Key insights
- The rules for determining when U.S. residency starts for income and estate tax purposes are quite technical. Many individuals unfamiliar with the U.S. tax system are unpleasantly surprised to find they became U.S. tax residents without realizing it.
- Key considerations include capital gains taxes, estate taxes, passive investment assets, and disclosure of foreign investments.
- By understanding these rules and planning accordingly, you can help reduce your tax exposure and provide a smoother transition to U.S. residency.
Reduce tax exposure during your transition to U.S. residency.
Individuals should understand U.S. tax laws before becoming a U.S. person (citizen, green card holder, or resident). This can help effectively handle U.S. income and estate taxes that might otherwise apply to appreciation in your pre-immigration assets.
The rules for determining when U.S. residency starts for income and estate tax purposes are quite technical. Many individuals unfamiliar with the U.S. tax system are unpleasantly surprised to find they became U.S. tax residents without realizing it.
Explore key items to consider before becoming a U.S. person:
Capital gains taxes
If a foreigner becomes a U.S. citizen or tax resident and then sells assets, they are subject to U.S. income tax on the entire gain, including the appreciation accumulated while the individual was a nonresident. Making selected U.S. tax elections for foreign investments or companies — or selling and re-investing in new investments — before establishing U.S. residency may allow an individual to realize gains free of U.S. income tax.
Passive investment assets
It can be highly inefficient for a U.S. citizen or tax resident to own passive investment assets through a foreign corporation. Doing so may cause long-term capital gains and qualified dividends — which are normally taxed at favorable U.S. rates — to be taxed at significantly higher ordinary income tax rates.
Therefore, those looking to immigrate often consider liquidating the foreign corporation with passive investments or making an IRS election to deem such a liquidation (solely for U.S. tax purposes). In some cases, this may involve converting the foreign corporation into a different type of legal entity.
Disclosure of foreign investments
The IRS has strict rules about disclosing foreign investments. A U.S. citizen or tax resident must timely file IRS forms to disclose interests in and contributions to foreign entities, ownership of foreign financial assets and accounts, signature authority over foreign financial accounts, distributions from foreign trusts, and gifts from foreign persons. Failure to file the required forms can result in significant civil and criminal penalties.
Estate taxes
The U.S. federal estate tax is currently imposed at rates of up to 40% of the fair market value of an individual's assets. Also, some U.S. states have their own estate or inheritance tax.
The extent to which assets must be included in an individual's taxable estate depends on various factors, including whether the decedent was a U.S. domicile at the time of death or whether a non-domicile decedent was domiciled in a country with an estate tax treaty with the U.S.
Planning techniques using trusts can be an effective way to designate who in your family has rights to these assets, whether they are U.S. or foreign, as well as manage both the current income from those trust assets and potential gift and estate taxes. Additionally, pre-immigration gifting can significantly reduce tax exposure.
How CLA can help with U.S. taxation and immigration
By understanding these rules and planning accordingly, you can help reduce your tax exposure and provide a smoother transition to U.S. residency. Let us help you navigate these complexities and protect your financial future.
Contact us
Reduce tax exposure during your transition to U.S. residency. Complete the form below to connect with CLA.If you are unable to see the form below, please complete your submission here.