Taxation Of Foreign Individuals And Us Citizens In Foreign Countries

March 13, 2024

962 / How does the estate of a foreign individual (nonresident alien) calculate the amount of U.S. estate tax owed?

<div class="Section1"> The estate tax computation base of a nonresident alien’s estate consists of his or her taxable estate plus any taxable gifts made during his or her lifetime.<a href="#_ftn1" name="_ftnref1">1</a> The taxable gifts of a nonresident alien made after 1976 (other than gifts included in the gross estate) also form part of the tax base upon which the estate tax is computed. The adjusted taxable gifts of a nonresident alien are computed in the same manner as for a resident citizen.<a href="#_ftn2" name="_ftnref2">2</a> Once the taxable estate of the nonresident alien decedent is determined, the mechanics of the actual tax calculation and the applicable rate schedule (before the unified credit) are the same for nonresident alien decedents as for citizen-residents. However, a very important difference comes into play in the use of the unified credit, which is greatly reduced for nonresident alien decedents. This, of course, indirectly results in a higher effective tax rate. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="964">964</a> for a discussion of the unified credit as applied to nonresident aliens. <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>     IRC § 2101(c). <a href="#_ftnref2" name="_ftn2">2</a>     IRC § 2101(b), (c). </div></div>

March 13, 2024

964 / May a nonresident alien’s estate claim an estate tax exemption upon the death of the nonresident alien?

<div class="Section1"> The unified transfer tax credit in the case of a nonresident alien decedent is only $13,000.<a href="#_ftn1" name="_ftnref1">1</a> This effectively exempts only the first $60,000 of his or her taxable estate from estate tax, a considerably lower threshold than applies to a domestic decedent. A special rule applies if the decedent was a nonresident of the United States, but resided in a U.S. possession (e.g., Puerto Rico, Guam) and was a U.S. citizen only because of birth or residence in, or citizenship of, the possession. Under these circumstances, the decedent is considered to be a “nonresident noncitizen,”<a href="#_ftn2" name="_ftnref2">2</a> and the estate of a decedent in this category qualifies for a credit that is the greater of: <blockquote>(1) $13,000, or (2) $46,800 multiplied by the ratio that the value (at death) of that part of the decedent’s gross estate that is located in the U.S. bears to the entire value of the decedent’s gross estate.<a href="#_ftn3" name="_ftnref3">3</a></blockquote> In either case, the credit may not be more than the amount of the estate tax.<a href="#_ftn4" name="_ftnref4">4</a> Further, the amount of the available credit is reduced by the value of any lifetime gifts made by the nonresident alien-decedent.<a href="#_ftn5" name="_ftnref5">5</a> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a> IRC § 2102(b)(1). <a href="#_ftnref2" name="_ftn2">2</a> IRC § 2209. <a href="#_ftnref3" name="_ftn3">3</a> IRC § 2102(b)(2). <a href="#_ftnref4" name="_ftn4">4</a> IRC § 2102(b)(4). <a href="#_ftnref5" name="_ftn5">5</a> IRC § 2102(b)(3)(B). </div>

March 13, 2024

966 / What considerations should a U.S. citizen or resident alien be aware of when disposing of real property that is located in a foreign country?

<div class="Section1"> The general rule that a U.S. citizen or resident alien is taxed on all worldwide income applies in the case of a sale of real property in the same manner as income from any other source.<a href="#_ftn1" name="_ftnref1">1</a> Therefore, a U.S. citizen or resident alien who sells real property that is located in a foreign country must report and abide by U.S. tax rules relating to the sale of real property (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7845">7845</a>). Thus, for example, a U.S. citizen who sells a principal residence that he or she has used as a principal residence for two of the five preceding tax years is entitled to exclude a portion of the gain from taxation in the U.S. in the same manner as though the property was located within the U.S. (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7845">7845</a>). Though the U.S. citizen or resident alien may also be required to pay taxes upon disposition of foreign-located real property both in the U.S. and in the country in which the property is situated, he or she will be entitled to claim a credit for certain foreign taxes paid on his or her U.S. tax return.<a href="#_ftn2" name="_ftnref2">2</a> Further, a U.S. citizen or resident alien may be entitled to deduct any real property taxes that are imposed by a foreign country on his or her U.S. tax return.<a href="#_ftn3" name="_ftnref3">3</a> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>     See IRS Publication 544. <a href="#_ftnref2" name="_ftn2">2</a>     See IRS Publication 54. <a href="#_ftnref3" name="_ftn3">3</a>     IRS Pub. 54. </div></div>

