Tax and Immigration Issues when U.S. citizens and Green Card holders work as foreign expatriates

1. The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500
Sending U.S. Employees
Overseas: Tax and Immigration
Update
Dale Mason, CPA
International Tax Director
The Wolf Group, PC
Eliot Norman
Partner-Immigration Practice Group
Williams Mullen
Washington DC and Richmond, Va.
enorman@williamsmullen.com
804.420.6482

2. Pursuant to Circular 230, promulgated by the Internal
Revenue Service, any U.S. tax advice contained in the
body of this presentation was not intended or
written to be used, and cannot be used, by the
recipient for the purpose of avoiding any penalties
that may be imposed under the Internal Revenue
Code or applicable state or local tax law provisions.
© 2013 The Wolf Group

3. Agenda
U.S. Expatriate Taxation – The Basics
U.S. Immigration for Expatriates -- The Basics
 Impact of Recent Tax Legislation
 Impact of Recent Immigration Developments:
Foreign Financial Reporting
 Foreign Account Tax Compliance Act and what
it means for U.S. expatriates
 Final Thoughts and Questions

4. The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500
U.S. Expatriate Taxation
The Basics

5. Tax Equalization
Assignee responsible for “stay-at-home” tax
• Hypothetical tax withheld from salary and personal
income
Company responsible for home and host
country income tax on worldwide income
Policy intent is assignee “no better or worse off”
from a tax standpoint

6. Income Subject to Tax
Equalization
 Company Income – Wages, allowances, etc.
 Personal Income – Investment income etc.
 Hypothetical tax can include:
• Federal income tax
• State income tax
• Social Security tax

7. U.S. Citizens and Green Card
Holders – U.S. Income Taxation
Taxed on worldwide income
Foreign financial information reporting
 Elimination of double tax provisions:
• Foreign earned income exclusion
• Foreign tax credits (even for persons working in
non-treaty countries)
Congress frequently considers elimination of the
foreign earned income exclusion

8. Income Tax Treaties
 U.S. citizens
• Always subject to worldwide taxation
• Savings clause - preserves the right of the U.S. government
to tax its citizens/residents as if no tax treaty existed
 U.S. lawful permanent residents
• May be treated as U.S. nonresidents
• Treaty tie-breaker provisions
• Taking a treaty tie-breaker position to treat GCH as
nonresident may trigger U.S. exit tax
• Immigration issues

9. Foreign Earned Income
Exclusions (FEIE)
 May exclude from income up to $97,600 in
2013 ($99,200 in 2014) plus the foreign
housing exclusion
Requirements
 Tax home in a foreign country
 Foreign earned income
 Bona Fide Residence Test or Physical
Presence Test

10. FEIE – Foreign Earned Income
Wages
Commissions
Bonuses
Vacation pay
Sick leave
Severance
Allowances

11. FEIE - Foreign Tax Home
Tax home must be in a foreign country
Tax home located at regular/principal place of business
Permanently or indefinitely engaged to work
If expectation is the assignment to last more than 1 year
then it is indefinite and qualifies
Tax home in a foreign country is not restricted by:
• Temporary presence in U.S.
• Maintenance of home in U.S., even if used by spouse and
dependents

12. FEIE- Bona Fide Residence Test
U.S. Citizen & Green Card Holders (only under
nondiscrimination article of treaty but be careful!)
Resident in foreign country for entire calendar year
Cannot claim to be a nonresident of the foreign
country
Subjective test based on facts and circumstances
Individual’s foreign earned income must be subject to
that tax – does not mean that foreign tax must be paid

13. FEIE - Bona Fide Residence Test
Green Card Holders
Green Card Holders – Nondiscrimination Article
“Nationals of a Contracting State shall not be
subjected in the other Contracting State to any
taxation or any requirement connected therewith that
is more burdensome than the taxation and connected
requirements to which nationals of that other State in
the same circumstances, particularly with respect to
taxation on worldwide income, are or may be
subjected.”
• Rev. Rul. 91-58

