Thomas C. Roberge & Company

PRE-IMMIGRATION TAX PLANNING

CAN GENERATE SUBSTANTIAL TAX SAVINGS

April 8, 2008

St. Petersburg and Sarasota
Telephone: (727) 822-9393
Email info@RobergeCo.com
Website www.RobergeCo.com

Copyright, 2008, Thomas C. Roberge & Company
All Rights Reserved

With the U.S. dollar at an all time low, the thought of obtaining a temporary or permanent visa to move to the United States is looking very attractive to many foreign nationals. We have often seen individuals get caught up in the excitement of the move.

However, we find that individuals in this situation fail to properly consider the tax consequences and planning opportunities that may be available. This article will address some of these issues.

The U.S. with its 35% maximum income tax rate (which, by the way, is normally not attained until one is well into a six figure income) is a tax haven compared to many countries. Most foreign countries have much higher average and actual tax rates. Also, Florida does not assess state income taxes against individuals.

Once an individual becomes a "U.S. income tax resident", he or she is taxed on their worldwide income, even if the income is not brought into the U.S. However, the U.S. provides a system of relief to avoid this income from being taxed twice. This is referred to as the "foreign tax credit". The way it works is that the U.S. income tax on non-U.S. income (for example, interest, dividends or retirement income from one's former home country) is reduced by the U.S. dollar equivalent of income tax charged by the former home country. This avoids the income from being taxed twice.

An individual becomes a U.S. income tax resident in one of two ways; either as a lawfully permanent resident (commonly referred to as a "green card") or if they meet the "substantial presence test". An individual is only taxed on their income from inside the United States until the point in time that he or she becomes a U.S. income tax resident. Once this point is passed the U.S. assesses tax on worldwide income.

However, it is the period of time before one becomes a U.S. income tax resident that can provide numerous tax saving possibilities in the U.S. and in one's home country. What strategies one employs during this transition can provide temporary and permanent tax savings.

Often, the year one terminates tax residency in their country of origin can be one for creative tax planning. Frequently, there can be a period of time between the time one moves from their home country until they achieve tax residency status in the U.S. We commonly refer to this as a "window of opportunity" when one is not a tax resident of any country. In other words, they are a citizen of the world.

In this situation, and with proper facts and planning, it frequently is legally possible to have certain types of non-U.S. source income generated during this period and not be taxed in the U.S. or the country of origin. Or, if the income is taxed in the country of origin, it may be possible to have it taxed at a lower rate since the individual is no longer a resident there.

As an example, there are certain European countries that do not tax gains from real estate sales if the property is owned for a number of years immediately prior to the sale. If the property in European Country X is sold after one establishes tax residency in the U.S., then the U.S. tax authorities will tax the profit. However, if it is sold before becoming a U.S. tax resident, then the U.S. cannot tax the profit. With proper planning it may be possible to create a period of nonresidence between the country one is emigrating from and the U.S. while these sales are being consummated.

As another example, a few years ago a European physician was planning a move to the United States. As part of the planning he negotiated and concluded the sale of his medical practice for a very substantial amount before he left his home country. Part of the terms of the sale were that the transaction price would be paid for over several years by the young physician who purchased the practice. In effect, these payments would be made after our client left European Country X and after he became a U.S. tax resident.

Through proper planning none of the principal payments from the sale of the medical practice were taxed by Country X. Furthermore, none of the principal payments were taxed in the U.S. because of certain strategies that were employed in the drafting, timing and manner in which the contract was executed. In other words, none of the profit from the sale of the medical practice was taxed in the physician's home country, and none of the profit was taxed in the U.S. even though the payments were received after he became a U.S. tax resident. And - it all was legal!

Frequently, one moves to the U.S. owning substantially appreciated real estate in their home country. If they sell the non-U.S. real estate after becoming a U.S. tax resident, then the U.S. will tax the profit on the sale. The profit is generally calculated by taking the difference between what the property is sold for less its tax basis (cost, plus improvements and expenses of sale, less depreciation). The U.S. tax system does not allow one to index the tax basis for inflation from the original purchase price. There are planning techniques available whereby one can utilize certain contracts using the appreciated property prior to becoming a U.S. tax resident, realize the profits from the eventual sale of the properties, and not have to pay tax on the appreciation that occurs prior to becoming a U.S. resident.

The creation and utilization of non-U.S. trusts prior to becoming a U.S. resident is an area of great complexity, especially if the settlor creates them within five years of becoming a U.S. resident. Also, if the person creating the trust retains control over the trust, he or she is generally treated as the owner for U.S. tax purposes. One should seek competent professional advice before creating these entities.

In summary, the time before one moves to the U.S. and becomes a tax resident can be a tremendous opportunity for minimizing one's taxes in the country he or she is moving from and the U.S. The tax planning strategies normally should be structured prior to establishing tax residency in the U.S. It is usually too late to put these strategies in place after becoming a U.S. resident. Our firm specializes in international tax matters and has significant experience in pre-residency tax planning. Please contact us at 727 822 9393 if you would like to discuss these matters further.

Internal Revenue Service Circular 230 Disclosure - You are hereby advised that any tax advice contained in this article is not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or to support the marketing of any tax transactions or matters addressed herein.