US Pre-Immigration Tax Planning

For foreign nationals looking to relocate to the U.S., we offer pre-immigration planning services. Given the worldwide reach of the U.S. income and transfer-tax systems, timing is essential. Once an individual becomes a U.S. resident for U.S. tax purposes, he or she may be exposed to U.S. income taxes on worldwide income and estate and gift taxes on worldwide assets. With proper planning, a taxpayer’s exposure to these taxes can be minimised.

There are 2 options available

1. Pre immigration tax planning sessions over Zoom for $400 per hour.

  1.  During the Zoom call we review all your assets and income streams and explain the US tax treatment
  2. If the US tax treatment is negative we may advise on mitigation strategies
  3.  If the US tax treatment is acceptable, then we leave it as is and move onto the next item
  4. Beyond income taxes, we also discuss potential gift and estate tax consequences and advise accordingly

Read more about what we discuss in your Zoom sessions here:
https://www.htj.tax/us-pre-immigration-planning/

2. Our Holistic Pre Immigration Tax Package for $4,500

  1. Understanding that you will be taxed on your worldwide income after becoming a US taxpayer, we gather all your financial details
  2. We then mathematically model the full tax impact of you becoming a US taxpayer
  3. Armed with this data, we explain how US taxes are impacting various asset classes.  More importantly, we make recommendations as to how such taxes can be mitigated or even completely eliminated
  4. Beyond income taxes, we also discuss potential gift and estate tax consequences and advise accordingly

Strategies often used in US Pre-Immigration Planning:

  1. PFIC Mitigation: This strategy aims to avoid punitive taxation on certain non-US investments like mutual funds, life insurance policies, or pension plans that may be classified as Passive Foreign Investment Companies (PFICs). Holding passive assets through offshore corporations does not easily defer passive income due to US antideferral rules. However, certain variable life insurance products can defer income, potentially avoiding US income and estate taxes if structured correctly. PFICs are foreign corporations meeting specific criteria, and many foreign mutual funds, pension funds, money market accounts, and some REITs could fall under this category.
  2. Accelerating Income: This strategy prioritizes realizing non-US source income while deferring losses and deductible expenses. Accounts receivables, stock options, accumulated earnings from foreign entities, taxable deferred compensation plans, and notes from installment sales, are collected. Attention should be given to assets with substantial built-in gain.
  3. Basis Step Up: To minimize US taxation on appreciated assets acquired before moving to the US, individuals use a planning technique with no tax consequences in their country of origin. Engaging in a transaction before relocating to the US treats it as a sale of the property for US tax purposes, while remaining non-taxable for foreign country purposes.
  4. Foreign Tax Credit: For business holdings in high-tax jurisdictions outside the US, this strategy addresses double taxation. Earnings are first taxed in the foreign jurisdiction and again in the US (at a fixed corporate rate of 21% and a maximum rate of 37% for individuals) upon distribution to the US resident. Certain structures allow the US resident to credit the foreign taxes paid against their US taxes, eliminating US taxation on foreign earnings. Treating a foreign entity as a disregarded entity for US tax purposes, individuals credit the foreign taxes paid against their US income taxes on the same foreign income.
  5. Qualified Dividends: This strategy is suitable for business holdings in low-tax jurisdictions. It involves repatriating earnings through a qualifying treaty country, subjecting the earnings to lower taxation rates (rather than higher ordinary rates of up to 37%) and avoiding certain US taxes.
  6. Trusts: Finally, we help individuals establish trust before moving to the United States. A trust is a legal structure that holds assets in the name of the trust rather than the individual transferring the assets. The earnings are distributed to the person(s) designated in the trust. Asset protection, probate avoidance, and estate tax blockers are not typically considered tax plays.

Let's talk about Pre immigration Tax Planning for the USA

There are no adverse consequences, other than transaction costs, to engaging in tax planning before immigrating to the United States. However, failing to engage in any tax planning before moving to the United States may result in significant adverse tax consequences that significantly outweigh the transaction costs of pre-immigration tax planning. The U.S. Tax Code was written with an implicit understanding that wealthy individuals would engage in tax planning to minimize taxes. Planning to minimize taxes is not considered tax evasion in the United States, but failing to report taxes is, and it carries significant penalties. Tax planning is a part of the “American Way.” If an individual fails to engage in tax planning, that person is essentially donating to the U.S. Treasury the excess taxes that he or she should have saved.

