For those thinking about retiring in the coming months or years and obtaining a green card, the following information can financially make or break retirement income. In addition to general retirement planning difficulties like estimating one’s lifespan or future costs in retirement (read more), international organization employees who are considering retiring in the U.S. and getting a green card have many additional issues to consider in order to minimize their U.S. taxes, avoid potential IRS penalties, and reduce their U.S. tax reporting complexity. Among these issues, Dale Mason, International Tax Director at The Wolf Group, has identified four key steps to potentially increasing one’s wealth in retirement:
1. Plan the start date of U.S. income tax residency status
Retiring is always a significant financial decision, but transitioning from being a nonresident alien for U.S. income tax purposes to paying U.S. taxes as a resident is critical in terms of timing. Due to the major differences in how nonresidents are taxed (generally only on U.S. income) and how residents are taxed (generally on worldwide income), minor mistakes in the timing of retirement can result in significant tax liabilities. Consideration must be given not only to the date a green card is granted, but also to the number of days spent in the U.S. during the year of retirement. One’s tax status at the time certain items of income are received could have a major impact on the amount of tax that an individual pays for any given year, as some income will be nontaxable to nonresidents or charged at very different rates.
2. Minimize U.S. tax liabilities during nonresidency period
Individuals should review their investment portfolio and consider realizing capital gains on certain appreciated securities while nonresident. In some cases it may be possible to avoid capital gains taxes on stock sales. Selling foreign mutual funds may not only reduce the tax rate one pays on any capital gains but also reduce future complexities related to reporting and paying tax on these investments. Additionally, if one owns appreciated foreign real estate, it may be possible to avoid U.S. taxes on the capital gain from the sale of that property. Planning pension distributions, including whether to take a lump sum distribution, can also provide an opportunity to reduce U.S. tax liabilities.
3. Understand U.S. tax obligations as a resident
Many international organization employees on G-4 visa do not file U.S. tax returns during their careers, so they are unfamiliar with the U.S. tax system. Unfortunately, the U.S. system is one of the most complicated in the world, and the taxation and reporting of non-U.S. assets and income is one of the most complex areas. 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 and reporting obligations before becoming U.S. residents. This will minimize their tax liabilities, avoid substantial potential penalties, and reduce reporting burdens.
4. Reduce tax reporting burdens and complexities
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 avoid substantial penalties charged by the IRS. Moreover, complying with the complex 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.
For more information on implementing these steps for a richer retirement, 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.