November 2019 Have you relocated to or from the United States, or simply worked in the U.S. or another country for part of the year? If so, then your tax matters have likely become complex, time-consuming and considerably more risky. Chris Cornelius and his team at Zander Sterling in Indianapolis can help. They are experts in tax matters related to U.S. expatriate and foreign national individuals. Zander Sterling is a CPA firm that specializes in providing a wide array of services designed to help globally mobile individuals or the companies that employ them. The firm’s clients are companies, including the Fortune 500, who temporarily relocate their employees around the world as well as higher net worth individuals, including C-suite executives, professional artists, athletes and physicians. The firm does not provide corporate, partnership or other entity-level tax services. Within the U.S., Zander Sterling frequently works with immigration legal counsel to deliver more cohesive service to U.S. foreign nationals or their employers. Outside the U.S., Zander Sterling delivers its services through a specialized network of tax and law firms that spans nearly 100 countries. In many instances, these firms are able to provide both immigration and tax counsel, a great benefit to travelers and workers outside the U.S. As a regulated CPA firm that transacts business globally, Zander Sterling meets or exceeds the same quality assurance and data privacy standards, including the European Union’s General Data Protection Regulation (GDPR), that one would expect from only the largest CPA firms. Highly Experienced Tax Specialists Cornelius, a CPA, has been providing expatriate and foreign national tax services for nearly 30 years. He grew up in Indiana, spending his formative years in the farming community of Burlington where he developed lifelong friendships and his strong work ethic. His parents then moved his family to La Porte for his high school years. “I was blessed,” Cornelius said. “Having to say ‘goodbye’ to my childhood friends was emotionally hard on me. La Porte is a much larger city, and its high school is five times the size of my previous one, which made the change more challenging for me. Fortunately, my new classmates were welcoming and helpful. Their reception of me is the reason I was able to assimilate quickly and excel both academically and athletically. I’ve never forgotten their kindness and generosity.” After high school, he attended Indiana University in Bloomington, where he earned his degree in accounting, and then joined Arthur Young (a predecessor firm of Ernst & Young). Early in his career, Ernst & Young gave him the opportunity to lead the expatriate and foreign national tax specialty practice for the Indianapolis office. “I raised my hand, and they said, have fun with that, good luck to you,” Cornelius said with a laugh. “And I’ve been doing it ever since.” Several years later, Cornelius left Ernst & Young to work at Cummins in their international human resources group, focused on the Cummins employees located outside the United States. Ernst & Young soon recruited him back, and he went on to become a partner in the Big Four professional services firm. In 2005, Cornelius’ wife was unexpectedly diagnosed with cancer, and he retired from Ernst & Young to help care for her and their three young children. “But I love what I do, in large part because of the wonderful people I get to meet from around the world. So even when I was away, I helped for a period of time.” His wife won her battle with cancer, but those challenging times altered his priorities in life. A change was needed. So, with his wife’s encouragement, Cornelius started his own tax services firm. A Deeper Mission in Defense of Children When Cornelius created Zander Sterling in 2016, he designed it to deliver personal client service experiences, not a transactional ones. And because it’s remarkably easy for people to become overwhelmed by the complexity of international tax laws, the firm would focus exclusively on this niche area of taxation. By doing so, he believed the firm would be better positioned to help its clients understand the laws that apply to them and, in turn, minimize their taxes and avoid costly penalties. But he also had a deeper mission for the firm. He wanted it to be socially responsible. As a result, the firm donates a percentage of its income to organizations dedicated to helping abused and neglected children, including Childhelp, an international organization started over 60 years ago by two remarkable women, Children’s Bureau, Inc., a local organization that gives Zander Sterling local impact, and CASA, the court appointed special advocate for children that works on county and national levels. Cornelius’ goal was and is for the firm to outlive him. So he didn’t name it after himself. Instead, with the assistance of his family, friends and business colleagues, he selected a name that aligned with its mission. “We receive a lot of compliments on the firm’s name and, of course, questions about its origin,” Cornelius said. He explained, “Zander is the phonetic spelling of ‘Xander’ and the short form of ‘Alexander.’ It’s originally from the Greek name ‘Alexandros,’ which means ‘defender of man.’ And ‘Sterling’ is a British term that refers to high quality and excellence.” Expatriates For U.S. citizens and lawfully admitted permanent residents who relocate to another country (commonly referred to as an “expatriate”), it’s critical for them to understand, Cornelius said, that “irrespective of where they live in the world—and some people move and never come back—they will forever be required to file an annual U.S. income tax return and declare their worldwide income on it [meaning any money you make anywhere in the world].” “Whether or not you are taxed by the host country—‘host country’ being where you have moved to or where you have lived—generally depends on the length of time you’ve been in that country and the nature of your activities while there. If you are only vacationing, you won’t need to file a tax return with that country. If you are in that country to work, however, you will typically need a proper work permit to do so. And applying for a work permit or visa is frequently the ‘trigger’ to being subject to taxation in the host country,” Cornelius said. “A common misperception by U.S. expatriates is that if they work in another country, they will become subject to tax in that country and their earnings will be double taxed—first by the foreign government and again by the U.S. But that rarely happens to U.S. citizens and tax residents because of special exclusions and credits available to them,” Cornelius said. In addition, the U.S. has executed a number of income tax treaties and social tax agreements (commonly referred to as “Totalization Agreements”) with other countries. These bilateral treaties and agreements override or otherwise modify the internal taxation laws of both the U.S. and the host country for the purpose of preventing double taxation. “Understandably, most people aren’t aware of the benefits available to them through the tax treaties and social security agreements, and, as a result, they end up paying too much tax. Navigating the complexities of these treaties and agreements for the benefit of our clients is one of the key advantages we provide to them,” Cornelius added. Foreign Nationals Under the U.S. tax code, everyone residing outside of the U.S. who is neither a U.S. citizen nor permanent resident (i.e., green card holder) is generally classified as a nonresident status taxpayer. As a nonresident, a person only pays federal income tax to the U.S. on U.S.