A Visa Holder's Guide To Saving For Retirement In The United States

 

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Quick back story: My husband and I came to the United States from India about 25 years ago on a J visa. I actually became interested in US Tax Law after I had to read up all the various rules and regulations for taxation of J Visa holders in the US. 

Naturally, visa holders coming to the United States to work make up a sizeable portion of our client list. The type of visas range from A to Z in the alphabet and each of them have special rules as to counting days in the United States; and taxation of their United States and/ or their world-wide income. 

Caveat: These rules should be navigated under professional guidance to save financial and legal trouble in the future. 

Two of the most frequently asked questions by visa holders are usually about Social Security taxes and saving for retirement. 

We will focus on retirement savings in this blog post. 

Retirement savings come under two categories:

• Pre-tax: A pre-tax retirement contribution yields a tax saving in the year in which it is made. The contribution grows tax-free until it is distributed, at that time it is taxed as ordinary income at your then tax rates. This is usually a "Traditional" contribution.  

• Post-tax: A post-tax retirement contribution is when taxes are paid upfront. The contribution grows tax free and is also usually not subject to taxation when a distribution is taken. This is usually a "Roth" contribution. 

Well, finding legal means to pay less in taxes is everyone's goal- but if you are a visa holder without long term plans to reside in the United States, there are many other factors that come into play to decide if this is the right step for you. 

Some of these factors are elaborated below:

• Employer match for your contributions and vesting schedule: 

Does your employer match some of your contributions? And how long do you have to work with them to take the employer match before you leave the company? If your employer matches your contribution, you should definitely contribute up to the match if you think you are going to stay with the company for as long or longer than the vesting period. This is free money!  

• Length of residency in the US or future plans: 

If your plans are to eventually get a Green Card and settle in the United States, this is a no-brainer- you should invest in retirement funds. However, if you do not or cannot plan to live in the US for the long term, you need to read further. 

• Short term and long term goals for your funds: 

Depending on the length of your stay in the US and your long term goals, investing in brokerage funds for ease of repatriation and convenience of liquidity may be a better goal for you.  

• Country where you plan to return to and whether this country has a tax treaty with the United States and Taking a distribution from your retirement savings as an NRA: 

The United States will tax you on distributions from your pre-tax retirement accounts unless the tax treaty it has with the country of your residence specifically states otherwise. If the tax treaty says that the United States has the right to taxation of your retirement funds, the tax rates are the same as if you were a US resident. If there is no tax treaty or if the resident country can also tax your earnings, you need to take into account if you will get a credit for one country's taxes paid on the other country's tax return. In this case, the US will tax your distribution at 30% flat rate before distribution of funds. 

• Managing funds in your retirement accounts when not present in the United States or as an NRA: 

Many retirement plan brokerage fund custodians do not want to deal with the additional reporting and compliance requirements if the plan participants are foreign citizens or non-resident aliens (NRA). Or they may not want to deal with your account if your balance is too small or the plan or your company might close your accounts. If this happens, you will be forced to either take a distribution or you may have to find a custodian who will service your accounts. The brokerage funds may also require medallion signatures. 

• Post tax retirement savings and distributions: 

I am of the opinion that if your long term plans do not include settling in the US, a Roth contribution may not be of much use to you unless the country you are planning to settle in also recognizes the Roth "wrapper" for your investments. Remember, you do not pay capital gains taxes as an NRA on the sale of your US investments hence, unless the tax free growth is accounted for in the country where you will reside after you move out, there is no advantage to making a Roth contribution. 

• Future Tax Laws: 

No doubt we can all agree that future tax laws are highly unpredictable. If you want to cut all ties to the United States once you leave the country, it is best to take all your retirement funds out as soon as you leave. Or plan your savings in such a way that there is minimal tax impact. 

We help clients in their pre-immigration and pre-emigration planning. This includes coming up with various scenarios for you to decide what your exit strategy should be and what you should do with your funds in the United States after moving out of the country. Please contact our office if you have questions regarding any of the above or more. 