March 13, 2024

959 / What are some of the considerations that a U.S. citizen or resident should be aware of when participating in a retirement plan while residing in a foreign country?

While many U.S. citizens and residents who are transferred abroad by multinational employers may continue to be covered by the multinational’s U.S. retirement plan, in some cases, a U.S. individual may obtain benefits under a foreign plan. Because U.S. citizens and residents are taxed on their worldwide income, benefits accrued under foreign retirement plans may be subject to U.S. taxation absent a treaty provision that provides otherwise. Most treaties provide that a pension or annuity received from a foreign employer is taxed in the country of residence under its domestic laws.<a href="#_ftn1" name="_ftnref1">1</a> Treaties with some countries provide for liberalized treatment of retirement accounts—for example, the treaty between the U.S. and the U.K. provides that U.S. citizens residing in the U.K. can deduct, for U.S. tax purposes, amounts contributed to a pension plan established in the U.K.<a href="#_ftn2" name="_ftnref2">2</a> Further, while a U.S. individual residing abroad may exclude a portion of foreign earned income from U.S. gross income each year, the foreign earned income exclusion does not apply to income received as a pension or annuity while abroad<a href="#_ftn3" name="_ftnref3">3</a> ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3559">3559</a>). <hr>

March 13, 2024

954 / When a U.S. citizen is a resident of a foreign country and earns income in that foreign country, is that income included in the taxpayer’s gross income for U.S. tax purposes?

<div class="Section1">Yes. If a U.S. citizen is employed in a foreign country and files a tax return in that country, that individual will also be required to file a Form 1040 in the United States. A U.S. citizen is taxed on worldwide income, regardless of whether that taxpayer lives in the U.S. or in a foreign country.<a href="#_ftn1" name="_ftnref1">1</a><div></div><div class="Section1">Despite this, a U.S. citizen with foreign earned income may be eligible to exclude all or a portion of foreign earnings from calculation of his or her income for U.S. tax purposes (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="955">955</a>).<a href="#_ftn2" name="_ftnref2">2</a> “Foreign earned income” includes amounts received by the individual from sources within a foreign country that are attributable to services performed by the individual.<a href="#_ftn3" name="_ftnref3">3</a> Pension and annuity income, amounts paid to the individual by the U.S. (or a U.S. agency) as an employee, and amounts paid to the individual under Section 402(b) (taxability of beneficiaries of nonexempt trusts) or Section 403(b) (taxability of beneficiaries under nonqualified annuities) are excluded from foreign earned income.<a href="#_ftn4" name="_ftnref4">4</a></div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>     See IRS Guidance on the Foreign Earned Income Exclusion, available at http://www.irs.gov/Businesses/Foreign-Earned-Income-Exclusion-1 (last accessed August 15, 2025). <a href="#_ftnref2" name="_ftn2">2</a>     IRC § 911(a)(1). <a href="#_ftnref3" name="_ftn3">3</a>     IRC § 911(b)(1)(A). <a href="#_ftnref4" name="_ftn4">4</a>     IRC § 911(b)(1)(B). </div></div>

March 13, 2024

960 / Are employer contributions to a foreign retirement account on behalf of a U.S. individual exempt from U.S. reporting requirements?

