Eases U.S. Tax Implications
By Joseph Saka
As immigration to the United States continues to surge, South Florida, in particular, continues to be a choice destination for Latin American citizens to invest their assets, conduct business and, in many cases, make their permanent home. Those immigrants seeking U.S. residency find that the path to citizenship offers a wealth of opportunities as well as a range of new responsibilities, including paying U.S. income, estate and gift taxes. Failing to prepare in advance of one’s move to America – whether temporarily or permanently – can be quite costly. Conversely, taking the time to understand U.S. tax laws and to plan and implement tax-efficient strategies before taking up permanent residence in the U.S. can ultimately result in significant tax savings and preservation of wealth.
Understanding U.S. Resident Tax Status
In the United States, an individual’s immigration status differs from his or her tax status. In most situations, once individuals apply for green cards or meet the thresholds of the substantial presence test, they could be considered income tax residents, who, like U.S. citizens, must report and pay taxes on their worldwide income. Before that point, they may be considered nonresident aliens, who pay tax only on income derived from U.S. sources.
Residency for income-tax purposes differs for estate and gift taxes. While the income-tax test is fairly defined, the determination of whether someone is a U.S. domiciliary, and, therefore subject to estate tax on their worldwide assets or gift tax on gifts of U.S. situs assets, is a facts and circumstances test. Additionally, it should be noted, that a non-U.S. domiciliary may be subject to an estate tax on his or her U.S. situs assets only.
Prior to becoming U.S. income tax resident aliens, immigrants have a unique planning opportunity to reduce their future U.S. tax liabilities before stepping foot on American soil. Overriding plans should focus on implementing specific strategies that accelerate income, defer losses and maximize tax efficiencies of estates and business entities prior to U.S. immigration.
Accelerate Income and Gains
Because foreign-source income is not subject to U.S. income tax before individuals gain resident alien status, it behooves future immigrants to realize income and gains before they seek U.S. citizenship. This acceleration of income may include collecting outstanding accounts receivables; distributing accumulated earnings and accelerating interest payments; and even selling or gifting assets before one becomes a resident alien of the U.S. For example, immigrants who own businesses in foreign countries may reduce their future taxable U.S. income by accumulating business earnings and paying themselves dividends before becoming U.S. resident aliens. While these immigrants may face tax ramifications on those payments in their home countries, they may be able to avoid bringing that income into the U.S., where they may pay higher taxes on the amount.
In addition, future U.S. income tax residents may avoid potential taxes on appreciated assets by selling them at fair-market value before moving to the U.S. If future income tax residents later repurchase those assets, they will receive a step-up in the assets’ cost basis, which will reduce full appreciation value and the taxpayer’s taxable gains when they sell the assets stateside.
Defer Losses and Deductible Expenses
The U.S. tax system allows income tax residents to reduce their taxable income by claiming losses and certain expenses against their gross worldwide income. As a result, immigrants may consider delaying losses and deductable expenses until after they gain U.S. tax residency. For example, if an immigrant’s stock portfolio decreased over the past 10 years, he or she may consider harvesting those losses and bringing them to the United States, where a sale of the stock may offset gains realized from another income-producing source.
Gift Assets and Restructure Estate Plans
Unlike the resident alien tests that rely on hard facts to determine one’s U.S. income tax responsibilities, one’s exposure to U.S. estate taxes considers a more subjective principle, namely one’s domicile or physical presence in and “intent” to remain in the states for an unlimited amount time. Determining domicile requires analysis of various factors, including the location of one’s business, home and personal belongings; whether or not the individual held a U.S. driver’s license or used U.S. issued credit cards; and the amount of time the individual spends in the U.S. and in other countries. Under the tax code definition of domicile, a foreign citizen may be considered a nonresident alien domiciled in the United States and thus subject to gift and estate taxes, also referred to as transfer taxes.
The best strategy for minimizing one’s estate taxes is to reduce the value of his or her taxable estate. This can be accomplished by gifting tangible personal property, including jewelry, art or a home sited outside the U.S. to family members prior to immigration or creating a trust, foreign corporation or other tax-efficient vehicle to hold those assets outside the purview of the U.S. tax system. However, with many of these estate tax planning instruments, estate owners must take special care to ensure they neither exclude U.S.-based heirs from benefiting from trust assets in the future nor fall under the five-year transfer rule or the throwback rule relating to undistributed net income. Yet, estate owners must of course consider the practical approach of their actions. Gifting assets away or losing control over investments is never desirable, and such activities need to be evaluated irrespective of their tax benefits. Through appropriate planning, including establishing goals and objectives and aligning them with the tax system, individuals may identify a more tax efficient manner to accomplish their stated aims. For these reasons, as with all U.S. tax planning, individuals should meet with experienced advisors and accountants to weigh the pros and cons of each potential tax savings strategy.
Immigrating to the United States is an endeavor that individuals must undertake only with the benefit of experienced legal and tax counsel. In addition, attention should be paid to allow ample time for clients and their counselors to address a complete range of tax planning strategies and their consequences, including those related to business entities, insurance policies and retirement plans. While the usual approach for immigrants to focus on obtaining visas first and then seeking tax advice once stateside could result in severe tax ramifications. The preferable strategy is for these individuals to put tax planning ahead of immigration.
For more than 30 years, the advisors and accountants with Berkowitz Pollack Brant have helped foreign citizens navigate complex U.S. tax laws and implement strategies that address unique circumstances and aim to minimize tax liabilities and preserve wealth.
About the author: Joseph L. Saka, CPA/PFS, is director in charge of the Tax Services practice at Berkowitz Pollack Brant. He may be reached in the Miami CPA firm’s office at (305) 379-7000 or via e-mail at firstname.lastname@example.org.