Tax planning for high-net-worth individuals immigrating to the United States.

• Author: Garcia, Rolando

For generations, the Statue of Liberty has welcomed immigrants with this most famous of quotes: "Give me your tired, your poor, your huddled masses yearning to breathe free" (Emma Lazarus, "The New Colossus"). However, Lady Liberty does not warn of the huge tax costs associated with immigrating to the United States. Foreign high-net-worth individuals immigrating to the United States should seek advice to minimize exposure to the U.S. income, gift, and estate tax system. This item articulates some considerations for those taxpayers.

How Residency and Domicile Are Established

A person is not subject to U.S. income tax unless he or she is a U.S. citizen or U.S. resident (Sec. 7701(a)(30)) and is not subject to gift or estate tax unless he or she is a U.S. citizen or domiciliary (Regs. Sec. 20.0-1(b)(1)). Residency for federal income tax purposes is different from domiciliary status for federal gift and estate tax purposes, and this distinction can often result in a person's having residency for income tax but not for estate or gift tax purposes (or vice versa). This distinction can make pre-immigration planning challenging but can create opportunities as well.

Income tax: The United States taxes the worldwide income of its citizens and residents (Sec. 7701(a)(30)). Thus, U.S. citizens and residents, even when living abroad, are subject to the full brunt of the U.S. tax system. U.S. federal income tax rates can be as high as 43.4% on U.S. residents. For income tax purposes, noncitizen individuals are U.S. residents if they meet either the green card test or the substantial-presence test, as described below.

Green card test: Individuals who hold a permanent resident card (a "green card") are taxable residents of the United States for income tax purposes, and, as a result, their worldwide income is subject to U.S. income tax (Sec. 7701(b)(1)(A)). Possession of a green card is the only relevant fact under this test (although there are special rules for the first and last year of lawful residence).

Substantial-presence test: In addition, individuals qualify as U.S. tax residents if they are present in the United States for 183 days or more in any given calendar year (Sec. 7701(b)(3)(A)). If the individual is not present in the United States for 183 days or more in any given year, but is present for at least 31 days, and the individual's days present in that year and the two preceding years, based on a weighted formula, equals 183 days or more, then the individual also qualifies as a resident for that year (id.). An individual is subject to U.S. income tax on the first day of...