U.S. individuals residing abroad may become subject to both the FBAR and FACTA reporting rules, and the corresponding penalties for noncompliance, based upon their participation in foreign retirement plans. Generally, a U.S. individual who has an interest in any “foreign account” is required to file an FBAR (Form TD F90-22.1) if the aggregate value of foreign accounts exceeds $10,000 at any time during the calendar year.<a href="#_ftn1" name="_ftnref1">1</a> The IRS has issued regulations that specifically exempt certain accounts, including plans that qualify under IRC Section 401 and IRA accounts, but these regulations do not provide a similar exemption for foreign retirement accounts.<a href="#_ftn2" name="_ftnref2">2</a> Therefore, whether FBAR reporting will be required for a U.S. individual’s foreign retirement accounts will likely turn upon whether the individual has a “financial interest” or “signature authority” over the foreign account. Penalties for failure to file an FBAR can be steep—for willful violations, the civil penalty can equal the greater of $100,000 or 50 percent of the account assets, and the IRS may be entitled to file criminal charges.<a href="#_ftn3" name="_ftnref3">3</a> For non-willful violations, the penalty can still equal up to $10,000 per violation unless the taxpayer can show that there was reasonable cause for failure to file, in which case no penalty is imposed.<a href="#_ftn4" name="_ftnref4">4</a> Because of the steep penalties imposed upon taxpayers who do not comply with FBAR reporting obligations, the IRS has issued guidance to allow certain “low risk” nonresident U.S. taxpayers who have resided outside of the U.S. since January 1, 2009 to catch up on filing delinquent U.S. income tax returns and FBARs with respect to their foreign accounts. Whether an individual is “low risk” or not will be determined based on the amount of U.S. income tax owed (less than $1,500 per tax year is low risk), and these delinquent returns will be processed in a streamlined manner absent any other high risk factors.<a href="#_ftn5" name="_ftnref5">5</a> The plan is described by the IRS as a method to provide assistance to U.S. citizens residing abroad, including dual citizens, with foreign retirement plan issues.<a href="#_ftn6" name="_ftnref6">6</a> In addition to FBAR filing requirements, a U.S. individual may be required to comply with FATCA and report any foreign financial assets with an aggregate value of over $50,000 (or higher amount, if the Secretary otherwise provides) on Form 8938, Statement of Specified Foreign Financial Assets, attached to his or her U.S. tax return.<a href="#_ftn7" name="_ftnref7">7</a> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a> See IRS “FAQs Regarding Report of Foreign Bank and Financial Accounts (FBAR) – Financial Accounts,” available at https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar (last accessed June 17, 2024). <a href="#_ftnref2" name="_ftn2">2</a> See IRS Guidance: “Report of Foreign Bank and Financial Accounts (FBAR),” available at https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar (last accessed June 17, 2024). <a href="#_ftnref3" name="_ftn3">3</a> 31 USC § 5321(a)(5). <a href="#_ftnref4" name="_ftn4">4</a> See IRS FS-2011-13 (Dec. 2011). <a href="#_ftnref5" name="_ftn5">5</a> See IRS Instructions for New Streamlined Filing Compliance Procedures for Nonresident, Non-Filer U.S. Taxpayers, available at http://www.irs.gov/Businesses/Corporations/Summary-of-FATCA-Reporting-for-US-Taxpayers (last accessed June 17, 2024). <a href="#_ftnref6" name="_ftn6">6</a> IR-2012-65 (June 26, 2012). <a href="#_ftnref7" name="_ftn7">7</a> IRC § 6038D(a).

March 13, 2024

958 / Can U.S. individuals employed in a foreign country receive U.S. Social Security credit?

