If you’ve already moved to the United States or if you are planning to move to the U.S., there are actions you can take to get your tax affairs in order. It’s important to plan your finances before you become liable for U.S. taxes or find the U.S. trying to tax your worldwide income.
If you’re planning to stay in the United States for an extended period, it’s best to know what your tax status would be and plan accordingly. If you are planning to immigrate, you should assess if you can afford the tax burden.
If the tax burden is too heavy, you have to decide whether you should maintain ties with your home country to claim a nonresident status for tax purposes during the transition year. Timing your green card application and knowing exactly when you become a resident will help you identify the most practical options.
Reminder, it’s important to understand your tax status in the U.S. Our article, 3 Things You Need To Know About Taxes Before Moving To the U.S. contains a helpful guide which you may wish to read before reading this article.
Review your foreign assets and dispose of them if appropriate – U.S. foreign asset reporting requirements are onerous.
In the U.S., there are lots of rules about reporting foreign assets. It’s important for you to understand how your foreign assets, particularly interest in foreign corporations or offshore companies, will be taxed. In some cases, you could be double taxed. Seek the advice of an experienced financial advisor who can help you determine if you should keep or liquidate foreign assets before becoming a U.S. tax resident.
One useful workaround is to change the way the company is treated so that it is not a corporation but instead a pass through entity. This can create what is called a “step up basis” prior to you becoming a U.S. tax resident and can help minimize the tax impact to you. Again, an experienced accountant and financial advisor can assist you in determining the best course of action.
Consider selling assets abroad before becoming a resident alien – capital gains tax in your home country may be lower.
Capital gains tax is another tax you may be able to control before becoming a U.S. resident. If you plan on selling stocks, do it before moving to the U.S. or becoming a U.S. resident. For tax purposes, capital gains are computed based on the original cost (the basis). The U.S. long term capital gains tax is 0-20% depending on your income in the year of the sale of the security. You may also be subject to the Net Investment Income Tax (NIIT) of 3.8% if you exceed certain income thresholds. You may be moving to the U.S. from a country without capital gains tax or with a lower capital gains tax than the U.S. If you sell your stocks prior to coming to the US, you may save a lot, given that the U.S. would require you to pay capital gains tax on that transaction based on the security’s original basis if you were a U.S. resident when you sold the security.
As for losses, you can carry forward accrued losses and use them to offset regular income ($3000 per year) and U.S. capital gains in the future.
Gift assets prior to becoming a U.S. resident – U.S. gift and estate tax rates can be as high as 40 percent.
The maximum rate for estate and gift taxes is at 40 percent. So, if you are planning to move to the U.S. consider if it would be better to dispose of some of your assets as gifts beforehand.
If you have an estate which exceeds the lifetime exclusion of $11.18M, consider setting up a discretionary trust or making an irrevocable gift to a relative who is outside the United States. This, of course, may depend on your home country and the applicable gift tax rates- they may be higher than those in the US!
Once you are a U.S. resident, when your transfers, living or dead, exceed $11.18M, you will be liable for estate and gift taxes. This $11.18M limit is valid through 2025, but it will revert back to $5M by 2026 unless Congress acts to extend it. This change also offers an opportunity to plan ahead especially if you have a lot of property.
If you give away assets or properties prior to becoming a U.S. resident, those past gifts will not be included in this tax-free limit. A trust including the undistributed accumulated income will also be taxable unless it has been funded and set up five years before you become a U.S. resident.
Accelerate or defer income if appropriate, depending on whether your home country or the U.S. have a lower tax rate.
Which tax rate is higher – your home country or the U.S.?
If your home country’s tax rates are lower than the U.S., opt for accelerated income recognition for all services performed outside the United States and for dividends to be paid from a closely held foreign corporation before you gain U.S. resident status. If U.S. tax rates are lower, defer income recognition and wait until you become a resident. By timing the recognition of income with the change in your tax status, you can minimize your taxes without committing tax evasion.
It Pays To Plan
Tax planning should be in your checklist if you’re moving to the United States or staying for an extended time. It’s also helpful to know tax treaties between the U.S. and your country.
By comparing the tax burden between your current country and the U.S. and disposing of properties ahead, you will have a better handle on your finances. Looking into taxation and its implications will not just help you minimize the tax burden, it will also provide a more accurate picture of the true cost of moving to America.
CitizenPath does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
CitizenPath partner MYRA Wealth specializes in financial, investment and tax planning for international and multicultural families in the United States. If you are a U.S. immigrant with complex tax or financial needs, schedule a free consultation.
Disclosure: CitizenPath partners with certain vendors who serve the immigrant community to bring you information about their services. MYRA Wealth is a valued partner, but this is not a sponsored post.