Before getting a green card, one should consider these four major issues to minimize tax exposure and reporting hassles. Getting a green card is an exciting life-changing event, it allows one to live and work almost anywhere in the U.S. On another hand, the green card holder becomes both a permanent resident for immigration purposes and for tax purposes. The Wolf Group has identified these four major issues so that you may plan your tax affairs before your tax residency changes.
1. Understand U.S. tax obligations as a tax resident
Individuals who have any non-U.S. financial accounts (bank, investment, pension, or life insurance), foreign investments, or an interest in foreign businesses or trusts, must meet important filing requirements in order to minimize exposure to substantial penalties charged by the IRS. It is essential for first-time U.S. taxpayers with non-U.S. assets and income to gain an understanding of their U.S. tax reporting obligations before becoming U.S. tax residents. This will limit tax liabilities, avoid substantial potential penalties, and reduce reporting burdens.
2. Reduce tax reporting burdens and complexities
Complying with the complex U.S. tax reporting requirements can be a huge headache, as it requires gathering detailed information to provide to the IRS each year. In some cases, it may make sense to close, reduce, or consolidate non-U.S. holdings before becoming a U.S. resident. It is advisable to consult with a seasoned tax professional on ways of doing so.
3. Beware! The Exit Tax clock is ticking from the date the green card is received
Generally, if one ceases to be a green card holder after having held a green card in at least 8 of the last 15 tax years (and one day in a calendar year = one year), one may be subject to the burdensome Expatriation Tax, the so called “Exit Tax”, depending on the individual’s tax and financial situation.
If the exit tax is triggered, all of the individual’s worldwide property will be deemed sold for its fair market value on the day before the expatriation date. The net gain from this deemed sale above an indexed exemption is subject to U.S. income tax. Therefore, one should plan ahead carefully if there is a possibility of repatriating to one’s home country.
4. Review investment portfolio to avoid U.S. capital gains tax
Income from the sale or exchange of securities (e.g. stocks, bonds, mutual funds, etc.) by a nonresident is in most cases not considered U.S. source income and is therefore tax-exempt. A U.S. tax resident on the other hand is subject to tax on his/her worldwide income, including any gains arising from the sale of securities. However, a tax advisor can provide nonresidents with tax-saving planning ideas to reduce or even eliminate the tax on their securities. This can result in significant tax savings on income that would otherwise be taxable.
For more information on minimizing your tax liability before becoming a U.S. permanent resident, please contact our New Client Lead, Fan Chen, to set up an appointment. You may reach Fan at (703) 502-9500 x137, or email her at email@example.com