Typical US Pre-Immigration Tax Planning Approach Taken by Qualified Tax Experts​

Qualified tax professionals conduct pre-immigration tax planning by following these steps:

1. Gather information from the client. The tax professional will need to gather information from the client, such as their citizenship, visa status, income, assets, and investments. This information will be used to assess the client’s current tax situation and identify potential tax risks.

2. Analyze the tax laws. The tax professional will need to analyze the US tax laws, as well as the tax laws of the client’s home country. This will help the tax professional understand the client’s tax liability and identify potential tax planning strategies.

3. Develop a tax plan. The tax professional will develop a tax plan tailored to the client’s specific needs and goals. The tax plan may include strategies to reduce taxes, such as transferring assets to a foreign trust or donating assets to charity.

4. Implement the tax plan. The tax professional will help the client implement the tax plan. This may involve changing the client’s financial arrangements or filing amended tax returns.

5. Monitor the tax plan. The tax professional will monitor the tax plan to ensure that it is still effective. The tax professional will also make adjustments to the plan as needed, such as if the client’s circumstances change.

Do Tax Treaties Work at the State Level Too?

No, international tax treaties do not always work at the state level. The United States has entered into tax treaties with over 60 countries, but these treaties only apply to federal taxes. Tax treaties do not cover state taxes.

There are a few exceptions to this rule. For example, some states have adopted the provisions of certain tax treaties into their own state tax laws.

This means that taxpayers in those states may be able to claim certain tax deductions or credits that are available under the tax treaty.

In addition, some states have reciprocity agreements with other states. Reciprocity agreements allow residents of one state to file a single state tax return, even if they work in another state. This can help to avoid double taxation.

However, for the most part, international tax treaties do not work at the state level. If you are a resident of one state and you work in another state, you may be subject to tax in both states. You will need to consult with a tax advisor to determine your specific tax liability.

Here are some examples of states that have adopted the provisions of certain tax treaties into their own state tax laws:

  • Indiana
  • Illinois
  • Michigan
  • New York
  • Ohio

These states have adopted the provisions of the U.S.-Canada tax treaty, which allows residents of both countries to claim certain tax deductions and credits. For example, residents of Indiana who are also residents of Canada can claim a deduction for alimony paid to a spouse who is a resident of Canada.

It is important to note that even if a state has adopted the provisions of a tax treaty into its own state tax laws, there may still be some differences between the state tax laws and the tax treaty. This is because the state tax laws may be more restrictive than the tax treaty. For example, state tax laws may not allow taxpayers to claim all the deductions and credits available under the tax treaty.

If you are a resident of a state that has adopted the provisions of a tax treaty into its own state tax laws, you should consult with a tax advisor to determine your specific tax liability.

How to Find the Right Tax Expert for Your US Pre-Immigration Tax Planning

Here are some tips on how to choose the right international tax advisor:

  • Consider your specific needs. What are your specific tax concerns? Do you need help with cross-border tax planning, compliance, or dispute resolution? Once you know your needs, you can start to narrow down your search for an advisor.
  • Get recommendations from your network. Ask your friends, family, colleagues, and business associates for recommendations for international tax advisors. This is a great way to get started and learn about the experience and reputation of different advisors.
  • Do your research. Once you have a few names, do some research online and in industry publications. Look for advisors with experience and qualifications in your specific area of need and a good reputation. Ensure the advisor is qualified and licensed.

Choose an advisor you feel comfortable with. It is important to choose an advisor whom you feel comfortable with and whom you can trust. After all, you will be sharing a lot of personal and financial information with them.

Here are some additional factors to consider when choosing an international tax advisor:

  • The advisor’s experience: How much experience does the advisor have with international tax matters? Do they have experience with the specific countries and jurisdictions that you are concerned about?
  • The advisor’s fees: How much are the advisor’s fees? Are their fees reasonable?
  • The advisor’s communication style: How does the advisor communicate? Are they easy to understand? Are they responsive to your questions?
  • The advisor’s availability: How available is the advisor? Are they available to meet with you when you need them?

