This article is contributed by Jared Garfield, Associate Attorney at Hone Maxwell LLP
Many foreigners choose to live and work in Singapore. According to the Ministry of Manpower, the foreign workforce in Singapore totalled more than 1.4 million people as of June 2023.
Many of the foreigners living in Singapore are Americans and those who are not may own U.S. assets such as U.S. stock or real estate for personal or investment purposes. For Americans living in Singapore or anyone who owns U.S. assets, it is important to be proactive in planning for U.S. taxes.
The U.S. imposes taxes based on citizenship, residency, and its economic relationship to the taxpayer. This means that you may be subject to some U.S. taxes even if you are not American and have never stepped foot in the U.S.
The most common example is the U.S. transfer tax, which consists of both an estate and gift tax. The U.S. transfer tax applies to the transfer of U.S. assets even if they are owned by non-Americans. Because the U.S. tax system is so broad and far-reaching, the first key to planning for U.S. tax is to determine if any U.S. tax rules will apply to you.
Are You A U.S. Person?
The application of U.S. tax to any individual is based on whether the individual is a U.S. person. This may seem like an easy determination to make, but in U.S. tax law, the term U.S. person has special meaning and can even mean different things in different contexts.
There are two main components to determining whether you are a U.S. person. First, you must answer the question in the context of the income tax, and then you must consider the question in the context of the transfer tax.
For income taxes, a U.S. person includes U.S. citizens, business entities formed under U.S. law, green card holders, and those who physically spend a substantial amount of time in the U.S.
For transfer tax purposes, U.S. persons include U.S. citizens and all others who are ‘domiciled’ in the U.S. at the time of the gift or their death. A person has a domicile in the U.S. if they live in the U.S., even for a short time, with the intent to remain there indefinitely. Once a person has a domicile in the U.S., they keep it until it is shown to have changed. U.S. citizens are always considered to be domiciled in the U.S. regardless of where they live.
Non-U.S. Persons Holding U.S. Assets While in Singapore
For non-U.S. persons holding U.S. assets, most of the U.S. tax planning that must be done relates to the U.S. transfer tax.
Non-U.S. persons are subject to an estate tax on all the U.S. assets they own at the time of their death. They are also subject to U.S. gift tax on gifts made during their lifetime of any tangible assets situated in the U.S. There is a lifetime exemption of $60,000 meaning that gifts of U.S. property and U.S. property transferred at death are not subject to transfer tax until the value of the transfers exceeds $60,000.
In many situations, planning can be done to avoid the U.S. transfer tax.
Commonly owned U.S. assets are U.S. stock and real estate. U.S. stock is considered intangible property, so it is not subject to gift tax, but is subject to estate tax. One simple planning method is to gift U.S. stock prior to death. You may also consider selling the stock prior to death as non-U.S. persons are generally not subject to U.S. capital gains tax on the sale of U.S. stock. However, death is often unexpected, and this may not be the best option for everyone.
Another option is to own the U.S. stock through a foreign corporation, trust, or other entities. This method can be administratively burdensome, so it is worth doing a cost benefit analysis before proceeding.
U.S. real estate is a tangible asset, so it is subject to gift tax. This means you cannot simply gift the U.S. real estate prior to death. The sale of U.S. real estate is also subject to U.S. capital gains tax, so selling prior to death may not make sense either.
To avoid U.S. estate tax on real estate it is generally recommended to set up a holding structure. This typically involves a U.S. Limited Liability Company and a foreign corporation or trust. There are additional hurdles when establishing this structure after the real estate is already purchased, so it is best to set it up prior to purchasing the property.
Tips for U.S. Persons Holding U.S. Assets While in Singapore
Income and transfer tax planning looks much different for U.S. persons.
For non-U.S. persons most of the planning required relates to transfer tax, but for U.S. persons, income tax is generally a much larger issue.
The transfer tax for U.S. persons is imposed on worldwide assets, not just U.S. assets. This means it does not matter whether the U.S. person moves their assets abroad or keeps them in the U.S., either way they are subject to the U.S. transfer tax. Although, the lifetime exemption for transfer tax is much higher – $13 million instead of $60,000. Individuals with smaller amounts of wealth generally need minimal planning for the transfer tax. It is worth noting that in 2025, the exemption will be cut to approximately $7 million.
U.S. persons must pay income tax on their worldwide income. This means that a U.S. person working in Singapore still must file U.S. taxes in addition to the taxes imposed on them by Singapore. To avoid paying tax on the same income to both countries, the U.S. person should utilise the foreign earned income exclusion or foreign tax credits, but the details of these programs are beyond the scope of this article.
The number 1 issue for U.S. persons in Singapore is not their U.S. assets, it is the assets they hold in Singapore or other countries. The U.S. has many reporting requirements for non-U.S. assets such as bank accounts, business ownership, ownership in trusts, receipts of gifts of non-U.S. property, and others. A U.S. person living in Singapore should consult with a tax professional to determine if any of their non-U.S. assets must be reported.
Hone Maxwell LLP’s tax and business attorneys provide a full spectrum of federal, international, state, and local tax law services, including tax planning and tax controversies involving civil and criminal claims.
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