In some cases, a U.S. individual will continue to earn U.S. Social Security credit if liable for Social Security and Medicare taxes on amounts earned while performing services as an employee in a foreign country. The IRS has issued guidance that provides that Social Security and Medicare taxes continue to apply to wages paid for services performed by a U.S. individual abroad if any of the following are true: (1) The individual is working for a U.S. employer, (2) The individual performs services in connection with a U.S. aircraft or vessel and the individual has (a) entered into an employment contract in the U.S. or (b) the vessel or aircraft touches down at a U.S. port while the individual is employed on it, (3) The individual is working in a country with which the U.S. has entered a Social Security agreement providing that the foreign earned income is subject to U.S. Social Security and Medicare taxes, or (4) The individual is working for a foreign affiliate (a foreign entity in which the U.S. employer has at least a 10 percent interest) of a U.S. employer under a voluntary agreement (under IRC Section 3121(l)) entered into by that employer and the U.S. Treasury Department.<a href="#_ftn1" name="_ftnref1">1</a> The IRS guidance further provides that an individual is “working for a U.S. employer” for purposes of (1), above, if the individual is working for (a) the U.S. government (or instrumentality thereof), (b) another individual who is a U.S. resident, (c) a partnership in which at least two-thirds of the partners are U.S. residents, (d) a trust, in which all of the trustees are U.S. residents or (e) a corporation organized in the U.S., or in any U.S. state (including D.C., the Virgin Islands, Guam, American Samoa and the Northern Mariana Islands).<a href="#_ftn2" name="_ftnref2">2</a> A U.S. employer who voluntarily enters into an agreement to extend Social Security coverage to its employees working in a foreign country is liable for the entire amount of the covered employees’ Social Security taxes that would otherwise apply under Sections 3101 and 3111 if those employees were employed domestically.<a href="#_ftn3" name="_ftnref3">3</a> The IRS has advised that U.S. individuals who are working in a country with which the U.S. has entered a Social Security agreement providing that the individual’s income will not be subject to U.S. Social Security taxes obtain a statement from the relevant agency in the foreign country stating that the individual’s income is subject to Social Security coverage in that foreign country. The U.S. Social Security Administration (SSA) will issue determinations that a U.S. individual’s income is subject only to U.S. Social Security taxes if the employer contacts the SSA and provides certain basic identifying information about that individual and his or her employment abroad. <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a> See IRS Guidance: “Social Security Tax Consequences of Working Abroad,” available at http://www.irs.gov/Individuals/International-Taxpayers/Social-Security-Tax-Consequences-of-Working-Abroad (last accessed June 17, 2024). <a href="#_ftnref2" name="_ftn2">2</a> IRC § 3121(h). <a href="#_ftnref3" name="_ftn3">3</a> IRC § 3121(l)(1)(A).

March 13, 2024

953 / What rules apply when a U.S. citizen or resident alien is married to a nonresident alien and the couple wishes to file a joint U.S. tax return?

<div class="Section1">If a U.S. citizen or resident alien is married to a nonresident alien, the couple may elect to treat the nonresident alien as a U.S. resident for tax purposes. The couple may elect this treatment by attaching a statement to this effect to their U.S. tax return for the relevant tax year. The election may be made at the time of filing, or by filing an amended tax return for up to three previous tax years (though in this case, the couple must also elect such treatment for all tax returns that have been filed since the date of the amended return).</div> <div></div> <div class="Section1">The couple must file a joint tax return for the year in which the election is originally made, though separate returns may be filed in later years.</div> <div></div> <div class="Section1">While this election will result in the nonresident alien being treated as a resident alien for income tax purposes, the individual may continue to be treated as a nonresident alien for purposes of Social Security and Medicare taxes.<a href="#_ftn1" name="_ftnref1">1</a></div> <div></div> <div class="Section1">The election will apply until it is suspended or ended. The election is suspended if, during a later tax year, neither spouse is a U.S. citizen or resident alien. The election is ended if (a) it is revoked by either spouse, (b) one spouse dies, (c) the spouses are legally separated or (d) the spouses have failed to keep adequate records to prove their income tax liability.<a href="#_ftn2" name="_ftnref2">2</a> If the election is “ended,” neither spouse may apply to make the election in a subsequent tax year.</div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a> IRS Guidance, “US Citizens and Resident Aliens Abroad – Nonresident Alien Spouse,” available at https://www.irs.gov/individuals/international-taxpayers/nonresident-alien-spouse (last accessed June 17, 2024). <a href="#_ftnref2" name="_ftn2">2</a> IRS Pub. 519. </div>

March 13, 2024

955 / What is the foreign earned income exclusion?

