US taxation of foreign taxpayers is somewhat unique for US citizens or permanent residents, regardless of where you are living. Unlike most countries, you don’t just report the US activities to the US, and the non US activities to the other country. Rather the whole load is reported to the US just as if you were living here full time, except a few exceptions as spelled out by various tax treaties. This can lead to a lot of problems by well intended people who figure the rental or brokerage account in Country X is not a concern of the US.
If you are not a US citizen or green card resident, you may still be considered a US resident depending on the number of days you spent here in the last three (3) years through a strange 100% of current year plus 1/3rd of the prior year, plus 1/6th of the year before that formula. The magic number is 183. We can go over this with you if you are concerned. If you are a US resident, you file a regular Form 1040 pretty much just like a US citizen.
The two rules for foreign income are:
- Inclusion in the return, no,matter how immaterial.
- Disclosure (mostly the FBAR and/or Form 8938).
In theory, if there is a past omission including not reporting the income, about the only legally valid option is the Streamlined Voluntary Offshore Disclosure Program, that while expensive and complicated, is a lot less expensive than a potential cumulative penalty of 50% of the affected account balance. Failure to file the disclosures alone is a bit simpler. Just amending the return or saying “I’ll do it right in the future” is called quiet disclosure, and while a bit better than doing nothing, does not relieve you from the risk of the cumulative 50% penalty, so certainly not our recommendation. We have taken people through a few of these with success.
Assuming you qualify as a foreign taxpayer, the basic premise is that certain activities in the US require the filing of a Form 1040NR, or if a corporation a Form 1120F. Partnerships and trusts have special withholding rules on distributions requiring a Form 1042. There will be state taxation issues as well. All things being equal, you are better off with investments in an income tax free state like Washington, versus California or Oregon. You will need a identification number, we requires the filing of a Form W-7. We are looking at the qualifications to become a Certified Acceptance Agent, but there are others we can direct you to locally in the meantime.
Similar to all others practicing in the foreign taxation area, we start out by checking for the existence of a tax treaty. There are some specific exceptions regarding US source income spelled out in tax treaties between the US and certain other countries, and they are far from consistent. However, they do provide some relief.
The most common area we run into is real estate, and particularly income oriented real estate. There are a lot of unique issues in this area, including elections on how to treat the rental and compliance with the Foreign Investment in Real Property Tax Act (FIRPTA). FIRPTA has both withholding requirements and disclosure rules. Any title company involved in a transaction should be watching for potential problems.
There are disclosures that pertain to foreign ownership in a US corporation. There are tax filing requirements for foreign corporations doing business in the US, especially if they have a permanent establishment here.
We do have some limited foreign language ability connections, especially in Chinese and Japanese for those it may help. However, we do not have enough knowledge to do any foreign returns, although we maintain a good correspondent relationship with a Canadian chartered accountant who we can refer you to.
One area not to ignore here is estate planning. There is an incredibly low $60,000 exemption for estate taxes on the value of certain property held in the US. There are also some special rules for a US citizen who is married to a noncitizen spouse that require the use of a special trust to protect the marital deduction. As in all areas that require the drafting of documents, we need to have a good estate attorney working with you as well.