Top 5 US Tax Tips for UK Accountants and IFAs
We have highlighted below the top 5 US tax tips we think UK accountants and IFAs should know about how UK citizens can be subjected to US income and estate taxes.
1). When UK citizens spend a substantial amount of time in the US.
If the individual is not a US citizen and was physically present in the US for at least 31 days in the current calendar year and the cumulative total of 183 days during the current year and 2 previous years, then they could be a resident for US tax purposes.
To calculate the 183 days in the US test use the following formula:
a). All the days present in the US during the current year (2021);
b). 1/3 of days present in the prior year (2020); and
c). 1/6 of days present in the pre-prior year (2019)
If the individual has spent more than 183 days in the US using the above formula they have met the ”Substantial Presence Test” and will be regarded as a US income tax resident. There are a few exceptions if they are in the US on certain visas, (e.g. teacher/trainee, students and professional athlete visas).
An individual can still be treated as a nonresident if they meet the “substantial presence test” if they:
- Are present in the US for less than 183 days during the current tax year;
- Had a closer connection during the year to one foreign country in which they have a tax home other than to the US;
- Maintained that tax home in that foreign country during the entire year; and
- Had not taken steps towards and did not have an application pending for lawful permanent resident status (Green Card)
It may also be possible to claim relief from US tax residence under the US/UK Income Tax Treaty.
2). UK Citizens – Purchasing US Rental Property
If a UK citizen purchases property in the US for rental purposes, the income they earn will be taxable income and they will have a US filing requirement.
There is a special election to treat all income from the property as income effectively connected with a US trade or business. They can make this election only for real property income that is not otherwise connected with a US trade or business. If they make this election they can deduct expenses relating to property which would be taxed at the graduated rates
If they do not make this election the US taxes payable would be 30% on the gross rents received during the calendar year.
3). UK Citizens selling a US property
If a UK citizen sells US non-real estate assets these are not subject to US capital gain taxes. However, if the property is real estate the gain from the sale will be subject to US tax.
Under the Foreign Investment in Real Property Tax Act (FIRPTA), if a foreign individual sells a US real property, whether held as a rental property, personal use, or just for investment, the buyer/purchaser is required to withhold 15% on the gross sale price. The IRS requires US taxes to be withheld on the sale to prevent the foreign individual from evading US income tax. The withholding must be submitted to the IRS within 20 days of the transfer date. Failure to do so can result in penalties.
You can apply for a “withholding certificate” to reduce or eliminate withholding on the disposition of US real property interests by foreign persons. With this, you can reduce the withholding to be on the difference between the sales price and the cost basis. Before applying for a “withholding certificate” the seller must inform the buyer in writing that the certificate has been applied for on the day or prior to the transfer of property. The IRS will normally take 90 days to process the application and will determine whether withholding should be reduced or eliminated or whether a withholding certificate should not be issued. Once the seller has received a withholding certificate or a notice of denial then the applicable withholding is required to pay any US tax to the IRS within 20 days, otherwise, there could be penalties.
If a foreign individual has had US taxes withheld on the sale proceeds we would advise filing a US income tax return as they may have overpaid or underpaid their US tax liability.
4). Estate Tax for Non-Residents with assets in the USA
If a non-US citizen and non-US-domiciled individual holds US situated assets such as US real estate located in the US or shares in US companies, they will be subject to US Estate tax on these assets that exceed $60,000. The current tax rate is 40%.
Estate tax treaties with the US often provide more favorable tax treatment to non-residents of the US on other types of assets considered as situated in the US, such as US pension plans. We would look at the treaty to see where the asset should be taxed.
If the fair market values of the decedent’s US situated assets exceeds $60,000t they would need to file Form 706-NA US Estate (and Generation-Skipping) Tax Return, Estate of Nonresident Not a Citizen of the US to show their US assets that may be subject to US taxes or exempt under the tax treaty.
If a deceased has assets over $60,000 in the US, they need to obtain a “Federal Transfer Certificate” which is a document from the IRS which you will receive once you have filed US Form 706NA. The Transfer Certificate will be required by the holder of the US asset(s) before they will release the asset.
5). Individual Taxpayer Identification Number (ITIN)
The IRS will issue ITINs to individuals who are complying with the US tax law and not eligible for a US social security number.
ITINs are mainly used for the following reason:
- Non-resident alien who is required to file a US tax return as they have income effectively connected to the US tax
- Resident aliens who are required to file a tax return as they have met the “Substantial Presence Test”
- Dependents or the spouse of a US citizen or resident alien
- Dependents or spouse of a non-resident alien visa holder
We can help with all of the above scenarios listed above so please feel free to contact us.