TAXATION ON A WORLDWIDE BASIS
All U.S. tax residents are taxed on a worldwide basis, which
means that all income earned must
be reported in the U.S. regardless of
the country from which they were
originated. There are mechanisms
in the law, however, to avoid double
ta xation or eve n avoid U.S . ta x
entirely.
Currently, U.S. tax rates on ordinary
income are from 10% to 37%. The
amount income is subject to each
level of tax depends on taxpayers’
filing status: single, head of
household (HOH), married filing
separately (MFS) or married filing
jointly (MFJ).
TAX
Rate
10%
12%
22%
24%
32%
35%
37%
"All U.S. tax residents are
taxed on a worldwide
basis, which means that
all income earned must
be reported in the U.S.
regardless of the country
from which they were
originated."
SINGLE
From
-
9,701
39,476
84,201
160,726
204,101
510,301
AC C E L E R ATI O N O F E V E N T S: Many times, investors
own shares of foreign entities and those entities have
been accumulating profits over the years, which were not
yet distribu ted to their owners.
Also, there might be assets with
unrealized built-in gains that can
b e s o l d . I t i s r e c o m m e n d e d to
accelerate events like these so that
they occur prior to the move to the
U.S., thus avoiding U.S. taxation
completely.
HOH
To
9,700
39,475
84,200
160,725
204,100
510,300
From
-
13,851
52,851
84,201
160,701
204,101
510,301
STEP UP IN BASIS: For assets that
can’t be sold prior to becoming a
U.S. resident and have unrealized
built-in gains, there are tax planning
strategies to bring the cost value
of these assets to their fair market
value before the U.S. tax residency
MFS
To
13,850
52,850
84,200
160,700
204,100
510,300
From
-
9,701
39,476
84,201
160,726
204,101
306,176
MFJ
To
9,700
39,475
84,200
160,725
204,100
306,175
From
-
19,401
78,951
168,401
321,451
408,201
612,351
To
19,400
78,950
168,400
321,450
408,200
612,350
Source: IRS
Ordinary income includes salaries, services, interest, dividends, rent, short term capital gains, income from pass thru entities, among
others.
Long term capital gains apply for assets held for more than 1 year and are subject to reduced tax rates, as shown below:
Filing Status
Single
HOH
MFS
MFJ
0% when taxable income is
Less than $40,000
Less than $53,600
Less than $40,000
Less than $80,000
15% when taxable income is
between $40,000 and $441,450
between $53,600 and $469,050
between $40,000 and $248,300
between $80,000 and $496,600
20% when taxable income is
More than $441,450
More than $469,050
More than $248,300
More than $496,600
Source: IRS
T h e U.S . may also ta x inves tm e n t in c o m e at 3.8%
depending on taxpayers’ level of income. This is called net
investment income tax.
In addition to the federal income taxes, taxpayers may be
subject to state and city income tax, depending on where
they decide to live and work in the U.S.
HOW TO AVOID TAX PITFALLS AND
MINIMIZE U.S. INCOME TAX BURDEN
There are strategies that can be implemented prior to
the start of the U.S. tax residency. These strategies can
minimize the U.S. tax burden observed after moving to the
country.
starts. As a result, the future sale of the assets will not
be subject to U.S. taxation on what relates to the gain
accumulated prior to the start of the U.S. tax residency.
Only the increase in value after the start of the U.S. tax
residency will be subject to U.S. tax.
F O R E I G N E N T I T I E S: The U.S. treatment of foreign
entities may be elected by U.S. taxpayers. These elections
can minimize their tax burden by allowing U.S. individual
taxpayers to offset income taxes paid by the foreign entity
with that owed by the individuals in the U.S. This offsetting
mechanism avoids what we call “double taxation”, when
income is taxed twice, by two different countries. If this
choice is not made before the U.S. tax residency starts, the
individual may have lost the opportunity to apply a more
beneficial US tax treatment to income arising from these
foreign sources.
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