Moving to... the US

Welcome to your tax information guide on moving to the US. Our detailed Q&A guide has been split into 6 key areas in order to help you find the information you need – quickly and easily!  If you require further help, simply click here to contact us.

This guide is for reference only and professional tax advice should be taken before any action is taken.

Before/Once you arrive

Q. Do I need a work permit to work in the US?
A.  Yes. A valid work visa should be obtained prior to arrival in the US. Several categories of visa exist depending on the reason for entry and the length of stay required.

Q.  Should I complete any documentation upon arrival in the US?
A.  If you are subject to United States tax you must obtain a taxpayer identification number or a social security number.  This number is used for all withholding and payment of taxes, as well as for correspondence with the Internal Revenue Service (IRS) and the filing of annual tax returns.  In some cases, you may be required to file a certificate to claim reduced withholding of taxes or applicable exemptions.

Q. Should I open an offshore bank account or is it OK to have an account on the US mainland?
A. Offshore accounts do not provide tax benefits for US purposes, however it may be advisable from a home-country tax perspective to open an offshore account.

Tax - Basics

Q.  What is the tax year?
A.  1 January to 31 December.

Q. How will I be taxed in the US?
A. In general, resident aliens are taxed on their worldwide income in the same manner as US citizens.

Non-residents are taxed on their income from US sources only, and on certain “effectively connected” income—that is, income that is effectively connected with a US trade or business. Individuals who receive income for services performed in the US are subject to tax unless (1) the services are performed for a foreign employer, (2) they are present in the US for not more than 90 days and (3) their income attributable to such activity is less than US$3,000. However, such income that would otherwise be subject to tax may in any event be exempt under the terms of any Double Tax Treaty that may exist between the US and the country in which the individual remains resident.

Q. How is tax residence determined?
A. Individuals will be treated as residents if they meet the requirements of any of the following tests:

• The lawful permanent resident test (having legal possession of a green card).

• The substantial presence test.

• The first-year election.

• “No lapse” rule.

Under the substantial presence test, if you meet both of the following tests you will be considered a resident:

• If you are physically present in the US for 31 days in the current year.

• If you are physically present in the US for 183 days over a three-year testing period that comprises the current and two preceding years.  The following weighting formula is applied in counting the days of presence in the three-year period:  (1) All days in the current year, plus (2) One-third of the days in the preceding year, plus (3) One-sixth of the days in the second preceding year.  Because of this weighting, you can spend up to 121 days each year in the US without becoming an income tax resident.

For the purposes of the above test, part days of presence count as whole days. If you otherwise satisfy the substantial presence test you may nevertheless be taxed as a non-resident if you are present in the US for fewer than 183 days during the current year and can establish a closer connection to a country other than the US and do not have an application for a green card pending. 

Under certain conditions you may make a first-year election if you do not meet the lawful permanent residence or substantial presence test and finds it advantageous to be treated as a resident in any event.

If you meet only the green card test you become resident on the first day that you are physically present in the US as lawful permanent residents.  Under the substantial presence test, the first date of residency is generally the first day of presence in the US during the calendar year.  However, a nominal presence period of up to 10 cumulative days is disregarded so that expatriates may make pre-move business or house-hunting trips.  The nominal presence period is excluded only for determining the residency start date; all of the days must be counted in determining substantial presence. If the first-year election is made the residency start date is the first day of the earliest 31-day period of presence in the US.

An alien, who would otherwise be considered to have ceased residence in one year, and resumes residence in the following year, is nevertheless treated as resident during the intervening period.  This is the no-lapse rule.

Q. Are there any regional or state taxes?
A. Most states, the District of Columbia, and some municipalities levy personal income taxes that are separate and distinct from the income tax imposed by the federal government.  The tax base may be broader or narrower than that used by the federal government.  State and municipal income taxes are independent of each other as well as of the federal tax.

State income taxes generally are levied on the worldwide taxable income of residents of the state, and on income from sources within the state for non-residents.  The states identify sources of income under a variety of rules, including pro-ration of worldwide income.

Residency may not be defined in the same manner for state tax purposes as for federal income tax purposes.  Usually it is based on the concept of domicile in maintenance of a permanent place of abode within the state or on the number of days of physical presence within the state.  US income tax treaties are not binding on states or cities.  Some states define state taxable income by reference to federal taxable income and, therefore, treaty exemption of income flows indirectly through to the state.

Q. Can I file a joint tax return with my spouse?
A. US tax law provides for the filing of returns under four different statuses, the availability of which depends on personal circumstances, including in some cases residence status.  Non-residents must generally file singly.  Married residents may file either jointly with or separately from their spouses.  Finally, certain individuals (including single, divorced and widowed individuals) who support qualifying dependents may file as the head of a household.  Different tax rate bands apply to each of the four filing statuses.

For state and regional income tax purposes, filing status usually, but not always, parallels federal filing status.

Q.  What rate of tax will I pay in the US?
A. The following Federal tax rates apply for 2006:

Married Filing Jointly

Single

Q. What tax allowances and deductions are available in the US?
A.  Allowances

Personal exemptions are available for you and your spouse and dependents.  Each individual is entitled to a personal exemption (in 2006, the amount is US$3,250).  The personal exemption is phased out above certain levels of Adjusted Gross Income.  This phase-out is to be repealed in future years however.

