Articles

Are U.S. Visa Holders Subject to U.S. Income and Estate Taxes? by Eden Abitan, CPA, CGMA

Posted on June 11, 2019

For many foreign persons, the U.S. tax system can be a complicated web of conflicting rules and exceptions, making compliance difficult, at best. One of the more complex challenges concerns the U.S.’s different treatment of foreign persons for income tax and estate and gift tax purposes.

In general, the U.S. presumes foreign persons to be nonresident aliens (NRA) who must pay U.S. tax only on the income they derive from America. Once NRAs apply for a green card or they physically spend a well-defined “substantial” number of days in the U.S., they will be considered resident aliens (RAs) who must pay U.S. taxes on their worldwide income, just like U.S. citizens.

In contrast, foreign persons’ exposure to U.S. gift and estate tax is based on their “domicile” at the time of death.

Unlike the clearly defined tests for U.S. residency for income tax purposes, domicile is based on an individual’s unique facts and circumstances at the time of death, including the location of his or her primary residence, business and personal belongings, and his or her intent to remain in the U.S. indefinitely. U.S. resident domiciliaries are subject to U.S. gift and estate tax on their worldwide assets, whereas nonresident domiciliaries are subject to estate tax only on their assets that are situated in the U.S. at the time of death.

U.S. domiciled resident decedents are required to file U.S. estate tax returns only when the fair market value of their worldwide assets at the time of death exceed the estate tax unified credit exemption, which, for 2019 is $11.4 million for individuals or $22.8 million for married couples filing jointly. Under the current tax law, this generous exemption amount is set to expire in 2026, when it is scheduled to revert back to its 2017 level of $5.49 million for individual taxpayers.

On the contrary, nonresident decedents must report and pay U.S. estate tax only on their assets situated in the U.S., including their tangible personal property and their interest in or their holdings of American real estate and securities of U.S. companies. Assets nonresident decedents can exempt from U.S. estate tax include securities that generate portfolio interest, bank accounts that are not connected with a U.S. trade or business, and insurance proceeds.  The executor of a nonresident’s estate must file a U.S. estate tax return if the fair market value of the decedent’s U.S.-situated assets at death exceeds $60,000.

It is important to note that a foreign citizen’s U.S. estate tax residency is neither based on their immigration status nor their possessions of a visa, including, but not limited to an H-1-B visa, H-1-C, EB visas, L-1 or R-1 visas.  In one case, for example, the IRS ruled that an illegal alien was domiciled in the U.S. for estate tax purposes at the time of his death because there were sufficient facts to indicate he decedent intended to remain in the U.S. indefinitely.

Both U.S. employers and the foreign persons they hire to work in the U.S. should have a clear understanding of the U.S.’s unique tax system and the ways in which a foreign person’s worldwide assets could be exposed to U.S. income tax and estate tax. It is critical that foreign persons work with experienced advisors and accountants before stepping foot on U.S. soil to avoid surprise tax liabilities both in their home country and the U.S.

About the Author: Eden Abitan, CPA, CGMA, is a manager with Berkowitz Pollack Brant’s Tax Services practice. Fluent in English, Hebrew and Russian, she focuses on income, estate and business tax planning for U.S. and foreign families. She can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at 954-712-7000 or via email at info@bpbcpa.com.