By Simon Brady, CFP® November 16, 2016
Most HR departments faced with inbound foreign nationals coming to work for the U.S. entity do a good job in making certain preparations for the employee’s arrival. Either on their own, or with the assistance of specialist relocation firms, they make preparations to deal with the immigration, real estate, educational and even cultural awareness needs of the new foreign employee.
However, there are a host of issues that foreign nationals face in the U.S. particularly in the fields of taxation, estate planning and credit development, where non-citizen staff are left to their own devices. And here we face the problem of “you don’t know what you don’t know” since most of them are unaware of some of the risks they are taking in these areas, let alone what to do about them. Among these concerns are:
The foreign employee paid in the U.S. is likely to become a “U.S. person” for tax purposes and that subjects them to declaring their worldwide income to the IRS. And since most people don’t emigrate to the U.S. overnight on New Year’s Eve, it is likely in their first year that they will have a somewhat complex tax return to complete with income being generated from at least two countries.
Overseas Account Reporting Requirements
The rules here apply to every U.S. person, including American citizens. But the fact is that the foreign nationals are far more likely to have overseas accounts with their names on them and failure to disclose many of these accounts to the Treasury Department (separate from a tax return) can lead to crippling penalties.
The rules here are complex and estate planning law can change at the whim of Congress. But while the rest of us are generally exempted from paying the 40% federal estate tax for estate values of under about $5.5 million, many non-citizens can face an exemption of only $60,000 on their U.S.-based assets before they pay the federal estate tax. And most states impose another layer of estate taxes that are just as harsh on the foreign national. Also, U.S. citizens can pass an unlimited amount to a spouse free of any federal estate tax. Not so for anyone who is not a full U.S. citizen. As you can imagine, in the case of many non-citizens who happen to die here, the effect on the surviving family can be catastrophic. (For more, see: Tax Rules for Resident and Nonresident Aliens.)
Overseas credit reports or records or income history are almost always disregarded by banks and credit issuers when it comes to assessing credit limits in the U.S. This can mean extremely low credit limits (or even no unsecured credit limit at all) being offered to recently-arrived foreign nationals, who essentially have to start building credit from scratch, regardless of their credit history in their own country.
Similar to the credit issue, most lenders will look very unfavorably on someone whose recent credit and income history is from outside the U.S. (For more, see: Getting a Mortgage for Non U.S. Citizens.)
And There’s More
Foreign nationals can face restriction or even denial of things like life insurance (a potential solution to the estate tax problem), participation in college savings plans, becoming a shareholder in a S-corporation and more. They also potentially face a layer of tax on gifts to a spouse while alive from which American citizens are exempt.
The Bottom Line
Recently arrived non-citizens face a lot of financial, tax and legal issues that U.S. citizens do not. And yet, they are far less networked to be able to find resources to help with them than someone who has been here all their lives. HR staff at work are not qualified tax professionals, financial planners or estate attorneys. Most are simply not in a position to offer advice or help in these matters, even if they are aware of them in the first place.
However, a qualified, fiduciary Certified Financial Planner with a specialty in these areas can act as a quarterback and point person, raising awareness, offering advice and bringing in outside professionals from their own network to consult with the foreign employee and their family. (For more, see: 6 Things Foreign Buyers of U.S. Real Estate Need to Know.)