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Tax Implications for Non-U.S. Citizens Investing in the United States
Author: Joel Baretto, CFP®
January 15, 2025
Summary:
• For non-U.S. citizens contemplating investments within the United States, acquiring a more comprehensive grasp of the U.S. tax framework can aid in sidestepping inadvertent imposition of U.S. taxation.
• Apart from income tax, the U.S. federal government enforces transfer tax encompassing estate, gift, and generation-skipping levies.
• Navigating cross-border strategies progressively demands a cognizance of the ramifications associated with global familial connections, investments, trusts, and legal entities.
If you are not a citizen of the United States (or a U.S. resident/domiciliary) and are contemplating an investment within the United States, you might be seeking clarity on the U.S. tax regulations. The U.S. federal government not only enforces income tax but also implements transfer tax, which encompasses estate, gift, and generation-skipping transfer (GST) taxes.
Additionally, the issue of double taxation arises. Will your home country impose taxation in addition to what you pay in the United States? Alternatively, does a tax treaty or foreign tax credit exist that can offer tax alleviation? Furthermore, privacy holds significance for many; therefore, it’s pivotal to comprehend obligations regarding tax filing and reporting.
This article addresses 10 inquiries designed to enhance the understanding of the U.S. tax system for non-U.S. individual investors. It also provides insights that could aid in minimizing inadvertent application of U.S. taxes.
It is important to note that prior to making any decisions, you should always engage in discussions with a qualified cross-border wealth manager, accountant, and/or attorney to gain a to avoid expensive financial mistakes.
1. DOES THE IMPACT OF FEDERAL INCOME TAX ON MY INVESTMENT VARY BASED ON THE NUMBER OF DAYS I SPEND IN THE UNITED STATES?
Yes. Regarding income tax considerations, U.S. residents are subjected to taxation akin to U.S. citizens. This implies that a U.S. resident is liable to be taxed on their worldwide income, even if the income is generated outside the territorial boundaries of the United States. Consequently, a non-U.S. citizen who avoids acquiring U.S. residency status can potentially access specific tax advantages.
The designation of a U.S. resident encompasses holders of Green Cards as well as individuals meeting the “substantial presence test.”
The substantial presence test evaluates whether a non-U.S. citizen has a physical presence within the United States for a minimum of 31 days during the ongoing year. Subsequently, the calculation combines (a) the days spent physically within the United States during the present year, along with (b) one-third of the days physically present in the United States during the preceding calendar year, and (c) one-sixth of the days physically present in the United States during the year before that. If the total derived from this equation reaches or surpasses 183 days, the non-U.S. individual is deemed a U.S. resident.
Substantial Presence Test
If an individual is present in the United States for 122 days for years one, two and three (current year), he or she would be a U.S. resident for income tax purposes because the weighted three-year average equals 183 days.
| Days | Applicable Factor | Total | |
|---|---|---|---|
| Year 1 | 122 | 1/6 | 20 1/3 |
| Year 2 | 122 | 1/3 | 40 2/3 |
| Year 3 | 122 | 1 | 122 |
| Weighted Average | 183 |
It’s essential to be aware that the substantial presence test can be circumvented if the individual can substantiate, through a comprehensive assessment of all pertinent factors and circumstances, that they possess a stronger affiliation with a foreign country compared to the United States.
KEY POINT: If you are neither a U.S. citizen nor a holder of a green card, limiting your stay in the United States to 121 days or fewer annually can effectively shield you from U.S. income tax on your global earnings.
2. ARE THE FEDERAL TRANSFER TAX CONSEQUENCES OF MY INVESTMENT INFLUENCED BY THE DURATION OF TIME I AM PRESENT IN THE UNITED STATES?
