My wife (a U.S. green card holder) recently sold her business that she owned prior to us meeting. She paid tax on that income in her home country. We would like to transfer the remaining funds to the United States to invest. Are we required to report this income and pay taxes again here?
The United States taxes U.S. persons on their worldwide income, which includes income earned from both U.S. sources and foreign sources. Citizens, lawful permanent residents (also known as green card holders), and other resident aliens of the United States are considered U.S. persons, and would be subject to U.S. taxation in this fashion. Since your wife is a U.S. green card holder, the gain on the sale of her business in her home country would also be taxable in the United States in the year of the sale, unless there is an income tax treaty between the United States and her home country that provides a rule to the contrary, and provided that she was a green card holder at the time of sale. If your wife was not a green card holder at the time of sale, more information would be needed to determine her U.S. residency status and, thus, the tax consequences regarding the sale.
Your wife may be eligible for a foreign tax credit in the United States for the taxes she paid in her home country. This credit, which is subject to limitations, can be used to offset her U.S. tax liability as a result of her reporting the gain on the sale of the business.
The calculations of the amount of gain reportable for U.S. tax purposes, as well as the intricacies of the foreign tax credit, can get complicated. It would be beneficial to seek advice from a tax adviser. It is also very important to accurately determine whether your wife was considered a U.S. resident at the time of the sale, because this could alter her overall tax outcome.
Answered by: James G. McGrory, CPA, and Stephanie K. Otake, CPA, are with Drucker & Scaccetti in Philadelphia.