Thinking of moving to the United States? If so, you are well advised to plan ahead in order to minimize your U.S. tax exposure. Otherwise, you may make a very costly mistake.
The U.S. is not a tax haven jurisdiction for those planning to move here.
Unless there is an applicable tax treaty, your tax rates (state and federal) could exceed 40% (not the 21% “allegedly flat” corporate tax rate you may have read about in the news after President Trump’s historical “Tax Cuts”).
You see, there are two (2) tax systems that you need to plan for:
- the federal income tax; and
- the federal “wealth transfer” taxes—the estate tax, the gift tax, and the generation-skipping transfer tax.
Federal Income Tax
The U.S. uses as a “worldwide” taxation system. This means that U.S. citizens and residents are subject to U.S. income tax on their “worldwide” income. This is dramatically different than most countries, which use a “territorial” system to impose income tax only on the income generated within that country’s own borders.
For income tax purposes, an income tax resident is a person who satisfies one of two tests: the legal permanent resident test (green card test) and the substantial presence test (183 day(s) rule).
Once determined to be a resident under either test, residents must file income tax returns to report and pay tax on their “worldwide” income.
Wealth Transfer Taxation
As with the income tax, U.S. citizens and residents are subject to “worldwide” taxation by the three wealth transfer taxes: the estate tax, the gift tax, and the generation-skipping transfer tax.
Unlike the objective tests for income tax residence, the test for estate and gift tax residence/domicile is subjective. A person acquires U.S. domicile by residing in the U.S. for any period of time with “no definite present intention of leaving”.
As a result, the determination of residence/domicile for wealth transfer tax purposes requires a determination of an individual’s state of mind at the requisite moment. Because this domicile test is different than the residence test for the income tax, it is possible for an individual to be a resident for income tax purposes without being a resident/domiciliary for wealth transfer tax purposes, and vice versa. This may present some planning opportunities or bring about disastrous results.
One of the biggest challenges for a nonresident considering moving to the U.S. is the foreign asset reporting requirements. Once you become a U.S. resident for income tax purposes, you must disclose your direct and indirect ownership over all foreign assets to the IRS. That is why pre-immigration tax planning with a properly structured Offshore Pre-Immigration Trust is so important.
So if you are thinking of moving to the U.S., be sure to plan ahead and beware of the draconian five (5) year lookback rule. Otherwise, you may make a very costly mistake.
By: Lazaro J. Mur, Esq.
AV Preeminent Rating
Founder, The Mur Law Firm, P.A.