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🇺🇸 United States of America

Nozipho Tshabalala speaks with Investec's Rene van Zyl and Stanley Barg, from Kozusko Harris Duncan in New York.

What should I know when moving to or investing in the USA? ​

Whether you’re investing in the US, have children studying there or are considering moving there yourself, you must plan properly before taking the leap, advise Rene van Zyl, joint-head of tax and fiduciary at Investec, and Stanley Barg, partner at Kozuska Harris & Duncan in New York City. The US tax system is complex, and adding in the complexities of the South African system, it becomes even trickier.

Residency and why it’s important for tax purposes ​

As with other jurisdictions, US residents are taxed on worldwide income; while non-residents (not taking SA taxes into account) are taxed only on US-generated income. You’re automatically considered a US resident if:

  • You’re a US citizen – even if you haven’t spent much time in or are not physically resident in the US.
  • You’re a Green Card holder
  • You pass the substantial presence test, which is 183 days in a calendar year. This is calculated on a rolling basis, so the prior two years count as well, though to a lesser degree. If you are a student or you have a medical condition that arises while you’re in the US, the substantial presence test does not apply.

Tax relief and your Green Card ​

While double taxation relief is available through a US-SA tax treaty, claiming relief through the treaty in the US can have serious consequences if you’re a Green Card holder. It is assumed that as a Green Card holder, you plan to become a US citizen at some point and claiming tax relief may count against you. On the plus side, the US will give you a tax credit on your US income, if you pay taxes in another jurisdiction as well.

What are some complications of the US tax system? ​

The US has three tiers of taxation (federal, state, and municipal) and you might be subject to all three, not just federal tax. The US might tax something that isn’t taxed in another jurisdiction. For example, the US taxes the sale of your primary residence. Investments that might be viewed favourably in SA, could be subject to punitive taxes in the US.

What about drawing income from a trust? ​

Many South Africans use trusts to make distributions to family in the US. But It can become tricky, so Rene again advises that you seek help before doing anything. There are two ways to take funds offshore when distributions are made through a trust:

  • If you’re still a South African Reserve Bank tax resident, you can use your R10 million Reserve Bank allowance.
  • If you want to access more than that, you can go through a formal Reserve Bank process and place your interest in the trust on record. But the funding of the trust is important - whether it's self-funded or third-party funded - as you may find some of your funds stuck in South Africa.

Stanley says that the type of trust also has tax implications in the US. He distinguishes between grantor trusts (where the person who set up the trust retains some control) and non-grantor trusts (where they have given up control). A US resident beneficiary of a grantor trust can receive distributions, which are reportable but not taxable, unless they are US situs (located in the US) property. With a non-grantor trust, regular income is taxed at about 40%, but accumulated income attracts a throwback (aka clawback) tax of up to 100%.

Residency and estate and gift taxes​

For estate and gift taxes in the US, residency is determined not through the substantial presence test but a domicile test - if you live where you intend to remain living.

  • US citizens are automatically subject to tax on worldwide bequests/gifts
  • If you’re domiciled in the US, you’re considered a resident and are taxed on a worldwide basis
  • If you have a Green Card, you’re presumed to be domiciled, thus taxed on a worldwide basis
  • If you're in the US on a visitor’s visa, you’re usually not regarded as domiciled.
  • If you’re not domiciled in the US, you pay tax on only the US situs assets.

Who is entitled to exemptions from estate and gift taxes?​

  • US citizens and residents currently get an exemption of up to $11.7 million
  • Non-residents’ exemption is only $600 000. US citizens are exempt from tax on spousal bequests
  • Non-US citizens will be taxed on spousal bequests unless the assets are placed in a particular type of trust called a QDOT.