A resident expatriate may claim personal exemptions for dependents that are US residents or citizens, or are residents of Canada, Japan, Korea or Mexico.

If you are a non-resident you are entitled to your own personal exemption, but no exemption is available for your spouse or children, except in certain cases.

Deductions

If you are a resident you may also take a standard deduction from Adjusted Gross Income in calculating your taxable income. This varies according to your status and is indexed annually for inflation. In 2006 the standard deduction for a taxpayer filing a Married Filing Joint return is $10,700. Non-residents and dual status taxpayers may not claim the standard deduction.

Alternatively you may itemise your deductions. A full-year resident may claim itemised deductions if they exceed the standard deduction.  Allowable deductions include medical expenses not reimbursed by insurance (subject to very restrictive thresholds; not available to non-residents), state and local income taxes paid, interest expense on loans secured by a resident’s first and second residence (subject to very liberal limitations and not available to non-residents), charitable contributions to US charitable institutions, and casualty and theft losses. If your Adjusted Gross Income exceeds US$139,500 as Married Filing Joint with your spouse, then a part of itemised deductions is phased out. 

Q. Is my home country pension plan tax efficient for US purposes?
A. Probably not. It is likely that your home country scheme does not qualify under US law and therefore your employers’ contributions will be included in your taxable salary. Similarly, your contributions will not be deductible for US tax purposes.

It may be possible to obtain some tax relief if a tax treaty exists between the US and your home country.

Q. I will also be paying tax in my home country. Am I being taxed twice?
A. No. The United States has entered into income tax treaties with many countries providing for an exemption or reduction in the statutory tax rates for certain types of income. It may also be possible to claim a foreign tax credit on your home country return for the US taxes paid on doubly taxed income. The method of avoiding double taxation will depend upon your situation, and the nature of the treaty agreement between your home country and the US.

Tax - Administration

Q.  Do I need to file a US tax return?
A.  If you are a full year resident you are required to file an income tax return once your total income exceeds the sum of your personal exemption ($3,100 for 2006) and standard deduction ($4,850 for singles in 2006).

As a non-resident or part-year resident you can generally claim only one personal exemption and must file a US return when total US income exceeds this exemption ($3,100 for 2006).
 
Q. When does it need to be filed?
A. The tax return is due on 15 April (15 June for non-resident aliens who had no wages subject to US. withholding). 

Q. Can the filing deadline be extended?
A. The deadline may be extended until 15 August if an application is made, and all taxes are paid, by the original due date.  A second extension of time to 15 October and then a third extension to 15 December may be requested as well, provided the Internal Revenue Service agrees with the reason each extension is required.  We need to reiterate that these extensions affect only the filing deadline, not the deadline for payment of tax.

Where any due date, extended due date, or date for payment of tax falls on a weekend, a US public holiday, the relevant date is extended to the next business day.

Q. What is the procedure for paying tax?
A. The IRS collects tax by withholding at source and by payments of estimated taxes during the tax year.  When the withholding taxes are insufficient, you must make estimated tax payments to cover the residual tax liability.

In general, you must prepay at least 90% of the current year’s tax liability or 100% of the prior year’s tax liability; whichever is less, in order to avoid an underpayment penalty.  If you have a 2006 adjusted gross income of more than $150,000 ($75,000 if married filing separately) you must pay at least 90% of the current year’s tax liability or 110% of the prior year’s liability in order to avoid an underpayment penalty.  All wages or salaries, bonuses, and in-kind benefits are subject to withholding, regardless of the employer’s location.  Foreign employers must collect withholding as well.

Estimated tax payments are due 15 April, 15 June, and 15 September in the tax year, and 15 January following the year-end.

Tax - Income from Employment

Q. Will non-cash compensation be taxable (e.g. housing)?
A. Generally, benefits such as employer-provided housing, assignment premiums, cost-of-living allowances, primary or secondary school tuition for children, language lessons for family, cash allowances, and tax-equalization reimbursements are included in gross income.

Certain expenses may not be included in gross income, as follows:

• Reimbursement by employer of direct moving expenses (household goods, taxpayer and family travel, visas, medical, etc.).

• Reimbursements for language lessons for the employee for a business purpose.

• Tax preparation fees paid by the employer, if the primary benefit is to the employer (for example, as part of a tax-equalization plan).

• Business-trip related tickets (but only for the employee, not any accompanying family).

• Subsistence allowances and company-provided housing for expatriate employees away from their tax homes for less than one year (per diem amounts so long as they do not exceed published maximums).  The test is more subjective than actual in determining whether the assignment is short-term i.e. the intent at the very start of the assignment is more important than the actual outcome.

Q.  I will be working in different countries while living in the US. Will all of my employment income be taxable in the US?
A. If you are determined to be a US resident for tax purposes, either for part of the year or the entire calendar year, you will be subject to tax on worldwide income for the portion of the year that you are a US resident. However, if you work outside the US during your resident period, and pay tax in another location in respect of the income relating to those workdays, you will be able to claim a foreign tax credit on your US tax return in respect of the doubly taxed income.

If you are a non-resident you must report on your US tax return only the amount of income relating to your US workdays.

Tax - Other

International social security agreements often stipulate that employees who are sent abroad contribute to their home country’s social security system, and are exempt from host-country social security contributions.  The exemption is commonly limited to transfers lasting not longer than five years, though it is sometimes possible to extend the period.