Individual taxation

Residence and domicile

How is residence/domicile determined for tax liability purposes in your jurisdiction?

US citizens and resident aliens are subject to federal income taxation on their worldwide income, whereas non-US persons are generally subject to income tax only on certain types of income from US sources.

A non-US citizen will be subject to tax as a resident alien for any calendar year in which they:

  • are a lawful permanent resident of the United States at any time during the calendar year (ie, hold a certificate of permanent residence, known as a ‘green card’); or
  • are ‘substantially present’ in the United States.

The substantial presence test is generally satisfied if a non-US citizen is physically present in the United States for a period of 183 days or more in a calendar year. The test is also satisfied if:

  • an individual is physically present in the United States for at least 31 days during that calendar year; and
  • the individual’s presence in that year and the two preceding years equals a weighted aggregate of 183 days or more (counting each day of the present year as a full day, each day of the preceding year as one-third of a day and each day of the next preceding year as one-sixth of a day).

Generally, an individual can spend up to 121 days each year in the United States without becoming a resident under the substantial presence test.

Many US states and some localities impose income tax.

For purposes of the federal transfer taxes (ie, estate tax, gift tax and the generation-skipping transfer (GST) tax), US citizens and residents are subject to tax on transfers of property, wherever it is located, whereas non-US persons are generally taxed only on transfers of certain types of US situs property.

A non-US citizen will be subject to federal transfer tax as a resident if they are domiciled in the United States. Domicile is established by living in the United States, even for a brief period, with no definite present intention of later moving away.

These federal tax rules may be modified by applicable US income and estate tax treaties.

Income

Describe the income tax regime in your jurisdiction (including tax base, rates, filing formalities and any exemptions, reliefs or deductions).

US citizens and resident aliens are subject to federal income taxation on their worldwide income, generally on a net basis, although the Tax Cuts and Jobs Act (TCJA) has eliminated many deductions until 2025. Most personal, business and investment income is taxed at rates ranging from 10% to 37%. Gains from the sale of capital assets held for more than one year – and dividends paid by US corporations and certain non-US corporations – are generally taxed at 20%. Net investment income of US persons is generally subject to a 3.8% Medicare surtax.

Non-resident aliens are subject to federal income tax only on certain types of US source income. Income that is effectively connected with a US trade or business is generally taxed on a net basis in the same manner as income earned by a US person. Certain US source ‘fixed and determinable income’ (eg, dividends, rents and some forms of interest) is generally subject to a flat 30% withholding tax, although this rate is reduced or eliminated by some US tax treaties. Non-resident aliens are generally not subject to:

  • federal income tax on interest from US bank accounts;
  • ‘portfolio interest’ on US debt obligations; or
  • gains from the sale of capital assets (other than gains arising from US real estate).

State and local income taxes may also apply.

Capital gains

Describe the capital gains tax regime in your jurisdiction (including tax base, rates, filing formalities and any exemptions, reliefs or deductions).

US citizens and resident aliens are subject to federal income taxation on their worldwide income, including gain from the sale of capital assets. Gain on the sale of capital assets held for more than one year is generally taxed at a maximum rate of 20%, while gain from assets held for one year or less is taxed at rates ranging from 10% to 37%. Net investment income is also generally subject to a 3.8% Medicare surtax and may be subject to state and local income tax.

Non-resident aliens present in the United States for 183 days or more during the tax year are subject to a flat 30% capital gains tax on US source gains; this may apply to individuals who are not resident aliens due to their visa status (eg, non-US students).

Generally, non-resident aliens are not subject to federal income tax on capital gains, unless the gains are effectively connected with the conduct of a US trade or business or arise from the disposition of certain direct and indirect interests in US real property.

Inheritance and lifetime gifts

Describe the inheritance and gift tax regime in your jurisdiction (including tax base, rates, filing formalities and any exemptions, reliefs or deductions).

Three federal transfer taxes – gift tax, estate tax and the GST tax – may apply to gratuitous transfers of assets by donors and decedents. Many states also impose transfer taxes.

US citizens and residents are subject to federal gift tax on certain gratuitous transfers of property (real and personal, tangible and intangible), wherever situated, direct or indirect, and whether in trust or otherwise. Non-resident aliens are subject to federal gift tax on transfers of real and tangible property situated in the United States, but not on intangible property (eg, shares of stock of US corporations). The donor is primarily liable for paying the tax, which is imposed at rates from 18% to 40%.

US citizens and residents have a lifetime gift tax exemption of $10 million ($11.18 million in 2018 as indexed for inflation, although after 2025 this amount will revert to $5 million as indexed for inflation). Non-residents do not have a lifetime gift tax exemption.

All donors – whether US persons or not – may give annually, to an unlimited number of individuals, $10,000 ($15,000 in 2018 as indexed for inflation) per donee, and may also pay qualified medical and educational expenses on behalf of donees. In addition, gifts to a US citizen spouse (outright or in a trust that meets certain requirements) are not subject to federal gift tax by reason of the marital deduction. Gifts to a non-US citizen spouse do not qualify for the marital deduction, but outright gifts of up to $100,000 ($152,000 in 2018 as indexed for inflation) may be made to such a spouse annually without tax.

US citizens and residents are subject to federal estate tax at death on their worldwide assets at rates from 18% to 40%. They are entitled to an estate tax exemption of $10 million ($11.18 million in 2018 as indexed for inflation, although after 2025 this amount will revert to $5 million as indexed for inflation). The estate tax exemption is reduced by the amount of gift tax exemption used by a decedent during their lifetime.

