Make sure you’ve got these tax bases covered before moving to the US – The Economic Times

Clipped from: https://economictimes.indiatimes.com/nri/migrate/make-sure-youve-got-these-tax-bases-covered-before-moving-to-the-us/articleshow/86964770.cms?utm_source=ETTopNews&utm_medium=HPTN&utm_campaign=AL1&utm_content=23Synopsis

Pre-immigration tax planning and estate planning could ameliorate tax liabilities and help optimize your options before you trigger tax obligations. However, it is critical to remember that some tax-saving measures can be availed of, only before you become a lawful permanent resident or Green Card holder.

Poorvi Chothani

Managing Partner, LawQuest, Contributor Content

Poorvi Chothani is the founder and managing partner of LawQuest, an employment and immigration boutique law firm. Poorvi, a graduate of University of Pennsylvania, is admitted to the bar in India and the USA and is a registered and practicing solicitor, England and Wales. She holds senior leadership positions in the American Bar Association, American Immigration Lawyers Association and the International Bar Association.The United States of America (the U.S.) is still considered a land of opportunities and thousands of immigrants flock to the country every year, from all over the world. The coveted Green Card opens the door to myriad opportunities, but introduces stringent and sometimes onerous tax obligations, particularly in the space of income tax and estate tax.

Pre-immigration tax planning and estate planning could ameliorate tax liabilities and help optimize your options before you trigger tax obligations. However, it is critical to remember that some tax-saving measures can be availed of, only before you become a lawful permanent resident or Green Card holder.

When you apply for an immigrant visa at a U.S. Consulate, you are generally issued an immigrant visa that is valid for six months (within which you must travel to the U.S.). If your medical reports are likely to expire within six months from the date of your immigrant visa interview, your visa will be issued for an even shorter duration.

All immigrant visa holders must travel to the U.S. and seek admission into the country before the immigrant visa expires. It is important to note that a visa is a document that allows you to travel to the U.S. and present yourself to the Customs and Border Patrol (CBP) to seek admission into the country. Admission is not guaranteed.

However, once CBP finds you eligible for admission, you will be admitted as a Lawful Permanent Resident, commonly referred to as a green card holder. But no “green card” is issued at the port of entry. Instead, you will get a stamp in your passport that identifies you as a lawful permanent resident and this is valid for work authorization, permanent stay, and travel. This stamp is usually valid for 12 months from the date of admission.

A “green card” also known as a permanent resident card is issued by the USCIS after the date of admission and is later mailed to your U.S. address. A Permanent Resident Card (Form I-551) is proof of lawful permanent resident status in the United States.

Tax Obligations Triggered on Becoming a Lawful Permanent Resident and More

It is important to note that you are considered a lawful permanent resident in the U.S. for tax purposes from the date you were admitted into the country. All your tax obligations begin on this day and apply to the entire calendar year in which you enter the country. By way of example, a person entering the U.S. on January 2, 2022 will be subject to tax and reporting compliance from 2022 onwards. However, a person entering on December 26, 2021, will be subject to such compliance for year 2021 and onwards.

Individuals who apply for lawful permanent resident status or their green card from within the U.S. are required to file an Adjustment of Status (AOS) application on Form I-485. They are issued a Permanent Resident Card (Form I-551) once this application is approved.

However, individuals who apply for AOS are likely to already be tax residents in the U.S. under the substantial presence test. Such persons who have applied for AOS are subject to compliances which is described further in this article under the United States tax laws even before they have become Green Card holders.

Pre-immigration tax planning is imperative to minimize the impact of U.S. taxes on your worldwide income, your foreign assets, financial accounts, and investments. Planning for such a tax impact should start as soon as a foreign national begins to consider moving to the United States or plans on otherwise becoming a U.S. person. This is because, as soon as you set foot in the United States as a Permanent Legal Resident, your obligation to report your worldwide assets begins under the Foreign Account Tax Compliance Act 2010.

