Preimmigration Tax Planning

Immigrating to the U.S.? Don’t Forget about Tax.

Immigrating to the United States has many wonderful benefits, but it also includes some challenges. When a person comes to the U.S. as a resident, that person must comply with U.S. tax rules, including paying taxes on world-wide income. U.S. tax law is complex and depends on each person’s individual circumstances. Below is a summary of important considerations that will apply to many potential immigrants. No one should become a U.S. resident without
planning for these consequences.

Who is a U.S. resident for tax purposes?

• A green card holder is treated as U.S. resident for tax purposes by default. However, a green card holder living outside the U.S. may be able to claim nonresident status under an applicable U.S. tax treaty.
• Other non-citizen, non-green card holding individuals may be treated as U.S. resident for tax purposes depending on the individual’s days of presence within the U.S. This test is a rolling test that considers the current year and the prior two years.

How are U.S. citizens and residents taxed?

• All U.S. citizens and residents are taxed on their world-wide income (including among other things salaries, dividends, interest, and capital gains, even if all attributable to non-U.S. companies and businesses).
• In some cases, U.S. residents are taxed on income earned by companies in which they have significant ownership stakes (so-called “controlled foreign corporations”).
• Non-U.S. mutual funds and other companies that have significant amounts of “passive” income or assets may be subject to the “passive foreign investment company” tax rules, which can be taxed at extremely high tax rates. Special tax elections can be made to avoid the worst of these rules, but, in many cases, it is better to sell or give away such assets prior to becoming a U.S. resident.
• In many cases, non-U.S. income is subject to tax in the country in which it was earned. This non-U.S. tax often can be claimed as a credit against U.S. tax, but complex rules can limit the availability of credits.

What are U.S. estate and gift taxes?

• When a U.S. resident gives a gift to any person other than a U.S. resident spouse, that gift may be subject to gift tax.
• In addition, when a U.S. resident dies (or when a nonresident dies holding certain types of property in the U.S.), that person’s estate may be subject to an estate tax.
• Small annual gifts are excluded from gift tax. However, larger gifts may be taxable, subject to a lifetime exclusion. Gifts to any person in excess of the annual exclusion must be reported to the IRS and reduce the lifetime exclusion.
• If a taxpayer has used the total lifetime exclusion, then gifts above the annual exclusion are subject to tax. In addition, the value of a decedent’s estate above the lifetime exclusion is taxed.
• In many cases, gifts made before a person becomes U.S. resident do not count against the lifetime exclusion, if correctly planned, so it is important to work with U.S. advisers and planners before becoming a U.S. resident.

What happens if I leave the U.S. permanently?

• The U.S. imposes a significant “exit tax” on any person who is a U.S. citizen who relinquishes citizenship or their green card. Furthermore, the U.S. imposes this exit tax on a green card holder who has been a “long-term resident” for any part of a total of eight years within the 15-year period prior to the exit date, and who has assets or tax liabilities of certain (relatively low) amounts.
• If you think there is a chance you might become subject to the exit tax regime, you should do careful planning before first becoming a U.S. resident to minimize the amount of tax that might be imposed in the future.

What reporting is required? 

• U.S. residents must report world-wide income on an individual income tax return. If you own interests in companies, you may be required to report information on those companies as schedules to your tax return.
• U.S. residents who have a trust, are the beneficiary of a trust, make gifts of assets, or receive gifts of assets, may be required to file additional tax returns or forms.
• Certain foreign financial accounts must be reported annually on an international information return called a Report of Foreign Bank and Financial Accounts (FBAR). Those assets and certain other non-U.S. assets must be reported on a separate form attached to your tax return. 
• The IRS has the authority to impose significant penalties, interest, and fees for failure to completely, accurately, and timely file U.S. tax and information returns, even if no tax is due. These penalties, interest, and fees can in some cases exceed the total value of the assets that were subject to reporting. Therefore, proper compliance is critical.

This is only a general summary of some important U.S. tax laws and filing rules. Specific requirements vary based on the individual, and tax laws change on a regular basis. Planning can take a lot of time to implement effectively, so it is best to begin the process well before your date of entry into the U.S. Saul Ewing attorneys can help navigate these complex rules.