Overview of Pre-Immigration Tax Planning: Learning the Basics

New Pre-Immigration Tax and U.S. Investment Planning

Pre-Immigration Tax and U.S. Investment Planning

Each year, Taxpayers from across the globe who are considered non-U.S. persons (aka Non-Resident Aliens ‘NRA’) decide that they want to relocate to the United States. For some foreign residents, it is a temporary journey, and for others, it is the first step in becoming a lawful permanent resident or U.S. citizen. What makes becoming a U.S. person so complicated is that it involves both tax implications along immigration rules and laws. Oftentimes, taxpayers are so focused on the immigration aspect of becoming a U.S. Person that they brush the tax implications to the side — only to realize too late that they are considered U.S. persons for tax purposes even though they may not yet be permanent residents or U.S. citizens (or that they may have become subject to the U.S. exit tax). In addition, depending on what stage the foreigner is in regarding their immigration application will impact whether they meet certain requirements and exceptions from a tax perspective, such as the closer connection exception. Let’s walk through eight important aspects of pre-immigration tax and investment planning.

First, Worldwide Income

One of the most important aspects of becoming a US person for tax purposes is to understand that the United States follows a Citizenship-Based Taxation Model and not a Resident-Based Taxation model. In other words, if a taxpayer is considered a US person for tax purposes, then they are required to pay tax on their worldwide income. And, while the name may lead taxpayers to believe that it is limited to citizens, unfortunately, that is not the case. Citizenship-based taxation also includes lawful permanent residents and foreign nationalists who meet the Substantial Presence Test. For the latter category, it is also important to note that it is not limited to work visas or investment visas and therefore taxpayers who may simply be visiting the United States on a B1/B2 visa can also get engulfed into this substantial presence matrix.

Apply for a Green Card, no Closer Connection

Some taxpayers will want to maintain their visa status because they are planning to avoid future headaches such as the exit tax. And, many taxpayers who meet the substantial presence test, may want to claim that they have a closer connection with a foreign country to avoid being taxed on their worldwide income. But, it is important to note, that if a taxpayer applies for the green card, and even if it has not been received yet or approved they can no longer claim the closer connection exception at that time.

Form 8840 Instruction, Page 3 states you do not qualify for closer connection if:

• • • “You have applied for, or taken other affirmative steps to apply for, a green card; or have an application pending to change your status to that of a lawful permanent resident of the United States.”

Foreign Mutual Funds & Elections (Becoming a US Person 8621)

For taxpayers who become US persons for tax purposes, they will want to be careful about owning foreign mutual funds, ETF’s, sicavs, and other pooled fund investments. That is because oftentimes, the United States will treat foreign policy funds as PFICs, which then means the taxpayer is subject to a much harsher tax regime than they would otherwise be subject to if they were holding foreign stocks or even domestic mutual funds. (Read: the IRS hates foreign pooled funds).

Foreign Trusts (Becoming a US Person 3520/3520-A)

Other taxpayers who are foreign nationals and have ownership or interest in a foreign trust should be aware of the very onerous foreign trust reporting requirements on Form 3520 and 3520-A. The complexity of these trusts for reporting purposes will hinge on whether they are grantor trusts or non-grantor trusts if there is domestic income generated in the foreign trust, and whether the US beneficiary is receiving a distribution.

Foreign Entities (Becoming a US Person 5471)

When a US person has an ownership or interest in a foreign entity, there may be additional complex reporting requirements depending on whether it qualifies as a foreign partnership or foreign corporation. When the foreign corporation is owned more than 50% by US shareholders, there are additional headaches to be aware of such as Subpart F Income, GILTI, FDII, and other acronyms.

Foreign Pension Distributions

In many foreign countries, when a taxpayer receives a pension distribution it is tax-exempt. For example, if a taxpayer is from Australia and has a superannuation then while the superannuation is taxed within the Super itself while it grows — the distributions are typically tax-free. Usually, the United States takes the position that at least with private pensions, the taxpayer is required to pay US tax on the distributions. Moreover, despite information that may be contained in the treaty about limited taxation of private pensions, most private pensions are not excluded from the savings clause.

FIRPTA

FIRPTA is the Foreign Investment In Real Property Tax Act. When foreigners own US property, they may be subject to a 30% withholding along with certain withholdings at the time that they want to sell the US property. Therefore, foreigners who are considering becoming US persons and then acquiring property may want to wait until they become a US person before purchasing real property in the United States. While there may be some planning techniques to help minimize the burden for taxpayers who want to acquire property beforehand, by waiting until the taxpayer becomes a US person will typically make the process much simpler down the line.

Future Exit Tax Planning (Around)

Most importantly, for high net-worth and high-income foreigners is that they may become subject to the exit tax if they become permanent residents or US citizens. This is very important for taxpayers who may plan on residing in the United States for a significant amount of time or maintaining US person status. These taxpayers may want to consider either not becoming permanent residents and remaining on a visa – or if they are maintaining the status but living outside of the United States to reside in a country that the US has entered into a treaty with so that the taxpayer may qualify for a Form 8833 treaty election to be treated as a foreign person for tax purposes (Since the years the 8833 has filed for that purpose do not count toward exit tax calculations).

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

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

Contact our firm today for assistance.