Every new immigrant to the United States is likely to be troubled by tax issues. Below, we will analyze the U.S. taxation principles and interpret how to engage in reasonable taxation. The principle of U.S. taxation generally only taxes realized income, meaning that taxes are levied only when property is sold or transferred.
Before immigration, cashing out unrealized gains
If property has not yet been transferred, unrealized gains on the books are not subject to capital gains tax. There are many situations where unrealized gains exist, such as the appreciation of real estate, stocks, bonds, and jewelry. New immigrants may encounter issues related to capital gains taxation when handling property in the U.S. Since property brought into the U.S. from abroad is not subject to tax upon becoming a resident, the simplest method is to cash out unrealized income before reporting, for example, by selling stocks or transferring real estate and then using the cash to invest in new stocks and real estate after obtaining residency. This way, there is no need to pay taxes on these appreciated properties. Conversely, if there are investment losses, there is no rush to sell; one can wait until obtaining a green card to sell, which can then be used to offset taxes.
Working overseas, tax exemption in the U.S.
For immigrants, green cards, citizenship, and taxes are often in conflict. U.S. immigration law stipulates that green card holders should ideally return to the U.S. at least once a year to maintain their intent to reside permanently. Of course, it is best to have a home, a bank account, family, and tax exemptions. However, if there is a valid reason for not being able to return to the U.S. within six months, one can apply for a re-entry permit (white paper), which is valid for two years. Additionally, to naturalize as a U.S. citizen, one must reside in the U.S. for more than two and a half years within the five years of holding a green card and must report taxes honestly.
However, more and more new immigrants return to China to work after obtaining their green cards, only symbolically reporting to the U.S. each year, earning the nickname "airborne people." The "airborne people" have a tax exemption on their overseas earned income. The tax-exempt income threshold for 2010 was $91,400. However, tax law stipulates that to enjoy this exemption, one must reside overseas for more than 330 days within a year, meaning one can only stay in the U.S. for 35 days each year. However, if one applies for a re-entry permit (white paper) and uses it in conjunction with the green card, one can legally reside overseas for 1-2 years, and the green card will not be revoked upon re-entry. This complies with immigration law requirements while enjoying a certain amount of tax exemption as stipulated by tax law.
Overseas accounts set up in "tax havens"
According to the U.S. Bank Secrecy Act, anyone who has bank accounts, brokerage accounts, mutual funds, unit trusts, and other financial accounts overseas, and whose cumulative funds in these accounts exceed $10,000, must file the Foreign Bank and Financial Accounts Report (FBAR).
However, if the accounts are set up in world-renowned "tax havens" such as Puerto Rico, the Northern Mariana Islands, American Samoa, and the U.S. Virgin Islands, one can enjoy tax-exempt treatment.
Making good use of gift tax exemptions
In the U.S., an individual can only gift up to $1 million to others over a lifetime. If the amount exceeds this threshold, one must report it to the tax authorities, and one can choose not to pay gift tax by deducting the gift from the future $1.5 million estate tax exemption, but the government must be informed.
However, gifts can sometimes incur more taxes. For example, if a pair of parents gifts a house purchased for $100,000 to their children, and the current market value of the house is $700,000. If the house is sold two years later for $1 million, the cost basis remains $100,000, and the children will have to pay capital gains tax on the $900,000 profit.
Because it is a gift, the basis is calculated from the original purchase price. If other methods are used, the tax amount will differ. For instance, if the parents do not gift the house now but instead pass it on as an inheritance after their death.
If the house's market value is $1 million, the basis for the house will be $1 million. If the children sell it after living in it for two years for $1.2 million, only the $200,000 appreciation will be subject to tax. If it is an inheritance, the basis is the market value at the time of the asset owner's death.
Two methods to avoid estate tax
Americans primarily use two methods to avoid estate tax.
One is a shelter trust.
A shelter trust effectively avoids the uncertainty of which spouse will pass away first by establishing a trust for each spouse. When one spouse passes away, their portion of the assets transfers into the children's trust. This way, the tax exemptions for both spouses are not wasted.
The second is a family limited partnership.
Families that establish family businesses can set up a family limited partnership, ideally during middle age, with the parents serving as general partners, gradually transferring assets to the children's accounts, so that ultimately, all children have a small portion. This is particularly suitable for Chinese families that enjoy purchasing commercial properties, as it allows for effective asset transfer through a family limited partnership.
Additionally, designating insurance beneficiaries is a means of transferring assets tax-free. For example, doctors use annuities to achieve this goal of protecting their families. Other insurances also have this function. Educational plans can also be utilized. Although the money invested in educational plans has already been taxed once, the subsequent investment income and educational expenses do not incur further taxes. If there is too much capital, it is essential to have a CPA and a financial advisor.
