Filing taxes in the first year after a K1 visa

[Homeskin 1]

Hi guys,

 

First off an apology if this question has been answered elsewhere and would greatly appreciate any signposting regarding how and what to file for the 2017 tax year.

 

Our situation

1) I am a UK citizen currently undergoing adjustment of status (AOS) following a K1 visa and marriage to my (US citizen) spouse

2) Point of entry was 04 July 2017

3) The AOS process is going well and I have a work permit and advance parole document, just waiting on the interview to be scheduled.

4) I believe I class as a resident alien for tax purposes for 2017 under the substantial presence test: Calculations in italics according to the IRS formula 

- I have been present in the US this year for more than 31 days

- present in 2017 for 190 days (by year end)

- present 2016 for 23/3 days equals 7.66 days 

-  present in 2015 for 20/6 days equals 3.33 days

Adding these figures up gives 201 days which is more than the 183 days required for substantial presence. 

 

5) I have had no income in the US and my income from my job in the UK has been deducted through payroll. 
 

So I have a few questions: 

a) Am I correct in assessing myself as a resident alien given that my presence in 2015 & 2016 was as a tourist?

b) Is the best thing to file jointly with my wife for the 2017 tax year?

c) I have some investments that are based in the UK - I have heard that these are heavily taxed in the US. Is this true and what is the best course of action?  

 

Thanks for any help guys! 

 

H 

[Suss&Camm 2,213]

21 minutes ago, Homeskin said:

Hi guys,

 

First off an apology if this question has been answered elsewhere and would greatly appreciate any signposting regarding how and what to file for the 2017 tax year.

 

Our situation

1) I am a UK citizen currently undergoing adjustment of status (AOS) following a K1 visa and marriage to my (US citizen) spouse

2) Point of entry was 04 July 2017

3) The AOS process is going well and I have a work permit and advance parole document, just waiting on the interview to be scheduled.

4) I believe I class as a resident alien for tax purposes for 2017 under the substantial presence test: Calculations in italics according to the IRS formula 

- I have been present in the US this year for more than 31 days

- present in 2017 for 190 days (by year end)

- present 2016 for 23/3 days equals 7.66 days 

-  present in 2015 for 20/6 days equals 3.33 days

Adding these figures up gives 201 days which is more than the 183 days required for substantial presence. 

 

5) I have had no income in the US and my income from my job in the UK has been deducted through payroll. 
 

So I have a few questions: 

a) Am I correct in assessing myself as a resident alien given that my presence in 2015 & 2016 was as a tourist?

b) Is the best thing to file jointly with my wife for the 2017 tax year?

c) I have some investments that are based in the UK - I have heard that these are heavily taxed in the US. Is this true and what is the best course of action?  

 

Thanks for any help guys! 

 

H 

You can choose to either file as a dual status alien, in which case whatever you made prior to your first full day in the US does not have to be reported. A dual status filing can not be joint.

If you file married jointly you will at the same time choose to file with the election statement that you elect to be treated as a US tax person for the entire year of 2017, meaning everything you earned will need to be reported to the irs. Filing this way you can also use 2055 foreign earned income exclusion and exclude up to just north of $100k on the return from wages earned abroad. 

I am less sure about the investments but the only thing you will owe taxes on are gains - you don't mention what type of investments these are.

I believe I've read about exclusions for gains from house sale - but I could have dreamt that,  so leaving the floor open for someone with specific experience on investments while moving over. 

[Wuozopo 4,285]

19 minutes ago, Homeskin said:

So I have a few questions: 

a) Am I correct in assessing myself as a resident alien given that my presence in 2015 & 2016 was as a tourist?

b) Is the best thing to file jointly with my wife for the 2017 tax year?

c) I have some investments that are based in the UK - I have heard that these are heavily taxed in the US. Is this true and what is the best course of action?  

 

Thanks for any help guys! 

 

 

A) Because you married a USC, you can be a resident alien even if you had zero physical presence so carry on with the resident alien plan of attack. 

