Pre-Immigration US Tax Planning for Future US Residents & Citizens
If you’re moving the the United States, get ready for our crazy tax system. Most importantly, if you will become a US resident, be prepared for US tax on your worldwide income. You need to do your pre-immigration US tax planning before you arrive to minimize these taxes.
Let me begin by defining what I mean by a US “resident.” Then I’ll review your pre-immigration tax planning options and what you need to do NOW before landing in the United States.
The United States taxes its citizens and it’s green card holders on their worldwide income. It doesn’t matter where you live or where your business is located. So long as you hold a blue passport or a green card, you will pay US tax any income you earn.
Likewise, the US taxes its residents on their worldwide income. A US resident is anyone who spends 183 days or more in the US in a calendar year. If you spend more than 183 days in one year, and then fewer days the next year, you might be a US resident for both years because a weighted average is used to determine residency.
- I won’t bore you with the details of how to calculate the average. Suffice it to say, if you spend significant time in the United States, Uncle Sam wants his cut.
A US tax resident is ANYONE who spends 183 days a year in the country. Even if you are here on a tourist visa, or illegally, you are a tax resident and expected to pay US tax on your worldwide income. Your legal or immigration status is separate from your tax status.
US Pre-Immigration Tax Planning Techniques
If you plan to become a US resident, green card holder or citizen, you need pre-immigration tax planning before you move to the America. Some of these strategies require you to plan years in advance. So, if you are working towards residency in the United States, stop and think about taxes NOW.
Minimizing US Tax on the Sale of a Foreign Business
When you sell a foreign business after you become a US resident, you pay US tax on the gain from that sale. This means you’ll pay US tax on all of the appreciation and value that has accrued in your business over the years.
For example, let’s say you started a business in Hong Kong 10 years ago. You invested $100,000 and now the business is worth $1 million. You move to the US and sell this Hong Kong company the following month. The IRS expects you to pay US capital gains tax on $900,000.
Obviously, the simple way to avoid this tax is to sell your business before you move to the United States. I suggest you sell the business and then wait a month or two before traveling to the United States to make sure there are no issues.
But, what if you’re not ready to sell today? What if you want to move to the United States for a year or two and then sell? Serious planning and US filings are required to minimize your US tax obligations.
You can basically sell the business to yourself by making certain elections in the United States for your Hong Kong business. By converting the business from a corporation to a partnership or disregarded entity, you are selling it to yourself for US tax purposes. Do this before moving to the US, and you will have no US taxes due on the phantom sale.
Then, when you sell the company again in one or two years, you will only pay US tax on the appreciation in value from the day you sold it to yourself. This is called Stepping Up Basis. Here’s an example:
You plan to move to the United States on January 15, 2017. So, you file forms with the US IRS to treat your Hong Kong company as a partnership on December 15, 2016. This triggers a sale of the assets to you, but no tax is due in the US because you are not a US resident for tax purposes. The value of the business on December 15, 2016 is $900,000.
Then, on December 15, 2018, you sell the business for $1 million dollars to a third party. Because of the pre-immigration tax planning you did along the way, you will only pay US tax on the $100,000 of appreciation that accrued from December 15, 2016 to December 15, 2018.
Another business income tax planning tool is to recognize as much income as possible before you move to the United States. You pay yourself as much in salary and bonuses as possible to deplete the value of the Hong Kong company before you move to the United States.
Note that salary from a foreign corporation will be taxed at about 35% Federal plus your State (maybe 12%). So, taking as much in salary before moving to the US can save you big time. Even if it requires borrowing money from banks or other sources, accelerating your income can be beneficial.
Offshore Trusts in Pre-Immigration Tax Planning
When you move to the United States, you need to worry about business tax, personal income tax (salary and capital gains) and death taxes. High net-worth residents pay a tax on the value of their worldwide assets when they pass away.
- United States death tax applies to residents, green card holders and citizens with assets of more than $5.45 in 2016 and the tax rate is 35% to 40%.
You can minimize or eliminate the US estate tax by giving away your assets before you move to the United States. Most transfers after you become a resident will be subject to US gift tax, which is 40% plus your state.
This form of pre-immigration tax planning can also reduce your US personal and business income taxes. If you give your assets to family who will not be residents of the United States, America can’t tax those assets when sold or as business income is generated.
Most clients want to maintain control over their assets while they are alive. They don’t want to pay US income or estate taxes, but they do want to manage the assets or business for the benefit of their heirs.
This is where offshore trusts come in to pre-immigration tax planning.
When you setup an offshore trust to manage your assets, they’re removed from your US estate and the death tax doesn’t apply. Also, gains or income from these assets can be removed from your US income tax if you plan ahead.
If you set up and fund an offshore trust at least 5 years before becoming a US resident, the income generated in that trust will not be taxable to you in the United States.
Thus, if you are thinking about becoming a US resident, or moving to the United States is a possibility (even a remote possibility), you would do well to create an offshore trust and engage in some pre-immigration tax planning now.
If you can’t meet the 5 year threshold, there are several benefits to creating an offshore trust before moving to the United States. For example, an irrevocable offshore trust can reduce transfer tax, estate / death tax, and protect your assets from creditors. Considering that the United States is the most litigious nation on earth, asset protection is an important part of pre-immigration planning.
I hope that you have found this information on pre-immigration tax planning to be helpful. For more information, and to consult with a US attorney experienced in these matters, please contact me at firstname.lastname@example.org. All consultations are free and confidential.