United States immigration gift and estate tax planning

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Wealthy citizens of Mexico or Latin America often consider moving to the United States in search of greater opportunities. However, those thinking of making a move should consider if pre-immigration tax planning is necessary.

Types of Tax Obligations to Consider

In the United States, there are three major types of taxes: federal income tax, federal estate tax, and federal gift tax. (The U.S. is the only country with estate and gift taxes, so these obligations may come as a shock to foreigners with minimal past exposure to the U.S. tax system.)

Local governments, such as states and municipalities, may also impose their own taxes, but federal tax rates are significantly higher than the state and municipal tax rates and thus the primary focus of any pre-immigration tax planning.

  • Federal income tax. The U.S. taxes foreigners who are considered tax residents on their worldwide income. Nonresidents are also taxed on income derived from the U.S., such as income from a U.S. business or income from certain real property investments in the U.S.
  • Federal estate tax. Estate tax is a tax on a person’s right to transfer property to their heirs after their death. The federal estate tax has a maximum rate of 40%
  • Federal gift tax. U.S. citizens and estate and gift tax residents must pay taxes on gifts that are made during their lifetimes and on their property, wherever it is located, when they die. Like the federal estate tax, there is a maximum rate of 40% for the federal gift tax.

Tax planning requires that you take into account which taxes you want to avoid. For example, transferring assets to a trust can help you avoid federal estate tax, but this approach will not eliminate the need to pay income tax on any income earned by the trust.

How Residency Is Determined

It is important to remember that U.S. residency for immigration purposes is not necessarily the same as U.S. residency for income tax purposes. Even if a person is in the U.S. illegally, they could still potentially have a tax liability.

A person who has a green card, even if it is only a conditional green card, is considered an income tax resident from the moment they arrive in the U.S. A noncitizen is subject to income tax if they meet the substantial presence test.

  • A person in the United States for 183 or more days is a tax resident for that tax year.
  • A person who spends at least 31 days in the U.S. may still be a tax resident via the carryover formula. This formula takes into account the days spent in the U.S. in the last three years. If the sum of all days is 183, the person is a tax resident.
    • Days from the current year (Year 3) are counted at their full value.
    • Days from the preceding calendar year (Year 2) are counted as 1/3 of a day.
    • Days from the second preceding year (Year 1) are counted as 1/6 of a day.

Estate and gift taxes use a different test. For a person to be considered an estate and gift tax resident, they must simply be present in the U.S. and intend to remain there permanently. If a person passes away while they are considered an estate and gift tax resident, their worldwide assets are subject to estate tax even if they were not an income tax resident.

There Are No Cookie-Cutter Solutions

While it is possible to engage in tax planning after a person has moved to the U.S., waiting to plan eliminates some of the options available to reduce your tax liability. You will need to consult an attorney experienced in working with international clients to determine how to reduce your exposure to U.S. taxes as a citizen or tax resident.

As you can see, there are no cookie-cutter solutions when it comes to pre-immigration tax planning. Wealthy Mexican and Latin American investors considering a move to the United States need to consider the value and type of assets, as well as where these assets are located, to determine if it’s better to plan as a U.S. person or a foreigner.

The typical CPA or tax prep office is ill-equipped to handle the specialized needs of investors with multi-national business interests. However, attorneys Antonio Gastélum and María Elia Gastélum are experienced, dual-licensed, and bilingual international business planning attorneys with the expertise to take care of all of your legal needs. To learn more about how MEG International Counsel can help with your pre-immigration tax planning, contact us online or call us today at (800) 694-6604.

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