An individual who is interacting with the U.S. tax system will be taxable in the U.S. if they are a U.S. resident or if they have U.S. sourced income. An individual will be a resident if they are a U.S. Citizen or Permanent Resident (i.e. Green Card holder) or if they satisfy the requirements of the Substantial Presence Test.
Furthermore, in certain circumstances an individual may be a resident in multiple countries (in addition to the U.S.) and an assessment may be required as to the application of the Closer Connection Test or the application of an Income Tax Treaty (if applicable).
When an individual becomes a resident under U.S. domestic law, they become subject to extensive U.S. income tax laws and foreign financial information reporting. Failure to comply with these requirements can trigger liability for penalties that can be as high as 50% of the value of bank accounts held outside of the U.S. or 5% of the value of assets held by foreign entities (such as foreign trusts).
Individuals will also face penalties if they fail to report or pay tax on assets held in another country, such as a residence in their home country. This is regardless of whether the assets are held in a foreign company or a trust, or whether the assets are already being taxed in that other jurisdiction. It is common for an asset to be subject to unnecessary, double taxation absent proper tax advice. Likewise, the U.S.’s law on the tax treatment of foreign companies and trusts can expose an individual who is interacting with the U.S. tax system to high compliance costs.
Without careful planning it is easy to expose yourself to laws that could substantially reduce your capital base.
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