The United States federal government and most states impose income tax on individuals on a citizenship and residency basis.
Individuals moving to the United States will find themselves entering a significantly more complex taxation system than that of New Zealand. The United States has the most developed body of income tax law in the world, galvanised into the 71,000 page Internal Revenue Code with accompanying regulations, revenue procedures and other pronouncements.
Dealing with the Internal Revenue Service is not the same as dealing with the Inland Revenue Department. Compliance with United States' income tax obligations requires significantly more disclosure than what a New Zealand citizen may be used to. A typical example is the number of forms for completion, which, depending on an individual’s financial and personal affairs can be multiple times the volume of paperwork involved in meeting New Zealand income tax filing obligations.
In addition to complexity, differing terminology between the two countries frequently causes difficulty in understanding how individuals and entities are taxable in the United States.
Income tax is imposed at the federal and state levels, and in some cases locally with city and county taxes. Inter-relationships exist between the three levels of income taxation, with tax rates varying according to the filing category of the taxpayer. Furthermore the imposition of capital gains tax, self-employment tax, Social Security & Medicare taxes, unemployment tax, gift tax, estate tax, excise tax and generation-skipping transfer tax frequently can be overwhelming.
Individuals and organizations either relocating or expanding operations from New Zealand to the United States may also have the implications of a remaining tax presence in New Zealand to address in addition to dealing with the United States tax system.
United States citizens and lawful permanent residents moving out of the United States will need to file a federal return and a part-year resident/part-year non-resident state return for the year in which they departed the United States.
Moving Expenses may be claimable in the United States tax return where eligibility criteria involving time and distance tests are met.
The Income Tax Treaty also may affect the way in which an individual or organization with a tax presence in the United States should file a United States income tax return.
NZ US Tax Specialists assists with planning to minimise the financial effect of a move to or from the United States created by moving from one tax jurisdiction into another.
United States Citizens and Lawful Permanent Residents
United States citizens and lawful permanent residents are required to file a United States tax return every year regardless of where they reside in the world. An exemption from filing is available if the individual’s income falls below a specified income threshold and meets certain other criteria required in order to qualify. Certain disclosures to the United States government may also be required to be made on an annual basis. These are in addition to the requirement to file a United States tax return.
Disclosures may need to be made about bank accounts located outside the United States, including signing authorities, which may be held either by the individual, or organizations in which the individual has a financial interest or for which the individual holds a signing authority.
Shareholdings in corporations located outside the United States, and interests in foreign trusts are also required to be disclosed in certain circumstances. In addition, complex rules exist under the Internal Revenue Code requiring, in some cases, income from foreign corporations and foreign trusts to be attributed to a United States citizen or lawful permanent resident.
Should disclosures be required to be made they may need to be filed together with the United States tax return, or separate to the return, all annually by a due date. Fines imposed on the individual for non-disclosure are as high as US$10,000 per corporation, and 35% of the gross value of property transferred to or distributed by a foreign trust. Receipts of foreign gifts may also be reportable transactions attracting penalties for non-disclosure.
Preparation and filing of the United States income tax return
The United States income tax return is prepared on a calendar-year basis for most taxpayers. The due date for filing the individual’s return, without extension of time for filing, is 15 April of the year following the tax year for which the return is prepared.
United States citizens and lawful permanent residents residing outside the United States are granted an automatic extension for filing of two months until 15 June. All tax must still be paid by the original due date for filing, 15 April.
Non-resident aliens are required to file a return by 15 June unless they receive wages subject to withholding tax, in which case the due date is 15 April.
United States citizens and lawful permanent residents may apply for an extension of time for filing for six months from the original due date, therefore until 15 October of the same year. This may be done either by submitting Form 4868 or making a payment of the estimated tax due.
Corporations’ income tax returns are due by 15 March of the year following the tax year for which the return is prepared. If an extension of time for filing is applied for, the corporation has until 15 September of the same year to file. Extension of time for filing is not an extension of time for payment. In order to avoid penalties and interest for unpaid tax, payment is required to be made by the original due date of the return, together with instalments of estimated tax by the due dates, where required.
Under the Internal Revenue Code, different methods may be available for the way in which items of income and expenditure are returned. Using different methods sometimes results in different tax positions, with one method resulting in a more favourable outcome than another method. Numerous tax credits, deductions and personal exemptions vary depending on the method engaged. Other factors impacting on the final tax position include the Alternative Minimum Tax and state taxation.
NZ US Tax Specialists has built a reputation for being diligent, timely and thorough with the preparation of United States income tax returns. Within the constraints of all obligations, whether ethical, legal, or other obligations, where there is a choice in methods available, the method resulting in the best lawful outcome will be used