Understanding PFICs Tax Disadvantages and Mitigation Strategies

While many portions of the U.S. tax code possess confusing and sometimes harsh rulings, the tax regime for Passive Foreign Investment Companies (PFICs) is almost unmatched in its complexity and almost draconian features. Countless times, our international clients have come to us to prepare what they thought would be straightforward tax returns – only to later learn that the small investment they had made in a non-US mutual fund was now subjecting them to all the concomitant filing requirements and tax obligations.

History

The PFIC tax regime was created via the Tax Reform Act of 1986 with the intent to level the playing field for US-based investment funds (i.e., mutual funds). Prior to the legislation of 1986, U.S.-based mutual funds were forced to pass-through all investment income earned by the fund to its investors (resulting in taxable income). In contrast, foreign mutual funds were able to shelter the aforementioned taxable income as long as it was not distributed to its U.S. investors.

After the passage of the Tax Reform Act of 1986, the main advantage of foreign mutual funds was effectively nullified by a tax regime that made the practice of delaying the distribution of income prohibitively expensive for most investors. To employ this punitive regime, the IRS requires shareholders of PFICs to effectively report undistributed earnings via choosing to be taxed through one of three possible methods – Section 1291 Fund, Qualified Election Fund, and Mark-to-Market Election.

When Should an Immigrant Begin US Pre-Immigration Tax Planning?

Pre-immigration tax planning is crucial for those contemplating a move to the US. Ideally starting years in advance, this process offers the chance to mitigate tax obligations and maximize financial potential.

Key Strategies in US Pre-Immigration Tax Planning:

  • PFIC Mitigation: This approach aims to prevent harsh taxation on certain non-US investments like mutual funds, life insurance policies, or pension plans that could be categorized as Passive Foreign Investment Companies (PFICs). Holding passive assets through offshore corporations doesn’t often defer passive income due to US antideferral rules. Yet, properly structured variable life insurance products might defer income, potentially sidestepping US income and estate taxes. PFICs encompass foreign corporations meeting specific criteria, possibly including various foreign mutual funds, pension funds, money market accounts, and select REITs.
  • Income Acceleration: This tactic involves realizing non-US source income while delaying losses and deductible expenses. It encompasses collecting accounts receivable, stock options, earnings from foreign entities, taxable deferred compensation plans, and notes from installment sales. Special attention are given to assets with significant built-in gain.
  • Basis Step Up: To minimize US taxation on appreciated pre-move assets, individuals employ a tax-neutral technique in their home country. Completing this transaction before moving to US, deems it a taxable event for US tax purposes while maintaining its non-taxable status in the originating country.
  • Foreign Tax Credit: Addresses double taxation in high-tax foreign business jurisdictions, this method involves crediting foreign taxes paid against US taxes. By treating a foreign entity as disregarded for US tax purposes, individuals can apply foreign tax credits to their US income taxes on the same foreign income.
  • Qualified Dividends: Ideal for holdings in low-tax foreign jurisdictions, this strategy involves repatriating earnings through a qualifying treaty country, subjecting them to lower tax rates instead of higher ordinary rates of up to 37%, thus sidestepping certain US taxes.
  • Trusts: Establishing trusts before moving to the US is advisable. Trusts legally hold assets under their name, distributing earnings to designated beneficiaries. While mainly addressing asset protection, probate avoidance, and estate tax issues, trusts don’t typically serve as direct tax strategies.

How Substantial Foreign Company Holdings Impact US Taxes?

Form 5471, officially called the Information Return of U.S. Persons with Respect to Certain Foreign Corporations, is an Information Statement (Information Return) (as opposed to a tax return) for certain U.S. taxpayers with an interest in certain foreign corporations.

The purpose of it isn’t to file tax information but rather so the IRS has a record of which U.S. citizens and residents have ownership in foreign corporations. The IRS wants to prevent people from hiding overseas assets, and having this information helps it do that. Because this form is an informational form, it most likely doesn’t affect how much you have to pay in taxes—unless you fail to file, in which case you’ll have to pay a penalty.

