US tax pitfalls for a non-US person moving to the US
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US tax pitfalls for a non-US person moving to the US lists and describes the major difficulties that may be faced by non-US persons who move to the US and so enter the US 'tax net', where they were previously outside it. Non-US persons are US nonresident aliens; that is, they are not US citizens and not US permanent residents (also known as green card holders).
The US has complex and harsh tax laws that often apply unfavourably to non-US investment holdings and assets. These can create significant tax difficulties and expenses for new US immigrants who have investments or other assets in their non-US country and which they do not cash in before becoming US residents.
The information in this page describes the situation for new US residents, people who have moved to the US from other countries. It is also a list of considerations for anybody who is not yet a US resident but is contemplating becoming one in future.
In contrast to countries that allow an initial period of non-domicile residence before becoming a full taxable resident, the US taxes its residents on their worldwide income, and applies its full tax code, from the moment that an individual becomes a US tax resident. It has punitive tax laws for assets or investments held outside of the US by US residents.
This combination causes problems for new US residents who leave investments or assets behind in their previous country of residence when they move to the US.
The sections below describe how new US residents can face unpleasant US tax surprises.
US residency for tax purposes
Definition of US residency for tax purposes
183 days, or green card test.
Timing becoming a US taxable person
A period of non-residency may be available; if yes, consider using it.
Pre-immigration trips to the US may bring forward effective date of tax residency. (Solution -- be careful not to trigger this with visits before immigrating)
Earnings and salary
Income is often paid 'in arrears', but the US taxes on receipt rather than where earned. (Solution -- accelerate income)
Non-US cash accounts
FBAR and FATCA. Note that post-FATCA, some non-US banks may force account closure on moving to the US.
Savings accounts and other interest-paying accounts
Interest is instantly taxable to the US. Also FBAR and FATCA tax forms. Potential closure by non-US bank.
Non-US investment accounts
Likewise, instantly taxable to the US, and FBAR and FATCA. Potential closure by non-US financial institution.
Shares are okay, but ETFs and funds are likely US PFICs, leading to punitive taxation. (Solution -- sell before immigrating)
Long-term bond and CD-like saving holdings may pay gains after becoming a US resident. (Solution -- none if fixed-term accounts; maybe amortise gains?)
Sales after becoming a US resident attract US CGT, even on gains from before immigrating. (Solution -- if built-in gain, sell before immigrating; if loss, after)
Rarely if ever honoured by the US as tax-advantaged; require annual tax filing. (Solution -- collapse if possible, esp. if not expecting to return to prior country)
May be covered by treaty, but if not then treated as unwrapped investments/non-US trust. (Solution -- collapse, else often none)
Non-US real estate
If retained and rented out, depreciates over 40 years (compare to 25 for US properties). Note also 'depreciation recapture' on any later sale. (Solution -- none, really)
If sold, US CGT payable if not meeting the 2 of 5 years rule, or gain > $250k/person. Note tax is on complete gain, no 'step up' (Solution -- sell before immigrating, or max 2 years after, or leave US before selling) If sold, also note also tax on 'retiring a non-US mortgage' (Solution -- none, really)
Investment real estate
As above regarding depreciation and CGT (except for the principle residence exemption).
US estate tax
Low limit ($60k) if not domiciled in the US, though only on US situs assets. (Solution -- limit US situs holdings if resident but not domiciled)
Becoming a green card holder or US citizen
Both may expose you to the US 'expatriation tax' should you later move out of the US and surrender the green card or renounce US citizenship. The 'expatriation tax' is a disincentive for HNW individuals in particular to take out a green card or naturalize US citizenship.
Too complex to approach here, but note that many states ignore tax treaties; creates problems with non-US pensions.
- Panitz, Philip. "Welcome to America, Now Give Us Your Money!". Forbes. https://www.forbes.com/sites/janetnovack/2014/05/02/welcome-to-america-now-give-us-your-money/. Retrieved October 6, 2020.
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