US Tax Implications and Reporting Requirements
US tax laws are based on residency as well as citizenship. That is, the US taxes both, its residents and citizens on their global income irrespective of where they live. A US person includes the following:
Taxability in the US:
- US citizens
- Permanent Residents / Green Card holders
- Person who is physically present in the US for a certain number of days in the year (meeting Substantial Presence Test)
1. Federal, State and some local taxes
2. Based on calendar year
3. US persons will be liable to pay tax and file tax returns, if their income (earned in the US and outside the US) exceeds prescribed thresholds
4. Federal income tax returns are due on 15th April (maximum 6 month extension can be filed)
5. Married individuals may file tax returns jointly or separately
6. US persons may also be subjected to the following: i. Gift Tax:
ii. Estate tax:
- Donor of the gift being a US person is liable to pay gift tax irrespective of the citizenship of recipient of gift
- Annual and lifetime exemptions available to a US person in excess of which the gifts made would be liable to tax in the hands of the donor
- US person (i.e. donor) is required to file an appropriate gift-tax return in Form 709 in addition to his/her annual income tax returns
US Reporting Requirements:1. Foreign Bank and Financial Accounts (FBAR):
- Estate Tax is payable by the legal heirs from the estate of the deceased individual
- Such estate tax is payable only if the deceased individual is a “US person” irrespective of location of the estate
- Rate of estate duty may be as high as 40%
- However, this is subject to a lifetime exemption of USD 5.49 million for the year 2017 and USD 5.60 million for the year 2018 (annual gifts in excess of prescribed thresholds are also credited against this exemption)
- An executor, personal representative, or administrator of the decedent's estate is required to file an Estate-tax return in Form 706 within 9 months after the death of decedent
i. Applicable to US persons who hold financial interest in or signature authority or other authority over any financial accounts in a foreign country
ii. If the aggregate value of such accounts exceeds USD 10,000 at any time in a particular calendar year, then US person is required to report the details of such accounts in FinCEN Form 114
iii. The form must be filed by June 30th of each year
iv. Information to be reported includes all foreign financial assets such as bank accounts, demat accounts, mutual funds, insurance policies, provident fund schemes, etc.
v. Maximum value (in USD) during the tax year of each account is reportable in the form along with other details. Maximum value of an account in foreign currency must be converted into USD using the exchange rate on the last day of the calendar year (using Treasury Reporting Rates of Exchange).2. Foreign Account Tax Compliance Act (FATCA):
i. US person is required to file Form 8938 – Statement of Specified Foreign Financial Assets along with annual tax returns
ii. The form requires a US person to report details that are similar to FBAR excepting a few differences such as threshold limits.
iii. US person with total value of specified assets of USD 50,000 or more on the last day of the calendar year or USD 75,000 at any time during the tax year is required to file such Form.
iv. In case of married persons filing joint tax returns in the US the reporting thresholds are higher.
v. Maximum value (in USD) during the tax year of each specified foreign financial asset is reported on Form 8938. In most cases, the value of a specified foreign financial asset is its fair market value.If asset is in a foreign currency, maximum value must be determined in the foreign currency and then converted to USD using Treasury Department's Financial Management Service foreign currency exchange rate for purchasing USD (Rates available at: www.fms.treas.gov/intn.html
).3. Gift reporting (Gifts received from Foreign Person):
A US person receiving gift/bequest is required to report such receipt in Form 3520- “Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts” in respect of the following:
i. gift or bequest valued at more than USD 100,000 from a nonresident individual or foreign estate
ii. gift valued at more than more than USD 15,797 (for 2017) from a foreign corporation or foreign partnership
Form 3520 is due along with income tax returns, including extensions.
4. Declaration of financial interest in foreign entities:
A US person having interest in a foreign entity or holding the position of a director or officer of such foreign company may be required to file Form 5471- “Information Return of US Persons with respect to Certain Foreign Corporations” or Form 8865- “Return of US Persons with respect to Certain Foreign Partnerships” and declare his/her interest. There are certain conditions that apply in case of both such forms.
Another Form 926 was also introduced recently, which form captures information on any transfers of property or funds by a US person to a foreign corporation.All thresholds mentioned above are subject to change as may be prescribed and notified by the IRS.