For successful individuals who wish to relocate themselves, their families, and some of their businesses to the United States, it is worthwhile to consider a series of proactive measures to make the most of this opportunity. In-bound U.S. tax planning is something that should always be carefully considered. The internationally renowned law firm Withers Bergman LLP is authoritative in the field of U.S. inbound tax planning. Edward A. Renn, a partner at the firm, states: “Good U.S. tax planning may be the best investment a non-U.S. citizen can make. In these cases, failing to plan ahead for taxes will inevitably lead to higher tax payments.” Undoubtedly, such planning can prove to be quite helpful in saving substantial amounts of money for non-U.S. citizens and avoiding heavier tax burdens in the future.
While each non-U.S. citizen relocating to the United States typically has their own circumstances to consider, there are also some general considerations that apply. Let us examine several common mistakes that many non-U.S. citizens often make.
1. U.S. Real Estate. It is usually wise not to purchase real estate in one’s own name. To minimize U.S. related taxes as much as possible, the most appropriate arrangement for holding U.S. real estate depends on whether the property is for personal use or investment. Investment properties should be held through entities that qualify for direct income flow to the investor (or owner) and are taxed as personal income at a single level, with creditor protection. Furthermore, U.S. real estate is also subject to U.S. estate tax. Depending on the specific situation, complex tax planning or purchasing a simple life insurance policy can protect this portion of the asset.
2. Green Card. It is essential to understand the tax implications after obtaining a green card; a green card is not just an immigration document: it makes the green card holder a U.S. resident, subjecting them to U.S. tax laws, regardless of how many days they reside in the U.S. each year, they must report their worldwide income to the U.S.
3. Time Spent in the U.S. For non-U.S. citizens without a green card, it is advisable, for tax purposes, to limit their time spent in the U.S. to no more than 121 days per year and to seek tax advice regarding the “substantial presence test.” This way, non-U.S. citizens can avoid paying personal income tax in the U.S. on their worldwide income and also avoid the obligation to report their global income to the U.S.
4. Alternative Investments. Without careful prior planning, alternative investments may lead to related income being classified as “effectively connected income with a trade or business in the United States,” thus requiring the submission of a U.S. income tax return. This is particularly true for real estate partnership investment companies and private equity investment funds.
5. Collectibles. U.S. estate tax applies to furniture, artwork, and jewelry within a U.S. domicile, as well as the real estate itself. Without proper planning, a masterpiece hanging over the fireplace could incur a significant estate tax.
6. Stocks in U.S. Companies. Stocks are subject to U.S. estate tax. U.S. stocks purchased on the New York Stock Exchange or NASDAQ can create a substantial estate tax burden, but reasonable arrangements can prevent or exempt this burden.
The above are just a few considerations that individuals heading to the United States should evaluate and address in their U.S. inbound tax planning. Each non-U.S. citizen should assess their own situation and weigh various tax planning options. Consequently, the result will be a set of tax planning decisions formulated based on expertise and practical experience.
In conclusion, any non-U.S. citizen considering immigration to the United States who does not engage in U.S. inbound tax planning is likely to make significant financial mistakes. Furthermore, the timing for such tax planning should ideally be before arriving in the U.S.