USA IF YOU ARE FOREIGNERS MOVING TO THIS COUNTRY THEN YOU MUST BE PREPARED TO ORGANIZE FINANCIAL AFFAIRS BEFORE ARRIVING AND READ THE STEP BY STEP GUIDE TO MANAGE EVERYTHING 16TH JANUARY 2014 People moving to the U.S., especially those with substantial wealth, need to organize their financial affairs before landing here. For those who plan ahead, there can be significant tax savings. Here are five steps to consider: 1. Know your residency status: While this may seem straightforward, you must understand the exact date you become a resident. Once you are a U.S. tax resident, you are generally taxed on your worldwide income and gains. The income tax residency rules for those who do not have U.S. citizenship or green card status are based on the number of days you are present in the U.S. Knowing your residency start date and planning accordingly can help minimize first-year taxes and provide a window to take action prior to actually becoming a resident. It is also important to understand how this impacts your estate and gift tax position. Unlike the income tax residency rules, exposure to gift and estate taxes is determined by your actions. Applying for U.S. citizenship or a green card could expose your worldwide assets to U.S. estate and gift taxes. Moreover, you could also be exposed if you move to the U.S. and your actions imply an intention to remain here indefinitely, such as discontinuing ties with your home country. 2. Consider accelerating or deferring income: If you are moving from a jurisdiction with a lower tax rate than the U.S., consider accelerating the recognition of income — such as dividends paid by closely held foreign corporations or deferred compensation for services performed outside the U.S. — prior to becoming resident. In this way, you avoid being taxed at higher U.S. rates. Conversely, if moving from a jurisdiction with a higher tax rate, consider deferring recognition of the income until after you move to the U.S. 3. Realize gains or losses: While timing of income recognition is limited to those few who have such control, the timing of when you realize capital gains or losses can be wider reaching. What are real-estate trends in 2014? Homes executive vice president Brock MacLean joins MoneyBeat with a forecast for the real-estate market for the coming year. Photo: Getty Images. The same objective applies as to when it makes sense to accelerate the gain or loss; however, it is important to note that capital gains realized once you are a U.S. tax resident carry the original cost basis. For example, someone who bought XYZ stock 20 years ago for $2 and moves to the U.S. before selling it for $50 will pay U.S. capital gains tax on the $48 gain. The same applies to founders of startups that have low- or no tax basis and subsequently sell at a huge gain. Selling securities (and possibly buying them back) prior to a move could purge this potential taxable gain. Losses that have accrued can be realized after becoming a resident and carried forward to offset against future U.S. capital gains. If there is not a liquid market for the asset to be sold, more complex strategies can be employed. The planning for realizing gains also works for real property located outside the U.S., but such gains are generally subject to U.S. income tax. 4. Review your foreign holdings: The U.S. tax rules that address foreign investments are complex, and geared towards limiting the ability to defer income taxes while maintaining full transparency through onerous reporting. It is crucial that you understand how foreign holdings will be taxed and reported. For example, it is not uncommon for wealthy individuals outside of the U.S. to hold their investments through an offshore company. If you own such an interest in a foreign company, becoming a U.S. tax resident may have adverse tax consequences. Possibly the income could be taxed each year at the highest rates, even if no income is distributed. Or you could be subject to a second level of U.S. income tax after paying foreign taxes. Careful consideration should be given as to whether it makes sense to liquidate the company prior to becoming a U.S. resident. Except liquidating a corporation is often not practical and may carry a tax cost in the country from which you are moving. Subject to certain conditions, it may be possible to force a deemed liquidation by electing to treat the company as a pass-through entity such as a partnership for U.S. tax purposes. This has the same tax effect as if the company sold its assets thereby potentially getting a step up in the tax cost basis prior to becoming a U.S. resident while still maintaining the entity’s legal form. In this way, the income is taxed each year but many of the complex reporting requirements associated with a foreign holding company are avoided. One bonus: These rules only apply for U.S. tax purposes, so the country from which you are moving or the jurisdiction of incorporation will typically not view this as a taxable event. 5. Consider gifting assets before moving: If you plan to be in the U.S. indefinitely and accordingly may face exposure to estate and gift taxes, consider making an irrevocable gift to a non-U.S. relative or a discretionary trust prior to moving. Those assets should be removed from your taxable estate. This can be attractive for wealthy individuals whose estate will be in excess of the current $5,340,000 lifetime exclusion. A gift of assets to a discretionary trust prior to moving will generally not use up any part of this lifetime exclusion. That said, income earned in the trust will probably remain taxable to you unless you had set up and funded the trust more than five years prior to moving to the U.S. Remember, it’s important to weigh any planning ideas against your personal and business objectives. And pay careful attention to how U.S. tax planning interacts with tax treaties and the tax and property laws in other countries. David Roberts and Joseph Kluemper are New York-based managing directors at independent tax firm WTAS LLC.
Posted on: Sun, 26 Jan 2014 04:42:07 +0000
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