Tools for Tax Planning for Foreign Nationals

Editor’s note: Current versions of the tools referred to in this article can be found at the AIPCA’s International Tax Resource Center.

Navigating through the complex tax rules for foreign nationals is difficult. As the global economy has become more integrated, there has been a sharp rise in cross-border employment and investment opportunities. The United States has always had a large contingent of foreign nationals working within its borders, and the need for foreign national employees does not seem to be diminishing.

Foreign nationals face considerably different methods of filing individual income tax returns depending on their residency status. Consideration must be given not only to the U.S. income tax implications of a move, but also to the various home-country taxes. Multi-jurisdiction tax implications combined with green card status, tax treaties, sourcing of income, retirement plan taxation, foreign trusts, foreign partnerships and corporations, etc., result in the practitioner’s having a seemingly never-ending list of issues to resolve and questions for the foreign national client.

The AICPA’s Foreign National Task Force has developed tools to assist practitioners in navigating the various issues that arise when preparing Form 1040NR, U.S. Nonresident Alien Income Tax Return, for a foreign national. The tools include a questionnaire and a worksheet for gathering necessary information, a checklist to ensure the practitioner considers relevant factors, and a flowchart diagramming various filing alternatives for foreign nationals.

Foreign National Questionnaire

The foreign national questionnaire (Exhibit 1) aids the tax practitioner in the information-gathering process. Intended to accompany a practitioner’s regular tax organizer package, the questionnaire outlines specific questions on international status that will directly affect the client’s tax outcome. For example, one question asked is: What is your country of citizenship? That answer, combined with the existence of a U.S. income tax treaty, may result in favorable tax treatment for certain types of income.

Also included in the questionnaire is a worksheet (Exhibit 2) to be prepared by the client to categorize all travel in and out of the United States, as well as working and nonworking days. This information is critical in determining whether or not the foreign national meets the residency rules in the United States and, if so, the residency start date (see Sec. 7701(b)).

Foreign National Checklist and Flowchart

The Form 1040NR foreign national checklist (Exhibit 3) is divided into eight sections that follow the format of other AICPA checklists and includes references to applicable Internal Revenue Code sections and tax forms. The eight main sections of the checklist are: General Information, Income, Other Requirements, Offshore Nonresident Tax Implications, Other Considerations, Expatriation or Termination of Residency, Estate and Gift Implications, and Foreign Trusts. Each section contains filing considerations and various alternative filing approaches.

The task force also developed a flowchart (Exhibit 4) that diagrams the various filing alternatives available to foreign nationals in their first year of residency in the United States.

Conclusion

The tax rules for foreign nationals can be complex, but the AICPA’s Foreign National Task Force has provided a starting point and roadmap for practitioners. Gathering the relevant information up front is the first step. Organizing the data and filing it appropriately is the second. These tools break the process down into individual elements, thus making Form 1040NR easier to navigate.

Authors’ note: The task force chair and vice chair thank the task force members for all their time and effort devoted to this project. The Foreign National Task Force members are Henry P. Alden II, Alan Alport, Charles Austin, Olaf Barthelmai, Jack Brister, Gary Carter, Henry Grzes, Keith Hiatt, Hildy Karev, Alex Knight, Brent Lipschultz, Jim Lynch, Jeff McCann, Andrew M. Mattson (Tax Executive Committee liaison), John E. Mitchell, Joseph E. Sardella, Thomas Spott, Peter Stratos, and Len Wolf. A special thank you to Eileen Sherr, AICPA Technical Manager, for her efforts in keeping this project moving and coordinating many conference calls.