US Tax Liability: 9 Tax Traps That Can Cost You a Lot of Money

Whether you are planning a US company formation, buying a vacation home in Florida, investing in US stocks or even moving to the USA: there are plenty of situations where you come into contact with US tax law.

In this comprehensive guide you will learn everything you need to know about taxes in the United States. 

But your US plans can quickly turn into a tax trap if you get the wrong advice. So you may not like hearing that, according to our research, 90% of all self-proclaimed "US experts" fail to tell you about key risks in US and international tax law.

And, it seems to us, for a good reason: many clients would probably drop their US plans if they knew about the potential tax downsides. And the advisor would lose a nice fee. Keeping quiet about tax traps may be good for your advisor's business, but it is certainly not in your interest.

Here are the most common US tax traps that most advisors keep quiet about.

For more on the US tax system, see our beginner's guide and our quick introduction to US tax law for European entrepreneurs.

1Tax trap 1: Choosing the legal structure for your US company

1.1Forming a US LLC while fully tax resident in Europe, and other mistakes in choosing a US legal structure

If you are thinking about starting a company in the USA, you can choose from a range of legal structures, as in any country. Each has its pros and cons, and which one suits your situation best depends on a number of factors.

Many formation agencies do not care whether you get into trouble with the tax authorities later. All that matters is that they sold one more formation. Don't fall for it.

Mount Bonnell Advisors forms and managesC Corporations,LLCsandLimited Partnerships (LP)for clients. If you live permanently outside your former high-tax home, a US LLC can be very attractive: our sister firm zerotax.llc advises on this. Thetrading LPis another option worth discussing.

2Tax trap 2: Taxing US business profits correctly

2.1The myth of the "tax-free" US company in Delaware or Nevada

Anyone trying to sell you a US company will often use any argument to make the offer look appealing. And the prospect of owning a US company that pays no tax is attractive bait for many buyers.

But: the profits of a US company are fully taxable in the USA at the regular US tax rates. The idea that you can form "tax-free" companies in Delaware or Nevada is a stubborn rumor. The formation advisor knows this too, but prefers to keep quiet so the deal doesn't fall through.

Income and corporate tax rates in the USA do tend to be lower than in many European countries, especially since the 2017 tax reform. But at the very least you should expect a US tax burden similar to Switzerland's, around 15-20%.

The USA also requires full bookkeeping and financial statements, to standards similar to those you know from Europe.

On the Mount Bonnell Advisors website, you will find worked examples of the actual tax burden for different structures (example: Corporation,example: LLC,example: LP). That way you know in advance what to expect tax-wise.

3Tax trap 3: Substance requirements / CFC rules

3.1Controlling and/or managing a US company without US substance while fully tax resident in your home country

If you run a US business and manage it from your country of residence, you usually create a so-called place of effective management there. The US company then becomes taxable in your country of residence and has to pay tax like a domestic company.

Only a US company with real US substance (a US managing director on the payroll, employees and an actual place of business in the USA) will be recognized by the tax authorities as a foreign company in the long run.

These rules are known as the "CFC regime", and almost every country has them in its tax law.

Of course, it is easier for an advisor to sell you a shell company. Who likes buying something complicated that also comes with high ongoing costs? Unfortunately, running a foreign company legally has become fairly complicated, and that is why your advisor stays silent about it.

At Mount Bonnell Advisorsyou get the advice you need to form a US company on a sound legal footing and run it. Only a structure that can withstand scrutiny by your tax authority is a good structure!

4Tax trap 4: Long US vacations & US tax liability

4.1Spending months in the USA on vacation without considering the US tax liability that may follow

Even without a US visa, Europeans can spend many months a year in the USA. In fact, we have a number of clients who spend most of the year in the USA on the Visa Waiver Program, with no visa at all.

But if you think you only become taxable in the USA when you live there on a visa, you are mistaken.

In fact, one of the factors that determines US tax liability is how long you stay in the country. A three-year window applies (the Substantial Presence Test): you become tax resident if you were in the USA for at least 31 days in the current year and the days of the current year, plus one third of the days of the previous year, plus one sixth of the days of the year before that, add up to at least 183. So if you spent a long time in the USA in one year, you can become taxable in the following years with far fewer days of presence.

Being taxable can, in some cases, mean that your entire worldwide income is taxable in the USA and that you have to file a tax return there.

Find out how to file a US tax return as a European here.

Mount Bonnell Advisors advises many international clients on their US tax obligations.Find out more here.

5Tax trap 5: US estate tax

5.1Building US wealth over the long term on the assumption that the US estate tax exemption is automatically $15 million

The US tax reform of 2017 raised the estate tax exemption from around $6 million to around $12 million; since 2026 it has stood at $15 million. These are fantastic sums, nothing like the exemptions in Europe.

You might be tempted to think that with clever structuring, or by obscuring ownership, you can pass US assets to your heirs for next to nothing. But that only works if the deceased is a US citizen or green card holder.

If you are a foreigner leaving, say, US real estate or a US company to your heirs, you have to live with an exemption of just $60,000 (!!!): any US assets above that are hit with the full estate tax.

That is why you should not walk into the office of just any US investment advisor who might sell you investments your heirs will later regret. Get advice from an expert who specializes in international clients. We are happy to put you in touch!

Mount Bonnell Advisors advises many international clients on their US tax obligations, on estate tax and on other taxes.Find out more here.

