What is Pre-Immigration Tax Planning: IRS Taxation Overview

Pre-Immigration Tax Planning Basics

Pre-immigration tax planning and strategizing is crucial to effective tax avoidance. Before becoming a U.S. person, individuals need to consider the U.S. tax implications of their foreign income, accounts, assets and investments — along with U.S. investment income they receive, which may have been considered non-taxable income when their status was a nonresident alien. The U.S. Tax and IRS requirements have many facets to it. When a foreign national is considering moving to the United States and/or otherwise becoming a US person, there are many tax precautions and pitfalls to consider. 

Unlike almost every other country in the world, the United States taxes individuals who are considered U.S. persons on their worldwide income.

In addition, the Internal Revenue Services requires U.S. persons to report their  foreign accounts, assets, investments, and income to the U.S. government each year on a variety of different forms.  These forms are collectively referred to as international information returns.

The failure to properly report these forms to the IRS may lead to significant fines and penalties.

Pre-immigration Tax Planning

5 Pre-Immigration Tax Planning Considerations

Once a foreign national decides they want to obtain U.S. status, it is very important to handle the planning before becoming a U.S. person.

That is because once a person becomes a US person for tax purposes, their entire tax world will change.

Here are five (5) planning tips:

Plan Before Green Card or Citizenship

This is very important.

A U.S. Person “Individual” includes:

• US citizen
• Legal Permanent Resident
• Foreign National who meets the IRS Substantial Presence Test (SPT)

Even though all U.S. persons are treated the same for tax purposes, the 3rd category (SPT) is the easiest to cancel when a person decides they want to leave the U.S. permanently.

For example, if a person’s goal is to travel to the United States intermittently — but to maintain permanent residence or citizenship status abroad — then they have to assess whether it is more beneficial for them to become a legal permanent resident or remain a visa holder.

Substantial Presence is not Just For Work-Visas

There is a common misconception that only Visa holders — and more specifically employment visa holders — are the foreign nationals that can be subject to the substantial presence test, but this is inaccurate.

Any foreign national can meet the substantial presence test (unless an exception, exclusion or limitations exists).

A person does not have to be on a work visa. Rather, even if a person is on an EB-5 investment visa or B1/B2 travel visa, they may be subject to the substantial presence test and U.S. person status.

Therefore, it is important to plan this before traveling to and from the United States.

Green Card Ramifications & Pre-Immigration Tax Planning

Legal permanent residents/green card holders are taxed on their worldwide income, and they also must report their global assets — even if they reside outside of the U.S.

Therefore, even if a person resides outside of United States, maintains all of their assets outside of United States, and all of their income is sourced outside of United States — they will still be subject to US tax and reporting on their worldwide income and assets — just as if they were a US citizens.

Therefore, if the goal is to travel back and forth between United States and/or reside in the United States but the tax transparency is just too great – a foreign national should avoid legal permanent residence status.

Exit Strategy as Part of Pre-Immigration Tax Planning

One major tax catastrophe for many green card holder clients is that they have had their green card for at least eight of the last 15 years.  As a result, they may be considered a covered expatriate and may have to file and paying exit tax when they relinquish their green card.

It is important to note that there is no requirement that a legal permanent resident reside in the United States for any of those 8 of 15 years.  

In addition, just because the green card expires does not mean that it was relinquished. In other words, unless there is a judicial, administrative or voluntary relinquishment of the legal permanent resident status, the person does not lose US person status for tax purposes.

Therefore, this is very important to have a strategy in place early in the process.

And, if a green card holder is approaching the eight year mark (it does not have to be 8 full-years), they may want to consider making a form 8833 treaty position to be treated as a foreign resident before they are considered a long-term resident – but noting filing for 8833 can be a considered an expatriation tax trap when the 8833 filing is miscalculated.

Pre-immigration Planning for Worldwide Asset Reporting 

Once a foreign national is considered a US person for tax purposes, there are several international information reporting requirements that occur. Two of the most common acronyms, include FATCA Form 8938 which is the Foreign Account Tax Compliance Act, and FBAR which is the Foreign Bank and Financial Account Reporting form (aka FinCEN Form 114). These forms require US persons to disclose their offshore accounts, assets, investments, and/or  income to the IRS. The failure to report these forms timely and properly may result in significant fines and penalties. In addition, there are many other international reporting forms that may be required when a person has a foreign trust, foreign business entity, and or receiving gifts from foreign persons.

Some of the more common forms include:

• Form 3520
• Form 3520-A
• Form 5471
• Form 8621
• Form 8865

It is important to plan before hand to avoid any noncompliance.

Once a person is out of compliance, that is when it can turn into a nightmare.

Golding & Golding: About our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure

Contact our firm today for assistance with getting compliant.