littledorrit

Hi,
Was wondering if anyone might be able to confirm some advice I've been given by a U.S. Tax advisor...

Bit of background. My husband a U.S. Citizen. Im a UK citizen. We are currently going through the visa ap process with the aim of moving in the summer. Our UK house will be sold on 1 June and we are aware (that due to poor exchange rate) the mortgage may result in a 'gain' that may be liable for tax.
My question is this... Our U.S. Tax advisor (who over the years has been really helpful) has advised that it would be better (tax wise) if I didn't move until after 2 July (to avoid the 183 days presence). What I'm not sure about is whether I also need to take into account the days I've been in the States for holidays over the last couple of years?
Also - whether it really matters at all? As I will have paid UK tax on all I've earned here this year already? Or whether it's just this mortgage gain that's an issue?
As you can probably tell - I'm a bit clueless about this (hence the use of a tax advisor), however I want to make sure that, for the sake of a few days, my tax liability isn't affected...
Any thoughts / advice gratefully received.

Cook_County

Does your spouse have any excess foreign tax credits? How much is the mortgage gain likely to be?

littledorrit

Hi
1. Don't know. His entire earnings have been in the UK until this summer? It's all been excluded for years...
2. Mortgage gain will be approx $40k (depending on exchange rate)

Owen778

The substantial presence test includes all presence in the US, including vacation. It includes being present for any part of the day, so it includes both the arrival and departure day. It doesn't include days when you were in transit somewhere else and didn't stay in the US overnight.

littledorrit

Thanks.

So this year I think 183 days falls around 2 July. If I add on the 15 days I've been in the U.S. Last year, would that mean I should not go before July 17th?

I don't suppose anyone could tell me if this just affects the mortgage gain (at least my 50% of it), or tax on my UK earnings for 2016 too?

cautiousjon

I moved to the USA in November 2014 and was able to file a 1040 NR (tax return for non-residents) for 2014 tax year as I was just under the limit for the 'substantial presence test'. This test is what the IRS uses to determine your eligibility for non-resident tax or resident tax. Non-resident tax is so much simpler, as you can imagine, as it means that the IRS will only tax you on income earned when you were in the USA, which, as I understand from my limited knowledge of these things, would *not* include the capital gain made on your house sale.

The substantial presence test has two components:
- 31 days during the current year, and
- 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
-- All the days you were present in the current year, and
-- 1/3 of the days you were present in the first year before the current year, and
-- 1/6 of the days you were present in the second year before the current year

For example,
- You arrive on July 2 2016, which means you will be in the USA for 183 days for the 2016 tax year
- You spent 15 days on holiday in the USA during 2015

Calculation: 183 + (15 / 3) = 188 days.

In order to not qualify for the substantial presence test, you will want a max of 182 days (not 183). I would plan to leave the UK no earlier than July 8 => 177 days + 5 days = 182. However, if you spent any time in the USA in 2014, you will need to take that into account too, by adding 1/6 of those days.

More info here: https://www.irs.gov/Individuals/Inte...-Presence-Test

When is your husband moving to the USA? If he moves before July 8 and falls under the substantial presence test, he will be liable to pay USA tax on all worldwide income for 2016, which would include any profits he gained from the $40k house sale profit. He'll get tax credits for whatever tax he paid to the UK, but the IRS will demand the difference between UK tax paid and the equivalent USA tax that would be owed if he had lived in the USA for the whole year.

For example, if his tax bill in the UK worked out to be £35,000, but his USA equivalent tax bill worked out to be £37,000, he'd have to pay £2000 to the IRS, which is roughly $2800.

littledorrit

Thanks - that's really helpful. I think the house sale profit is exempt as it's our main residence. The tax on our gain from the mortgage would be an issue though. And I guess UK income tax from our 2016 earnings would be fairly similar to the U.S. (Worse in the UK if anything).

It sounds as if it's all a lot more straight forward if we move after a date that would ensure we are classed as non- resident for tax purposes.

