The ABC’s of United States Tax Laws for Foreign Investors

Jenifer Schembri - Bradenton Attorney

Jenifer S. Schembri, Estate Planning, Board Certified in Tax Law, The Florida Bar

One of the challenges for foreign investors is navigating the United States tax laws, and further complicating the issue is that rules for determining residency of income tax purposes are distinct from the domicile rules for estate and gift tax purposes. Residency and domicile are two separately defined concepts in the U.S. tax code

Income Tax

United States Income Tax on worldwide income applies to U.S. citizens, permanent residents (those holding a green card), and those that satisfy the “substantial presence test.”  For income tax purposes, substantial presence includes:

  • Presence in the U.S. at least 31 days during the current calendar year; and
  • Presence in the U.S. at least 183 days taking into account:
    • All of the days during the current calendar year;
    • 1/3 of the days in the 1st preceding calendar year; and
    • 1/6 of the days in the 2nd preceding calendar year.

Generally speaking, non-residents should limit their presence to 121 days in a calendar year to avoid satisfying the substantial presence test and possibly subjecting themselves to U.S. income tax on those items of income which are generally exempted from U.S. income tax.

Non-residents are subject to income taxes on U.S. income, with the exception of the following:

  • Bank deposit interest
  • Certificates of deposit
  • Portfolio Debt Instruments (does not include loans to related parties)
  • Certain capital gains

Note that these exceptions do not include rental income, which may also be subject to U.S. income tax withholding requirements on the part of the tenant.

Estate Tax

The United States Estate and Gift Tax will apply to worldwide assets for U.S. citizens and those domiciled in the U.S., which is defined as physical presence with intent to reside in the United States. The test to establish domicile for estate and gift tax purposes is more of a facts and circumstances approach and consequently the results can be different for income and estate tax purposes.

The Estate and Gift Tax rates and exemptions are as follows:

  • U.S. citizens and residents are subject to the following:
    • 40% highest marginal rate
    • 5.43 million exemption per person, 10.86 million for spouses
  • Unless a particular treaty between the U.S. and another country provides otherwise, non-residents are subject to the following:
    • graduated rates of 26% over $60,000, and 40% over $1 million
    • $60,000 exemption on death
    • Assets subject to U.S. estate tax include US real property, tangible and intangible property
    • Assets subject to U.S. gift tax include U.S. real property and tangible property.  Gifts of intangibles are not subject to U.S. gift taxes.

If you have any questions, please contact one of our Tax Attorneys for more information at 941.748.0100 or visit www.blalockwalters.com.

Jenifer Schembri, is an attorney in our Business & Corporate, Tax Law, and Estate Planning practice groups.  She is Florida Board Certified in Tax Law and a Certified Public Accountant. Jenifer can be reached by email at jschembri@blalockwalters.com.