Coming to America: the basics of pre-immigration tax and estate planning.

• Author: Klasing, David W.
• Position: Taxation guidance

CPAs are often among the firs1 tax professionals who are approached when a nonresident alien is considering immigrating to the United States. Immigration to the United States can lead to enormous income, gill and estate tax ramifications to the high net-worth client. Therefore, a basic understanding of pre-immigration, tax and estate planning is a great quiver for CPAs to have in their arsenal.

Pre-Immigration Tax Planning Basics

As CPAs understand, the United States subjects its citizens and permanent residents to Federal income tax on their worldwide income, including foreign source income.

However, foreign source income is not subject to U.S. income tax prior to a nonresident alien becoming a citizen or resident, usually via obtaining a green card or by meeting the substantial presence test.

Therefore, the usual strategy for pre-immigration income tax planning involves accelerating the realization of foreign source income prior to immigration to avoid U.S. income tax, and deferring losses and deductible expenses until alter immigration SO that they may lie used to offset post immigration taxable gains and income.

Accelerating income typically involves collecting outstanding amounts that may be due--such as accounts receivables, stock options, accumulated earnings from foreign entities, taxable deferred compensation plans and notes held from installment sales. Where practical, these assets may also be sold at their present fair market value and the proceeds transferred to the individual before immigration.

In addition, where immigrant has foreign assets with substantial built-in gain, those assets do not receive a step-up in basis upon obtaining U.S. citizenship or permanent residence status. Consequently, those assets sill mid be disposed of and possibly reacquired at a higher cost basis prior to immigration to avoid U.S. taxation on the built-in gain.

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However, for the sale to be respected, the transaction should be entirely arm's length, bona fide and yell documented-with no implied obligation for repurchase or cancellation. It should be mentioned that there would be expenses to consider when both selling and repurchasing.

In contrast to accelerating realization of built-in gain and income, built-in losses and deductible expenses should be deferred until U.S, residency status is achieved to shelter post-immigration income and gain. This includes deferred disposition of loss property and--whew practical--deferred...