Tips for Non-US Citizens Living in the US
If you or your spouse are non-US citizens living in the US, you face a number of significant financial challenges. Awareness of the following issues can make a major difference in your planning efforts.
Are You a Resident or Nonresident Alien?
Your answer determines how you are taxed. As a foreign citizen, you are considered a resident alien if you hold a green card. Even if you don’t hold a green card, however, you are considered a resident alien if:
- You are present in the US for 31 days or more during this calendar year, and;
- The sum of the number of days you are present in the US for the current year, plus one third of the days you were present in the previous year, plus one sixth of the days you were present during the year before that equals at least 182 days.
How Are You Taxed
Resident aliens are taxed on income from all sources, no matter where they are located, just as US citizens are taxed. The good news is that you can use the same deductions as US citizens.
Nonresident aliens are taxed on income earned from US sources. However, you won’t have as many deductions as your resident counterparts. You should check to determine whether your home country has an income tax treaty with the US that may enable you to take advantage of certain tax benefits. Many treaties, for example, provide for taxation of interest and dividends at a lower rate than you would pay on income earned from US sources. IRS Publication 901, US Tax Treaties contains more information of which you should be aware. You can access a copy by visiting www.irs.gov.
What about Estate and Gift Tax
US citizens benefit from an unlimited marital deduction that enables them to transfer assets to each other, either while alive or as a legacy, with no gift or estate tax liability. If you or your spouse is a non-US citizen, however, more stringent rules apply. You may give your nonUS citizen spouse up to $155,000 a year without incurring gift tax (this amount may be adjusted annually for inflation). Gifts or legacies above that amount are fully taxable unless they are structured as a Qualified Domestic Trust (QDOT).
A QDOT enables you to defer the payment of estate tax until the death of your surviving non-US citizen spouse. QDOTs, combined with a structured gifting program, can reduce your tax liability considerably. However, they come with a few caveats:
- Income must be distributed to the surviving spouse annually and neither income nor principal may be distributed to anyone else as long as the spouse is alive.
- Principal distributions during the life of the spouse are subject to federal estate tax, unless they qualify as hardship withdrawals.
- Assets remaining in the trust after the death of the surviving spouse are taxable at the top marginal estate tax rate of the first spouse to die.
- At least one QDOT trustee must be a US citizen or corporation.
Other Issues To Consider Your status as a resident or nonresident alien will influence the strategies you formulate when considering:
If you’re a nonresident alien, you can purchase life insurance with the security of knowing that the death benefit will not be subject to US estate taxes. Resident aliens and even US citizens do not enjoy this privilege.
If you’re a resident alien, consider transferring ownership of your policy to an irrevocable life insurance trust (ILIT). With this structure, the proceeds of your policy are removed from your estate. Nonresident aliens might also want to consider this approach, if they own a policy on the life of another person. Without an ILIT, the value of the policy (not the proceeds) will be included in their taxable estate.
If your spouse is not a US citizen, you might consider designating him or her as owner of a life insurance policy on another person. This approach obviates the need for an ILIT since the policy would be considered part of your non-US spouse’s estate and, therefore, not subject to estate tax.
Nonresident aliens who own US situs property can face substantial estate tax liability. US situs property includes shares of US corporations, US brokerage accounts and other assets located in or connected to the US. If these assets are held through a foreign corporation, however, you can avoid dire estate and gift tax consequences. You must be certain that the foreign corporation is recognized as such under US law and that you treat it as a separate entity, distinct from your personal finances.
If you’re thinking about giving up your green card, be aware of potential tax implications. Resident aliens who have held their green card for eight out of the past fifteen years are considered “long-term permanent residents” by the government. As a result, they may be subject to a special exit tax upon surrendering their card.
Expatriation laws are complex and may involve both tax-related and non-tax-related issues. Consult an immigration attorney and other experts before making decisions you may regret later.
If you are a non-US citizen living in the US and facing any of these financial challenges, speak to a Lenox Advisor to learn more about strategies to plan appropriately.
The information provided is not written or intended as specific tax or legal advice. Lenox Advisors, Inc., its employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Lenox Advisors, Inc. (Lenox) is a wholly owned subsidiary of NFP Corp. (NFP), a financial services holding company, New York, NY. Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. 90 Park Ave, 17th Floor, New York, NY 10016, 212.536.6000. Fee based planning services are offered through Lenox Wealth Advisors, LLC (LWA), a registered investment adviser. Services will be referred by qualified representatives of MML Investors Services, LLC (MMLIS). LWA is a subsidiary of NFP and affiliated under common control with Lenox. Lenox, LWA and NFP are not subsidiaries or affiliates of MMLIS, or its affiliated companies. FP56 CRN202303-279448