<div class="Section1"> The foreign earned income exclusion is available if the following requirements are met: <blockquote>(1)     The individual has income received for work performed in a foreign country, (2)     The individual has a tax home in a foreign country, and (3)     The individual meets either (i) the bona fide residence test or (ii) the physical presence test (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="956">956</a>).  </blockquote> According to IRS guidance, an individual’s “tax home” is the general area of the individual’s principal place of business or employment. The individual’s principal place of residence is irrelevant for determining the individual’s tax home. However, if the individual is not consistently present in one business location, the location of that individual’s principal residence may be used as a factor in the tax home determination. If the individual has neither a regular principal place of business or residence, the individual is considered itinerant and his or her tax home is wherever he or she works. The individual’s tax home is not considered to be in a foreign country if that taxpayer’s “abode” is in the U.S.<a href="#_ftn1" name="_ftnref1">1</a> <div class="Section1" style="padding-left: 40px;"> Example: Joe is a U.S. citizen who is employed on a fishing enterprise in the waters of a foreign country. His schedule provides that he works one month on and one month off. Joe continues to maintain a residence in the U.S., where his family lives and where he returns on his “off” months. Joe is considered to have a “tax home” in the U.S. because his time is split equally between the U.S. and foreign waters. He is not entitled to take advantage of the foreign earned income exclusion, though he may be entitled to deduct his living expenses while living abroad as business travel expenses.<a href="#_ftn2" name="_ftnref2">2</a> A taxpayer’s election to exclude foreign earnings under the foreign earned income exclusion may be revoked by the taxpayer by filing a statement to that effect with the IRS, but if the taxpayer attempts to claim the exclusion within five tax years after the revocation, he or she must apply for IRS approval.<a href="#_ftn3" name="_ftnref3">3</a> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>     IRS Pub. 54 (2019), p.12 <a href="#_ftnref2" name="_ftn2">2</a>     IRS Guidance, “Foreign Earned Income Exclusion – Tax Home in Foreign Country,” available at https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-tax-home-in-foreign-country (last accessed August 15, 2025). <a href="#_ftnref3" name="_ftn3">3</a>     IRS Guidance: “Revocation of the Foreign Earned Income Exclusion,” available at http://www.irs.gov/Individuals/International-Taxpayers/Revocation-of-the-Foreign-Earned-Income-Exclusion (last accessed August 15, 2025). </div></div>

March 13, 2024

961 / What assets of a foreign individual (nonresident alien) are subject to U.S. estate tax?

