenses of a spouse or dependent are taxable. Note that being 'away from home' requires a temporary absence from an individual's tax home. Assignments of more than one year in a single work location are not considered to be temporary, regardless of facts and circumstances.

A qualified retirement plan may allow a participant to contribute funds on a before-tax or an after-tax basis. Similar treatment may be available for participation in a foreign pension plan via treaty. When benefits are paid to the participant at retirement, the portion of the pension payment that represents a return of the after-tax contribution amount paid is not again subject to tax. Otherwise taxable retirement distributions also may be either exempt from US tax or subject to special rates of US tax under a treaty.


2. Equity compensation

Multiple types of equity compensation are used by US companies, including stock options and various payment rights based on stock value. The taxation of these different instruments varies.

The timing, type, and amount of income inclusion depend on whether the taxpayer receives a non-statutory (nonqualified) stock option or a statutory stock option (also known as an incentive stock option). If an employee or service provider receives a nonqualified option to buy stock as payment for services, the taxpayer generally recognizes income when the option is exercised (to buy the stock or other property). Upon grant and exercise of an incentive stock option, however, taxpayers generally do not include any amount in income for regular tax purposes until the stock purchased by exercising the option is sold.

Foreign nationals who are granted stock options prior to the start date of their residency in the United States may be subject to US income tax at exercise on all of the realized income if they are US residents at such time. In most cases, when a foreign national who is a resident alien exercises an option to buy foreign stock, the spread between the option price and the fair market value of the stock at the time of exercise is subject to US income tax. A portion of the spread may be treated as foreign-source (to the extent allocable to services rendered in the foreign country). As a result, even though the full spread will be subject to tax in the United States, a foreign tax credit generally may be claimed to reduce the US income tax (assuming foreign tax is paid on this income).

In a situation that is often overlooked, if a foreign national returns to his or her home country and exercises an option that was granted before or during the taxpayer’s residency in the United States and vested after at least one US workday, a portion of the income could be subject to US taxation because it is attributed to the period during which he or she performed services in the United States.

Inbound insight: Stock options or restricted stock units that are granted and become vested after the individual has performed work in the United States may be subject to Section 409A. Section 409A imposes various requirements on equity compensation; a violation of these requirements may result in an additional 20% tax plus an interest penalty on the value of the compensation. Foreign nationals should review these grants to see if Section 409A applies and whether any changes must be made before working in the United States.

3. Business income

When an individual works for himself or herself, that individual generally is deemed to have self-employment income. Self-employment income is taxed under US law in a manner similar to employment compensation. However, a self-employed individual often may have more ability to deduct business expenses than an employee. Citizens and resident alien individuals may (subject to certain exceptions) be subject to increased social security contributions (i.e., self-employment tax) in the United States on self-employment income earned while resident in the United Sates (see section VI.E.1., Social security contributions, above). Nonresident aliens are rarely exposed to the self-employment tax.


4. Capital gains

Net capital gains of a citizen or resident alien are included in worldwide income and are subject to US taxation (see section VI.E.2., Capital gains taxes, above). The excess of net long-term capital gain over net short-term capital loss is considered net capital gain. A nonresident alien is taxed at 30%, generally collected by withholding at the source of the payment, on US-source net capital gains from intangible property if the person is in the United States for 183 days or more during the tax year in which the gain occurs. Capital gains from US real property interests are taxable regardless of US presence, and also may be subject to a special withholding at source based on the sales price of the property (see discussion above of FIRPTA).


5. Dividend income

Dividend income received by a citizen or resident alien is subject to US tax, whether it is from US or foreign sources. The maximum federal income tax rate on ‘qualified dividends’ received from a domestic corporation or a qualified foreign corporation is 20% (23.8% if the net investment income tax discussed above in section VI.E.1 applies).

Nonresident aliens' US-source dividends generally are subject to a flat 30% tax rate (or lower treaty rate), usually withheld at source.


6. Interest income

Interest income received by a citizen or resident alien is subject to US tax, whether it is from US or foreign sources.

Nonresident aliens' US-source interest is generally subject to a flat 30% tax rate (or lower treaty rate), usually withheld at source. Note that certain 'portfolio interest' earned by a nonresident alien generally is exempt from tax.


7. Rental income

Rental income received by a citizen or resident alien is subject to US tax, whether it is from US or foreign sources.

Nonresident aliens' US-source rents are generally subject to a flat 30% tax rate (or lower treaty rate), usually withheld at source. However, a nonresident alien can elect to report real property rental income net of expenses, subject to tax at graduated rates.


