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Tax in the first year

Tax in the first year

Old Jul 7th 2011, 4:02 pm
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Default Tax in the first year

Hi all

We've just got the paperwork for our forthcoming move, including the all important salary figure, and are now trying to work out how much we'll be left with each month for rent, cars and iced coffee.

I searched on here and found some helpful links to calculators, and am now pretty sure I have it sussed for full residency years. What I'm stuck on is how it works for the first year.

So far, this is how I thiiiiiiink it works:

We move over from Switzerland to the US on, let's say 1 September 2011. For 2011, we seem to be able to choose whether to be resident or nonresident alien for tax purposes (I understand these descriptions have nothing to do with immigration status; for the record we'll be on L visas). Hubby will be the only one working.

Nonresident alien: he'll only have to pay US tax on the earnings received from 1 Sept - 31 Dec (including any money received from his Swiss employment that lands in his bank account after the 1 Sept). He can only file as a single person. His earnings during this time will be 1/3 of a full year, so the 'annual' salary would be quite small, resulting in a low tax bracket.

Resident alien: we can file jointly, but are taxed on the entire year's earnings, with tax treaties coming into play to offset this. The cost of living here is very high; on a straight FX basis, his Swiss salary is quite a bit higher than his proposed US salary, so he's already paid quite a lot of tax. On the other hand, his Swiss salary is quite a bit higher than his proposed US salary, so this would almost certainly push him up one or more tax brackets.

Oh, and he's already travelled quite regularly to the US in the first half of this year, for business meetings, training, etc. Which I believe would mean that the IRS would count 10 days into 2011 and say 'THAT's the day you officially arrived for tax purposes'. Which would probably be sometime in February!

Have I got it straight so far, please? We will be provided with someone to do our taxes for Year One as part of our relocation; this is more about me trying to work out how much we'll have to live on during this time, whether we're going to be faced with a large and unexpected bill for 2011 taxes, and whether we need to get his company to provide some sort of starting bonus to offset this.

Thanks for any help or anecdotes on how it worked out for you.

kodokan
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Old Jul 7th 2011, 6:11 pm
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Default Re: Tax in the first year

Have a read of IRS publication 519 if you haven't already.

I'm not familiar with Swiss tax rates so I won't pretend to know the best option there, however I will say that if you become resident for tax purposes on January 1st it can make the US paperwork easier as you will realize from reading 519 as your first tax year will be a full calendar year. (As far as I'm aware, only Canada and South Korea and maybe Mexico have a non-discrimination clause in their tax treaty, but I haven't read the US-Swiss tax treaty.)

People get worked about this "days present" calculation the IRS have in all their publications, however it's not as big a deal as it appears, it's more about where you live and what your intent was. If his principal residence was in Switzerland and his spouse was in Switzerland and there are other ties (e.g. driver's licence) then he would likely be considered a resident of Switzerland (unless the treaty says something different) for tax purposes.

The IRS only become aware of your existence anyway once you have an SSN or ITIN or they start getting tax paperwork from the employer or wherever.

For 2011, we seem to be able to choose whether to be resident or nonresident alien for tax
No not really, he'd be considered dual-status, i.e. non-resident up until you became resident.
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Old Jul 8th 2011, 9:45 am
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Default Re: Tax in the first year

Thank you, Steve.

Ok, I've had another... and another... and another read of 519, and had hubby count up all his US days for 2001 so far. We'll be under the 183 days rule, so I think that will make us dual-status for Year One unless we choose to be taxed as resident for the whole year.

So have I understood this correctly?

Taxed as resident for the whole year: the advantages are that we can file as joint married and use the standard deduction. Hubby will be taxed by the US on his Swiss AND US earnings. Any tax paid to the Swiss govt will be credited against tax due to the US, and we'll have to pay the US the difference. This would be substantial, as his salary here is pretty much double what it will be in the US, and the rate of tax is a little below 20%.

Dual-status: his Swiss earnings would be ignored for US tax purposes, and we had no other income deriving from US sources. His tax obligations would start once we become US resident, which should be the date we arrive 'properly' on our L visas rather than a much earlier date in the year when he was on a business trip but clearly had his employment, family base, etc in Switzerland. Assuming an arrival date of 1 Sept, he would pay US taxes on earnings for Sept-Dec, ie, only 4 months' money, which would therefore result in a much lower tax bracket than a full year's salary would generate. This will probably balance out the fact that he can only file as married single, not joint, and that the standard deduction doesn't apply.