Non-residents are subject to federal estate tax on certain types of US situs assets (eg, real and tangible personal property located in the United States and shares of US corporations). US bank accounts and US debt instruments that pay ‘portfolio interest’ are generally exempt from estate tax. Non-resident aliens are eligible for a credit that effectively exempts only $60,000 in taxable US situs property.

Bequests to a US citizen spouse (outright or in a trust that meets certain requirements) are not subject to federal estate tax by reason of the marital deduction. Although bequests to a non-US citizen spouse do not qualify for the marital deduction, the deduction is available if the bequest is made to a ‘qualified domestic trust’ for the non-US citizen spouse.

These rules may be modified by certain US estate tax treaties.

The GST tax applies to certain lifetime and testamentary transfers of property, whether direct or indirect, to or for the benefit of persons at least two generations (or, if the transferee is not a family member, more than 37.5 years) younger than the transferor. The tax rate is presently 40%. Each donor, including a non-resident, has a GST tax exemption equal to $10 million ($11.18 million in 2018 as indexed for inflation, although after 2025 this amount will revert to $5 million as indexed for inflation), which may be used with respect to transfers during life or at death. In addition, the GST tax does not apply to any transfer in any amount by a non-resident, if the transfer is not otherwise subject to the federal gift or estate tax. This presents a planning opportunity for non-resident transferors with US beneficiaries. Depending on which of three possible events triggers the GST tax, the tax must be paid either by:

  • the transferor;
  • the transferee; or
  • the trustee of the trust with respect to which a taxable transfer has occurred.

Real estate

What taxes apply to individuals’ acquisition and disposal of real estate in your jurisdiction?

Many states and some localities impose a transfer tax on transfers of interests in real property. Other taxes may also apply, such as mortgage recording taxes.

Gain on the sale of real estate is subject to federal income tax at a maximum rate of 20% (if the real estate had been held for more than one year) or at rates ranging from 10% to 37% (if the property had been held for a year or less).

The sale of a direct (and in some cases, an indirect) interest in US real property by a non-resident alien is subject to federal income tax under the US Foreign Investment in Real Property Tax Act. The tax is generally collected by requiring the transferee to withhold 15% of the purchase price and to remit such amount to the US Internal Revenue Service. If the amount withheld exceeds the amount of tax actually due the non-resident alien may apply for a refund of the overpayment.

Additional state and local income taxes may apply.

Non-real estate assets

Do any taxes apply to the acquisition and disposal of other assets apart from real estate?

The United States does not have a value added tax. Most states and many localities impose a sales tax on goods purchased within them. Generally, there are no taxes on the acquisition of investment property in the United States.

US citizens and resident aliens generally recognise gain (or loss) for federal income tax purposes on the sale or other disposition of an asset. Gain on the sale of capital assets held for more than one year are taxed at a maximum rate of 20%, while assets held for one year or less are taxed at rates ranging from 10% to 37%. There is an additional 3.8% federal Medicare tax which is imposed on the net investment income applicable to US persons who meet certain income thresholds. This tax is not applicable to non-resident aliens.

Non-resident aliens present in the United States for 183 days or more during the tax year are subject to a flat 30% capital gains tax on US source gains. This may apply to individuals who are not resident aliens due to their visa status (eg, non-US students).

Generally, non-resident aliens are not subject to federal income tax on capital gains unless the gains:

  • are effectively connected with the conduct of a US trade or business; or
  • arise from the disposition of certain direct and indirect interests in US real property.

Additional state and local taxes may apply.

Other applicable tax regimes

Are any other direct or indirect tax regimes relevant to individuals?

The United States taxes workers and employers to fund social security and Medicare programmes through payroll taxes. At the federal level, social security taxes are generally imposed on an employee’s wages (up to $128,400 in 2018) at a rate of 6.2% payable by the employee and 6.2% payable by the employer.

Medicare taxes are generally imposed at the federal level on all of an employee’s wages at 1.45% (with a surcharge of 0.9% for compensation in excess of $200,000) payable by the employee and 1.45% payable by the employer. Many states and some localities also impose payroll taxes.

The United States does not have a value added tax. Most states and many localities impose a sales tax on goods purchased, or services provided, within them. In addition, many states impose a ‘use tax’ on goods or services purchased outside the state if they are to be used within the state.

Specific goods may be subject to federal or state excise taxes. Excise taxes apply to such items as gasoline, alcohol, airline tickets and tobacco.

Planning considerations

Are there any special tax planning considerations for individuals with a link to your jurisdiction?

The United States imposes transfer taxes on certain transfers during life or at death which apply differently depending on whether the donor or decedent is a US or non-US person. The difference in tax treatment between these two categories offers opportunities for non-US individuals before moving to the United States.

A non-US individual may make gifts of intangible property, wherever located (eg, shares of US and non-US corporations) and real and tangible personal property (eg, artwork) located outside the United States before moving to the United States without any US gift tax liability. Such gifts may be made directly to other beneficiaries or to an irrevocable trust for other beneficiaries. It may be possible in certain circumstances for the donor to also be a discretionary beneficiary of such a trust. These gifts reduce the donor’s estate subject to US estate tax, and if properly structured, transfers to an irrevocable trust may be protected from US estate tax on the death of any trust beneficiary.

To protect US real property from federal estate tax, non-resident aliens often acquire such property through non-US corporations. Assuming the company is properly organised and maintained, the non-resident alien shareholder will be treated at death as owning shares of the non-US company, which is a non-US situs asset and not subject to federal estate tax.

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