Do you happen to know if there are any considerations for moving money to the U.S. (profit from house) tax-wise? We don't need the money immediately, as we are renting to start with - and because the exchange rate is so terrible at the moment, we would rather wait until it improves.

cautiousjon

From what I understand, no, there isn't a problem, as long as you can prove that you got the money from a genuine, bonafide source, and it is not 'profits from crime'. Proof of a house sale with bank records should suffice. If you move the money in cash when you travel to the USA (which I wouldn't recommend at all) and are carrying more than $10,000 in currency, you MUST declare it to Customs, and have said proof of where it came from.

If I was you, I would move the money via a specialist broker, like Transferwise, XE Trade, etc, once you are in the USA and have a US bank account. I am not sure about the company's rules for max transfer limits, but I would imagine that they'd also want to see proof that the money is from a genuine source too. I used XE Trade to transfer a smaller amount of money and it was all fairly simple once my account was verified. Set up transfer request, send a BACS transfer of £X from my UK account to their UK Barclays account, then a few days later, they send $Y from their US account to my US account.

durham_lad

Fully agree.

I've moved a large chunk of £ from our UK bank to US bank after we sold a house in the UK, and used a broker similar to XE.com (Hifx.com) and was prompted for a reason I was transferring the money. Simply stating "Proceeds from sale of house" was sufficient. Never had to prove the sale, but did have the proof available had there been any follow up.

littledorrit

Thanks again! That's good to know. And we'll make sure we use a good money transfer service .

I think I found it confusing because our tax advisor flagged that I needed to consider my move date, but said it would have no affect of my US spouse. Which really confused me. As, although he's a U.S. Citizen, he's currently not resident either - so I couldn't understand how we'd be any different, for tax purposes. I guess the thinking was that he'd have to pay tax on his 50% of the mortgage gain whenever moved (or even if he didn't), but that I might avoid paying tax on my 50% if I wasn't resident for more than 183 days.

Cook_County

If the planning had been better the US citizen spouse would not have owned 50% in the first place.

littledorrit

Yes - for sure. We should know better by now! (although we've only really decided to move to the US in the last couple of years - at which point the mortgage settlement gain was already an issue).

With regards to my situation though, am I right in thinking that if I enter the US with a green card, but do not meet the substantial presence test (taking into account any previous visits over the last 3 years) I can file dual returns for 2016?

So 1 return for the first half of the year when I was non-resident (and therefore can exclude any income earned in the UK before moving - including my 50% of the mortgage gain) and file a 2nd return as a resident alien for the 2nd half of the year?

And my US citizen husband would file a full year single return?

There seems to be so many variables for figuring out which is the best way of going about this. I was hoping (visa allowing) to move in June - so if I go with the above approach, I will have to pay for somewhere to live in the UK for an extra 2 months (and more expensive flights in August). Which may well be around the same cost as any additional tax due versus just filing as a resident alien for the whole year.

Also - the hassle of filing twice in one year sounds a little intimidating (but worth it if it saves paying more tax)?

Cook_County

If you are legally married, your husband cannot file as Single. You could file a dual status return, and would do so if it saved you tax overall. The key question is why your "really helpful" existing accountant overlooked suggesting that your US citizen husband gift the property to you some years back to avoid your husband being subject to US tax on any mortgage gain. This has been standard planning for decades so why was it missed?

littledorrit

I'm confused???

Even if the house ownership was transferred from my USC spouse to me, we couldn't have transferred the mortgage itself? Could we? And presumably the mortgage gain is attached to settling that loan, rather than the sale of the house itself?

Anyway - yes - all these are hard lessons learned. Main thing now is for me to figure out best way to limit any tax due.

And my main question still remains - am I best off waiting to move until later to ensure I don't meet the substantial presence test? So that I at least have the option to file dual status? Or does the fact I'm entering on a green card mean that I am considered resident alien for the whole year anyway? In which case I move whenever I want to (subject to visa of course)...

ubernathan

I believe you have to account for the previous years presence in the USA at a discounted rate. IIRC the previous year counts as 1/3 and the year before that at 1/6. Fortunately for us we moved late enough in the year for us to be under the 183 day limit.