US tax laws are based on residency as well as citizenship. That is, the US taxes both its residents and citizens on their global income irrespective of where they live. A “US person” includes the following:
- US citizen
- Green Card holder
- Person meeting Substantial Presence Test (physical presence in US)
Tax Cuts and Jobs Act:
US Congress approved major tax reforms on Dec 22, 2017. Such legislative reform, effective from Calendar Year 2018 till 2025, is referred to as ‘Tax Cuts and Jobs Act of 2017’. Major areas impacted:
- Federal tax slab rates
- Change in Standard deduction
- Estate Tax Lifetime Exemption Limit
- Deemed Repatriation Tax (Accumulated profits of specified foreign corporations are deemed to be repatriated to US and are taxed subject to conditions) and
Taxability in the US:
- US persons (as defined above) are required to file a US federal tax return with Internal Revenue Service (IRS) irrespective of where they live, if their income (earned in US and outside US exceeds prescribed thresholds)
- In addition, they may also be liable to State and / or Local taxes
- US Tax filings are based on calendar year
- US persons are liable to pay tax and file tax returns on global income.
- The federal tax slab rates as amended by Tax Cut and Jobs Act are as below:
Taxable Income Ordinary Federal Tax Rate Single($) Married Filing Jointly ($) $ 0 – $ 9,700 $ 0 – $ 19,400 10% $ 9,701 – $ 39,475 $ 19,401 – $ 78,950 12% $ 39,476 – $ 84,200 $ 78,951 – $ 1,68,400 22% $ 84,201 – $ 1,60,725 $ 1,68,401 – $ 3,21,450 24% $ 1,60,726 – $ 204,100 $ 3,21,451 – $ 4,08,200 32% $ 2,04,101 – $ 5,10,300 $ 4,08,201 – $ 6,12,350 35% $ 5,10,301+ $ 6,12,351+ 37%
- Due date for Federal tax returns:
- Apr 15 (without filing extension)
- Oct 15 (Extension to be filed before Apr 15)
Exception: US Persons residing outside US can file tax returns by Jun 15 without filing extension and Oct 15 if extension is filed by Apr 15.
- Married individuals may file tax returns jointly or separately
- US person being tax resident of foreign country, may qualify to exclude certain foreign earned income (being current income such as salary, bonus, commission, professional fees, etc.) up to $ 1,03,900 for 2018. The said amount is adjusted for inflation each year.
- US persons may also be subject to the following:
- Gift Tax:
- Gift tax is imposed on transfer of ownership of property, where full consideration is not received
- Donor, being a US person is liable to pay gift tax in US irrespective of the citizenship of gift recipient
- There are annual exemptions ($15,000 for 2018 per recipient) available to US person. Gift in excess of the annual exemption may be liable to tax in the hands of donor subject to the overall lifetime exemption prescribed ($ 11.18 million for 2018 and $ 11.4 million for 2019)
- Gift Return to be filed if gift exceeds annual exemption in addition to his/her annual federal tax returns
- Tax rate of approximately 40%
- Certain gifts are not considered taxable, for example, a US person’s gift to US Citizen spouse is fully exempt from tax
- Estate tax :
- Estate tax is a tax imposed on US person’s right to transfer property to legal heirs at death
- It is payable by the heirs from the estate of deceased US person on worldwide assets subject to certain exemptions / deductions.
- Estate tax is subject to the lifetime exemption available ($ 11.18 million for 2018 and $ 11.4 million for 2019 for US person) after adjusting gifts in excess of annual exemption during the life of US person
- The exemption available for non-US person is minimal
- Tax rate of approximately 40%
- Estate-tax return to be filed within 9 months of death of US person
- Gift Tax:
Key US Reporting Requirements (amongst others):
|Foreign Bank and Financial Accounts (FBAR)||FinCen Form 114||More than $10,000 in aggregate value of all financial accounts held outside the US||Apr 15|
Automatic extension to Oct 15
|Foreign Account Tax Compliance Act (FATCA)||Form 8938||Total value of specified assets exceeds:|
A) $ 50,000 on Dec 31; OR
B) $ 75,000 at any time during the calendar year.
(for joint filers, the threshold is double )
|Apr 15 OR|
Oct 15 (if extension filed for Tax Return)
|Gift received from foreign person/ estate||Form 3520||A) More than $ 1,00,000 from foreign person / foreign estate|
B) More than $ 15,797 (for 2017) from foreign corporations / foreign partnerships
|Apr 15 OR Oct 15 (if extension filed for Tax Return)|
|Financial Interest in Foreign Entities||Form 5471 (Foreign Corporation) Form 8865 (Foreign partnership)||Person having certain level of interest in foreign entity (several conditions stipulated)||Apr 15 OR Oct 15 (if extension filed for Tax Return)|
Certain Exceptions from Reporting:
US person who has reported specified foreign financial assets on other forms, need not report the same on Form 8938.
- Trusts and foreign gifts reported on Form 3520 or Form 3520-A (filed by the trust);
- Foreign corporations reported on Form 5471;
- Passive foreign investment companies reported on Form 8621;
- Foreign partnerships reported on Form 8865;
- Registered Canadian retirement savings plans reported on Form 8891.
(Note that value of the foreign financial assets reported on such forms has to be included in determining the total value of assets for the reporting threshold)
Consequences of Non-Compliance:
- Civil as well as criminal penalties
- IRS Amnesty Programs for streamlining previous failures
Contents herein are subject to change as may be regularly updated and notified by US IRS.
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