International tax treatment of deferred tax bonus payments

Your payment(s) represent compensation for services. As such they will be US source income subject to US taxation in the year received. If you are a resident alien for tax purposes in the year received, you file a US tax return including your worldwide income and you may avail yourself of all the tax deductions and credits available to citizens. If at the time you receive the payments you are a nonresident alien of the US, you would only be subject to tax on your US source income.

IRS Pub 519 explains who is a nonresident alien and how they are taxed. The instructions for IRS Form 1040NR-EZ or Form 1040-NR if you have other types of income that would preclude you filing a

1040NR-EZ, also may help you.

I am not aware of anything in the US - UK tax convention that would provide any tax exclusion for the compensation you have earned.

If you are a non-resident at the time that you receive those payments, the (resident) payer is legally obligated to remit to the IRS a withholding tax (currently maximum 30%.) A security may also be required from you.

You may find it easier and cheaper to remain in the US.

The bonus is personal services income. As such, it is subject to normal withholding rules identified in Circular E and its Supplement.

If you give up your permanent residency or citzenship, you may be subject to the expatriation tax. This usually happens if your net worth and/or income is high enough. There are exceptions for dual citizens, which looks to be your case, but maybe they decide on a case by case basis.

I'm not quite sure how the expatriation tax differs from the regular

1040-NR that may be filed by a regular non-citizen who has US source income (either from a business, dividends, etc). The big difference I see is that you have to file for 10 years.

In addition, the instructions say "If you have other items of U.S. source income that are not subject to tax under section 871(a), you will be taxed on a net basis at the regular graduated rates applicable to individuals. Report this income on the appropriate lines on page 1 of Form 1040NR". So if you have US bank or treasury interest, or capital gains on US stocks, then for a regular non-citizen these would not be taxable, but for an individual under the expatriation tax, they would be.

This really is a complex issue. My brother and I discuss things like this for hours on end. It's easier for me to relate to this as a US citizen - in which case you would have foreign earned income in the years received. That assumes you are not the one who caused the bonus payments to be delayed. If your bonus is that large, you should consider discussing this with someone with significant experience in International Taxation.

Think twice about hiding out for two years in a tax haven. The Eagles have a song "Lying Eyes" in which there is an appropriate line: "Every form of refuse had its price". In this case, you would be out of work for two years and may not have a job when you return.

I'd wish you good luck, but in your situation it will be better to be good than lucky.

Dick

Dick: I am not sure I agree with you about the "cause" of the delay. If you elect to defer compensation under a company plan, I believe that compensation can still be deemed foreign. Using your example of a US citizen, if you defer compensation - say into an IRA or 401k - while overseas, when you take a distribution of that income in later years (after you have repatriated to the USA) you can consider that income as "foreign" for the foreign tax credit. I suspect the same would apply for income deferred into an executive deferred compensation plan.

If you are talking about the taxpayer "causing" an administrative delay in processing the payment, I agree with you. But for a US citizen, I don't think a normal deferral in realizing the income is an issue. You can be awarded stock options for service performed while in a foreign country, repatriate a few years later and exercise them, and call that income foreign....since it was clearly "earned" while working on foreign soil.

Best wishes.

I was referring to an administrative delay that you mention below.

So if a US citizen works in a foreign country and is able to contribute to a regular IRA, he/she gets the foreign earned income credit on their earned income and then again on the distributions from their IRA?

We agree as noted above.

Back to the OP. Does a US Green Card holder have to file US taxes upon leaving the US? 20 years ago UK income was not taxable until brought ashore. Thus, people getting paid and having investment accounts in foreign countries. Has this changed under the EU?

Dick

Dick: I don't see why not. The foreign tax credit is available to alleviate double taxation. I strongly suspect that the earned income was taxed (when earned) in the foreign country. Do they allow US deductions like IRA contributions in foreign jurisdictions? I am not an expert, but I doubt it. So, when this income is realized (for the second time) when distributions are taken, I don't see why the FTC wouldn't apply.

Even if the foreign earned income credit completely wiped out any US taxable income, I don't see how you could argue that this income wasn't already taxed when earned on international soil.

To take the point even further, I have seen two Big Four firms apply similar logic and use the FTC against stock option income realized by former expatriates. The stock options were granted while overseas (and presumably not taxed at that time by the local jurisdictions). After repatriation, the options were exercised and the FTC was used against that income. This income was arguably never taxed, but the FTC was used. By the way, I have another colleague who had his tax return prepared by a local CPA and she used the foreign earned income exclusion on his stock option income, even though he had been living in the states for several years after repatriation. While I believe the FTC is an appropriate use, I don't think the exclusion is available if you aren't living overseas.