No. The implications of transfer taxes (gift, estate, and GST) for a non-U.S. citizen are contingent upon whether the individual holds domicile status within the United States or maintains a non-U.S. domicile. An individual becomes a U.S. domiciled individual if they have relocated to the United States with the intention of staying indefinitely. Conversely, a non-U.S. domiciled individual plans not to establish permanent residency in the United States. This category includes individuals temporarily present in the United States, those with children living in the country, or those who own real estate within its borders. However, as long as their intent is to return to their home country, they will not be subject to the complete weight of the U.S. transfer tax system.
It is noteworthy that an individual spending an average of 183 days in the United States might be liable for the same income taxes as U.S. citizens due to their resident status for income tax purposes. Nonetheless, if the individual has intentions of returning home, they will not be exposed to the entirety of transfer taxes that U.S. citizens face, as they do not possess U.S. domicile status.
KEY POINT: To avoid the U.S. transfer tax, it’s crucial to demonstrate your intent to go back to your home country. This can be substantiated by owning property there and upholding business and social ties in that location.
3. IF I AM NOT A U.S. RESIDENT, DO I STILL NEED TO PAY U.S. INCOME TAX ON INVESTMENTS MADE IN THE U.S.?
Indeed, the tax liability for a non-U.S. citizen is applicable solely to U.S. source income, rather than encompassing all income worldwide. U.S. source income can be categorized into two segments: “ECI” or “effectively connected income,” and “FDAP” or “fixed or determinable annual or periodical gains, profits, and income.”
ECI emerges when a non-U.S. resident engages in commercial operations within the United States. All U.S. source income that maintains a “connection” with the U.S. trade or business falls under the ECI category. Although there is no definitive criterion to ascertain when commercial activities attain the level of constituting a U.S. trade or business, the U.S. taxing authority (the “Internal Revenue Service” or “IRS”) generally identifies a U.S. trade or business when commercial endeavors exhibit substantial, continuous, regular, and noteworthy attributes.
FDAP typically encompasses sources such as interest, dividends, rents, and royalties. Capital gains do not fall under the purview of FDAP income. Nevertheless, the “Foreign Investment in Real Property Tax Act of 1980” (“FIRPTA”) mandates U.S. income taxation when a non-U.S. resident sells either (a) U.S. real estate or (b) shares in corporations possessing significant real estate holdings. Moreover, if a non-U.S. resident sells an interest in a partnership (inclusive of an LLC taxed as a partnership), they will be subject to taxation on any portion of capital gains that pertains to assets utilized in a U.S. trade or business.
ECI Example:
A scenario involves a non-U.S. resident making an investment in a private equity fund. This private equity fund subsequently makes direct investments in U.S.-based enterprises. Both the fund and the businesses in question are structured as U.S. limited liability companies (LLCs), with the LLCs being treated as partnerships for U.S. federal income tax purposes. In the absence of additional measures to counteract or prevent U.S. tax implications, the non-U.S. investor stands to potentially receive a proportion of the net profits originating from the underlying U.S. businesses through the private equity fund. These profits, stemming from U.S. enterprises, would constitute ECI due to their U.S. origin. Consequently, the non-U.S. investor could potentially incur U.S. income tax obligations on the profits classified as ECI.
KEY POINT: The constitution of your portfolio holds significance. Should your objective be the reduction of U.S. income tax exposure, it’s advisable to contemplate investments in U.S. corporate debt, U.S. government debt, U.S. corporate stock, and U.S. bank deposits.
4. WHAT IS THE TAX RATE IF I EARN TAXABLE INCOME FROM U.S. SOURCES?
ECI is subject to taxation at the prevailing ordinary U.S. individual income tax rates, which could potentially reach a maximum of 37%.
FDAP is liable to a uniform tax rate of 30%. Unlike ECI, FDAP constitutes taxation based on the gross sum of income. This diverges from ECI taxation, which pertains to net income.
FIRPTA gain undergoes taxation akin to ECI, implying that regular individual income tax rates are applicable to net gain.
| U.S. Source Taxable Income Rates: | |
|---|---|
| ECI | Maximum 37% (taxed at ordinary income tax rates) |
| FDAP | 30% flat rate |
| FIRPTA | Maximum 37% (taxed at ordinary income tax rates) |
In conjunction with these federal income tax rates, individual U.S. states could also impose their own income taxes. A comprehensive analysis of state income taxes is outside the scope of this content.
