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 second post. The first post is here.
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.
Before we get started, let’s talk about what it means to be a U.S. resident.
There are three major bureaucracies you will wrestle with in understanding this concept of being a “U.S. resident.” There is one minor bureaucracy that may or may not be important to you.
The first is the immigration bureaucracy. This is the United States Customs and Immigration Service. These are the people who issue your visa to enter and stay in the United States. I’m not talking about this process. I take it for granted that you will get a visa of some kind.
The second bureaucracy is the Internal Revenue Service. This is the Federal bureaucracy responsible for collecting taxes.
For them, you become a resident of the United States based on complex rules that are almost entirely unrelated to your immigration status. You can be a resident of the United States for tax purposes even if you are present in the United States without a visa.
The Internal Revenue Service has two (!) different sets of rules for you to determine whether you are a resident of the United States or not. One set of rules applies to the income tax. The other set of rules applies to estate, gift, and generation-skipping transfer tax. Don’t panic. I will clear this up for you.
The third bureaucracy? States. Most States have an income tax, and therefore they have a taxing authority responsible for deciding whether you are a resident of that State (therefore taxable) or not. Because there are so many variables here (each State will have a different rule) I will ignore this.
Also, State taxes are much lower than Federal taxes, so when you are making your preliminary plans it is simpler to ignore the State income tax rules. Later, when you are selecting a place to live, State tax will become very important. But for the moment, I am going to ignore State income tax.
The “half a bureaucracy” for tax purposes? Cities. A very few cities in the United States will have income taxes. New York and Philadelphia are two examples. Again, because the rules are different from place to place, and because the total tax will likely be small, I will not talk about City income taxes. But when you are deciding to buy a house, whether you are inside or outside the borders of a particular city will make a difference for your tax bill.