Best wishes.

The foreign earned income exclusion is not available to offset income from an IRA that was created while working abroad. To be eligible for exclusion, payment of the income must be made within two years of being earned. Technically, an end-of-contract bonus may not be fully excludable if the contract covered more than two years.

For FEIC purposes you must use the accrual method in calculating the exlusion. Thus, even if the IRS were attributable, if the income for the year was equal to the maximum exclusion, there would be no exclusion remaining.

Lanny W. Williams, CPA Nawarat, Williams & Co., Ltd. Income Tax Services for Expatriate Americans

Dick Adams wrote: [snip]

Earned income excluded under the foreign earned income exclusion is not eligible compensation for making an IRA contribution. Anyone who excludes 100% of foreign earned income can not contribute to an IRA.

In addition, deferred compensation also fails the test as earned income for purposes of making an IRA contribution.

Let's back up. If you are a foreign national working in the U.S., the general rule is you need a Green Card or a work visa. Are Green Card holders treated any differently for tax purposes than are those with work visas when they depart the U.S.?

Dick

the US. As such, you are taxed on your worldwide income. Departing the US, does not in itself change your alien status.

When a foreign national works in the US (whether on a work visa or not) you are subject to the substantial presence test to determine your alien status. These workers can be resident aliens, nonresident aliens or dual status aliens depending upon when they arrive, how long they stay and when they leave.

Yes. The green card is valid for one year after you leave the US, so you have to continue to file as a US citizen on your worldwide income. If you file an extension form, the validity is extended to 2 years. That's it. Though there are probably exceptions for people who are not able to return (like if the other country trapped them in a prison, or they were seriously sick). However, if you are thinking of giving up your green card, and have a lot of money, it might be better to fill out the official forms with the secretary of state to renounce your green card.

It is my understanding that if a foreign national who holds a Green Card departs the US without a reentry document and is outside the US continuously for more than a year, the Green Card is no longer valid as an entry document. It does not necessarily mean that the person has abandoned their lawful permanent residency (LPR) nor does it mean that the USCIS has revoked it. What you have is a rebuttable assumption by the USCIS.

Those individuals who want to be outside the US for more than a year and remain an LPR should obtain a reentry permit before departing. The permit is good for two years. If you fail to apply before leaving, or if you applied and the permit has expired (more than two years) you can still apply for return to the US by requesting an SB-1 visa. You do have to show that it was not your intent to permanently reside in another country and abandon your LPR. If it is your intent not to abandon your LPR, you should be filing timely US tax returns. Failure to file after a year outside the country, can be used as evidence by the USCIS that it was your intent to abandon your LPR.

I think we are now getting beyond the scope of this newsgroup.

I am not sure I understand your question on the "value" of the FTC. Since I haven't seen the local foreign tax returns myself, lets discuss the principles involved. I see no provision in Pub. 514 that requires the income to have been taxed in a foreign jurisdiction. If you have excess FTC's, can you not apply them to any foreign income taxed in the US?

I understand the issue of not being able to use FTCs on income excluded from US taxation. However, the issue I am focusing on is deferred compensation in one form or another. It could be an IRA, a

401k, stock options, restricted stock or an executive deferred comp plan. Under all of these five different plans, you will recognize the income in later years, although you "earned" the income while living abroad. In these situations, the use of the foreign income exclusion (while living abroad) is irrelevant since none of these categories of income would be taxable in the US in that year anyway.

Do you see any reason why FTCs - however generated - cannot be used for income from any of these 5 different plans when recognized after repatriation?

Best wishes.

It matters not. There was an airline pilot whose regular flight was Paris to New York. He lived in Paris. The Courts upheld his firght to the Foreign Earned Income exmeption noting it did not care that he had never paid French taxes.

Dick

How come he never paid French taxes if he lived in France?

There are two things here. One is the foreign earned income exclusion, currently 87600. The other is the foreign earned income tax credit, which is partial or full rebate of foreign taxes paid.

The post to which I asked my question was talking about the credit, not the exclusion. I don't see how you can take a credit if no foreign taxes were paid.

Because form 1116, line 9 asks you for the foreign tax paid. Line 13 is the maximum credit, which is line 9 plus any foreign tax credit carryover, minus an adjustment to foreign taxes because of things like the exclusion. They then do a calculation to determine the amount of the credit, which is the smaller of line 13 and the US tax on your foreign income, and the result is line 21. So if you repatriate to the US and pay no foreign tax on income that was earned in the foreign country but recognized only now, then line 9 on form 1116 for that year will be zero, and so line 21 will also be zero. So unless you have a carryover (line 10), I don't see how there can be a FTC. I'm still trying to understand how the carryover is calculated.