There are exceptions to this norm—for example, if you are a Controlled Foreign Corporation (CFC) shareholder, Form 5471 may affect your income in the form of the GILTI tax (Global Intangible Low-Taxed Income).

Reporting requirements can range from basic details, such as the percentage of stock owned by the taxpayer and company information, to disclosing the entire income of the corporation through financial statements and balance sheets.

This is why we strongly recommend seeking guidance from an experienced tax team to navigate the process and ensure you’ve completed all necessary filings, thereby avoiding penalties.

Let's Talk About FBARs

U.S. citizens and permanent residents must report worldwide income to the I.R.S., even when paying taxes elsewhere. Additionally, you must file an annual FBAR (now called FinCEN Form 114) to disclose your foreign bank accounts if their aggregate value exceeds $10,000 at any point during the year. The penalties for either failure are substantial, potentially even resulting in criminal consequences. FBAR penalties are even more severe than those for tax evasion.

According to the FBAR instructions, U.S. persons include U.S. citizens and U.S. residents. Similarly, the FBAR regulations state that a U.S. person is a citizen of the United States or a resident of the United States, meaning “an individual who is a resident alien under 26 USC 7701(b) and the regulations thereunder.”

A careful reading of the statute, along with a review of the relevant regulations, reveals that Section 5314 encompasses two distinct requirements: filing FBARs and retaining specific records related to foreign accounts. Concerning the former, the relevant regulation (31 C.F.R. §103.24) mandates the following:

Each person subject to the jurisdiction of the United States (excluding a foreign subsidiary of a U.S. person) who possesses a financial interest in, or signature or other authority over a bank, securities, or other financial account in a foreign country must report such a relationship to the [I.R.S.] for each year in which the relationship exists. Furthermore, they should provide the information specified in a reporting form prescribed by the Secretary for submission by such individuals.

Preimmigration Tax Planning: Which US Bound Migrants Need It?

Pre-immigration tax planning is important for those wishing to migrate to the USA because it can help minimize their tax liability and avoid unexpected surprises. Here are some of the benefits of pre-immigration tax planning:

  • It can help you identify and understand your tax obligations. The USA has a complex tax system, and it can be difficult to understand all of your tax obligations if you are not familiar with the system. Pre-immigration tax planning can help you identify and understand your tax obligations so that you can plan accordingly.
  • It can help you reduce your tax liability. There are a number of strategies that you can use to reduce your tax liability.
  • It can help you avoid any unexpected surprises. USA tax laws are constantly changing. Staying up-to-date on the latest changes is important. Pre-immigration tax planning can help you avoid any unexpected surprises by making sure that you are aware of the latest tax laws.

If you are considering migrating to the USA, it is important to speak with a tax advisor to discuss your individual circumstances and develop a pre-immigration tax plan. This will help you minimize your tax liability and avoid any unexpected surprises.

Here are some additional tips for pre-immigration tax planning:

  • Start planning early. The sooner you start planning, the more time you will have to gather all the necessary information and make informed decisions.
  • Get professional help. A tax advisor can help you understand the US tax system and develop a tax plan that is right for you.

Are Trusts or Foundations Useful in US Pre-Immigration Tax Planning?

Until 1969, the term “private foundation” lacked definition in the US Internal Revenue Code. Post-1969, any US charity qualifying under Section 501(c)(3) of the IRS Code as tax-exempt is a “private foundation” unless it proves itself otherwise. Unlike public charity. US private foundations generally face a 1% or 2% excise or endowment tax on net investment income.The US “Foundation Center” defines a private foundation as a nonprofit, nongovernmental organization with a fund managed by trustees. Hopkins (2013) listed four private foundation traits, including an endowment:
  • It’s a charitable organization under general charity rules.
  • Funding usually comes from one source, like an individual or company.
  • Annual costs are covered by endowment earnings, not continual donations.
  • It awards grants to other charities, not just its programs.
Structure-wise, private foundations are often nonprofit corporations named after benefactors, but can be Trusts. Benefactors express charitable goals (e.g., cancer research grants) during their lifetimes, making tax-deductible donations. The foundation can also be funded via wills, trusts, or qualified plans/IRAs. IRS recorded 115,340 US private foundations in 2008, 110,099 grant-making and 5,241 operating. About 75% file annual IRS reports.
 