B) You are going to have to figure taxes with your specific incomes and decide which is best. You can file jointly, or she can file Married filing separately and you file nothing (as long as you earn no US income by year end). Usually jointly works out best but you should run all scenarios.  When you file jointly, you must report worldwide income of both spouses. Yes, that is what you earned in the UK Jan 1 to July 4 converted to $$. You will qualify for the foreign earned income exclusion. Look up Form 2555EZ and read that.

 

Any investment income you earned (intest/dividends/capital gains paid to you in 2017) can not be excluded on your joint return. That is called unearned income and is taxed based on US rules. Basically if you earned $100 in interest and $8000 in dividends, then you have $8100 additional taxable income thrown into the pot with your (her) salary income.  Your balances invested are not taxed, just what they earned you in the tax year. A big gain on a house sale has some exclusion allowed so generally not an issue unless you owned a castle and made a big profit off the sale.  

 

Best thing for you to do is keep reading as you have been, and work through a tax return to see how the investments affect your bottom line. You will learn as you work through with some real numbers.  There is no one answer fits all tax payers. A US tax return is very individual specific. 

[Homeskin 1]

On 11/19/2017 at 5:04 PM, Suss&Camm said:

I am less sure about the investments but the only thing you will owe taxes on are gains - you don't mention what type of investments these are.

I believe I've read about exclusions for gains from house sale - but I could have dreamt that,  so leaving the floor open for someone with specific experience on investments while moving over. 

Thanks guys, this advice is really helpful - makes things a little bit clearer. 

 

The investments are mutual funds / etfs but they're based in the UK, not the US. If anyone has any knowledge / advice on these let me know. I'm trying to figure out whether it's best to pull and reinvest or leave them where they are. 

 

I'm speaking to a tax professional soon so will provide an update after that. 

[Wuozopo 4,285]

2 hours ago, Homeskin said:

Thanks guys, this advice is really helpful - makes things a little bit clearer. 

 

The investments are mutual funds / etfs but they're based in the UK, not the US. If anyone has any knowledge / advice on these let me know. I'm trying to figure out whether it's best to pull and reinvest or leave them where they are. 

 

I'm speaking to a tax professional soon so will provide an update after that. 

If you file a joint return, you must report worldwide income. If the mutual funds earned you interest, it is reportable and taxable income. But filing jointly gives your wife an extra $10,400 off her taxable income because you're on the return. (Your U.K.salary income is going to be excluded and not taxed so it is basically only her salary with the extra $10,400 off because of you.) That may work out better doing that if your investment income is less than $10,400.   You have to try various ways since you have some options. And if you have already paid UK tax on the investment income, you can have credit for foreign taxes paid. It's probably not as bad as you are imagining. 

[Italian_in_NYC 259]

You can file a joint return and have to report all your 2017 UK income and take your UK taxes paid as foreign tax credit.

That's usually the most convenient way in terms of tax liability (not always though).

Re: UK investment income - it depends on which securities you invested. Foreign mutual funds are usually classified as PFICs, which are taxed in three different ways - you'd want to avoid sec 1291. Perhaps you can make a QEF election (check with your advisor, some funds already do this), or a mark-to-market election. Equity and bonds go on schedule D, just be mindful of the exchange rates (a capital gain in GBP is not necessarily a capital gain in USD).

Don't forget FBAR (FinCen 114) and form 8938 (if you meet the thresholds). If you own at least 10% of a foreign corp, you will have to file a form 5471.

[Italian_in_NYC 259]

12 hours ago, Homeskin said:

Thanks guys, this advice is really helpful - makes things a little bit clearer. 

 

The investments are mutual funds / etfs but they're based in the UK, not the US. If anyone has any knowledge / advice on these let me know. I'm trying to figure out whether it's best to pull and reinvest or leave them where they are. 

 

I'm speaking to a tax professional soon so will provide an update after that. 

I happen to do this for a living (intl tax and especially inbound taxation).

