United States Expatriate Tax Site:Taxation of Resident Alien

Introduction And Residence
Generally speaking, the US is not an attractive location for resident expatriate executives seeking to limit taxation.

Taxation Of Resident Alien
Tax-resident foreign nationals in the US are taxed just about on the same basis as a US national.

Taxation Of Non-Resident Aliens
The US tax position of a non-resident alien is reasonably favourable.

Tax Treaties
A resident or nonresident alien from a country with which the United States has an income tax treaty may qualify for certain benefits.

Services For Foreign Employer
If a non-resident alien is paid by a foreign employer, his or her US source income may be exempt from US tax.

Social Security And Medicare Taxes
The liability of aliens for US social security taxes.

Totalization Agreements
The US has agreements with some foreign countries to avoid double payment of social security taxes.

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.