Darlene Ayoub is a Manager in MFR's Tax Services practice.  In her role, she frequently works with expatriates and deals with their tax issues.  Darlene can be reached at 713.622.1120 or via email at dayoub@mfrpc.com.

Tax advisors pay special attention to “expatriates,” or people who are temporarily resident outside their home countries.  Usually, they are in a host country with special visas permitting them to work, seek training, conduct business as agents, serve as directors, participate in sport or artistic programs, represent a foreign government or agency or international organization, or seek asylum.  Those coming to the United States are often referred to as “inpatriates,” but the U.S. tax rules refer to them as “aliens.”  According to Darlene Ayoub, a tax manager with MFR, P.C. who often works with expatriates, “Whenever you cross a border, other than for casual travel, you need to consider both home and host country tax issues.”   

Under U.S. tax rules, U.S. citizens and resident aliens are taxed on their worldwide income.  Not all countries apply such rules and they look to residency status instead -- these expatriates may not be taxed on income earned abroad if their resident connection with their home countries is broken.  Short-term visitors to the United States (“nonresident aliens”) earning income here are taxed only on U.S. source income (offset by deductions), but sometimes gross withholding applies instead. 

To ameliorate double taxation, income, estate and gift tax treaties and social security agreements may apply, and the U.S. foreign tax credit is available to both U.S. citizens and resident aliens.  Relief may be available under a home country’s tax rules.

Inpatriates who stay in the United States for any period of time may be asked to produce a “sailing permit” when they leave, reporting U.S. tax liability on income earned here; however, some income can remain taxable in the United States even after departure.    If you have been in the United States for years or are a U.S. citizen giving up your U.S. status, the departure can trigger special exit taxes. Ms. Ayoub observes that “While it is difficult to enter the United States and comply with its complex tax rules, it can be equally difficult to sever U.S. tax ties.   Cross-border planning is imperative throughout the expatriate process.”

Another feature of U.S. tax rules that often surprises inpatriates is the treatment of foreign assets acquired prior to coming to the United States.  Those assets are reported as if you were fully taxable in the United States when they were acquired, and complex U.S. basis rules may also apply.  “It’s a good news/bad news scenario for many inpatriates,” according to Ms. Ayoub, “but pre-immigration tax planning helps.”   Some inpatriates are surprised to learn that U.S. tax rules can apply to their foreign business operations as well, and that information on foreign bank accounts and foreign gifts must be reported.  

State and local taxation is a feature of the U.S. tax system that confounds aliens and citizens alike.  The state and local rules operate as independent from federal tax rules, and bi-lateral treaties do not apply.  Thus, even though activities may be “treaty protected” or untaxed under the U.S. Internal Revenue Code, state and local governments may decide that they are taxable.  Expatriates often overlook on-going state and local obligations that continue after they leave the United States.

The opportunity for U.S. citizens and resident aliens can offer exciting opportunities to spend time in a foreign country.  When beginning a foreign assignment, however, you may have flash-backs to Dorothy’s famous quote from The Wizard of Oz:  “Toto, I've a feeling we're not in Kansas any more.”  The tax rules that apply to U.S. citizens and residents working outside the United States can be equally confusing to these aliens in strange lands.  The most important things to remember as a U.S. expatriate: you need to continue to file U.S. (and possibly state and local) returns; the U.S. continues to tax you under its rules on your worldwide income wherever you reside; and, finally, complex exclusion and credit rules may apply to reduce the consequences of being subject to tax both in the foreign country and the United States.

Even if you are working in a low or no tax country, taxes need to be considered because such foreign assignments often include housing, education, special assignment payments and home leave incentives that remain taxable in the United States.  Income from passive investments, incentive and retirement plans, and U.S. home rentals also have tax consequences.  It is not unusual for U.S. taxable income to double, even though real income remains constant. 

Many U.S. expatriates are offered comprehensive, written expatriate packages when they accept a foreign assignment. According to Ms. Ayoub, “It is important to review the cost and benefits that an expatriate will bear under such plans.  Often, this means seeking out the advice of a personal tax advisor.  If no such written plan is being offered, don’t let the lure of a foreign assignment distract you from the financial consequences to you and your family.  In any case, the impact of a foreign assignment for estate and retirement planning also needs to be thoroughly reviewed.” 

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MFR, PC advises that you consider the tax consequences before you become an expatriate to or from the United States.  It will help to avoid the unexpected which, in the cross-border tax world, can be very costly – avoid discovering the “bad news” of being an expatriate.  Consult a tax advisor before you begin any foreign assignment.  When you arrive in a foreign location, seek out advisors that can help you consider all the relevant local rules.  Keep in touch with home country tax advisors to remain compliant. Plan ahead so that, unlike Dorothy, you will not spoil a wonderful adventure by spending unnecessary time seeking out advisors to help you solve complicated and expensive cross-border situations.