Check with your financial advisor whether the funds made a QEF election, that would help a lot.

If not, check your positions. If they are loss positions in USD, I recommend to liquidate them asap. Either way, you'd have to file a form 8621 for each PFIC.

If they are taxed under sec 1291, all excess distributions (and cap gains are all excess distributions) are taxed at 39.6% and you'll be charged interest spreading on the holding period.

[Homeskin 1]

On 11/22/2017 at 1:24 AM, Italian_in_NYC said:

I happen to do this for a living (intl tax and especially inbound taxation).

Check with your financial advisor whether the funds made a QEF election, that would help a lot.

If not, check your positions. If they are loss positions in USD, I recommend to liquidate them asap. Either way, you'd have to file a form 8621 for each PFIC.

If they are taxed under sec 1291, all excess distributions (and cap gains are all excess distributions) are taxed at 39.6% and you'll be charged interest spreading on the holding period.

 

Thanks so much, this is really helpful! What does it mean to be charged interest spreading on the holding period? Does that count for the whole time they've been open or just for 2017? 

 

[Italian_in_NYC 259]

On 11/27/2017 at 7:53 AM, Homeskin said:

 

Thanks so much, this is really helpful! What does it mean to be charged interest spreading on the holding period? Does that count for the whole time they've been open or just for 2017? 

 

The whole time you held the PFIC.

Taxes are allocated year-by-year (at the highest marginal rate) and you are charged interest on the unpaid tax allocated to prior years.

[landmb 2]

Homeskin, I am in a very similar boat to you, moving to US from UK with K1 this year, passing the substantial presence test, and holding a PFIC in the UK (I actually divested in the UK before I moved, however this was during the 2017 tax year, so if I decide to file MFJ I still need to go through the PFIC rules). My PFIC is stocks and shares ISA.

 

From my (admittedly, not very detailed) understanding of the PFIC rules, any excess distribution is split into portions: https://www.irs.gov/instructions/i8621#idm139845816015872. Theres the pre-PFIC, the PFIC, and the current tax year portion. The pre-PFIC and current tax year count as ordinary income. However the tax and interest charge (which is what Italian_in_NYC mentions in this quote), is only on the PFIC period. I tried to figure out what defines the PFIC period a while back, and found guidance which mentioned that the PFIC period, amongst other criteria, was a time when it was owned by the US person. Frustratingly, I now can't find the source for this, or any source which explains what qualifies as the PFIC period. I took this to mean that my PFIC has never been in the PFIC period - as I divested it in the current financial year and I have never been a US person in previous years. If I am correct, if you were to divest this year you  would just treat the excess distribution as ordinary income (pre-PFIC and current tax year periods). However, I fully admit I could be completely wrong, as I am yet to do more research and/or seek professional advice.

 

On 11/28/2017 at 3:43 AM, Italian_in_NYC said:

The whole time you held the PFIC.

Taxes are allocated year-by-year (at the highest marginal rate) and you are charged interest on the unpaid tax allocated to prior years.

Edited December 7, 2017 by landmb

[Italian_in_NYC 259]

5 hours ago, landmb said:

Homeskin, I am in a very similar boat to you, moving to US from UK with K1 this year, passing the substantial presence test, and holding a PFIC in the UK (I actually divested in the UK before I moved, however this was during the 2017 tax year, so if I decide to file MFJ I still need to go through the PFIC rules). My PFIC is stocks and shares ISA.

 

From my (admittedly, not very detailed) understanding of the PFIC rules, any excess distribution is split into portions: https://www.irs.gov/instructions/i8621#idm139845816015872. Theres the pre-PFIC, the PFIC, and the current tax year portion. The pre-PFIC and current tax year count as ordinary income. However the tax and interest charge (which is what Italian_in_NYC mentions in this quote), is only on the PFIC period. I tried to figure out what defines the PFIC period a while back, and found guidance which mentioned that the PFIC period, amongst other criteria, was a time when it was owned by the US person. Frustratingly, I now can't find the source for this, or any source which explains what qualifies as the PFIC period. I took this to mean that my PFIC has never been in the PFIC period - as I divested it in the current financial year and I have never been a US person in previous years. If I am correct, if you were to divest this year you  would just treat the excess distribution as ordinary income (pre-PFIC and current tax year periods). However, I fully admit I could be completely wrong, as I am yet to do more research and/or seek professional advice.

