Overview
Moving to or purchasing real estate in the United States as a nonresident requires careful consideration of US federal income, estate and state and local tax laws. Inbound US federal tax planning involves analyzing these laws to ensure compliance with tax obligations and the maximization of tax benefits.
One important aspect of inbound tax planning is determining tax residency status. The US income tax system distinguishes between residents and nonresidents for tax purposes. A resident is typically someone who is a citizen, holds a green card or spends enough time in the United States to meet the so-called substantial presence test. Nonresidents are individuals who do not meet the criteria for tax residency.
As a nonresident, an individual may still be subject to US federal income tax on income earned in the United States. For example, rental income from US property or source income may be subject to US income tax. Nonresidents are also subject to US estate and gift tax on their situated assets, such as real estate located in the United States.
In addition to federal tax considerations, nonresidents must also consider state and local tax obligations. Most states and localities impose their own income, property and sales tax, among other taxes. In some cases, nonresidents may be subject to state and local taxes in addition to federal taxes. However, nonresidents can also take advantage of state and local tax incentives, such as tax credits and deductions, to reduce their overall tax liability.
The estate tax is the most expensive tax in the US tax code and thus is another important consideration for individuals who are not domiciled in the United States. If a non-domiciliary dies with a US situated asset, such as real estate located in the country, the estate may be subject to US estate tax. The US estate tax is imposed on the fair market value of the situated assets at the time of the non-domicile’s death less an exemption amount that is only $60,000. However, a non-domiciliary may be able to minimize US estate tax liability through proper estate planning and the use of tax treaties.
For nonresidents looking to obtain a green card, citizenship or otherwise become domiciled in the United States, income and estate tax planning becomes even more crucial prior to changing residence because the individual will be subject to US income and estate tax on the individual’s worldwide assets.
In conclusion, US federal tax planning is crucial for nonresidents considering moving to the United States or purchasing real estate in the country. Understanding US tax laws and taking advantage of available tax benefits can minimize tax liability and prevent penalties for noncompliance. In addition to federal tax considerations, nonresidents must also consider state and local tax obligations and estate tax implications. To navigate the complexities of the US tax system, nonresidents should seek guidance from qualified tax professionals.
