Are U.S. Visa Holders Subject to U.S. Income and Estate Taxes? by Tony Gutierrez, CPA
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 manner in which the U.S. imposes tax on foreign persons for income tax and estate and gift tax purposes.
In general, the U.S. presumes foreign persons to be nonresident aliens (NRAs) who must pay U.S. tax only on the income they derive from U.S. sources. 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. income tax 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 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 U.S. real estate and securities of U.S. companies. U.S. situs assets that nonresident decedents may exempt from U.S. estate tax include investments 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 (i.e., Form 706-NA) if the fair market value of the decedent’s U.S.-situs assets at death exceeds $60,000.
It is important to note that foreign citizens’ U.S. estate-tax residency is neither based on their immigration status nor their possession 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 supporting the presumption that the 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 unique tax system in the U.S. 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 in order to mitigate unnecessary tax exposure both in their home country and the U.S.
About the Author: Tony Gutierrez, CPA, is a director with Berkowitz Pollack Brant’s International Tax Services practice, where he focuses on tax and estate planning for high-net-worth individuals, family offices, and closely held businesses in the U.S. and abroad. He can be reached at the CPA firm’s Miami office at 305-379-7000 or info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of the law and subsequent guidance issued by the Internal Revenue Service.
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