Elections can be made up to 75 days retroactively, but a successful pre-immigration liquidation may require additional measures before the effective date of the election—and before the shareholder becomes a U.S. resident for tax purposes. In some cases, it may be possible to make a late election.
It’s important to note that residence can begin midyear, so it is critical to pinpoint clients’ U.S. residency starting date before they check the box. An election that results in the deemed liquidation of a foreign corporation after the company owner becomes a U.S. resident can trigger U.S. taxes on the gains.
This option is not for everyone. Once an entity elects to be treated as a partnership or disregarded entity, its income and losses flow up to its owners, who may or may not have other losses or deductions that could offset the income, or income against which losses or deductions from the entity could be applied to reduce taxes. Moreover, there are limits to how soon clients can check the box again to convert the entity back into a corporation, and there are significant tax consequences to doing so once they become U.S. residents. A decision to check the box should not be taken lightly.
Pre-Immigration Gift Planning
If clients are planning significant wealth transfers, they might consider transferring non-U.S. assets and intangible property, including corporate stock, before they become U.S. residents. U.S. citizens and residents are subject to gift and estate taxes at a 40% rate on lifetime gifts or gross estates in excess of a combined exclusion amount of $5,450,000, without regard to where their assets are located. Many states impose estate taxes as well. In contrast, nonresidents are subject to gift taxes only with respect to gifts of tangible U.S. property, including real estate, and to estate taxes only with respect to U.S. “situs” assets, including stock in U.S. companies, albeit with a much lower $60,000 exclusion. Even if transfers in the near term are likely to be below the $5,450,000 exclusion threshold, clients can avoid prematurely using up their exemption by making gifts that would be taxable only to a U.S. person before they establish residence. Also note that residence for gift and estate tax purposes is based on different criteria than residence for income tax purposes.
Numerous tax complications can arise with cross-border wealth transfers, particularly where trusts are involved. Coordination between U.S. and foreign tax advisors is critical.
Exit Tax And Visa
If a foreign client is looking to reside in the U.S. temporarily, it is important to consider their eventual departure. The U.S. imposes an exit tax on U.S. citizens who relinquish their citizenship, as well as on long-term residents who give up their green cards if they have been lawful permanent residents for eight of the last 15 years. Additional taxes may be imposed if such individuals subsequently make gifts or bequests to U.S. citizens.
The exit tax generally does not apply to those without a green card, so clients should weigh their visa options carefully. A non-immigrant visa, such as an E-2 investor visa, may be more suitable than a green card in many cases. Moreover, a green card holder is more likely to be considered a U.S. resident for gift and estate tax purposes. If a client already has a green card, then you will want to consider how “permanent” his or her residence will be before reaching the eight-year mark.
The exit tax, it should be noted, can be triggered by involuntary expatriations—for example, by having a green card revoked for “abandonment” (when someone is outside of the country too long) or for convictions or other deportable offenses.
Also, most departing residents, and some nonresidents, are required to obtain a tax clearance from the IRS before leaving. Whether one is coming or going, tax planning across borders is never simple.