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U.S. PRE-IMMIGRATION TAX PLANNING

 

For tax purposes, the primary distinction between U.S. tax residents and non-residents lies in the scope and treatment of taxable income:

 

  • Worldwide Income Requirement for U.S. Tax Residents: The United States imposes tax on its residents’ global income and mandates comprehensive reporting of foreign financial assets, including overseas bank accounts, financial investments, and shares in holding companies.

  • Limited Tax Scope for Non-Residents: By contrast, non-U.S. tax residents are only subject to tax on their U.S.-sourced income.

 

This difference underscores the importance of tax planning for individuals considering immigration to the U.S. Pre-immigration tax planning enables individuals to anticipate and potentially mitigate the tax obligations they may face upon becoming U.S. tax residents. 

 

Given the complexities of U.S. tax law, particularly for high-net-worth individuals (HNWIs) considering U.S. residency, we recommend consulting with an experienced international tax accountant to develop a tailored pre-immigration tax plan, along with further discussions on reducing income taxes through trust arrangements and foreign asset structuring, as well as strategies for minimizing estate and gift taxes.

 

Key Tax Planning Strategies for High-Net-Worth Individuals (HNWIs) Considering U.S. Immigration

 

Postpone U.S. Tax Residency Until After Green Card Approval

 

For immigrants, it is prudent to avoid U.S. tax residency until formally obtaining a green card, as becoming a tax resident triggers the U.S. global income tax requirement. By maintaining non-residency until green card approval, individuals can avoid premature exposure to U.S. worldwide taxation.

 

Step-Up Asset Cost Basis to Minimize Capital Gains Tax

 

Capital gains tax is levied on profits from the sale or exchange of capital assets, such as stocks, bonds, or real estate. By increasing the cost basis of an asset, HNWIs can effectively reduce the capital gain recognized upon sale, thereby decreasing the associated tax liability. Before immigrating, transactions may be arranged to appear as asset sales for U.S. tax purposes while remaining non-taxable in the individual’s home country. This can be accomplished by establishing a foreign corporation, transferring assets to that corporation, and then altering the corporation’s U.S. tax classification. This change is treated as a liquidation for U.S. tax purposes, resetting the asset’s cost basis (Treas. Reg. 301.7701-3(g)).

 

Under U.S. tax law, gains on non-U.S. assets are generally exempt from U.S. income tax for non-residents, so this strategy may allow for significant tax savings.

 

Utilize the “Check-the-Box” Election for Foreign Business Entities

 

U.S. tax law categorizes business entities as “individual entities” (e.g., C corporations) or “pass-through entities” (e.g., partnerships, S corporations, and single-owner LLCs). While corporations must file their own tax returns and are independently liable for taxes, pass-through entities transfer tax liability to their owners. Under Section 7701’s “check-the-box” election, certain business entities can select their tax treatment for U.S. federal purposes.

 

A common approach is to establish foreign assets within a corporation abroad and then elect to treat this corporation as a disregared entity under the Check-the-Box regulations for U.S. tax purpose. When the IRS recognizes a corporation as a disregared entity, it views this election as a liquidation, effectively allowing for an increase in the cost basis of the corporation’s assets (Treas. Reg. 301.7701-3(g)(1)(ii)).

 

Implementing these strategic tax planning measures before immigrating to the U.S. can offer considerable tax advantages, making pre-immigration tax planning essential for those seeking to manage their financial transition effectively.

 

Copyright: This article is original and copyright © Alphakey Advisory LLC. This article may not be reproduced, copied or used in any way, in whole or in part, without permission. The information provided here is general in nature and should not be regarded as legal, accounting, or tax advice from Alphakey Advisory LLC. Readers are advised that this material may not apply to or suit their specific circumstances, and additional considerations—both tax and non-tax—may be necessary before undertaking any action based on this content.