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February 6, 2010 - Phil Hodgen

Pre-immigration tax planning: Federal tax rules for being a resident

I am writing a series of blog posts about pre-immigration tax planning. What should you do — for tax planning — if you wish to become a U.S. resident?

This is the third post. Prior posts are found here: Post 1 and Post 2.

If you have any questions or comments I would love to hear them. Send an email to phil-at-hodgen-dot-com, or leave a comment below.

Routine disclaimer: this is not legal or tax advice to you. Go hire someone smart before you make any moves.


Federal tax rules for being a resident

There are two sets of Federal tax rules that define when you are a “resident” of the United States for tax purposes.

Income tax rules

There are technical rules for when you are a resident for income tax purposes.  One set of rules has some mechanical “count the days” tests.  If you are in the United States enough days during the calendar year, you are a resident of the United States for income tax purposes.  This determination is made without regard to your visa status.  Indeed, someone living in the United States without a proper visa may nevertheless be a resident for income tax purposes.

The other set of rules looks to your visa status.  If you are a permanent resident (meaning you have a visa status which is called a “green card”) you are treated as a resident of the United States for income tax purposes.

Bad tax results happen when you are not paying attention to the starting date of your residency status.  Perhaps you sold some real estate on a date when you were not a U.S. resident for tax purposes.  But application of the technical rules says that the sale occurred when you were a resident of the United States for income tax purposes.  That would take a nontaxable sale and make it taxable in the U.S.

I look for problems where the “count the days” rules could be inadvertently triggered making someone an accidental U.S. resident.  I also look at the “When did you start being a U.S. resident” and “When did you cease being a U.S. resident” because it is vital to know these dates in order to know whether a particular financial transaction is taxable in the United States or not.

Estate, gift, and generation-skipping transfer tax

There is a separate set of technical rules that determine when you are a resident for estate tax, gift tax, and generation-skipping tax.

  • The estate tax is imposed on the value of the assets you own when you die.
  • The gift tax is imposed on gifts you make in your lifetime.
  • The generation-skipping transfer tax is imposed when you transfer wealth by skipping a generation:  you leave an inheritance to your grandchildren, for instance.

These rules attempt to define where your true permanent home is located.  If it is in the United States, then you are a U.S. resident for these taxes.  If your true permanent home is in another country, then you are a resident of that country for these taxes.

Complexity

Both sets of rules are complex.  You might be a resident of the United States for income tax purposes, yet be a nonresident for estate, gift, and generation-skipping transfer tax purposes.  Or the revise might be true.

“Keep it simple” assumption

For our purposes, we are going to keep it simple.  If we are talking about you becoming a U.S. resident, we simply mean that for all purposes you are living in the United States as your primary home, and you are present in the United States at least 6 months out of every year.

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