Immigration to the U.S.- Tax Planning

As the global commerce moves across the globe faster than ever before, more people move between different countries, crossing borders. We also continue to see the unprecedented trend of digital nomads and global movements of people since the pandemic. Often not discussed, but an important consideration in these movements is tax. When someone immigrates to the U.S., U.S. tax implications should be carefully looked into for planning. The U.S. international taxation is complex and proper tax planning is crucial in avoiding tax disadvantages and optimizing tax strategies before immigration to the U.S.

Tax Residency

The first thing to remember is the U.S. tax residency may or may not be affected by the immigration status. Once someone becomes a U.S. tax resident (i.e. “U.S. person”), the U.S. tax system reaches to the worldwide income of that person. The worldwide assets of a U.S. person is also subject to various U.S. international tax reporting regimes. This is why tax should never be an afterthought in immigration planning.
There are mainly two ways for a non-U.S. citizen to be a U.S. tax resident:

• Green card (Lawful permanent residency)
• Substantial presence test

Under the substantial presence test, the U.S. day count is the deciding factor for the U.S. residency. Simply speaking, if a non-U.S. citizen is physically in the U.S., whether for personal or business reason, and the physical presence exceeds 183 days on a weighted basis for a three-year lookback period, that person is considered a U.S. person – establishing the U.S. tax residency.
The third way for a non-U.S. citizen to be a U.S. person is by making a first year election to be treated as a U.S. resident alien. This election must meet certain conditions and typically is made when the spouse of such a non-U.S. citizen is already a U.S. person subject to U.S. tax residency. The election is typically made in order to achieve optimal tax positions when a non U.S. person is married to a U.S. person.

Income Tax Complexity for U.S. Immigrants

As mentioned before, the U.S. international taxation is not only far reaching but also has complex reporting requirements for both income tax reporting and information reporting. The key aspects for pre immigration consideration are:

1. Worldwide taxation of income
2. Anti-deferral tax regimes, consisting of Subpart F, Global Intangible Low Tax Income (GILTI), and Passive Foreign Investment Income (PFIC).
3. Reporting for certain foreign assets, including (but not limited to):
   • FBAR (Foreign Bank Account Reporting) : reported to FinCEN, not the IRS
   • FATCA (Specified Foreign Financial Assets)
   • Controlled Foreign Corporation (Form 5471) : a foreign corporation of which more than 50% of the vote or value is owned by U.S. shareholders with 10%+ ownership.
   • Passive Foreign Investment Company (Form 8621) : common example is foreign mutual funds.
   • Foreign partnerships (Form 8865)
   • Foreign branch (Form 8858) : including foreign disregarded entity or rental property activities, depending on various factors

Avoiding Double Taxation : Foreign Tax Relief and Tax Treaties

Under the U.S. law, there are two mechanisms that help reduce tax burdens for international taxpayers.

1. Foreign Tax Relief – taxpayers could claim a credit for income taxes paid to foreign countries if the tax was paid on the same income subject to the U.S. tax. There could also be a deduction for certain foreign tax, or exclusion available for foreign earned income when eligibility is met.
2. Tax Treaties – The U.S. currently has tax treaties with a number of foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from U.S. taxes on certain items of income they receive from sources within the U. S. These reduced rates and exemptions vary among countries and specific items of income. Under these same treaties, residents or citizens of the U. S. are taxed at a reduced rate, or are exempt from foreign taxes, on certain items of income they receive from sources within foreign countries. However, most income tax treaties contain what is known as a “saving clause” which prevents a citizen or resident of the U. S. from using the provisions of a tax treaty in order to avoid taxation of U.S. source income.

This blog’s discussion covers the brief overview of the U.S. international taxation which needs to be part of planning prior to the immigration to the U.S. Stay tuned for more detailed discussion on each of these items.
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