5. IF I AM NOT DOMICILED IN THE UNITED STATES, AM I LIABLE FOR U.S. FEDERAL ESTATE TAX?
Indeed, estate taxes for non-U.S. citizens apply solely to assets situated within the United States. The all-encompassing estate of a U.S. citizen or U.S. domiciliary encompasses the valuation of all the individual’s possessions, encompassing both tangible and intangible assets, whether real or personal, and regardless of their geographical location. Conversely, the gross estate of a non-citizen, non-domiciliary is restricted to property located within the United States.
Frequently, discerning the location of assets, particularly intangible ones, within the United States can pose challenges. The provided chart furnishes examples of both U.S. and non-U.S. property for reference:
| U.S. Property | Non-U.S. Property | |
|---|---|---|
| Real Property | U.S. real estate | Shares of stock issued by a non-U.S. corporation holding U.S. real property |
| Personal Property | Tangible personal property located in the United States |
|
| Intangible Property |
|
|
KEY POINT: To mitigate exposure to U.S. estate tax, a prudent approach involves retaining personal valuables such as jewelry and artwork within your home country.
6. IF I AM NOT DOMICILED IN THE UNITED STATES, AM I SUBJECT TO U.S. FEDERAL GIFT TAX?
Yes, the U.S. gift tax pertains exclusively to tangible assets situated within the United States. Unlike the U.S. estate tax, which is applicable to all U.S. assets, the U.S. gift tax only concerns tangible assets located in the U.S. Examples encompass real estate and tangible personal belongings, such as jewelry.
KEY POINT: The disparity between the regulations governing the U.S. estate tax and the U.S. gift tax underscores the potential merit in bestowing U.S. situs intangible assets before one’s passing. This strategy can preempt their inclusion within the U.S. estate and consequent exposure to U.S. estate tax upon demise.
7. ASSUMING I HAVE A U.S. FEDERAL TRANSFER TAX OBLIGATION, WHAT IS THE APPLICABLE RATE?
The top estate, gift, and GST tax rate is 40%.
Example:
Although a U.S. citizen does not pay estate tax until his or her assets exceed $13.99 million, a non-domiciliary only can exclude the first $60,000 of assets from the estate tax.
| Pay estate taxes on | Exclusion Amount | Rent | |
|---|---|---|---|
| U.S. Citizen/ U.S. Domiciliary | All assets he or she owns worldwide | $13.99M | 40% |
| Non-U.S. Citizen/ Non-U.S. Domiciliary | U.S. assets | $60K | 40% |
Furthermore, a non-domiciled individual is eligible to deduct funeral expenses, administrative costs, losses, and debts from their U.S. gross estate, akin to a U.S. citizen or U.S. domiciliary. Nevertheless, only those expenditures directly linked to U.S. assets are subject to deduction. Consequently, in order to compute and assert the deduction, a non-U.S. citizen liable for U.S. estate tax must furnish the IRS with a U.S. estate tax return disclosing the comprehensive value of the decedent’s worldwide assets. However, in several instances, executors overseeing estates of non-domiciliaries choose to abstain from availing the estate tax deduction. This decision stems from concerns about divulging the decedent’s complete financial profile to the IRS, fearing that such disclosure might result in the United States sharing this information with the decedent’s home country under the purview of mutual exchange of information agreements.
For U.S. federal gift tax purposes, a non-domiciliary can give $19,000 (2025) to an unlimited number of people each year free of gift tax. This number is $190,000 (2025) for gifts to a non-U.S. citizen spouse.
For U.S. GST tax purposes, a non-domiciliary has the same lifetime exemption amount as a U.S. citizen of $13.99 million (2025). This means he or she can transfer $13.99 million during life or at death without owing GST tax.