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Consult with an Enrolled Agent for your unique tax needs and make sure your questions are answered. Always remember to read my disclaimer here. If you have any more questions regarding this or other tax matters, contact me via my website www.mntaxbiz.com. 

What Should I Know About Doing Business With United States Customers?

 

Picture Courtesy: Pixabay Alaska Aurora Borealis

You may have now heard this ad nauseum- 2020 was the "Year of The Pivot". Everything went online and we were all for the most part working with our clients virtually. 

When 2021 came by, it did not look like much was going to change with how we were doing business and networking with our colleagues. I, like many others, realized that this was a great thing to happen! People who were earlier reluctant participants in the virtual world were now embracing it with enthusiasm; we were able to reach far more people in our effort to offer niche foreign tax reporting and compliance services for inbound and outbound cross border operations. 

In an ongoing effort to also network virtually, I have met many enterprising business women, solopreneurs, accountants and fellow tax professionals in the foreign tax compliance and reporting space; my most longstanding membership of all has been the one that I have with HEN India. 

HEN stands for Her Entrepreneurial Network and was founded by a very smart visionary, Ruche Mittal. I have met so many women here who are either starting off with very interesting business ideas or are already doing very well and looking to scale. Naturally, their eyes turn towards one of the biggest markets in the world- the United States. 

Here are answers to some questions I get frequently from members of HEN India and others who want to do business in the United States: 

Do I Have To Set Up An Entity In The US To Do Business?  

There is no necessity to set up an entity in the United States. However, your current foreign entity can be elected to be classified for U.S purposes as:

1. A Disregarded Business (If owned by a single person)
2. A Partnership (If owned by multiple people) 
3. Or an Association Taxed as a Corporation. (Could be owned either by a single person or many)

Note: An election CANNOT be made for Per-se corporation listed under the Regulations. 

Will I Owe Taxes In The US? 

When operating as a foreign entity in the United States, there are two types of income on which you would pay taxes to the United States-Income that is sourced to your entity and income that is sourced to the United States:

• Effectively Connected Income {ECI} 

If you are carrying on a for-profit business in the U.S., and your entity satisfies an asset use test or business activities test, you will be subject to income tax. The taxes are calculated at graduated rates. 

A tax return must be filed within the due date (or extended due date) and deductions and credits are available if return is filed timely. 

• Fixed or Determinable Annual or Periodic Income {FDAP} 

This is income sourced to the United States and includes dividends, rent, salaries, wages, premiums, interest (exceptions apply), remuneration, director's fees etc. FDAP income is generally subject to a flat 30% withholding rate by the payor and deductions and credits are NOT permitted against this income. If the payor has properly withheld these taxes, there is no requirement to file a tax return. For those who have to file a return, rate of tax can be mitigated under DTAA or Double Tax Avoidance Agreement rules. 

Sale of Goods In The United States:  

If the goods are an inventory property- generally the sales are subject to income tax by the country where they are being manufactured or production activities are mainly conducted. 

If the goods are personal property- generally the sales are subject to income taxes where the seller resides. 

Can I have a Branch In The US? 

Yes, one can have a branch in the United States. However, a branch profits tax of 30% is imposed on the branch's US net ECI (which is US income minus the amounts reinvested in the United States). 

Branch profit tax can be mitigated by provisions of a tax treaty (if one exists with United States and the country where seller resides). 

Will I Have To Pay Sales Tax on Goods And Services?  

Sales Tax rules are based on which state in the U.S. the entity is believed to have a PE in. A foreign entity is deemed to have a Permanent Establishment (PE) either by way of a branch/ fixed place or there can be PE attributable to an agent acting on behalf of the foreign entity. 

Currently, Sales Tax calculations for foreign entities conducting online sales in the U.S. is ambiguous. 

Moreover, this area of taxation on international movement of goods and services is still evolving and there is much talk among various nations on how the governments can tax this revenue. Rules, regulations and various standards are still a work-in-progress. For those start-ups and businesses looking to cater to the US market, advance planning can mitigate United States taxation by avoidance of permanent establishment and other issues. 

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Do not forget to read my disclaimer here. Please consult an Enrolled Agent for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com.