8. Exempt income

Certain items are generally exempt from federal personal income tax. Two common types of tax-exempt income include interest from municipal bonds and property received as a gift or bequest.

Conversely, some types of income that enjoy preferential tax treatment in an individual’s home country may not enjoy the same tax treatment in the United States. For example, certain retirement-type accounts in foreign jurisdictions are treated as ‘look-through’ entities for US tax purposes.


9. Deductions

a. Employment expenses

For years before 2018, employees may be able to claim an itemized deduction for certain 'ordinary and necessary' unreimbursed work-related expenses. Common deductions include travel expenses and transportation costs (other than commuting to and from work), business entertainment and gifts, computers and cell phones if required for the taxpayer's job and for the convenience of the employer, uniforms, and home office expenses. The Act repealed this itemized deduction.

The deduction for employment expenses of an employee was subject to the floor on the total of ‘miscellaneous’ itemized deductions equal to 2% of adjusted gross income. Various other limitations and strict substantiation requirements apply.

b. Personal deductions.

Under rules as modified by the Act, citizens and resident aliens may deduct, as itemized deductions, the following common personal expenditures:

  • qualified residence mortgage interest
  • state and local income taxes and property taxes up to an aggregate of $10,000
  • medical expenses, certain casualty, disaster, and theft losses, and charitable contributions, subject to limitations.

Certain personal expenses are allowed as deductions against gross income (so-called ‘above-the-line’ deductions).

Nonresident aliens may deduct, subject to limitations, certain casualty and theft losses incurred in the United States, contributions to US charitable organizations, and state and local income taxes (subject to the same $10,000 limit).

c. Interest expenses (other than qualified residence interest)

No deduction is allowed for personal interest, such as on a car loan. However, interest paid on investment debt is deductible, but only to the extent that there is net investment income (i.e., investment income net of investment expenses other than interest). Disallowed excess investment interest expense may be claimed as a deduction in subsequent years, to the extent of net investment income.

d. Standard deductions

Instead of itemizing deductions, citizens and resident aliens may claim a standard deduction. The basic standard deduction for 2019 is $24,400 for married couples filing a joint return; $12,200 for single and married filing separate individuals; and $18,350 for heads of household. These amounts are adjusted annually for inflation. Nonresident aliens (including dual-status residents) may not claim a standard deduction.

Individuals – including resident aliens – who are blind or age 65 or over are entitled to a higher standard deduction. For 2019, such an individual who is married may increase the standard deduction by $1,300; if such an individual is unmarried and not a surviving spouse, the additional standard deduction is $1,650. If an individual is both blind and age 65 or over, the standard deduction may be increased twice.

e. Personal allowances

The Act eliminated personal exemptions.

Tax readiness insight: The net effect of the increased standard deduction and elimination of personal exemptions under the Act will be a benefit to many taxpayers, but may be a detriment to others.

f. Losses

An individual's capital loss deduction generally is limited to the individual's capital gains plus an additional amount of $3,000 ($1,500 for married filing separately). The additional loss is not permitted to nonresident aliens. Individuals may carry over any unused net capital loss to later tax years, subject to the annual $3,000/$1,500 limit on using net capital loss against ordinary income.

Losses incurred by individuals that are attributable to an activity not engaged in for profit (i.e., hobby losses) generally are deductible only to the extent of income produced by the activity.

Taxpayers with net operating losses (NOLs) may carry their losses forward and back to certain tax years. The general NOL carryback period is the two years preceding the year in which the loss was incurred. If the NOL is not fully used on the carryback, the loss may be carried forward for 20 tax years following the year in which the loss was incurred. (For carrybacks and carryforwards of NOLs by corporations, see section I.N.15. above. For capital losses of corporations, see section I.M.2. above.)

G. Foreign tax relief and tax treaties

1. Foreign tax relief

Taxpayers (generally US persons and foreign persons with effectively connected US trade or business income) may claim a credit against US federal income tax liability for certain taxes paid to foreign countries and US possessions. Foreign income, war profits, and excess profits taxes are the only taxes that are eligible for the credit. Taxpayers may choose to deduct these taxes with no limitation or, alternatively, claim a credit subject to limitations.


2. Tax treaties

The United States has bilateral tax treaties with more than 60 foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from US taxes, on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and specific items of income.

Under these same treaties, residents or citizens of the United States are taxed at a reduced rate, or are exempt from foreign taxes, on certain items of income they receive. All US income tax treaties contain what is known as a 'saving clause' that reserves the right for a country to deny tax treaty benefits to its own residents. In US treaties, the saving clause always applies to US citizens and residents, and always includes exceptions. (For more information, see Section III, US tax treaties, above, and Appendix A.)