KEY POINT: It’s imperative to assess whether the potential value of the U.S. estate tax deduction justifies the necessity of divulging the entirety of your global assets to the IRS.
Non-Domiciliary Gift Tax Limits
$19,000 annually to unlimited recipients
$190,000 annually to a non-U.S. citizen spouse
Non-Domiciliary GST Tax Limits
$13.99 million transferred during life or at death
8. IF I AM NOT DOMICILED IN THE UNITED STATES, AM I LIABLE TO U.S. FEDERAL GST TAX?
Indeed, the GST tax exclusively applies to assets situated within the United States. The GST tax functions as a levy on transfers to beneficiaries that lie beyond a single generation (“skip persons”). A classic illustration would be grandchildren. This tax on multi-generational transfers is predicated on the notion that if assets were to pass from parent to child upon the parent’s demise, and subsequently from child to grandchild upon the child’s demise, the government could potentially levy estate tax not solely upon the parent’s passing, but also upon the child. The GST mechanism ensures that estate tax cannot be evaded by having the parent directly transfer the asset to the grandchild.
The general principle dictates that if a non-U.S. domiciliary would have been subject to U.S. estate tax or gift tax for a transfer, then the said transfer may also be subject to GST tax. However, it’s important to note that the GST tax cannot be imposed on transfers that were not initially subject to U.S. estate or gift tax.
9. WILL I NEED TO SUBMIT A U.S. FEDERAL TAX RETURN IF I MAKE INVESTMENTS IN THE UNITED STATES?
It depends. Filing obligations are as follows:
| Income Tax | Estate Tax | ||
|---|---|---|---|
| ECI (including FIRPTA gain) must be reported on a U.S. income tax return | The executor must file Form 706-NA if the date of the death value of the decedent’s U.S. situs assets, together with his or her U.S. lifetime gifts, exceed $60,000. | ||
| Gift Tax | GST Tax | ||
| The non-domiciliary must file Form 709 if, in any given year, he or she (a) gives a non-spouse recipient more than $19,000 or (b) gives his or her non-U.S. citizen spouse more than $190,000. | If the non-domiciliary is required to file an estate tax return (Form 706-NA) or a gift tax return (Form 709), any generation-skipping transfers will be reported on those forms. |
10. IF I PAY TAXES IN THE UNITED STATES, WILL I ALSO PAY TAXES IN MY HOME COUNTRY?
It depends. In instances where the home country has established treaties with the United States pertaining to income, social security, or transfer taxes, these treaty provisions can potentially alleviate the occurrence of double taxation. Furthermore, the regulations of the home country might permit tax credits for taxes paid in the United States. For comprehensive insights, consulting a tax advisor specialized in your home jurisdiction is advisable.
Conclusion
It only makes sense for high net worth non-U.S. citizens/residents to diversify investments through the U.S. markets. The current intersection of the global economy, international investments, and individual mobility has given rise to a wealth and tax planning terrain that is notably dynamic. The contemporary landscape demands an acute understanding of the ramifications linked to international familial connections, investments, trusts, and legal entities in cross-border planning endeavors. At Abacus Wealth International (AWI) we assist U.S. expats and affluent non-U.S. citizens/residents with growing, protecting, and transferring wealth for generations to come. Schedule your free 15-minute consultation with a qualified AWI cross-border wealth manager today.
Disclaimer
- The information provided is for educational purposes only and does not constitute personal financial, tax or investment advice and should not be relied on as such. It does not take into consideration any investor’s particular investment objectives, strategies, time horizon, and tax or legal status. Abacus Wealth International (AWI) does not provide tax or legal advice. Please consult a tax or legal professional for corresponding tax and legal advice.
- All material and content have been obtained from sources believed to be reliable. AWI does not guarantee the accuracy of the information provided and shall not be held liable for decisions based on the foregoing information.
- All examples of graphs, financial products and historical returns contained in the foregoing material are for illustration and educational purposes only and shall not be deemed as financial advice or recommendation. Past performance is not indicative of any future investment returns.