“The exodus continues. It’s like the party’s over and the last one to leave gets stuck with the check!”
- Agent Zed, “Men in Black” (a film about aliens)
Immigration laws and tax laws frequently go hand in hand – unsurprising given how complex both can be.
For resident and nonresident aliens who wish to leave the United States, the concept of the “sailing permit” can be one of the most important items of business that must be resolved before departing. But what exactly is a “sailing permit?” (Spoiler: It has nothing to do with maritime law, marina fees, or the United States Coast Guard.)
Internal Revenue Code Section 6851(d)(1) specifies that “[n]o alien shall depart from the United States unless he first procures from the Secretary a certificate that he has complied with all the obligations imposed on him by the income tax laws,” subject to certain exceptions by regulatory authorities. This certificate, simply put, is result of the IRS’s review and concurrence that an alien is up to date with all income tax obligations and is therefore cleared to leave.
The IRS refers to this certificate in informational materials as a “tax clearance document,” but it’s also known as a “departure permit” or, more commonly, as a “sailing permit.”
As mentioned earlier, all departing resident and nonresident aliens must obtain this document, with the following exceptions: foreign diplomats, employees of international organizations, exchange students and industrial trainees, aliens who earn no U.S. income, and commuting employees who reside in Canada or Mexico whose wages have U.S. taxes withheld.
Applying for a Sailing Permit from the IRS
If you don’t meet an exception, the application for a sailing permit is done using one of two forms: Form 2063 or Form 1040-C.
Form 2063 is the simpler and easier of the two forms to prepare, but has certain conditions that must be met. Resident aliens who have taxable income but are not, in the IRS’s evaluation, leaving to avoid paying income taxes, may file this form. Additionally, resident and nonresident aliens who have no taxable income for the current and preceding year may file this form. Form 2063 is short, but more importantly doesn’t require you to calculate and pay tax. If you don’t qualify for Form 2063, your only avenue is to file Form 1040-C, which is more onerous and requires a calculation of tax before you can receive a sailing permit.
Regardless of the form you need to file, the window of time you have is limited and you’ll need quite a bit of information to make the process go as smoothly as possible. If you are a resident or nonresident alien and you think you may need to apply for the sailing permit, we stand ready to assist you in the process.
Tax Planning and Advice for Resident and Nonresident Aliens
We at Freed Maxick pride ourselves on our experience and expertise with sailing permits and other international tax matters. If you are a resident or nonresident alien, and would like to discuss your tax and compliance responsibilities, please connect with us here , or call us at 716.847.2651 to schedule a brief conversation.View full article
“Things as certain as death and taxes, can be more firmly believ’d.” - Daniel Defoe
Most U.S. nonresidents are aware these days that if you move to the United States or have U.S. investments, you may become subject to U.S. income tax laws. But what may not be as well known is that you may also be subject to U.S. estate tax, even if you don’t earn any income or file income tax returns.
The Internal Revenue Code is notoriously complex and this area is no exception. The Internal Revenue Code actually has two separate determinations for taxing a foreign person: residency for the income tax, and domicile for the estate tax. Even if you are not a resident for income tax, you can still be considered domiciled for the estate tax.
The IRS defines residency for income tax under a number of different tests, including whether the taxpayer holds a green card or if they’ve been in the country for a substantial portion of the year. You can also make the First-Year Election to declare your residency on the first U.S. income tax return you file.
When it comes to the estate tax, federal regulations determine a “domicile” as living somewhere for a period of time without any immediate plans of leaving. Domicile depends on both physical presence and intention to stay in the country. Simply put, if you intend to stay, you’re domiciled, but if you plan to leave, you need to actually leave.
If a person is deemed to be a U.S. resident for estate tax, their worldwide assets are subject to the estate tax. If someone is a nonresident, only assets with situs in the United States are subject to inclusion in his or her estate.
What Can You Do if You Are Subject to U.S. Estate Tax?
At this point, you may be thinking, “I have U.S. and foreign assets, so how can I reduce or avoid U.S. estate tax?”
The answer to that question largely depends on your current situation.
If you’re a nonresident alien who has a domicile in the United States, there’s a certain amount of preplanning you can do in anticipation of this tax, such as gifting intangible property before establishing a domicile in the U.S. There are other measures you can take, such as having U.S. real estate and equities owned by a foreign corporation, to make sure you are in the most advantageous position in the U.S. and the foreign country.
It’s also important to consider whether a nonresident’s country of citizenship has a tax treaty in force with the United States. The U.S. has active tax treaties with many countries, and depending on the country, a nonresident individual may be entitled to the full $5,495,000 estate exclusion or only a statutory $60,000 exclusion.
Expatriation might seem like a good way to avoid the U.S. estate tax—and this may be the case in certain situations—but Section 2107 of the Internal Revenue Code makes nonresident aliens subject to U.S. estate tax if they were domiciled in the United States for a period of five years or more. The window for being subject to this tax is ten years and you are taxed on any assets (tangible or intangible) that are situated in the United States.
If you are a foreign national living and owning property in the U.S. and have concerns that you may be subject to U.S. estate tax, we can help you sort out your options. We at Freed Maxick pride ourselves on our experience and expertise with these and other international tax matters. Please contact us if you have any questions.View full article