The United States also has entered into totalization agreements, in part for the purpose of avoiding double taxation of income with respect to social security taxes with various countries, which are listed in Appendix B. (See also discussion of social security taxes in Section VI.E.1, above.)

H. Other tax credits and incentives

1. Child tax credit

Citizens, resident aliens, and nonresident aliens may claim a child tax credit if the qualifying dependent child is a citizen, national, or resident of the United States. Under the Act, if the child has not reached the age of 17 by the end of the year, a tax credit is allowed for up to $2,000 per child with a social security number (of which up to $1,400 is refundable). The amount of the credit is reduced once the taxpayer’s income reaches certain thresholds, as increased under the Act. The Act also provides a nonrefundable credit for a qualifying dependent other than a qualified child with a social security number; this credit is available for a qualified child with an individual taxpayer identification number (ITIN) but not a social security number.


2. New Markets Tax Credit

The New Markets Tax Credit (NMTC) permits individual and corporate taxpayers to receive a credit against federal income taxes for making ‘qualified equity investments’ in qualified community development entities. The Act preserves the NMTC's existing authorization through 2019.


3. Other tax credits

Numerous other tax credits exist at the federal, state, and local levels to provide an incentive for specified investments or activities.

I. Tax administration

1. Tax period

The US tax year for individuals generally is the same as the calendar year, i.e., January 1 through December 31.


2. Tax returns

Individual income tax returns (the Form 1040 series) are due on the 15th day of the fourth month after the end of the tax year (i.e., April 15) unless that day is a Saturday, Sunday, or federal holiday, in which case the return is considered timely filed on the next business day. A taxpayer who cannot file by that deadline may receive an automatic six-month extension of time to file Form 1040. To do so, the taxpayer must file Form 4868, Application for Automatic Extension of Time to File US Individual Income Tax Return, by the due date for filing the return. Note that filing for an extension does not extend the time to pay taxes. If the amount due is not paid by the regular due date, interest will accrue and penalties may apply whether or not an extension to file is received. There also is an automatic two-month automatic extension for US citizens and residents who are out of the country on April 15 (Form 4868 is not required to obtain this extension).

Married individuals generally may file a joint return only if each is either a citizen or a resident on the last day of the tax year. However, if only one spouse is a citizen or resident on the last day of the tax year, a joint return may be filed if both spouses agree to be taxed as full-year residents on their combined worldwide income.

Generally, joint filing will result in a lower tax liability than separate returns. This determination can be made with certainty only after a thorough review of the taxpayers' facts and circumstances. Married nonresident aliens (i.e., both spouses are nonresident aliens and do not qualify to be treated as resident on December 31) may not file joint returns and must use the tax table for married persons filing separate returns. Nonresident aliens may not file as heads of household. Note: Couples that both qualify as nonresident aliens under general rules may in some instances elect to be treated as residents of the United States (if certain requirements are met, including resident status in the subsequent year), which can then be coupled with elections under Sections 6013(g) or (h) to ultimately allow joint filing.


3. Payment of tax

If federal income tax is owed, payment is due by the original return filing due date prior to extensions (April 15) to avoid interest and penalties for non-payment. The due dates for state income taxes may vary. Estimated tax payments may be required during the year (see below).

Most types of US-source investment income paid to a nonresident alien are subject to a withholding tax of 30%, although a reduced rate or exemption may apply if stipulated in the applicable tax treaty. In general, a person who pays US-source income to a foreign person must withhold the proper amount of tax, report the payment on Form 1042-S, and file a Form 1042 by March 15 of the year following the payment unless that day is a Saturday, Sunday, or federal holiday, in which case the return is considered timely filed on the next business day.

Income tax generally must be withheld from employee compensation. Citizens, resident aliens, and nonresident taxpayers with income not subject to withholding (e.g., self-employment income, interest, dividends, or capital gains) generally must make quarterly payments of estimated tax due April 15, June 15, September 15, and January 15. (States also may require estimated income tax payments.) Nonresident aliens who do not have any income subject to payroll withholding tax must make three estimated tax payments (rather than four) due June 15, September 15, and January 15, with 50% due with the first payment.


4. Audit cycle

An audit is an IRS review of an individual's accounts and financial information to ensure information is being reported correctly and to verify the amount of tax reported on the individual's tax return is accurate. An individual's tax return may be examined for a variety of reasons, and the examination may take place in several ways. Returns are chosen by computerized screening, by random sample, or by an income document matching program. After the examination, if any changes to the individual's tax are proposed, the taxpayer either can agree with the changes and pay any additional tax owed, or disagree with the changes and appeal the decision.

