CERTIFIED PUBLIC ACCOUNTANTS AND ADVISORS |
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FINANCIAL PLANNING FOR FOREIGN RESIDENTS IS TRICKY The millions of foreign citizens who come to the United
States to work, live, and sometimes attain U.S. citizenship, face complicated
tax, estate and other financial planning issues. And once they take up
residence in the United States, each change in residency status, and
attainment of U.S. citizenship, changes those financial planning issues. When addressing any financial issues, one must start with
one’s residency in the eyes of the United States. Ideally, financial
planning should begin before the foreign national crosses the U.S. border,
takes up residence here or considers marrying a U.S. citizen. This is the time
when one has maximum flexibility. For example, the United States treats the Canadian
retirement account, called an RRSP, as an ordinary investment rather than an
individual retirement account. Hence, the Canadian citizen should consider a
number of distribution planning options before leaving Canada in order to
minimize the potential tax bite. A Mexican citizen moving to the United States may want to
sell assets with large capital gains before the move. That’s because Mexico,
like many other countries, has no capital gains tax, while the United States
does.
Furthermore, unlike most countries, the United States doesn’t allow you to
step-up an asset’s basis when you arrive. Should you sell the asset while
living here, all the gains most likely will be taxed, not merely the gains
earned since your arrival on American soil. Health care is another area that needs advance planning.
Someone coming from Canada or England, for example, where there is national
health care, will need to find private health care coverage here. Legal aliens
may eventually qualify for Medicare, but not until after at least five years
of consecutive residence in the United States. Once you arrive in the United States to live, whether temporarily or permanently, residency status continues to be critical. For example, nonresident aliens are subject to U.S. income tax only on the income they earn in the United States. They also pay no capital gains taxes, except from the sale of real estate located in the United States. Foreign nationals who receive a green card or live in the
United States long enough to meet the “substantial presence” test (usually
more than 183 days in a single year) become a resident alien. At that point, all
income they earn worldwide, including capital gains, is subject to U.S. income
tax. Thus, a foreign national expecting compensation for services outside of the
United States should try to receive that compensation before receiving resident
alien status. Foreign nationals returning home should be aware that they
may qualify for U.S. Social Security benefits, and they need to take care in
rolling over qualified retirement plan accounts before leaving the United
States. Taxes on investment income can be especially complicated,
depending on where you earned the income. It’s not uncommon for foreign
citizens to end up being taxed twice, in the United States and in their
homeland, for income from the same investment. There often are tax credits
available, depending on the tax treaties, so working with a tax expert in this
area is crucial. Estate planning is another crucial area for foreign
citizens. For example, American couples can transfer unlimited assets between
each other free of estate and gift taxes. But a U.S. citizen can transfer
tax-free no more than $110,000 in 2002 (indexed for inflation) to a noncitizen
spouse living in the United States. If the U.S. citizen dies, the estate, instead of being transferred
to the noncitizen spouse tax free, must be taxed within nine months. Again, it
may be wise to transfer some assets before the foreign national becomes a
resident. It also may be advantageous to establish separate savings and
investment accounts, or a qualified domestic trust, which can defer estate taxes
until the second death. Becoming a U.S. citizen, especially if you also retain your
homeland’s citizenship, again changes planning needs. One area it dramatically
changes is the tax-free transfer of assets between spouses. It’s also
important to be sure that all insurance policies, wills and legal contracts are
valid in both countries. Another area of concern involves persons living here who
hold dual citizenship in this country and their homeland. Should they decide to
permanently move back to their homeland, it can save a lot of tax money in some
cases to maintain their U.S. residency. Clearly, this is a complex area that requires advance
planning and expert advice. March 2002— This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by McGuire & Co., LLP, a local member in good standing of the FPA. |
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