Introduction on the United States Federal Income System
In our whitepaper, The Expansion of “United States” Taxpayers: How the TCJA Drags Unassuming Foreign Companies and Individuals under its Scope, we discuss the Tax Cuts and Jobs Act of 2017’s impact on the U.S. tax system, as it heavily expands the U.S.’s ability to tax foreign persons through the operation of rules on constructive ownership and controlled foreign corporations. The following blogs will discuss different aspects of our whitepaper and other Code sections relevant to foreign persons to make sure non-U.S. residents or citizens are aware of their possible U.S. tax reporting obligations. Additionally, please visit our website asenaadvisors.com for information on how the U.S. tax code interacts with tax laws of other countries on our website, and how we can help you protect your global wealth.
It is important to understand how the U.S. federal income tax works prior to diving into an analysis of whether you are subject to U.S. reporting obligations. As an overarching concept, the U.S. taxes individuals and entities based on their status as either a U.S. Person or a nonresident alien.
Under the U.S. tax code, U.S. Persons are taxed on their worldwide income. A U.S. Person is any U.S. citizen or U.S. resident, regardless of whether the applicable Person is an individual or entity. For a discussion on the tests used to determine residency status, please look for a later post titled, U.S. Residents are Taxable, U.S. Persons: So, What is a “U.S. Resident”?
Alternatively, the U.S. taxes nonresident aliens on income sourced within the U.S. To classify as a nonresident alien, an individual or entity must not be a U.S. citizen nor a U.S. resident.
Tax Exposure: Payment & Reporting
There are various ways for an individual or entity to be subject to U.S. tax laws, and under these laws, the individual or entity may be liable for the payment of taxes, for the reporting of information, or both. This tax obligation is annual, with the fiscal year in the U.S. being from January 1st to December 31st. While most individuals and entities are required to file their taxes using this fiscal year, foreign persons may elect to use the fiscal year of their home country.
Typically, if a person is subject to pay tax on their income then they must report that income to the Internal Revenue Service; this is true even if the individual or entity has no taxable income. For individuals with global assets or cross-border companies, the U.S. is strict about the information that must be reported regarding assets in foreign countries, and those reportings have only become more stringent under the Tax Cuts and Jobs Act of 2017. Accordingly, please refer to this blog series so you can stay aware and compliant of your U.S. tax obligations, as failure to comply comes with large civil and criminal liability. Please also contact us at asenaadvisors.com so we can provide you with the tax planning you need to avoid any global tax surprises.