The decision of a nonresident alien to move to the United States and become a U.S. citizen or resident alien will invoke significant tax considerations involving the interaction of the tax systems of the United States and the alien’s current country of residence. This includes both consequences under U.S. law and the application of tax treaties relating to income taxes and wealth transfer taxes. Under United States tax law, United States income tax is imposed on the worldwide income of a United States citizen or resident alien on the same basis. Effectively, a resident alien is subject to all the same tax rules as a United States citizen. However, in certain situations, a resident alien or a “green card holder” may limit his exposure to U.S. taxes on worldwide income and certain sources of U.S. income by utilizing an international tax treaty “tie-breaker.”
Our international tax attorneys can assist any individual considering moving to the United States. The following are strategies nonresident aliens can engage in prior to becoming a U.S. resident. Any foreign national considering immigrating to the United States should also consider possible collateral tax consequences in his or her current country of residence.
Sale of Appreciated Assets Pre-Immigration
Once a nonresident alien becomes a United States resident, that individual will be subject to U.S. income tax on his or her realized gain from the sale of assets regardless of when the appreciation occurred. Therefore, the prospective U.S. resident should consider disposing of appreciated assets prior to becoming a resident alien. Gain realized prior to becoming a resident alien will escape U.S. taxation.
Acceleration of Income
Prior to become a U.S. resident, individuals expecting to receive deferred income should consider accelerating the income to be received in the future so the income is realized at a time when it is not subject to United States income tax. Consideration still needs to be given to tax consequences in the person’s current country of residence, but it is a favorable strategy, if either the applicable tax rate is lower or the income could be accelerated in a manner that does not trigger additional tax in the person’s current country.
Consider Entity Election for Closely Held Foreign Eligible Entities
Under Treasury Regulation Section 301.7701-3, foreign eligible entities with limited liability are by default treated as corporations for United States tax purposes. Prior to becoming a resident alien, the foreign resident could file a Form 8832, Entity Classification Election, converting foreign eligible entities from a corporation to a partnership or other disregarded entity. This deemed liquidation of the corporation will result in a realization of gains for U.S. tax purposes (prior to the individual being subject to U.S. taxes) and create a higher tax basis going forward, when the individual is subject to U.S. taxes.