14. Physical Presence Test
US citizen or resident alien of the U.S.
Tax home in foreign country
Physically present for at least 330 full days
during 12 consecutive months

15. Housing Exclusion
Housing exclusion applies to amounts considered paid
from employer-provided amounts in excess of
government-set based housing amount
Housing exclusion limited
• Excess of housing costs over a base amount which is
16% of the FEIE.
• 2013 base amount is $15,616
• Upper limit is 30% of foreign earned income
exclusion.
• 2013 upper limit is $29,280
• High cost locations upper limit is increased

16. FEIE Summary
Bona fide residence test
• Tax home in foreign country
• Bona fide foreign residence
• Entire taxable year
Physical presence test
• Tax home in a foreign country
• 330 days out of 12 consecutive months
Housing exclusion

17. Foreign Tax Credits (FTC)
U.S. citizens and residents subject to US tax on
worldwide income
FTC eliminates double taxation by allowing a
credit against U.S. tax for foreign tax paid or
accrued
FTC limited to lesser of foreign tax or U.S. tax
on foreign income

18. Foreign Tax Credits
Most states do not recognize foreign tax
credits, e.g., California, Virginia, Maryland etc.
does not recognize
• Double taxation may occur

19. The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500
U.S. Immigration Basics: Your
Company and its Expatriates

20. U.S. Immigration Basics: Green
Card Holders Working Overseas
 Who is an expatriate?
 Green Card Holders: a Definition
 Their Value to your Company
 The Doctrine of Abandonment
 Consequences of Abandonment
 Tips to avoid Abandonment
• Myths and Reality
 Practical Solutions
 One size does not fit all

21. U.S. Immigration Basics: Reentry
or Travel Permits
 Filing of I-131
 Must be in the USA at the time of filing
 Biometrics and your expatriate’s travel schedule
 Effect: not a panacea or absolute guarantee
 Subsequent Travel Permits: up to 6 years total in 2 year
increments
 Use as a planning tool and success
rate

22. U.S. Immigration Basics:
Nonimmigrants
 Sending H-1B and other nonimmigrant foreign
employees overseas
 Some definitions
 Basic Rules
 Advantages/Disadvantages
 Practical Problems
 Practical Solutions
• The L-1B or H-1B who wants a Green Card
• The H-1B who is “running out of time”
 Tax and Compensation Issues (Dale Mason)

23. U.S. Immigration Basics: Obtaining U.S.
Citizenship
 The Path to Citizenship: “Naturalization”
• Prerequisite: Must be a Green Card Holder First
• Basic Procedures to be Naturalized
 Some Definitions and Concepts:
• The waiting game: 3 and 5 years
• physical presence test 50% of the 3 or 5 years
• continuous residence tests
 The Technicalities
• definition of continiously reside
• 90 day test: reside in state where application if filed:
• Must “continuously reside” in USA from date of natz application until
obtain citizenship
 Dangers of “Disruption of Residency” when Green Card
employees are sent to overseas assignments

24. U.S. Immigration Basics; “preserving
continuous residence” for naturalization
 Practical Solutions: Preserving Residency for
Expatriates on the Path to U.S. Citizenship
 The N-470: “Don’t leave home without fiiling it”
• basic eligilibty: 1 year continuous uninterrupted physical presence
after obtaining permanent residence and BEFORE being sent
overseas
• N-470 preserves “continous residency” while working overseas for
“U.S. company”. How defined?
 Practical Examples: How it works
 Additional exemption for foreign Green Card
spouse who accompanies U.S. citizen sent overseas to work for
your company
 Final Pointers:

25. The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500
Impact of Recent U.S. Tax
Legislation

26.  0.9% Additional Medicare Tax
Employee share of Medicare tax on compensation
exceeding $250,000 (MFJ), $200,000 (single)
Employer required to withhold the additional 0.9% on
all wages exceeding $200,000, despite filing status
Individuals liable for new Medicare Tax - Any shortfall
or excess of additional Medicare tax can be
paid/refunded through the tax return
Additional Medicare Tax
© 2013 The Wolf Group

