U.S. income tax filing services
Last updated on 30 January 2017
MAJATTORNEY offers U.S. income tax consulting and income tax filing and reporting services to U.S individuals and U.S beneficial owners/corp-owners and to entrepreneurs/business’s entering the Nordic and U.S. market.
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INTERNATIONAL INCOME TAXATION
Most countries apply one or two of the main three principles of income taxation, Residency, Source and Citizenship, which is represented in their respective domestic tax legislation. When applying the residency principle for income taxation, a country taxes anyone who is considered to be a resident of that country on his/her worldwide income. Applying the source principle for income taxation, a country taxes income derived from sources within the country. And if a country applies the principle citizenship for income taxation purposes, it taxes its citizens on their worldwide income, even if the citizen does not live in the country.
There are various legal ways of minimizing/eliminating double taxation caused by among other things differences in countries’ domestic income taxation. These rules to minimize double taxation appear in both domestic laws as well as in tax treaties.
U.S. INCOME TAXATION
The U.S. is one of the very few countries in the world that apply all three principles of taxation and use the citizen principle for income taxation. As such, U.S. citizens are required to file and report their worldwide income to the U.S., even if/when they reside in another country. This makes the income tax situation for U.S. citizens living abroad especially burdensome and complex. Non-US persons may also be required to file US income tax returns to report U.S. source income/gain.
You are considered a U.S. person and exposed to U.S. income taxation on your worldwide income if you are a
- U.S. citizen
- An alien and meet the green card test (GCT)
- An alien and meet the substantial residence test (SPT)
- U.S. partnership,
- U.S. corporation,
- U.S. estate and/or trust
Certain rules exist for determining the U.S. residency starting and end dates for aliens.
In some cases aliens are allowed to make elections which override the GCT and the SPT, i.e. nonresident spouse treated as resident; closer connection to foreign country, tax treaties.
You can be both a nonresident alien and a resident alien during the same calendar tax year. This usually occurs in the year you arrive or depart from the U.S. If so, you may elect to be treated as a Dual Status Alien for this taxable year and a Resident Alien for the next taxable year if you meet certain tests.
You are considered a non-U.S. person if you do not meet the above criteria. If so, you are taxed in the U.S. only on U.S. source income but may have informational reporting requirements depending on your situation.
Income tax returns:
If you are a U.S. person and/or a non-U.S. person you are required to file certain income tax returns among others such as:
Form 1040, the regular annual U.S. income tax return and this form is required to be filed if you are a US person and you are obliged to report your worldwide income. The regular due date for the income tax return is 15th April, with an automatic extension until June 15 for all living outside the U.S. on April 15. You may also be able to file for an additional extension of time to file, which extends you filing due date to October 15.
Form 1040NR, is the regular annual income tax return for US non-residents, and required to be filed reporting your U.S. source income and/or for the portion of the year that you are not considered a U.S. person.
Form 1120, U.S. corporate income tax return
Form 1120-S, U.S. S-Corp income tax return
Form 1041, U.S. estate and trust income tax return
Form 1065, U.S. partnership income tax return
Schedule K-1 (Form 1065), U.S. partners share of income
State and city income tax returns may also be required and also needs to be considered depending on your specific situation.
Informational tax reports:
If you are a U.S. person and receive benefits from foreign assets and/or ownership in various foreign assets you may apart from the above income tax filing requirements also be required to file certain informational tax reports among others such as:
Form FinCen 114, previously known as the FBAR – Report of Foreign Bank and Financial Accounts (formerly TD-F 90-22.1) is required to file for all foreign bank accounts, pension accounts, trust accounts, insurance accounts, in which you have a financial or beneficial interest in or signature authority over the account, and if the aggregate balance of all your accounts exceeds $10,000 at any time during the year. The regular due date for this form is June 15th, and this form is filed separately from the income tax return.
Form 8938, Statement of Specified Foreign Financial Assets. Different rules apply for individuals living in the U.S. and U.S. persons living abroad if you have specified foreign financial assets. This applies if your year-end balance exceeds a certain amount which varies depending on your filing status, for U.S. persons living abroad this would apply when and if the combined specified year-end foreign financial assets exceeds $200,000, or $400,000 if married filing jointly. This form is in addition to the reporting of your FBAR and is filed along with your regular income tax return when/if required.
Form 8621 Passive Foreign Investment Corporation (PFIC)
Form 5471 Controlled Foreign Corporation (CFC)
Form 8886 Reportable Transaction Disclosure Statement
Form 5472 Information Return of 25% foreign-owned U.S. Corporation or a Foreign Corporation engaged in a U.S. trade or business
Other informational reports detailing ownership or beneficial interest in foreign corporations, partnerships, trusts and estates, may also be required to be filed depending on your specific situation. If you have received assets in the form of property, income or other applicable benefit anywhere in the world, you will also need to report this to the IRS.
Risks for not filing/not paying any U.S. income taxes due/not being compliant:
As a U.S. person and/or non-U.S. person with U.S. source income you are legally obliged to bring your filing obligations up to date. Failing to submit a tax return and not paying U.S. income tax that you owe, can have serious consequences, including double taxation, penalty for late filing and/or late tax payment, interest, other penalties, as well as possible criminal charges.
Why act immediately?
In July 2014 a new legislation Foreign Account Tax Compliance Act (FATCA) came into effect, requiring foreign financial institutions to report to their respective domestic tax authority or directly to the U.S. tax authority the Internal Revenue Services (IRS), the financial institutions U.S. account holders’ year-end balance; income and capital gains.
