996 / What U.S. tax issues may arise when U.S. citizens live and work in a foreign country?
An estimated nine million U.S. citizens are resident in a foreign country.1 In many cases, these individuals are employed by either a U.S. business or a foreign business while living in the foreign location. However, many other types of situations be relevant for U.S. tax purposes in this context. Examples include situations where:
A U.S. citizen/individual may be engaged in a foreign country as either a sole proprietor or as a partner in a U.S. or foreign partnership located in the foreign jurisdiction;
A foreign individual may be engaged in any of these activities (i.e., as an employee, sole proprietor, or a partner in a partnership) and that foreign individual may be a resident alien in the United States for U.S. income tax purposes;2 or
A U.S. citizen/individual or a resident alien may have retired from gainful employment, while continuing to live in a foreign jurisdiction and receiving some type of retirement income distribution (or investment income sourced from outside the U.S.).
All of these individuals are subject to the global applicability of the U.S. income tax.
It’s important for U.S. employers and individuals to consider the various issues that can arise in these situations. Examples of the types of both foreign country and U.S. income tax planning issues which these various individuals must confront can include:
Potential exposure to income tax (and other important taxes) in their residence jurisdiction, considering how any potential individual income tax costs at that location be moderated
U.S. income tax exposure for these individuals and the U.S. tax obligations and tax planning opportunities for both the employer and the employee because of this foreign status
Exposure of foreign-based individuals to U.S. income tax upon the receipt of deferred compensation?
The obligations of these individuals to contribute both to the U.S. Social Security system and to any foreign country government-supported retirement/social welfare programs, and the U.S. and foreign country income taxation of any benefits received under these government pension/retirement income systems
U.S. financial account reporting obligations, distinct from income tax obligations, that may apply for these individuals
Importantly, these various questions might be resolved under applicable statutory rules, but might also be impacted by the provisions of an applicable bilateral income tax treaty.3
1. See CA by the Numbers, U.S. Department of State’s Bureau of Consular Affairs (Dec. 2018).
2. A foreign based individual can still be deemed a resident of the United States for U.S. income tax purposes (and subject to U.S. worldwide income taxation) while living outside the United States. This would occur, for example, where the individual has a “greencard,” that (for U.S. immigration law purposes) provides a right to live permanently in the United States. See IRC § 7701(b)(1)(A).
3. In other cases, it’s possible that a “totalization” agreement may be relevant. This type of agreement is a type of tax treaty concerning government Social Security plan contributions and benefits.