 

Yes, you are correct.

For other PFIC years excess distribution is taxed at the highest marginal rate (regardless of your income level). Actually, you won't even see the income on the return, there will just be an extra tax amount added (you can trace that to a schedule in the 8621s).

However, you might want to check with the fund admin and see if they made a QEF election.

[Italian_in_NYC 259]

5 hours ago, Dee elle said:

We were both IR5 immigrants in 2016. We divested all investments and assets in Australia into cash,  prior to entering the US, and chose to done MFS and dual status for the best year to avoid the complexities of the overseas income.  Once we found an Enrolled Agent who knew what he was doing we were fine... before that.. less than fine courtesy of a CPA who totally messed everything up and landed US with a tax bill of $4000 USD that we definitely didn't owe.

Italian _in_NYC.... where were you when I needed you!!! 😁

Ha! I do this for a living (I actually spoke at some AICPA conferences on PFICs, FBARs, information returns and pre-immigration planning). I am a CPA though

[Italian_in_NYC 259]

3 minutes ago, Dee elle said:

Am usually very happy with the services of CPA... the one I found unfortunately just got everything turned around and very messed up... filed initially as dual status but failed to read that we couldn't file MFJ, used the wrong form for claiming my foreign earned income, failed to even ask if we held any overseas financial accounts during the year, and so I remained ignorant about FBAR until mid August. So the IRS changed everything to my husband, denied the foreign income exemption and billed us 4K. Then she redid the return for both of us as Non residents for the whole year, told me we didnnt meet the substantial presence test so we were not residents.. even though we held GC for 4 months...did the AUD to USD calculations using the exchange rate going the wrong way...and basically told me I had no Idea what i was talking about when I raised these errors with her,, I came this close to reporting her to the State CPA  board... 

Not many CPAs (or EAs) know much about international tax, it's a very specific (and technically intense) field.

However the other mistakes are inexcusable (the exchange rate is simple math, you don't need an accounting degree or a professional license).

Unfortunately, those few CPAs are very expensive (they tend to be in large metropolitan areas and work for fairly large firms) and it does take several hours to process the docs (often in a foreign language), prepare the return, and review the return.

[Italian_in_NYC 259]

18 hours ago, Dee elle said:

These were all in English, I am very thorough and explained our finances and situation to her, asked if she felt that she could do it.. and she said yes she could. She advertised herself as experienced in multinational expat and complex tax needs, which drew me to her in the first place.. I was able to identify her errors from simply reading the instructions for the forms... much like USCIS,,, ah well  

Sounds like a pretty bad experience. I hope you didn't end up paying the IRS bill, at least.

[Chelleyandaaron 506]

I am so relieved I found this thread! I have spent the entire afternoon going down a wormhole of IRS information.  Firstly discovering that to file jointly I need to declare my UK income for Jan-June (I got here on July 3rd) - which is not as straightforward as it sounds as I was self-employed and the UK tax year runs April to April.

However - I then found the 2555 (not eligible for the 2555-EZ as I was self-employed) and got taken aback by the exemption amount and thought there was no way I could be eligible ($49000 exemption? - I didn't earn anywhere near that much in those six months - maybe $15000?).

 

So - am I right in thinking that I declare all my income from self-employment (what evidence is required? I don't have certified accounts) and then claim the six months exemption (182 days or thereabouts) on the form 2555.  I don't mind just demonstrating all income - without prepared accounts as it still comes well under the $50,000 even without any deductions.

 

Am I missing anything else?  I don't have any savings - I do have a son who was under the age of 19 who lived with me but was not a US citizen or resident - and he has stayed in the UK to study.