- 1 New Zealand Income and US Taxation
- 2 Worldwide Income
- 3 US Taxes Until Formal Expatriation
- 4 Treaty Benefits May Apply to New Zealand/US Residents
- 5 Foreign Earned Income & Housing Exclusion (FEIE)
- 6 Foreign Tax Credits (FTC)
- 7 New Zealand Pension Plan/Superannuation & US Tax
- 8 PIE Investments
- 9 Totalization Agreement
- 10 New Zealand Pension & US Reporting
- 11 FATCA and Form 8938
- 12 Foreign Account Reporting & FBAR (FinCEN Form 114)
- 13 Foreign Gifts from New Zealand & Form 3520
- 14 Expat Tax Amnesty for New Zealand Residents
- 15 About Our International Tax Law Firm
New Zealand Income and US Taxation
It is very common for US taxpayers who are citizens of New Zealand to relocate to the United States temporarily or permanently for work (or vice versa)– only to get (understandably) overwhelmed by the U.S. tax system. Unlike most other countries across the globe, the United States follows a worldwide income tax model. It is based on citizenship, although that is a bit of a misnomer because it is not just limited to US Citizens – – it includes US Citizens, Lawful Permanent Residents, and Foreign Nationals who meet the Substantial Presence Test. For taxpayers who fall into any one of these categories, they are considered to be a US person for tax purposes and are subject to US tax on their worldwide income, as well as global reporting and international information reporting forms such as the FBAR and Form 8938. Let’s take a look at some important tax aspect for Taxpayers who are originally from New Zealand and residing in the US and/or US persons now residing in New Zealand.
The United States Tax System is one of the only tax systems across the globe that follows a Citizenship-Based Taxation model. Therefore, unlike other countries that tax individuals on their worldwide income only when that person qualifies as a resident of that country –– the United States taxes individuals on their worldwide income simply because they are a US Person. In fact, citizenship-based taxation is actually a misnomer because in reality, a person can be a US Citizen or Resident of the United States and still be considered to have the United States as their tax home.
US Taxes Until Formal Expatriation
One of the most common misconceptions that US Expats have is that if they relocate overseas, they are no longer required to pay U.S. tax on foreign earnings — but that is incorrect. Unless a person formally expatriates and relinquishes their green card — or renounces their US citizenship — they are still considered a US Person and are still required to pay U.S. tax on their worldwide income.
Treaty Benefits May Apply to New Zealand/US Residents
If a person is considered a US person, they may be able to make a treaty election using form 8833 and elect to be treated as a foreign person for U.S. tax purposes (generally excludes U.S. citizens). In this scenario, the Taxpayer may qualify to file a Form 1040NR as a nonresident instead of a form 1040 — and they only have to pay U.S. tax on their US-sourced income (FDAP and ECI).
Foreign Earned Income & Housing Exclusion (FEIE)
US persons who reside overseas and qualify for either the Physical Presence Test or Bona-Fide Residence Test can qualify to exclude up to about $108,000 of their US income from their U.S. tax return — as well as claim a housing credit for a portion of the rent and other costs associated with foreign housing. If a person qualifies for the Foreign Earned Income Exclusion they must still file the tax return and include a Form 2555 — couples filing joint tax returns can each claim the earned income exclusion but cannot double-dip on the housing exclusion.
Foreign Tax Credits (FTC)
When a person pays tax overseas on income they earned abroad, they may be able to claim a foreign tax credit against any taxes that would otherwise be due on the same income on a US tax return. It is not always a dollar-for-dollar credit — and if a person claims the foreign earned income exclusion for earned income they cannot double-up on the same dollar using both the credit and the exclusion — but they may still have some remaining credit available depending on how much income they earned after applying the earned income exclusion. In other words, if a person earns significant income from employment — above the foreign earned income exclusion amount — they may be able to still claim a foreign tax credit on the additional income for the portion not exempted by the FEIE.
New Zealand Pension Plan/Superannuation & US Tax
A New Zealand Pension Plan typically grows tax-free (distinct from Provident Funds in non-treaty countries in which there may be more immediate tax consequences). Since it is a foreign pension, it may qualify as not taxable during the growth phase from a U.S. tax perspective — but some IRS agents may take the position that the growth is still taxable since it is not a qualified plan. You should speak with a Board-Certified Tax Law Specialist before taking a position on your tax return.
PIE Investments in New Zealand (Portfolio Investment Entities) are very complicated from a U.S. tax perspective. That is because technically while the PIE investment is created as a type of retirement supplement, it is not technically employment pension per se and therefore is not treated as pension would otherwise be treated by the US government for tax purposes. Likewise, the tax implications in New Zealand for these type of investments may be different than in the United States common because in the United States they would be considered as PFIC. Further complicating the pie investments from New Zealand is the fact that oftentimes they are held within a foreign trust.
Currently, there is no Totalization Agreement between the United States and New Zealand.
New Zealand Pension & US Reporting
Even if the New Zealand Pension Plan is not taxable during the growth phase, it is still a reportable foreign financial account that must be disclosed on various different international information reporting forms such as the FBAR and FATCA Form 8938.
FATCA and Form 8938
FATCA is the Foreign Account Tax Compliance Act. US taxpayers generally comply with FATCA by filing a Form 8938 (above). The Foreign Financial Institutions (FFI) may send expats and other US persons a FATCA letter or KYC Letter to ascertain whether the individual is a US person even if they are residing outside of the United States as an expat. This may lead the FFI to report the Taxpayer to the IRS.
Foreign Account Reporting & FBAR (FinCEN Form 114)
When a US person has foreign bank accounts and other financial accounts with an annual aggregate total that exceeds $10,000 on any given day in any year, they have to report the accounts on the FBAR (aka FinCEN Form 114). The form is filed electronically directly on the FinCEN website.
Foreign Gifts from New Zealand & Form 3520
Here is a common scenario: A US citizen has moved back to their home country. They may possibly have dual citizenship but their immediate family resides overseas. They receive a large gift or bequest from a family member who is a nonresident alien, such as when a grandparent or parent passes away and leaves a gift to multiple siblings — and the US Expat may be the only US person sibling. The expat is still required to report the gift on Form 3520 and the failure to do so can lead to some steep penalties.
Expat Tax Amnesty for New Zealand Residents
The US government has developed various voluntary disclosure and amnesty programs designed to assist expats and other taxpayers with getting into compliance for unreported income, accounts, investments, or assets. There are various different programs and although some of the programs have been recently closed, other programs have been updated and for expats who can meet the foreign residence test and prove they are non-willful, they may still qualify for the Streamlined Foreign Offshore Procedures — and a complete penalty waiver.
About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and expatriation.
Contact our firm today for assistance.