Posted: June 16th, 2014
Generally speaking, the US is not an attractive location for resident expatriate executives seeking to limit taxation. There are, however, some particular features of the US tax system which are attractive for certain individuals in certain situations.

For tax purposes, an alien is an individual who is not a US citizen. Aliens are classified as non-resident aliens and resident aliens. Resident aliens generally are taxed on their worldwide income, in the same way as US citizens. Non-resident aliens are subject to different tax laws than those that apply to US citizens; for example, many non-resident aliens working temporarily in the US can claim treaty benefits. In general, non-resident aliens are taxed only on their income from sources within the US and on certain income connected with the conduct of a trade or business in the US.

An individual is considered a non-resident alien for any period that he or she is neither a US citizen nor a US resident alien. He or she is considered a resident alien if meeting one of two tests for the calendar year.

The first test is the green card test. If at any time during the calendar year an individual was a lawful permanent resident of the US, according to the immigration laws, and this status has not been rescinded, or administratively or judicially determined to have been abandoned, he or she is considered to have met the green card test.

The second test is the substantial presence test. To meet this test, an individual must have been physically present in the US on at least 31 days during the current year, and 183 days during the 3-year period that includes the current year and the two years immediately before. To satisfy the 183 days requirement, an individual must count all of the days he or she was present in the current year, and one-third of the days he or she was present in the first year before the current year, and one-sixth of the days he or she was present in the second year before the current year.

An individual need not count any day he or she was present in the US as an exempt individual.

An exempt individual may be anyone in the following categories:

• A foreign government-related individual;
• A teacher or trainee with a J or Q visa who substantially complies with the requirements of the visa;
• A student, with an F, J, M, or Q visa who substantially complies with the requirements of the visa; or
• A professional athlete temporarily present to compete in a charitable sports event (although the IRS recently launched an Issue Management Team focused on improving US income reporting and tax payment compliance by foreign athletes and entertainers who work in the United States).

Also, any day where an individual is present in the US because of a medical condition need not be counted.

Even if a person meets the substantial presence test, he or she can be treated as a non-resident alien if he or she is present in the US for fewer than 183 days during the current calendar year, and maintains a tax home in a foreign country during the year, and has a closer connection to that country than to the US. This does not apply if a person has applied for status as a lawful permanent resident of the US, or has an application pending for adjustment of status.

Sometimes, a tax treaty between the United States and another country will provide special rules for determining residency. An alien whose status changes during the year from resident to non-resident, or vice versa, generally has a dual status for that year, and is taxed on the income for the two periods under the provisions of the law that apply to each period.

Tax-resident foreign nationals in the US are taxed just about on the same basis as a US national that is to say, on their world-wide income, comprehensively defined. There are tax credits under double tax treaties for some foreign tax deductions.

The situation for US citizens either assigned overseas or expatriating is just as unappealing from a tax perspective.

Because the US taxes its citizens on the basis of their nationality and not on the basis of their residence, the concept of 'offshore' is not very useful to a US national from a residence point of view. There is an income tax concession available during non-residence, but beyond that the only real option for a US citizen is to change nationality. In all other respects the international tax situation of an individual citizen is about the same whether they are in or out of the US.

US expatriates who meet the Physical Presence Test or meet the Bona Fide Resident Test may be able to take advantage of the Foreign Earned Income Exclusion and or the Foreign Housing Exclusion.

You are considered physically present in a foreign country (or countries) if you reside in that country (or countries) for at least 330 full days in a 12-month period. You can live and work in any number of foreign countries, but you must be physically present in those countries for at least 330 full days. The qualifying period can be any consecutive 12-month period of time. A "full day" is 24 hours; days of arrival and departure are generally not counted in the physical presence test.

A person is considered a "bona fide resident" of a foreign country if they reside in that country for "an uninterrupted period that includes an entire tax year." A tax year is January 1 through December 31. Brief trips or vacations outside the foreign country will not jeopardize status as a bona fide resident. If the foreign government concerned has determined that a person is not subject to their tax laws as a resident, the Exclusions will not be available.

In 2012, the maximum income exclusion is USD91,500. The housing exclusion is equal to 30% of maximum income exclusion, and includes such expenses as rent, repairs, utilities (other than telephone), property insurance, property taxes, security deposits, furniture rentals and parking fees which may be paid by the employer.

US citizens and resident aliens who are outside the United States (and its possessions) have the same requirements to file tax returns as anyone living in the United States. Income from worldwide sources must be considered when determining if a federal tax return must be filed. In general, foreign earned income is income received for services performed in a foreign country.

If you pay foreign taxes, it may be possible to offset these against US taxes if there is a double tax treaty with the country in which you are resident.

The concept of 'tax home' is used in connection with foreign residence. Generally, a person's tax home is the general area of her main place of business, employment, or post of duty where she is permanently or indefinitely engaged to work. A person is not considered to have a tax home in a foreign country for any period during which their abode (the place where they regularly live) is in the United States.

A person who claims the Exclusion cannot claim any credits or deductions that are related to the excluded income, for instance a foreign tax credit or deduction for any foreign income tax paid on the excluded income. The earned income credit is also unavailable. Furthermore, for IRS purposes, the excluded income is not considered compensation and, for figuring deductible contributions in an employer retirement plan, is included in modified adjusted gross income.