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Pre-Immigration Income Tax Planning

Since the United States has some of the highest tax rates and most complex tax rules in the world pre-immigration tax planning is very important (but rarely done). Various actions that resident and nonresident aliens take can affect the amount of tax they will pay in the United States.  Tax planning, therefore, is essential for foreign nationals who are or will become subject to income taxation by the United States.

Some possible ways to plan the timing of income recognition include

  • Exercising stock options before US residency begins;
  • Accelerating the receipt of bonuses or other deferred compensation to a date before—or deferring it until a date after—the period of US residency;
  • Deferring recognition of losses until the period when US residency begins, and paying deductible expenses when a US resident;
  • In the case of privately-owned foreign corporations, accelerating the payment of a dividend while the shareholder is a non-resident alien (since earnings accumulated prior to US residency but paid as a dividend after the US residency start date would be subject to US taxation);
  • Obtaining a step-up in the tax basis of assets before US residency begins, as discussed in more detail below; and
  • Selling a foreign residence before US residency begins, to avoid US tax on any gain.

 

Rules enacted in 1997 appear to place nonresident aliens on the same footing as resident aliens and citizens with respect to the disposition of a principal residence.  In general, up to $250,000 ($500,000 for taxpayers who are married and file joint returns) of gain from the sale of a principal residence can be entirely excluded from income, provided that the home in question has been owned and used as a principal residence for at least two of the five years preceding the sale.  A pro-rata portion of the exclusion is available for taxpayers who fail to meet the two-year use test by reason of a change in employment, health, or other unforeseen circumstances.  If, for example, a taxpayer is transferred by an employer and must sell a house that has been occupied for only one year, the taxpayer will be entitled to one-half the maximum exclusion (i.e., to $125,000, or to $250,000 if the taxpayer is married and files jointly).  For purposes of the exemption, it is not important whether the taxpayer is a resident alien or a nonresident alien at the time of sale.  However, a recoverable withholding tax may be applied if the seller is nonresident. A nonresident seller might wish to seek a withholding tax waiver.