There are voluntary programs available to Americans abroad that are required to file and various voluntary ways to become compliant. The odds of minimizing the risk of unwanted consequences are of course much better in situations where you have taken voluntary actions/compliance measures, before the tax authority request you to. Therefore the trend of voluntary disclosures and the compliance developments is likely to continue.
Voluntary Disclosure Program (OVDP)
In 2009 the IRS began a tax ‘amnesty’ program – the 2009 offshore voluntary disclosure program (OVDP). This program allows individuals with undisclosed income from offshore accounts to become compliant with their US tax obligations. Similar programs were opened in 2011 and 2012.
The 2012 program was revised in June 2014 and the OVDP has been tightened up. Despite carrying higher penalties than previous programs, the 2014 program continues to offer taxpayers clear benefits by allowing them to disclose foreign accounts now, rather than risk criminal prosecution if the IRS picks them up before they choose voluntary disclosure.
Streamlined Voluntary Disclosure
The Streamlined Voluntary Disclosure procedure was introduced in 2012 for non-resident U.S. taxpayers. The procedure recognized that some U.S. taxpayers living outside of the U.S. had failed to file their US tax returns or Foreign Bank and Financial Accounts (FBARs), but had recently become aware of these obligations and wished to become compliant, in order to avoid penalties and criminal prosecution.
The 2012 procedure accommodated non-residents and dual citizens, but in June 2014 the procedure was extended to taxpayers living in the U.S..
Exit taxation – renouncing citizenship
Many U.S. citizens and long-term Green Card holders (8 out of 15 years) who live outside the U.S., find it increasingly difficult to reconcile paying and reporting taxes on worldwide income to the U.S. as well as avoiding double taxation based on their respective residency worldwide income taxation.
For personal or financial reasons an individual may therefore decide to renounce his/her U.S. citizenship and/or green card.
Under certain circumstances, the U.S. may in these cases impose an “exit tax” at the time of expatriation. Exit tax applies to U.S. citizens and long-term green card holders if the individual’s net worth is in excess of $2 million (included all assets such as house, pension, deferred compensation, etc), and if the individual is not in compliance with his/her U.S. tax filing and reporting obligations for the last 5 years. For dual citizens at birth the $2 million net worth trigger does not apply if he/she is in compliance with his/her US tax filing and reporting obligations for the last 5 years.
Americans living in Sweden or out of the U.S
U.S. citizens residing out of the U.S. are not only affected by the U.S. tax laws, but also by the respective domestic tax law in the country where they reside. As such, it is very important for these persons not only to take into consideration the U.S. tax implications but also the country’s of residence tax laws as well as any international tax implications. This requires knowledge of both U.S. and the county of residence’s tax laws as well as of international tax laws, which set of skills is rarely found by regular tax consultants. It is therefore recommended to ensure that the competences of the tax consultant are sufficient when seeking assistance in this area, since you otherwise may stand a risk of double taxation, extensive penalties and/or interest charges and of not enabling the appropriate tax solution to be applied.
SWEDISH INCOME TAXATION
Sweden like most countries applies the Residency and Source income tax principles, and taxes its residents on their worldwide income and any non-resident on Swedish source income.
You are considered a Swedish resident (Sw “obegränsat skattskyldig”) for income tax purposes if you
1) maintain your “real home and dwelling” in Sweden (Sw “bosatt i Sverige”); or
2) stay in Sweden during a lengthy period of time with only occasional interruptions (Sw “stadigvarande vistas i Sverige”); and/or
3) do not stay in Sweden on a permanent basis but previously maintained a “real home and dwelling” in Sweden and have “essential connection” with Sweden (Sw “har väsentlig anknytning till Sverige och tidigare varit bosatt i Sverige”).
When determining if a person who previously maintained a “real home and dwelling” in Sweden is considered to have an “essential connection” with Sweden, a evaluation is made considering the following circumstances in conjunction:
- if the person is a Swedish citizen (om personen är svensk medborgare)
- how long the person maintained a “real home and dwelling” in Sweden (hur länge personen var bosatt här)
- if the person do not maintain a permanent “real home and dwelling” in a foreign country (om personen inte varaktigt är bosatt på en viss utländsk ort)
- if the person spends time outside Sweden for studies or health reasons (om personen vistas utomlands för studier eller hälsoskäl)
- if the person maintains a permanent home suitable for all year living in Sweden (om personen har en bostad här som är inrättad för åretruntbruk)
- if the person have his/her family in Sweden (om personen har sin familj här)
- if the person runs a business in Sweden (om personen bedriver näringsverksamhet här)
- if the person has an economic interest in Sweden by possessing assets that indirect or direct gives him/her a substantial influence of a business in Sweden (om personen är ekonomiskt engagerad här genom att inneha tillgångar som, direkt eller indirekt, ger honom ett väsentligt inflytande i näringsverksamhet här),
- if the person owns a property in Sweden (om personen har en fastighet här), and
- similar circumstances (liknande förhållanden).
The Six-months rule and the One-year rule
Where a resident of Sweden performs work abroad as an employee, any income received from such work may be exempt from Swedish income tax under the “sixmonth-rule” or “one year-rule”. The sixmonth-rule provides than income is exempt if the employment and the stay abroad lasts for six months or more and the income is taxed in the country where the work is performed. The oneyear-rule provides that an income is exempt if the employment lasts for one year or more in one and the same country. The exemptions above will only be granted where the visits to Sweden do not exceed six days per calendar month or in aggregate 72 days per year of employment. Such visits to Sweden may not take place at the beginning or the end of the employment abroad.
If you are not considered a resident of Sweden for Swedish tax purposes (Sw “begränsat skattskyldig”) you are taxed in Sweden only on certain types of income that are specifically connected to and/or derived from Sweden in Sweden.