<div class="Section1"> Unlike a U.S. citizen, who is subject to estate taxation on worldwide assets, the gross estate of a nonresident alien (meaning, a foreign individual who is not a U.S. citizen or resident alien) only includes property that is situated in the U.S. at the time of the nonresident alien’s death.<a href="#_ftn1" name="_ftnref1">1</a> For purposes of determining what property is situated in the U.S., any property which the decedent has transferred, by trust or otherwise, which would be taxable within the provisions of IRC Sections 2035 through 2038 (relating to termination of certain property interests within three years of death, transfers with a retained life estate or to take effect at death, and revocable transfers), is deemed situated in the United States if it was so situated either at the time of the transfer or at the time of death.<a href="#_ftn2" name="_ftnref2">2</a> For a decedent who was a nonresident alien at the time of death, property is considered located in the U.S. if it falls into any of the following categories: <blockquote>(1) Real property located in the U.S.; (2) Tangible personal property located in the U.S., including clothing, jewelry, automobiles, furniture or currency. Works of art imported into the U.S. solely for public exhibition purposes are not included; (3) A debt obligation of a citizen or resident of the U.S., a domestic partnership or corporation or other entity, any domestic estate or trust, the U.S., a state or a political subdivision of a state or the District of Columbia; or (4) Shares of stock issued by domestic corporations, regardless of the physical location of stock certificates.<a href="#_ftn3" name="_ftnref3">3</a></blockquote> However, in the case of a nonresident alien who dies while in transit through the U.S., personal effects are not considered located in the U.S. Neither is merchandise that happens to be in transit through the U.S. when a nonresident alien owner dies. The IRS has also addressed certain assets and found that they are specifically excludible from a nonresident alien’s gross estate as being “without the U.S.” The following non-exhaustive list of the property owned by a nonresident alien is not considered to be situated within the U.S. for calculating the gross estate: <blockquote>(1) A bank account that is not used in connection with a U.S. trade or business;<a href="#_ftn4" name="_ftnref4">4</a> (2) A deposit or withdrawable account with a savings and loan association chartered and supervised under federal or state law or an amount held by an insurance company under an agreement to pay interest on it. But the deposit or amount must not be connected with a U.S. trade or business and must be paid or credited to the decedent’s account;<a href="#_ftn5" name="_ftnref5">5</a> (3) A deposit with a foreign branch of a U.S. bank if the branch is engaged in the commercial banking business;<a href="#_ftn6" name="_ftnref6">6</a> (4) A debt obligation, the interest on which would be exempt from income tax under IRC Section 871(h)(1), relating to tax-exemption for interest earned by nonresident aliens with respect to portfolio debt investments;<a href="#_ftn7" name="_ftnref7">7</a> (5) Stock issued by a corporation that is not a domestic corporation, even if the certificate is physically located in the United States;<a href="#_ftn8" name="_ftnref8">8</a> (6) An amount receivable as insurance on the decedent’s life;<a href="#_ftn9" name="_ftnref9">9</a> (7) Certain original issue discount obligations;<a href="#_ftn10" name="_ftnref10">10</a> and (8) Certain stock that a nonresident alien owns in a regulated investment company (RIC) at the time of his or her death.<a href="#_ftn11" name="_ftnref11">11</a></blockquote> If the decedent was a citizen or resident of one of the countries with which the U.S. had an estate tax treaty in place, the provisions of the treaty may override the normally applicable provisions of the Internal Revenue Code that are outlined above. </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a> IRC § 2103. <a href="#_ftnref2" name="_ftn2">2</a> IRC § 2104(b). <a href="#_ftnref3" name="_ftn3">3</a> Treas. Reg. § 20.2104-1(a). <a href="#_ftnref4" name="_ftn4">4</a> See IRS Guidance: “Some Nonresidents with U.S. Assets Must File Estate Tax Returns,” available at http://www.irs.gov/Individuals/International-Taxpayers/Some-Nonresidents-with-US-Assets-Must-File-Estate-Tax-Returns (last accessed June 17, 2024). <a href="#_ftnref5" name="_ftn5">5</a> IRC §§ 2105(b)(1), 871(i)(3). <a href="#_ftnref6" name="_ftn6">6</a> IRC § 2105(b)(2). <a href="#_ftnref7" name="_ftn7">7</a> IRC § 2105(b)(3). <a href="#_ftnref8" name="_ftn8">8</a> IRC § 2104(a). <a href="#_ftnref9" name="_ftn9">9</a> IRC § 2105(a). <a href="#_ftnref10" name="_ftn10">10</a> IRC §§ 2105(b)(5), 871(g)(1). <a href="#_ftnref11" name="_ftn11">11</a> IRC § 2105(d). </div>