Wealthy immigrants often come from countries that use
a residence-based tax system (where income taxation may
be avoided or minimized by splitting residence between two
countries), that use a territorial tax system (no taxation of
income earned abroad), have a low tax rate, or a lax tax collection system. They are often unprepared for the U.S. tax system,
which not only will tax their worldwide earnings, but will do so
aggressively and in a well-structured manner.
All tax planning for an immigrant starts with the determination of when the immigrant becomes a U.S. resident alien for
tax purposes (“U.S. tax resident”). This is the day on which the
immigrant becomes subject to the U.S. tax regime. All preimmigration tax planning must be in place prior to this date.
Determining the residence start date is very different for income
tax and for estate tax purposes.
For income tax purposes, an NRA becomes a U.S. tax
resident if: (1) he holds a green card at any time during the
taxable year, (2) meets the substantial presence test or (3) makes
an election to be deemed a U.S. tax resident for a tax year when
present in the United States for at least 31 days. Under the
substantial presence test, U.S. income tax residence is triggered
as follows: (i) presence in the United States for at least 31 days
during the calendar year, and (ii) presence in the United States
for 183 days or more taking into account: all the days of the
calendar year at issue, one-third of the days of the first preceding
calendar year, and one-sixth of the days of the second preceding
If a non-resident alien becomes a U.S. tax resident under the
s ubstantial presence test, then he is deemed to be a U.S. tax
resident for U.S. income tax purposes from January 1 of that
year. An immigrant who comes to the United States on a “green
card” or an EB-5 visa will be deemed a U.S. tax resident on
the date when he obtains permanent residence and is physically present in the United States. If an immigrant meets the
substantial presence test and obtains an EB-5 visa in the same
calendar year, then the residence start date will be determined
under the substantial presence test (i.e., January 1).
An NRA may stay in the U.S. for up to 183 days a year without becoming a U.S. tax resident if the NRA has a tax home in a
foreign country and a closer connection to that foreign country.
This is also mirrored in some income tax treaties. All income tax
treaties also use a residence tie-break test if an individual can be
deemed a tax resident of both treaty countries. Using the treaty
tie-break must be disclosed to the Internal Revenue Service and
does not relieve the NRA of certain reporting requirements (like
disclosure of foreign bank accounts).
Using the treaty tie-break may be problematic for an immigrant seeking a permanent residence visa in the United States.
Claiming a foreign country residence would usually contradict
the stated intent of an immigrant visa applicant to reside
permanently in the United States.
For estate tax purposes an NRA becomes a U.S. tax resident
when the NRA has intent to make the United States his
domicile (no intention of leaving). This is a subjective test, and
intent is inferred through circumstantial evidence, such as the
length of stay in the United States, statements of intent on visa
application, frequency of travel, size and cost of U.S. home,
location of close family members, social activities, business
interests and voting records. For an immigrant seeking an EB-5
visa it would be difficult to argue that his domicile is intended to
be outside the United States.
Taxation of NRAs
Having determined the residence start date, the focus shifts
to how the United States will tax the NRA’s pre-immigration
Income tax rules applicable to NRAs are complex. As a
general rule, an NRA pays a flat 30 percent tax on U.S.-source
“fixed or determinable, annual or periodical” (“FDAP”) income
that is not effectively connected to a U.S. trade or business, and
which is subject to tax withholding by the payor. The rate of tax
may be reduced by an applicable treaty to anywhere between
zero and 15 percent. FDAP income includes interest, dividends,
royalties, rents annuity payments, and alimony. For example, if
an NRA receives interest income from U.S. sources (other than
interest on bank deposits), he is subject to a 30 percent tax.
Note that the NRA is subject to this tax but does not pay it. The
30 percent FDAP tax is withheld by the payor at the time of
payment and remitted to the U.S. Treasury. The NRA receives
the remaining 70 percent.
NRAs are generally not taxable on their capital gains from
U.S. sources unless (i) the NRA is present in the United States
for more than 183 days, (ii) the gains are effectively connected
to a U.S. trade or business (this includes gain from sale of U.S.
real property), or (iii) gains are from the sale of certain timber,
coal or domestic iron ore assets. When these exceptions apply,
the NRA is taxed on U.S. source capital gains at the rate of
NRAs may be subject to U.S. transfer taxes (estate and gift)
if they have property in the United States. The estate tax is
imposed only on the NRA’s property that at the time of death
is situated in the United States. An NRA is subject to the same
40 percent estate tax rate as a U.S. taxpayer, but only the first
$60,000 of property value is exempt. These harsh rules may be
ameliorated by an estate tax treaty. The United States does not
maintain as many estate tax treaties as income tax treaties, but
there are estate tax treaties in place with most Western European
countries, Australia and Japan.
The following assets are specifically included in the definition
of property situated in the United States: (1) shares of stock of
Continued to page 16