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Does the United States Tax Worldwide Income
Does the United States Tax Worldwide Income (3 Examples)
The United States Tax System is one of the only tax systems across the globe that follows a Citizenship-Based Taxation model. Therefore, unlike other countries that tax individuals on their worldwide income only when that person qualifies as a resident of that country –– the United States taxes individuals on their worldwide income simply because they are a US Person. In fact, citizenship-based taxation is actually a misnomer because in reality a person can be a US Citizen or Resident of the United States and still be considered to have the United States as their tax home. Let’s take a look at three examples involving the US taxation of individuals.
US Citizen Residing Overseas
Here is a very typical example: Jennifer is a US citizen who resides overseas. She earns all of her income from sources outside of the United States and she pays foreign taxes on the income she earns overseas. The fact that Jennifer resides outside of the United States and has not earned any US-sourced income does not eliminate her US tax requirement. Even though Jennifer resides overseas, she still required to file a US tax return to report her global income, along with disclosing her foreign assets on various international information reporting forms such as FBAR and FATCA.
Lawful Permanent Resident Abroad
Michael is a Lawful Permanent Resident who lives outside of the United States. Similar to Jennifer, Michael earns all of his money from overseas as well. From a baseline perspective, Michael is considered a US person and is therefore required to report his foreign income on a US tax return as well as disclose his international assets and accounts to the US government on various international information reporting forms. But, Michael may be able to claim treaty rights to be treated as a foreign resident instead of a US resident — and is therefore only taxed on his US source income similar to a non-resident. In order to qualify, the taxpayer must be in a treaty country and meet other requirements. Of important note is that if the LPR is already a Long-Term Lawful Permanent Resident (LTR) — then they have to be careful of accidentally expatriating and possibly becoming subject to exit tax if they are considered a covered expatriate with significant assets or income.
Non-Permanent Resident & Substantial Presence
In this example, Michelle is a non-resident alien who is neither a permanent resident nor US citizen of the United States. Her foreign company transferred her to the United States on an L-1 visa. She remains in the United States for the majority of each year other than traveling back to see her relatives back home a few weeks out of the year. Since Michelle meets the Substantial Presence Test, despite the fact that she is neither a US citizen nor lawful permanent resident, she is also required to report her global income and assets to the US government.
Out of Compliance with IRS?
If a person is out of compliance for not properly reporting their income and assets, they may want to consider one of the offshore disclosure programs. Taxpayers should speak with a Board-Certified Tax Law Specialist who specializes in this area of international tax to help understand the different strategies and options available.
We Specialize in Streamlined & Offshore Voluntary Disclosure
Golding & Golding specializes exclusively in international tax — and specifically IRS offshore disclosure.
Contact our firm today for assistance.