7Tax trap 7: the 2017 US tax reform

7.1Not knowing the downsides and upsides of the 2017 US tax reform

The 2017 US tax reform, passed by Congress at the end of 2017 and with its core elements made permanent by the One Big Beautiful Bill Act of 2025, brings many tax cuts for businesses. The corporate tax rate, for example, fell from over 35% to 21%. Individuals benefit from tax cuts too.

That said, the reform package is complex and there are losers as well. On top of that, some of the tax cuts, especially for individuals, were initially only temporary; it took the 2025 tax package (the One Big Beautiful Bill Act) to make many of them permanent.

The reform includes far-reaching positive changes for US companies doing business internationally. Naturally, few US tax advisors know their way around international matters.

So as the owner of a US company, you could easily end up paying far too much tax because your US tax advisor does not know how to prepare your company's return correctly.

Mount Bonnell Advisors has followed the 2017 US tax reform since it was passed and has fully incorporated the One Big Beautiful Bill Act of 2025. The firm's tax experts know the current rules inside out and are ready to help with advice and hands-on support.

8Tax trap 8: advisors with only regional or national know-how

8.1Falling for an advisor who knows only the USA or only Europe and never looks beyond that

A big problem across the advisory professions, especially in tax, is that most experts focus only on their own region or country and have very little insight into how things connect internationally.

So if you are not a US citizen and go to just any US CPA for tax advice, they can usually help you only to a very limited extent and cannot, for example, deal with your income from Europe.

Preparing a return with international income and interpreting the relevant double tax treaties is also an almost impossible task for most tax advisors.

Mount Bonnell Advisors has advised clients on international tax matters for many years and has built a network of capable partner firms in various countries that it works with closely and in trust.

9Tax trap 9: handling the IRS the wrong way

9.1Hard to believe, but true: the IRS actually wants to help you, especially if you are not American

You hear plenty of horror stories about the IRS. Reports of sometimes draconian penalties for tax offenses make the rounds in the media back home too.

As in many European countries, the US tax authorities have sweeping powers and can, for example, freeze the accounts of suspected tax evaders fairly easily.

It is also part of the American legal mindset to make an example of someone to intimidate and deter other tax evaders.

In our view, the IRS acts far less arbitrarily than some media reports suggest. As a rule, if you meet your filing deadlines, you can expect no problems.

What's more, the USA has a strong interest in attracting foreign investors. So it makes no sense to hide from the IRS or set up a structure the IRS cannot see through. Far better to engage openly with the IRS and get approval for tax-optimized structures in advance.

The IRS has no interest in informing foreign tax authorities about your US assets (unless you are involved in international crime). So it is better to see the IRS as a partner, not an opponent.

10How Mount Bonnell Advisors can support you in the USA

10.1US tax support in English for individuals & businesses since 2008

Mount Bonnell Advisors is a tax advisory firm founded in 2006 and headquartered in London, with its own office in the USA since 2008. From its US base in Austin, Texas, the US team handles the sometimes complex US tax affairs of its international clients, both individuals and businesses.

The firm's services include:

• Legally sound formationand ongoingtax and administrativesupportfor US companiesof various US legal forms;

• comprehensive advice before formationon all tax aspects, happily in cooperation with your lawyer and accountant at home;

• Account openingat leading US bankswithout you having to travel to the USA;

• ongoing bookkeeping for US companiesof every kind and in every US state, including companies not formed by the firm;

• US payroll;

• US sales tax registrationand ongoing bookkeeping;

• preparation ofannual financial statements and tax returnsfor US companies of every kind;

• preparation ofindividual tax returns, especially for people with income from Europe and the USA.

115 advantages for US clients of Mount Bonnell Advisors

Clients who have Mount Bonnell Advisors handle their US tax affairs enjoy a range of advantages the firm offers its clients.

The key advantages of working with the firm are:

1. Open-minded, honest advice: At Mount Bonnell Advisors you get no free consultation and no free initial consultation. Because you pay the firm for its advice, the consultation is not a sales pitch in disguise but open-minded and honest. All the cards are put on the table.

2. In your time zone:US clients are looked after from the USA and from London. Whether you are in Europe or in the USA, there is always a contact close to your time zone.

3. Service in English:Most of the firm's clients come from Europe. There is always someone on the team you can talk to in English, and who can liaise between you and colleagues on any part of your case.

4. Qualified people:Everyone at the firm who handles clients' tax work is a qualified US tax professional (CPA) and an accountant authorized by the IRS (Approved E-File Provider).

5. International know-how:Unlike conventional tax experts, who focus purely on one country, Mount Bonnell Advisors has always been international.

12Get advice now on taxes, company formation and moving to the USA

Ifyou are planning a project you may want to carry out in the USA, you have probably already looked closely at the conditions there. Today you can find a wealth of information online on almost any topic, the USA included, in no time.

It is quite common toreach a point where confusion grows and clarity fades. There are simply too many factors to weigh at once. The situation is complex.

You may also have found thatmost local tax advisors in the USA and at homeknow too little about the international pictureto really help you.

Tountangle the knotand clear the way for your next steps, we now offer you aone-hour phone consultation on taxes, company formation and moving to the USA. 

In this consultation we cango through specific technical questions(e.g. tax aspects, a US corporation or an LLC), orsimply talk through the strategic optionsyou are consideringtogether. You decide what we cover and set the pace.

You will find more on the US tax system in our beginner's guide and in our compact introduction to US tax law for European entrepreneurs. All tax topics are collected in our Taxes hub.