27. Impact on Assignment Costs
Additional tax plus gross-up costs will be incurred if
assignees are subject to the 0.9% due to assignment
allowances
Host country may also tax the employer
reimbursement
Totalization Agreements – Additional Medicare Tax
should be covered under the agreements
Consider implication on hypothetical Medicare tax

28. Tax is 3.8% of the lesser of:
• Net Investment Income OR
• The excess of Modified Adjusted Gross Income
over:
o$250,000 (MFJ)
o$125,000 (MFS)
o$200,000 (Single & Other taxpayers)
Modified by adding back the foreign earned
income exclusion
Net Investment Income Tax

29.  Unearned Investment Income:
• Capital Gains
• Dividends Income
• Interest Income
• Net Rental Income
• Foreign non-qualified pensions
 Unearned Income does not include:
• Qualified retirement plan income
• Sale of principal residence exclusion
Net Investment Income Tax

30. Impact on Assignment Costs
Additional tax plus gross-up costs will be
incurred by employer if assignees are subject
to the 3.8% tax because of assignment
allowances
For employees working outside the U.S., host
country tax costs may increase

31. 2013 & 2014 Top Tax Rates
Top 39.6% rate above the following
thresholds:
• $450,000 joint filers & surviving spouses
• $425,000 HOH
• $400,000 Single
• $225,000 MFS

32. Capital Gains/ Dividends
LT Capital gains/Qualified Dividends now 15% or 20%
for taxpayers over the following ordinary income
thresholds:
• $450,000 joint filers & surviving spouses
• $425,000 HOH
• $400,000 Single
• $225,000 MFS

33. Phase-Out of Personal
Exemption
Phase-out of personal exemptions (2013 = $3,900)
Phase-out begins at the following AGI thresholds:
• $300,000 MFJ
• $275,000 HOH
• $250,000 Single
• $150,000 MFS
Reduced by 2% by each $2,500 (or portion thereof)
over the threshold amount.

34. Phase-Out of Itemized
Deductions
Itemized deductions are reduced by 3% of the
amount AGI is over threshold amounts (not to
exceed 80% of deductions).
Phase-out begins at the following AGI thresholds:
• $300,000 MFJ
• $275,000 HOH
• $250,000 Single
• $150,000 MFS

35. The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500
Impact of Recent U.S.
Immigration Developments

36. 2014: Immigration Realities
 Homeland Security and U.S. Customs and Border Protection
• Inspections and Secondary Inspections
• Sequestration and Morale
 Preparing your Foreign Expatriates for dealing with the
new realities in 2014
 Spouses and children: issues: “benign neglect” or part of
the planning process, dangers s of 3 year and 10 year bars,
dual career families, “one size does not fit all”
 Final Thoughts

37. 37
Attention!
Homeland Security remains in charge of
immigration to the USA

38. WHAT’s NEW?
38

39. Customer Service

40. Conclusion: New Reality?

41. The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500
Foreign Financial Reporting

42. Foreign Bank Account Reporting
“FBAR” – FinCen Form 114
U.S. persons
oU.S. Citizens
oGreen Card Holders
oOther income tax residents
Financial interest in or Signature authority
over:
• Foreign financial accounts if in the aggregate
the accounts equal or exceed $10,000 at any
point during the year

43. What Foreign Financial
Accounts are Reportable?
Bank & saving deposit accounts
Securities accounts
Life insurance policies with a cash value
Mutual funds
Assets not held in an account are not
reportable

44. FBAR Filing Requirements
Filing deadline is June 30 of the following year
• Must be received by June 30
• No extensions
• E-Filing now mandatory
Not filed with tax return
• Informational return – no additional income tax
liability
• Form 1040 Sch. B question

45. FBAR Penalties
Non-willful failure penalty
• $10,000
Willful failure penalty
• Greater of $100,000 or 50% of account balance
Criminal penalties
6 year statute of limitations

