Tax Planning for Non-U.S. Citizens

Non-U.S. Citizens

If you are not a U.S. citizen or legal permanent resident, you are subject to U.S. income taxes for the year if either (1) you have income sourced in the U.S. or (2) you qualify as a “U.S. person” under U.S. tax rules.  If you qualify as a “U.S. person,” you are subject to U.S. income tax on your worldwide income.  If you do not qualify as a U.S. person, you are subject to U.S. income tax only on income that is sourced in the U.S.  This includes any income earned from performing services in the U.S.; dividends, interest, and royalties received from U.S. companies or U.S. persons; and income earned through ownership of a business or partnership located in the U.S.  There are many exemptions and complex rules governing this area of the tax code, so be sure to get competent advice from a tax professional.

A U.S. Person subject to worldwide U.S. income taxation includes (1) U.S. citizens; (2) U.S. legal permanent residents (green card holders) and (3) persons who meet the “substantial presence” test under the U.S. tax code.

Under the “substantial presence” test, you are considered a U.S. Person if (1) you are present in the U.S. for at least 183 days during the calendar year; or (2) (a) you are present in the U.S. for at least 31 days during the calendar year and (b) you have been present in the U.S. for a weighted average of 183 days over the previous three years.  For more information on the substantial presence test and other relevant tax rules, visit the IRS website.

Why Pre-Immigration Planning Is Necessary

People the world over aspire to become a citizen or legal permanent resident of the United States.  While such status incurs tremendous benefits and privileges, it also triggers less-appealing obligations to the IRS.

Your tax obligations in the U.S. may be far greater than in your home country.  If this is the case, there are often steps you can take to minimize your tax liability prior to relocating here.  For example, suppose you own corporate stock that you purchased for $10,000 that is now worth $110,000.  If you hold on to it and sell it after you relocate to the U.S., you may face capital gains taxes of up to 23.8%, or $23,800.  If your home country has a lower tax rate – for example, 10% – you would save nearly $14,000 by selling the stock prior to immigrating.  Conversely, if the tax rate is higher in your home country than it is in the U.S., you may want to defer sale of the stock until you become a U.S. resident.

In addition to new income taxes, your status as a U.S. taxpayer may create a large estate tax bill for your children.  The current amount exempted from the estate tax is $5.25 million per individual (for 2013).  If your net worth is more than $5.25 million (or you expect it grow to that amount in the near future), you may wish to take steps to reduce your future estate prior to becoming a permanent U.S. resident.

Careful tax planning can reduce some of the sting of becoming a U.S. taxpayer; however, most of these strategies are effective only if you implement them prior to receiving your green card, or in some cases, before you move to the U.S. on a temporary visa.  If you are considering immigrating to the U.S., consulting with a tax professional early in the process can help you minimize your overall tax bill.

Estate Planning for Non-Citizen Spouses

Married couples in which one spouse is a non-US citizen face unique estate planning challenges if they have substantial assets. Under US estate tax rules, married couples generally benefit from an unlimited marital deduction, which allows spouses to make unlimited transfers to each other without incurring any gift or estate tax. The deduction applicable to couples where one spouse is a non-US citizen is far more limited. While a non-citizen spouse can transfer an unlimited amount of assets to a spouse who is a US citizen, gifts by the citizen spouse to the non-citizen spouse are considered taxable gifts, subject to an annual exclusion of $143,000 for 2013. No marital deduction applies for purposes of the estate tax on the death of the citizen spouse.

Due to these unique estate tax rules, creative estate planning strategies are often necessary to minimize estate taxes where one spouse is not a US citizen. A commonly-utilized estate tax strategy in these circumstances is to create a Qualified Domestic Trust (known as a QDOT) that provides income to the surviving non-citizen spouse and allows estate tax on the trust assets to be deferred until the surviving spouse’s death. In addition to a QDOT, many other Advanced Tax and Estate Planning Strategies can be used to reduce the estate tax burden as well.