Making the decision to immigrate to the United States is one that requires a lot of thought, paperwork and planning. One of the most difficult aspects is understanding the tax ramifications that come with U.S. resident status.
Unlike most countries, the U.S. taxes residents and citizens on worldwide income. Becoming tax compliant doesn’t only mean understanding domestic filing standards; it also means becoming acquainted with taxation standards for non-U.S. assets and holdings.
Knowing the rules could help you decide whether you decide to remain on a visa or seek citizenship.
Consider your presence in the U.S.
Whether you’re coming to the U.S. as a permanent resident or on a temporary basis (such as a student or temporary worker), it is important to look at your finances prior to applying for your visa. Tax planning must be a part of your immigration process in order to avoid adverse tax consequences.
The reason you need to examine your presence in the U.S. is because the IRS will do the same.
If you have taxable income anywhere in the world and also meet the Substantial Presence Test, you’re legally obligated to pay taxes as a U.S. person—which requires disclosure of global assets. The IRS sees U.S. persons as:
- U.S. citizens
- Legal permanent residents (aka “green card holders”)
- Visa holders passing the substantial presence test
- Persons present in the U.S. without any immigration status and passing the substantial presence test
You should ask yourself the following questions before coming to the United States or applying for citizenship:
- How long will you be in the country?
- What will your employment status be (along with earned income potential)?
You should also consider what you are planning to do with your non-U.S. assets such as real estate, investments and business holdings. Disposing of them after you obtain your resident status will trigger U.S. tax consequences.
Additionally, be mindful that letting your green card lapse doesn’t mean officially giving up U.S. tax status—even if you reside outside of the United States.
Worldwide asset reporting
If you plan to live and work in the U.S. permanently while maintaining your assets and holdings outside of the country, the IRS has additional reporting requirements. This reporting is also mandatory for U.S. citizens and legal permanent residents living outside of the United States.
The IRS provides several different forms and resources for identifying and reporting global income and assets.
||Report transactions with foreign trusts and receipt of gifts
||Information of foreign trust with a U.S. owner
||Report loss from foreign disaster, theft or casualty
||Return by a shareholder of a passive foreign investment company
||Return of U.S. persons with respect to certain foreign partnerships
||Return of U.S. persons with respect to certain foreign corporations
||Return by a U.S. transferor of property to a foreign corporation
||Statement of specified foreign financial assets
||Individuals filing the report of foreign bank & financial accounts
Proper use of these forms and full disclosure of foreign assets is paramount. Attempting to hide, underreport or misattribute foreign assets is fraudulent behavior subject to fines, penalties and even imprisonment.
Working with an experienced tax professional is almost always advised to avoid non-compliance or unintentional mistakes.
Avoid double taxation
Your pre-immigration tax planning should also include looking into any tax-advantaged options for reporting income. All global income of U.S. residents and citizens is subject to taxation. However, foreign income credits and foreign income tax exclusions can help alleviate your U.S. tax burden.
Under certain conditions, presence in the United States may be excluded from the substantial presence test for international students or J visa holders. The U.S. also has tax treaties with other countries that reduce tax rates and provide exemptions from U.S. tax residency.
Recap for pre-planning
Once you become a U.S. citizen, you open yourself up to tax liability on a global scale. For many, it’s worth it to earn the rights and freedoms of citizenship. For others, temporary presence and visas may be the less invasive route.
Aside from personal reasons to seek U.S. citizenship, make sure you’re considering what it means to be a U.S. person in the eyes of the IRS and how that impacts earned income and global wealth. And be sure to enlist the help of an international tax CPA to guide you through the regulations.