Planning on applying for a green card or obtaining lawful permanent residence in the US? If you have significant foreign income or assets, you’ll want to consider how to improve your tax position before you become a US tax resident. A little pre-immigration tax planning can save you a lot in US tax. Once you become a US tax resident, you will pay tax on your worldwide income, regardless of where that income originates or where you live.
Three Tax “Surprises” You Can Avoid
Often new green card holders who don’t do pre-immigration tax planning will learn expensive tax lessons.
1. Toxic Tax Investments
Holding foreign mutual funds and certain types of life insurance outside the US leads to harsh US tax treatment. These investments are may be treated as Passive Foreign Investment Companies (PFICs), and you typically want to avoid having them in your portfolio before becoming a US tax resident. We can help you plan a course of action for these assets, including converting them to a self-directed individual retirement plan (IRA) and other alternatives.
2. Assets with Big Unrealized Gains
Holding assets, like real estate, stock, stock options, or shares of a business, before becoming a US tax resident exposes you to paying US capital gains tax once you sell these assets. Short-term or long-term capital gains tax may apply, so it’s important to decide how to handle these assets before becoming a US tax resident. Tax rates in your home country and international tax treaties factor into the decisions about these assets. We can help you implement a thoughtful plan for your foreign assets with unrealized gains.
3. Foreign Business Ownership
Once you become a US tax resident, your foreign business will likely be considered a controlled foreign corporation (CFC). This exposes your business to a slew of new tax implications, including GILTI taxes.
and US informational reporting requirements. We can help you understand your options to tax-optimize your business. We can advise on elections to treat the business as a partnership, corporation, or disregarded entity for tax purposes. We’ll walk you through the pros and cons of each strategy.
If you’re already a US tax resident and are uncertain of your business tax situation, check out our international business consulting services.
Fast Tax Facts to Know Before You Immigrate to the US
Fact: Your US tax residence status begins on the earlier of the dates you meet the lawful permanent residence test (green card test) or the Substantial Presence Test.
Learn more about the Substantial Presence Test.
Fact: Foreign asset reporting will be required. US tax residents often must file annual informational reports on many types of assets held outside the US—or face large penalties. For instance, bank accounts and other financial accounts held outside the US must be reported each year on the Foreign Bank Account Report (FBAR). Other reporting is required to disclose foreign pension accounts, retirement accounts, life insurance, and ownership in foreign trusts, partnerships, and other entities. Learn more about foreign asset reporting.
Fact: Many pensions and retirement accounts held outside the US will require annual reporting, even if you don’t currently receive distributions. The US may consider your non-US pensions or retirement accounts to be foreign trusts, investment accounts, or another type of foreign asset the requires special treatment. It’s important to understand the US tax implications and reporting requirements for your retirement assets before becoming a US tax resident.
Fact: You may need to take steps to avoid double taxation. Once you become a US tax resident, you may owe taxes in both the US and another country. Fortunately, there are ways to reduce or eliminate the double taxation. For instance, you can take advantage of foreign tax credits or tax treaties to reduce the double taxation.
FACT: Giving up your US citizenship or long-term green card may generate an “Exit Tax.” If you decide to give up your US citizenship or green card (for green cards held in 8 or more years), you must take certain steps to end your US tax residency. These steps are in addition to the steps you take for immigration purposes. On the tax side, you may be subject to an Exit Tax. This tax applies if your income or worldwide net worth exceeds certain thresholds. To learn more, see our information on the Exit Tax.
Pre-Immigration Tax Planning
We help clients with international tax situations:
- Understand the implications of changing citizenship, location of primary residence, residency status of spouse, and many other issues
- Tax-optimize non-US businesses
- Make decisions regarding the holding and reporting of foreign assets
- Properly time the sale of investment assets with unrecognized appreciation
- Determine the most tax-efficient date to become a US tax resident
- Ensure compliance with US and state tax law in filing income tax returns, making estimated tax payments, etc.
Why The Wolf Group?
Since 1983, we’ve worked with clients in the United States and abroad on international tax matters. We have a long history of “cleaning up” complex tax returns, reporting foreign assets, and reconstructing financial records.
Check out our extensive team of CPAs, all with vast international tax experience.
Looking for a Nexia International Partner?
We’re an active member of Nexia International, a global network of independent accountancy, tax and business advisors with over 250 firms around the globe.