-sourced and effectively connected income. Once a nonresident relocates to the U.S. (commonly referred to as a “foreign national”), the “clock starts ticking” on his or her U.S. resident status, Cornelius said. So when does someone become a tax resident of the U.S.? They either become a lawfully admitted permanent resident of the U.S. (i.e., green card holder) or meet the requirements of something called the Substantial Presence Test, whichever occurs first. The Substantial Presence Test uses a specific formula and set of rules to determine if a person has accumulated 183 days of qualified presence within the U.S. over a contiguous three-year period of time. Once a person meets the Substantial Presence Test, he or she is considered a U.S. tax resident. And once you’re a tax resident, all of your income, worldwide, is subject to U.S. taxation, similar to U.S. citizens. How could this impact you? Let’s say you decide to move to the U.S. from another country (i.e., your “home country”) in August of 2019 and you fail to qualify as a U.S. tax resident that year. For calendar year 2020, however, you are a tax resident of the U.S. for the entire year. On January 1, 2020, you decide to sell some of your stock portfolio that you’ve owned for years. The sale yields a gain of $50,000. In your home country, income from the sale of stock isn’t subject to tax. So your expectation is that you get to keep the full $50,000. Since you sold the stock when you were a U.S. tax resident, the full $50,000 gain is taxed, so you’ll net considerably less. In contrast, had you sold the stock one day sooner, on December 31, 2019—when you were a nonresident status taxpayer—none of the gain would have been subject to federal income tax. A single day can make a huge financial difference. Residency and Its Effect on Taxation The internal laws of most countries will assess tax based on an individual’s residency status, Cornelius said. Generally, residents are subject to tax on their worldwide income, while nonresidents are subject to tax only on income earned within the country. So whether you’re a U.S. expatriate or foreign national, the first thing you want to figure out is at what point do you become a resident? And, in general, a person’s residency status for tax purposes isn’t necessarily determined by a person’s immigration status. Instead, it’s frequently based on how many days you’ve been physically present in a country—which is why keeping detailed records of your travel becomes crucial. Because tracking days is so important to internationally mobile individuals, Zander Sterling provides its clients with a calendar tool to help them more easily monitor and track their days in each country. “ is one of the big administrative burdens that goes along with residing and working outside of your home country,” Cornelius said. “You have to track each of your days, noting which country you’re in and whether you were working or not working.” Information Returns and Disclosures The U.S. operates one of the most complex systems of individual taxation and financial reporting in the world. Part of the complexity stems from a number of potential information returns and mandatory financial disclosures that the U.S. has that other countries don’t, the most common of which is the FinCEN Form 114 disclosure, better known as FBAR. “The FBAR is an annual filing where a qualified individual has to disclose all of their foreign financial accounts, including bank accounts, foreign pensions, brokerage accounts, etc.,” Cornelius explained. “While this disclosure doesn’t assess any tax, the fines for noncompliance start at $10,000 per account that a person fails to disclose, irrespective of the amount of funds in the account. That’s scary.” “While the information required to be provided on the FBAR can be quite simple, having to reveal the details of personal financial accounts feels intrusive for our clients, most of whom weren’t required to file this disclosure until they relocated internationally,” he said. The FBAR isn’t filed with a person’s individual income tax return. Instead, it’s a separate filing that’s enforced by the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. FinCEN collects and analyzes information about financial transactions in order to combat domestic and international money laundering, terrorist financing and other financial crimes. And because it’s easy for a person to meet the requirements that mandate the filing of an FBAR, most internationally mobile people end up having to file this form each year. “Everyday individuals become burdened and placed at risk by this compliance requirement. It’s unfortunate because 99.9% of them are not the intended target of this legislation,” he said. “So we help them comply.” Cornelius added, “The FBAR has been a hot topic in recent years as a result of increased enforcement activity by the government. There are millions of U.S. citizens or green card holders living outside of the United States. And many of them likely have no idea they are required to file an FBAR each year.” The government is aware of this and has provided a variety of voluntary disclosure programs to help individuals come into compliance. “These programs can be quite beneficial, but the procedural rules and required filings associated with them can be extensive and complicated. When needed, we team with qualified outside legal counsel to provide the proper level of assistance and protection for our clients,” Cornelius said. As you can see from this overview, properly complying with the income tax and other disclosures is extremely complicated and burdensome. If you are a U.S. expatriate or foreign national, call on the tax experts at Zander Sterling. They’ll help you develop a plan to avoid costly mistakes and properly manage your compliance obligations around the world. Visit zandersterling.com or call (317) 610-3293.