After IRS tags a foundation as private, its funding and governance define its type: Family, Private Operating, or Corporate Foundation.
 
Trusts date back to common law jurisdictions from the 12th century. A trust involves a trustee holding assets for beneficiaries. It’s a relationship, not a distinct entity. A trust starts when a settlor transfers assets to trustees who manage and potentially grow them until distribution to beneficiaries. Though trustees hold legal ownership, beneficiaries have a beneficial interest, so trustees only manage assets on their behalf.
 
Trust types vary; some provide income to individuals while others give trustees discretion on income and capital distribution based on settlor wishes. Trusts facilitate family succession planning, ensuring wealth management after a settlor’s passing, delaying beneficiaries’ access to wealth until they’re responsible. This also shields assets from personal debts and offers potential tax advantages. The appeal of trusts lies in asset protection, succession, and estate planning.

Let's Talk About Dealing with Late Tax Reporting for Overseas Assets

The streamlined procedures are designed to provide taxpayers in such situations with:
  • A streamlined procedure for filing amended or delinquent returns, and
  • Terms for resolving their tax and penalty obligations.
First offered on September 1, 2012, the streamlined procedures have been expanded and modified to accommodate a broader group of U.S. taxpayers.
Penalties Avoided under IRS Streamlined Procedures 
The great news about the Streamlined Filing Procedures is that the IRS waives all late-filing and late-payment penalties for those who qualify and submit their completed Streamlined filing.If you qualify for the program and comply with all the instructions for filing, you will not be subject to failure-to-file, failure-to-pay, or FBAR penalties.Participants in the IRS Streamlined Procedures avoid several potential onerous penalties, including:
  • Failure-to-file penalty – 5% of the taxes owed for each month outstanding (capped at 25% of the total tax liability)
  • Failure-to-pay penalty – 0.5% of the taxes due for each month outstanding (no cap)
  • Accuracy-related penalty – an additional 20% penalty may apply if your income is substantially understated
  • Civil penalties for international returns (e.g., Forms 5471/8865/8858) – $10,000 penalty per year per entity
  • Criminal Penalties – A willful violation can result in the imposition of criminal penalties, which include additional fines and jail time.

We have significant experience assisting our clients with complicated, international tax issues. The following list represents some of the areas in which we have provided both planning and compliance services for our clients:

  • US shareholders of foreign corporations
  • US partners in foreign partnerships
  • US grantors and beneficiaries of foreign trusts
  • US shareholders of Passive Foreign Investment Companies (PFICS)
  • Reporting for Foreign Bank and Financial Accounts (FBARs)
  • Blocked income reporting for deferral of tax in currency restriction situations
  • Donations to foreign charities by US private foundations via expenditure responsibility grants
  • Income tax treaty analysis for various issues including determination of residency, re-sourcing of income to avoid double taxation, reduction or exemption of tax
  • Determination of residency for income tax purposes for foreign nationals including optimization of elections for first and last year of residency
  • Social Security tax implications to compensation of foreign nationals and US expatriates including application and analysis of Totalization agreements
  • Foreign tax credit optimization including analysis of paid versus accrued methods and maximizing foreign source income
  • Optimization for US expatriates including analysis of foreign tax credit versus foreign earned income exclusions
  • Reporting of foreign rental properties including proper depreciation methods and treatment of rental of principal residence
  • Reporting and planning for nonresidents with US investments or US effectively-connected income
  • State residency and domicile issues for foreign nationals and US expatriates
  • Reporting gifts and inheritances from nonresidents
  • Consulting to employers of international assignees relating to tax equalization policy development and application, tax planning for international assignments including coordination with tax advisors in local jurisdictions, compensation structuring, payroll reporting and employee education and tax return preparation
  • Determination of residency for US citizens in US possessions