Upon employing foreign nationals, U.S. tax planning early on can help better manage tax costs, surprises and potential penalties. Houston international tax accountant Bill Leary, CPA, was part of a panel providing insight on tax planning when hiring foreign nationals to the 300 attendees at FosterQuan’s Spring Immigration Update.

Ask the Right Questions Timely

Lack of proper pre-immigration planning can result in problems both for your business and your foreign national employees. Before employees relocate to the United States and become subject to tax, ask yourself these key questions:

• What kind of planning do we need to do before they become taxable in the United States?
• Are we dealing with any individuals who have outside investments, retirement plans or foreign bank accounts? If so, can we take steps to reduce or eliminate potential U.S. tax?
• What happens if their stay is extended?
• Do they need to reconsider their estate planning?
• What are your options for handling bonuses and deferred payments that might be paid?

Avoid the costly “would have, could have, should have” traps and appreciate just how different tax rules are from country to country.

Determine When Foreign Nationals Become Taxable in the United States

Taxation of your foreign national workers will depend on whether they are resident aliens or nonresident aliens and whether tax treaties apply. Employees are resident aliens of the United States for tax purposes if they meet either the “green card” test or the substantial presence test:

• Green Card Test – A resident is legally entitled to be in United States if they are given the privilege of permanent residence under U.S. immigration laws. Generally this status is obtained when an alien registration card, also known as a "green card," is issued.
• Substantial Presence Test – This test qualifies them as a resident alien based on a foreigner’s days in the United States over a three-year period that includes the current year and the two years prior to that. To meet this test, the individual must be physically present in the United States for at least 31 days of the current year and for a total of at least 183 days during the three-year period. One-third of those days are accounted for from the first year before the current year and one-sixth from the days of the second year before the current year.

Otherwise, a foreign individual is a nonresident alien and may be subject to federal tax withholding and only taxed on the U.S.-source income. State and local taxes, Social Security and estate taxes also need to be considered because different rules apply. The health care act may also come into play.

Focus on Arrival and Departure Years

Few foreign nationals appreciate just how complex U.S. tax rules and compliance are. While it is important to plan for every year the employee is working in the United States, the international tax professionals at Doeren Mayhew recommend placing extra emphasis on arrival and departure years. These are the years that offer more tax planning opportunities and options.

• Arrival year – Identify the income that may be excluded from U.S. tax and review foreign tax credits that may be available to lessen the individual’s worldwide tax burden.
• Departure year – Review tax compliance and consider how deferred income will be treated, and consider whether one’s green card should be surrendered to avoid ongoing U.S. tax liabilities.

Doeren Mayhew’s Houston international tax accountants help businesses and individuals navigate the complexities of cross border activities and focuses on global tax management For more information, contact us.