Pre–immigration Planning – What The Non-Resident Alien Should Do Prior To Immigrating To The United States
Non-resident aliens (NRAs) who anticipate immigrating to the U.S. on a temporary or permanent basis (an Immigrating NRA) may achieve significant U.S. income and transfer tax savings with proper planning and tax advice from a qualified professional in the field.
The U.S. income tax consequences depend on whether the taxpayer is a resident alien of the U.S. (a RA), a Citizen of the U.S. (a US Citizen) or a NRA. U.S. Citizens and RAs are taxed on their worldwide income. NRAs are taxed only on U.S. source income, unless engaged in a U.S. trade or business. An individual, who is not a U.S. Citizen, is generally presumed to be an RA for U.S. income tax purposes if such individual meets either the Green Card Test or the Substantial Presence Test. Under the Green Card Test, an individual is treated as a RA if such individual holds a valid alien registration receipt card (i.e., a green card). Under the Substantial Presence Test, an individual is presumed to be an RA if the sum of the following equals least 183 days: (1) the number of days spent in the U.S. during the current year; (2) one-third of the number of days present in the U.S. during the first preceding year, and (3) one-sixth of the number of days present in the U.S. during the second preceding year. However, the following individuals are not considered RAs even if they meet the Substantial Presence Test: (1) an individual who was not present in the U.S. for at least 31 days during the current year, (2) an individual who was not present in the U.S. for 183 days or more during the current year and can show that he/she has a tax home in and a closer connection to a foreign country; (3) certain professional athletes, (4) certain students, (5) certain teachers, (6) certain trainees, (7) certain diplomats and (8) certain individuals who qualify for benefits under an income tax treaty to which the U.S. is a party.
The consequences of the U.S. transfer tax system, which include the U.S. Estate Tax (the Estate Tax), U.S. gift tax (the Gift Tax) and the U.S. generation-skipping transfer tax (the GST Tax), on the other hand, depend on whether the taxpayer is domiciled in the U.S. or domiciled outside of the U.S. For purposes of these transfer taxes, a person acquires a "domicile" in a place by (1) living there, even if for a brief period of time; (2) with no definite present intention of later removing therefrom. The "domicile" determination is a facts-and-circumstances test and both parts of the test must be met before "domicile" is present. Generally, only U.S. situs assets of a non-domiciled individual are subject to U.S. transfer taxes, whereas the worldwide assets of a U.S. domiciled individual are subject to U.S. transfer taxes.
Because of the various sourcing rules mentioned above, an Immigrating NRA can achieve significant U.S. tax savings with proper planning. The following represent some U.S. tax planning suggestions that an Immigrating NRA should consider prior to immigrating to the U.S.:
- Consider transferring any existing life insurance policies to an Irrevocable Insurance Trust. This should avoid the Gift Tax, the GST Tax, and keep policy proceeds out of the Immigrating NRA’s estate for purposes of the Estate Tax. Of course, any transfers to the trust after the immigration will be subject to the Gift Tax provisions.
- Consider transferring foreign situs assets and U.S. situs intangible assets to those friends and family who will receive such assets upon the Immigrating NRA’s death. Under a special rule, U.S. situs intangible assets are not treated as "having a situs in the U.S." for purposes of the Gift Tax (although they are for purposes of the Estate Tax). Once again, there will be no Gift Tax or GST Tax imposed on the transfer and the Immigrating NRA has removed the transferred assets from the reach of the Estate Tax.
- Consider moving the location of some U.S. situs tangible personal property (e.g., money, checks, art) to some location outside of the U.S. and then gifting such property to those who will eventually receive the assets upon the Immigrating NRA’s death.
- Consider breaking up the ownership of properties purchased by the Immigrant NRA and his/her non-U.S. Citizen spouse as tenants by the entirety or as joint tenants with rights of survivorship. Under another special rule (which is not applicable where the NRA’s spouse is a U.S. Citizen), 100% of these joint tenancies will be subject to the Estate Tax when the first spouse dies (and potentially again when the second spouse dies), except to the extent that it can be proven that the property was not acquired with funds provided by the decedent spouse.
- Consider entering into transactions that step up the tax basis in assets owned by the Immigrant NRA.
- Attempt to receive as much foreign source income that is not connected to a U.S. business as possible before immigrating to the U.S. Such income is not taxable to an Immigrating NRA if received during his/her period of non-residency.
- Determine whether the Immigrating NRA can benefit from any Treaty. Most Treaties contain "tie breaker rules" (that may continue to grant NRA status to the Immigrating NRA), contain more favorable situs rules and may provide the Immigrating NRA with other benefits.
- If the Immigrating NRA has established a foreign trust, is the beneficiary of a foreign trust, or is a shareholder of foreign corporations, it is especially important to consult with a tax professional who can advise of the tax impacts thereof and can plan to lessen such impacts. Once the Immigrating NRA becomes a resident of the U.S., he/she may be taxable on the income earned by such a foreign trust or foreign corporation even if he/she never receives a distribution from such entity.
This article was intended to provide general suggestions for an Immigrating NRA. However, because of the complexity of the various Income Tax, Estate Tax, Gift Tax and GST Tax rules (including, the various situs rules), it is strongly recommended that an Immigrating NRA consult with a tax professional who is a specialist in the field prior to immigrating to the U.S. It may be too late to accomplish significant tax savings if the Immigrating NRA waits until he/she becomes resident in the U.S.