Preparing for an international move generally involves an extensive to-do list, topped by tasks such as finding a new home, choosing schools for the children, establishing a banking relationship, and figuring out transportation.
If you are like most people, “tax matters” is likely pretty low on your to-do list, if it is even on the list at all. The stark truth, however, is that the U.S. tax system is very different from most tax systems around the world, and many new arrivals to the U.S. face surprises and unintended consequences.
By moving tax planning up on your priority list, you can save yourself not only unnecessary tax costs but also a lot of headache. These four essential tasks can make a world of difference:
1. Find out ahead of time—will you be considered a U.S. tax resident or nonresident for your first year? What about subsequent years? Will you be a state tax resident, as well?
Residency status determines how you will be taxed, how much income will be subject to tax, what forms you are required to file, what special elections are available, and what tax treaty benefits you can use. Determining residency status is the first step in all planning.
- Find out what your residency status will be in your home country during your time in the U.S., as well. This may affect your ability to claim foreign tax credits and invoke tax treaty benefits.
2. Find out ahead of time—what will be your U.S. residency start date? Make important transactions before this date, if possible.
If you have income that was earned in your home country but will not be paid until after you arrive in the U.S. (e.g., income from bonuses, stock options, other incentives and equity awards), be careful! If paid during your nonresident period, the income is generally not taxable. If paid after becoming a U.S. resident, then it is taxable for U.S. federal and state purposes even if it was earned before you became a resident!
Similarly, if you have stocks, securities, funds, or investment assets (including non-U.S. real estate) that have appreciated over time, if you sell them after you become U.S. resident, then the full gain is generally taxable in the U.S.—sometimes at capital gains rates, and sometimes at high, punitive rates.
- Consider selling problematic assets, such as non-U.S. mutual funds and life insurance accounts, before your U.S. residency start date.
- Work with both your U.S. tax advisor and your home country tax advisor to develop a comprehensive plan, especially if you have stock options, equity awards, retirement savings, and appreciated investment or real estate assets.
- If there is a possibly of obtaining a U.S. green card, where you intend permanent residence status in the U.S., seek both immigration and tax advice prior to the move.
3. Find out ahead of time—what options and elections will be available to you, and what is their impact?
Many elections are available to nonresidents and to residents during the first year of U.S. tax residency. Elections can be made to:
- Be treated as a full-year (rather than part-year) U.S. resident
- Treat a nonresident spouse as a U.S. resident
- Choose a lower tax scheme for U.S. rental property
- Choose more favorable tax treatment for non-U.S. mutual funds
- Take advantage of benefits under a tax treaty
Elections generally reduce the rate of taxation or significantly affect how assets will be taxed. For instance, elections to be treated as a full-year resident or to treat a spouse as a resident enable you to take advantage of deductions and credits only available to residents and to use the lower Married Filing Jointly tax rates instead of higher Married Filing Separate rates.
- Elections can provide great benefits, but they may affect residency start dates and other factors, so be sure to consider their impact on other planning measures, such as the timing of sale of appreciated stocks.
- Some elections must be made during the first year, so plan accordingly so that you don’t miss the window of opportunity.
- Each election has pros and cons, so work your U.S. tax advisor and your home country tax advisor to identify the optimal plan.
4. Before moving to the U.S., prepare a list of your family’s financial assets and all related details. You will need this information for your U.S. reporting, even if the assets do not generate income.
U.S. tax residents often must file informational reports on their non-U.S. financial assets every year—or face steep penalties and possible criminal charges.
Before you move to the U.S. (while the information is easier to obtain), make a list of all non-U.S. financial assets in which you have an interest or signature authority, including bank accounts, custodial accounts, brokerage accounts, mutual fund account details, trust instruments, retirement accounts, mortgage accounts, and life insurance policies. For each asset, include details such as account type, account numbers, institution holding the assets, address of the financial institution, and names of other owners (if not spouse).
- Obtain the contact information for a representative at each financial institution where you hold assets, so that you can contact this person should you need information in the future. Also, obtain English translations of key terms on account statements, if possible.
- Remember that income generated from these accounts may be reportable and taxable in the U.S.
- If you own non-U.S. mutual funds, are an owner of a non-U.S. trust or entity, or are a beneficiary of a trust outside the U.S., seek professional tax assistance prior to the move.
Summary—What To Do?
Although these four tasks may seem like drudgery, they can save you a great deal of money and headache if you address them in advance (and let’s face it, you will have to do them eventually anyway).
Having a basic understanding of your tax situation and the U.S. rules can also bring you peace of mind. You can find very good information on the IRSs’ website for international taxpayers at www.irs.gov/individuals/international-taxpayers. Also, an experienced tax professional, qualified in U.S. and international taxation, can review your situation and provide guidance appropriate for your particular scenario, especially if you arrange for a tax consultation prior to moving from your home country. Likewise, seeking guidance from your home-based tax advisor is equally important.
A small bit of planning can go a long way, especially with your bank account.