Does this sound about right, please anyone? Have I misunderstood or missed anything important?

Sigh at the complication... on the plus side, it'll make the following year seem REALLY easy, even with the rules on reporting the overseas accounts we hold!

Thank you in advance for any help.
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Old Jan 26th 2012, 3:53 pm
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Default Re: Tax in the first year

We are looking for advice on this as well, the advantages or disadvantages of doing the dual status filing as compared to being considered resident alien for whole year.

my husband has had no income from us sources for the first year and arrived in the us in oct 2011.

its quite confusing.
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Old Jan 26th 2012, 4:21 pm
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Default Re: Tax in the first year

You are very correct in your facts from what you've read.

We finished our 2010 taxes understanding the scenario (and KPMG laid out the same to us). We could take the full year as married filing jointly if we claimed full year US.

We were in USA <183 days and I'm a US Citizen, already filing married filing separately prior. So it came down to KPMG running both scenarios and our tax burden in UK and US was less if we filed my husband as Non Resident Alien and and filing us as married, filing separately. This was just what worked best for our particular tax situation. And yes, since he was taxed at only days of salary in the USA, the tax bracket was smaller, indeed. We get full whack this year. (He makes more $ in USA as in UK he was self-employed so didn't 'make' as much due to accounting, which is a bit different than your situation. If you go full year, your husband pays on full year of worldwide income. Uncle Sam then doesn't care when you came in...)

So, at the time, you may simply run both permutations with financial facts in hand and then figure out what to do.

Ours was tipped to nonresident alien filing married, separately because we had a home sale in UK prior to moving to USA and even with exemptions, it was advantageous for our situation to file as we did. This year we'll be full year residents and filing married, filing jointly.

Mileage may vary but that was OUR particular tax situation.

Last edited by Bomjeito; Jan 26th 2012 at 4:24 pm.
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Old Jan 26th 2012, 4:34 pm
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Default Re: Tax in the first year

When filing as a non resident, there are other disadvantages such as less deductions, less tax credits, etc.

You indicate that he was taxed slightly less than 20% in Switzerland and I assume that is the effective tax rate. If it is, that is quite a bit of tax credits so it is difficult to determine which way would be the most advantageous.
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Old Jan 26th 2012, 6:24 pm
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Default Re: Tax in the first year

Ooh, I'd forgotten about this thread!

In the end, we arrived in the US on 13 October. And then general HR/SSN slackness meant that hubby stayed employed by the Swiss office until 1 December, paying tax at source in Switzerland.

Sooo glad we'll have our tax returns done for us, and this isn't our problem to sort out! I'll come back and do an update on which first year option worked out best for us, and why.

On a related note, if hubby decides to go with filing as Dual-Resident for the first year (and therefore can't file as married), will I have to do a tax return too? I don't work, and have no income other than a tiny amount of interest from a bank savings account.
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Old Jan 27th 2012, 5:54 am
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Default Re: Tax in the first year

If he chooses Dual Status Alien has has to file as Married Filing Separately, but he should be able to claim exemptions for you as spouse and any children. He can't file Married Filing Jointly or Head of Household (or single, because he's married).

You wouldn't have to file a return if you have no income.
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Old Mar 30th 2012, 10:28 pm
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Default Re: Tax in the first year

Having arrived with my US. wife from the UK in Sept 2011, I was advised that I had to file as dual status. Our income comes from the UK.

In order to get a tax refund from the Inland Revenue, I had to complete form US Individual 2002 and enclose that with my dual status tax return.

My questions are:

Does anyone have any clue how long the IRS are likely to take to send the form to the UK?

Ditto for the Inland Revenue to 1) Send my refund and 2) Inform my pension providers that they need to pay me without tax?

Thanks to anyone that can shed light on this.
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Old Mar 30th 2012, 10:42 pm
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Default Re: Tax in the first year

Our tax people (Big Four Co) have just come back today to say that they've done a first pass over our info, and that it looks like filing for 2011 as Non-Resident will be most advantageous for us. (We didn't hit Substantial Presence and don't have Green Cards, so had the choice of Non-Resident, Dual-Resident or Full Year Resident if we wanted to file jointly.)

Super happy with this, as they also said that non-residents (for tax, not visas) don't have to do FBARs, that other new form for foreign accounts, take treaty positions on pensions, etc etc etc. Sure, we'll have to deal with all that in a year's time, but hopefully by then the accountants will have a year of experience and will be able to better advise us.
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