In the event of a disagreement, the IRS has an appeals forum. If a taxpayer does not reach an agreement with the IRS Office of Appeals, or if the taxpayer does not want to appeal the case to that office, in most instances the taxpayer may challenge the IRS assessment in the US Tax Court without paying the contested additional tax before litigation.

If taxpayers overpay their tax, there is a limited amount of time in which to file a claim for a credit or refund. Taxpayers can claim a credit or refund by filing Form 1040X with the IRS at the address specified in the Form 1040X instructions. A separate form must be filed for each year or period involved, along with an explanation of each item of income, deduction, or credit on which the claim is based. If the claim is denied, the taxpayer generally can challenge the denial through the IRS administrative appeals process or in federal court.


5. Statute of limitations

Generally, the IRS has three years after a return is due or filed, whichever is later, to make tax assessments. That particular date also is referred to as the statute expiration date. The statute of limitations also will limit the time taxpayers have to file a claim for credit or refund. If a return is filed on extension, the limitations period runs from the date of filing the return and not the extended due date.

J. Other issues

1. Treatment of flow-through business entities

Certain legal entities are 'flow-through entities' (e.g., partnerships and S corporations). Income accrued by such entities is not taxed at the entity level. Instead, the income 'flows through' to the owners or shareholders, who are then taxed on the revenues. The Act provides a 20% deduction to domestic owners of flow-through entities against their qualified business income for tax years beginning after December 31, 2017, and before January 1, 2026. Complex rules apply with respect to this new deduction.

Note: Certain types of foreign entities – including some pension funds and other investment vehicles – are treated as foreign trusts for US tax purposes and may have filing requirements in addition to the US income tax reporting of the underlying income.


2. Foreign information reporting

Although the Unites States does not have foreign exchange controls, any 'United States person' who has a foreign financial account (or a signature authority over such account) during the year may be required to file a report with the US Treasury Department by April 15 of the following year, with an automatic extension to October 15. (Note: If the federal income tax due date is extended because April 15 falls on a weekend or legal holiday, this deadline is extended as well. Thus, the deadline is April 15, 2019, for accounts maintained in 2018.) The term 'United States person' includes a citizen or resident of the United States or a person in and doing business in the United States. The form need not be filed if the value of all foreign financial accounts does not exceed $10,000 at any time during the year.

Schedule B (Interest and Ordinary Dividends) of Form 1040 requires taxpayers to state whether they had a financial interest in (or signature authority over) a financial account located in a foreign country, or received a distribution from or were the grantor of or transferor to a foreign trust.

Note also the requirement under FATCA for resident aliens to file Form 8938, Statement of Specified Foreign Financial Assets. (This form is not limited to bank accounts.) Resident aliens who file as nonresident aliens under treaty for the entire tax year are not required to file Form 8938.

In addition, if cash equal to or in excess of $10,000 is brought into or sent out of the United States at any time in the year, it must be reported to the US Customs Service.


3. Work permits

In general, individuals who plan to live and work in the United States for a temporary work assignment must obtain work authorization. Since US immigration rules are extremely complex, professional advice from an immigration attorney should be sought well in advance of any intended move to the United States.

In certain instances, a traveler may be eligible for admission to the US as a B 1 Business Visitor, which is a visitor status rather than a work authorization status.

It is important to note, however, that whether one qualifies for admission as a B-1 Business Visitor, or is required to obtain work authorization, may depend on the nature of the intended activities in the United States, the intended duration of stay in the United States, and whether the traveler, or the traveler’s foreign employer, will be paid by a US entity.

A visa that permits an individual to work in the United States for several years may take several months to obtain. Note that visa type can affect the impact of US tax rules as well as eligibility for a social security number or ITIN.

There are two types of lawful status for non-US citizens residing in the United States – non-immigrant status and permanent resident status. Non immigrant status is limited to a fixed number of years. Permanent resident status (i.e., a green card) allows individuals to remain in the United States indefinitely, even if the permanent resident changes employment or ceases to work.

Inbound insight: Obtaining a green card is more complex than obtaining a non-immigrant visa; the process usually takes much longer, and the tax implications of having a green card are complex.
Inbound insight: US immigration rules have become a controversial topic and could be changed by Congress or the Administration. Businesses should stay focused on the potential for changes to these rules.
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Christopher Kong

Leader, US Inbound Tax

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