Information
provided on this site is for general guidance only
and is often simplified. Actual IRS procedures are
complex, and taxpayers should obtain professional
assistance or use IRS sources for complete information.
Taxation
Of Resident Alien
Tax-resident
foreign nationals in the US are taxed just about on
the same basis as a US national (see http://www.usa-federal-state-individual-tax.com/federal_tax.asp),
that is to say, on their world-wide income, comprehensively
defined. There are tax credits under double tax treaties
for some foreign tax deductions.
Unfortunately,
the offshore investment options are not very interesting,
indeed an expatriate's existing offshore investments
may fall under US tax laws, so that one is well advised
to take professional advice on the tax situation before
becoming tax-resident in the US.
Under
US PFIC (Passive Foreign Investment Corporation) legislation,
gains on disposal of holdings in almost any kind of
offshore or mutual fund are likely to be taxed as
income, spread over the years in which the investment
was held.
Trading
activity in shares while one is US-resident may quite
possibly bring on capital gains tax or income tax
charges, depending on where and how the acquisitions
were made. An expatriate is not likely to be able
to make use of the various pensions-related tax-breaks
for share acquisition available to US citizens, unless
the residence is for a long period; and at the same
time tax deductions for US tax purposes on continuing
contributions to pension plans in another country
will probably not be available.
All in
all, it will probably be best to make sure that existing
offshore investments do not mature and are not disposed
of during US residence, and that any new investments
will not need to be changed and will not mature until
after US residence has ceased.
An expat
also needs to be aware that a long period of US residence,
particularly if close to retirement, may mean that
the IRS will continue to have an ability to tax after
residence has ceased.
In the
light of all the above, it can be seen that professional
advice is even more than usually essential for anyone
contemplating US residence, or thinking of carrying
on an investment activity while US resident.
Despite
tax reductions introduced during the Bush presidency,
the Alternative Minimum Tax, which applies to resident
aliens as much as to US citizens, is a growing menace
for tens of millions of American taxpayers.
Several
legislative measures to restrict its impact are currently
making their way through Congress.
In
an attempt to put a brake on what is seen by the Internal
Revenue Service as a growing incidence of tax avoidance
by America’s most wealthy, the agency said in March,
2005, that it had begun to regularly examine the tax
returns of highly paid executives and entrepreneurs.
The tactic is part of a broader strategy of scrutinising
the tax affairs of top company executives, including
those who run charities and other non-profit organisations.
This comes in the wake of the highly-publicised crimes
perpetrated by high-ranking figures at the now-defunct
energy firm Enron.
In
particular, the IRS expressed an interest in executive
compensation schemes such as stock options, deferred
compensation, golden parachutes and other fringe benefits.
Since 1993, the agency has investigated compensation
practices used at more than twenty firms. IRS Commissioner,
Mark Everson, said:"We're moving toward a position
where we routinely look at compensation of executives
when we conduct our audits of corporations.”
He
added that investigators will routinely “pull the
returns of key executives” to establish whether income
has been recorded appropriately.
In
June 2007, a Senate subcommittee hearing on the vexed
issue of executive stock options concluded that new
tax and accounting rules are needed to bring more
transparency for investors regarding CEO pay, and
to rein in huge and undeserved salaries enjoyed by
some bosses at non-performing companies.
The hearing,
held by the Senate’s Permanent Subcommittee
on Investigations, examined corporate accounting and
tax rules that require corporations to report one
set of stock option compensation figures to investors
on their financial statements and completely different
figures to the Internal Revenue Service on their tax
returns.
“Stock
options are a major factor in the growing gap –
now chasm – between executive pay and average
worker pay,” said Sen. Carl Levin (D - Mich),
subcommittee chairman. “Companies pay their
executives with stock options in part because, right
now, those stock options often generate huge tax deductions
that are 2, 3, even 10 times larger than the stock
option expense shown on the company books."
New IRS
data, examining tax returns for periods ending between
December 2004 to June 2005, showed a stock option
book-tax gap of $43 billion, "which means US
companies legally reduced their taxes by billions
of dollars for that period by claiming $43 billion
more in stock option tax deductions than the stock
option compensation amount shown on their books,"
Levin stated.
"Those
companies did not break the law," he continued.
"They are benefiting from an outdated and overly
generous stock option tax rule that produces tax deductions
that often far exceed the companies’ reported
expenses.”
“It
is time to take a serious look at whether it makes
sense to have two completely different sets of stock
option rules for financial accounting and tax purposes,”
Levin concluded, “especially when the result
is a revenue loss of billions of dollars.”
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