Once you have set foot in the United States, established your residency, and procured your Green Card, your worldwide income and assets are reportable to the U.S. Internal Revenue Service even if you later move out of the United States. This remains true until you officially surrender your Green Card. Please note that on giving up your Green Card you may trigger exit or expatriation tax liabilities in the U.S. The authors will address this issue in a future article.

Among the forms required to be filed for U.S. persons with foreign financial assets, the two most known are Form 8938 (under FATCA) and the FinCEN Form 114 AKA the FBAR if thresholds are met. These forms require that you disclose the highest balances in your foreign financial accounts for the calendar year.

You need to also disclose if you have or are a part of a foreign trust/ receive gifts or inheritances from non-U.S. citizens (Form 3520 and Form 3520-A), foreign partnership (Form 8865), foreign corporation (Form 5471) and own foreign mutual funds or other passive investments (Form 8621).

If you have not planned for these disclosures, catching up with the filing is a nightmare in itself and carries very heavy penalties for non-compliance! Amnesty programs for remedying non-compliance are available with the U.S. Internal Revenue Service but this must be done working with specialists.

One exception for a Green Card holder: In certain cases, you can claim Tax Treaty benefits if the income tax treaty between the United States and the country of residence has a provision that provides for a tie-breaker rule. Under this rule if you would be treated as a resident of the other country under the tie-breaker rule and you claim treaty benefits as a resident of that country, you are treated as a non-resident alien in figuring your U.S. income tax. For purposes other than figuring your tax, you will be treated as a U.S. resident.

If you are planning on immigrating to the United States, make sure you are consulting with tax professionals in the country where you live right now and coordinating it with US tax professionals who are experts in the field.

Pre-Departure Tax Compliance for Residents of India
Pre-immigration tax planning is equally important in India when an Indian resident leaves to become what is popularly known as an NRI (non-resident Indian). The individual ought to be mindful of his residential status in India to determine tax obligations, which depend on the duration of stay in India.

This is extremely relevant as the global income of a resident is subject to tax in India, which would include both ‘earned’ or ‘active’ income such as salaries or consultancy income and ‘passive’ income such as capital gains, interest, or dividends. On the other hand, non-residents are liable to pay income tax in India on income arising (or deemed to accrue or arise) in India, i.e., where the source of income is India.

Hence, one may plan the timing of their exit from India keeping in mind the impact on the residential status and taxable income in India. The individual & the immediate family may also look into any business interests/Trusts that they are part of, which may become exposed to U.S. tax reporting & compliance, as well. It would be incumbent on the individual to let such entities know of the move, so that any such obligation is appropriately addressed and acted upon.

It must be noted, however, that the individual is protected against any double taxation, thanks to the DTAA between the U.S. & India, which allows Indian residents to avail of Foreign Tax Credit for taxes paid in India, subject to terms & conditions.

Indian individuals would also need to take care of a few items on the banking side of things. It is most likely that their bank account would move to NRO/NRE status, for which the bank needs to be notified. FATCA declarations for U.S. compliance need to be completed with regard to all financial institutions that the individual has dealings with. Some financial accounts are open to Indian citizens and residents only and these may need to be closed.

Another aspect that is often ignored, are the retirement accounts. Given the paperwork and procedures necessary to amend or avail these benefits, it is important that the process is started well in advance.

Planning and More
It is advisable to consult specialists to help you minimize the overall tax impact of having assets in more than one country. There are lawful ways to address the complexities of reporting global income and assets, like creating a trust to hold Indian assets, among other things.

In addition, Green Card holders, citizens, and others who own assets in the U.S. are also subject to federal estate tax and may be subject to State-mandated estate tax depending on where they live. The authors will address this in a future article as well

Other Authors: Manasa Sogal Nadig and Sujatha R. Krishnaswamy

Manasa Sogal Nadig is an Enrolled Agent based the U.S. and is the founder of MN Tax and Business Services PLLC. Her practice is focused on U.S. and cross-border taxation of individuals and small businesses.

Sujatha R. Krishnaswamy is a Chartered Accountant, management consultant, and tax advisor, with a focus on Indian and U.S. taxation for individuals.

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