46. IRS Offshore Voluntary
Disclosure Program
FBAR and certain international tax reporting
Pay all taxes and interest for the past 8 years
Waiver of penalties for informational forms
Penalty: 27.5% of the highest account balance
Reduced or no penalty in certain situations
Currently no deadline; subject to change
© 2013 The Wolf Group

47. Specified Foreign Financial
Assets Report
Form 8938
Interest in “Specified Foreign Financial Assets”
with an aggregate value exceeding $50,000
Information statement attached to the
individual's U.S. income tax return; no
additional tax liability
© 2013 The Wolf Group

48. Foreign Financial Asset
Report Cont.
 “Specified foreign financial asset”
• Foreign financial account
• Stock or security issued by a foreign person
• Financial instrument/contract with a foreign issuer
• Any interest in a foreign entity
• Includes foreign pension plans
Information statement
• Maximum value of assets, account numbers, names and
addresses of foreign financial institutions, etc.
© 2013 The Wolf Group

49. Form 8938 Filing Thresholds
Year-End Aggregate Value
of All Specified Foreign
Financial Assets Exceeds:
Highest Annual Balance
Exceeds:
Single, living in the U.S. $50,000 $75,000
Single, living outside the
U.S.
$200,000 $300,000
MFS, living in the U.S. $50,000 $75,000
MFS, living outside the U.S. $200,000 $300,000
MFJ, living in the U.S. $100,000 $150,000
MFJ, living outside the U.S. $400,000 $600,000
© 2013 The Wolf Group

50. Foreign Financial Asset Report
Penalties
• Minimum penalty $10,000
• Maximum penalty $50,000
• Presumption is that the value of the
account is in excess of $50,000
• Extends Form 1040 statute of limitations

51. The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500
The Foreign Account Tax
Compliance Act – “FATCA”

52. FATCA Overview
Designed to force U.S. citizens and residents
to report all foreign income
FATCA provisions adds an entirely new
Chapter 4 to the Internal Revenue Code
500 pages of Final Regulations

53. IRS Agreement or 30%
IRS /Foreign Governmental Agreement :
• Required of all worldwide foreign financial
institutions (“FFI”) and certain non-financial
institutions who receive any U.S. source
payments
 OTHERWISE:
• 30% withholding tax applied to any “Withholdable
Payment”
© 2013 The Wolf Group

54. Practical Implications
Many foreign financial institutions have and
will decide to terminate U.S. clients’ accounts
Self-reporting will be cross checked with
institutional (foreign government) reporting.
Discrepancies will be easy to identify
 Opening foreign financial accounts may be
difficult in some jurisdictions
© 2013 The Wolf Group

55. FINAL THOUGHTS AND QUESTIONS
 From Eliot Norman
enorman@williamsmullen.com
www.williamsmullen.com
804-420-6213
 From Dale Mason
dmason@thewolfgroup.com
(703) 502-9500
 Your Questions?

56. Contact Us
Dale Mason, CPA
International Tax Director
The Wolf Group PC
dmason@thewolfgroup.com
Tel: (703) 502-9500
4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033
1875 I Street, NW (International Square), Suite 500, Washington, DC 20006
www.thewolfgroup.com
© 2013 The Wolf Group

57. Biographical information
Eliot Norman
Partner- International
Williams Mullen
Washington, D.C.
T. 001.804.420.6213
enorman@williamsmullen.com
www.williamsmullen.com
Eliot Norman has worked for many years advising U.S. and Foreign Multinationals deal effectively
with their global mobility issues.
Mr. Norman is an International Practice Partner with Williams Mullen, a 250 lawyer national and
international commercial law firm, with offices in Washington, D.C., Virginia and North Carolina. Eliot
graduated from Yale College and Boston College Law School and served with the U.S. Department of
Justice before entering private practice. He is listed in Best Lawyers in America for Immigration. He
speaks French fluently and obtained a Certificate from the Institut d’etudes politiques, Paris, France.
Mr. Norman regularly travels to Europe to meet with clients concerning investment projects and
operations in the United States and to speak to industry trade groups and chambers of commerce.