American Portfolio Management – Jeff Jankowski

Foreign citizens working or retiring in the United States can be dazed and confused by the complex tax and financial reporting laws in the U.S. The millions of foreign citizens who come to the United States to work, live, and sometimes attain U.S. citizenship, face complicated tax, estate and other financial planning issues. And once they take up residence in the United States, each change in residency status, and attainment of U.S. citizenship, changes those financial planning issues.

When addressing any financial issues, one must start with one’s residency in the eyes of the United States. Ideally, financial planning should begin before the foreign national crosses the U.S. border, takes up residence here or considers marrying a U.S. citizen. This is the time when one has maximum flexibility.

For example, the United States treats the Canadian retirement account, called an RRSP, as an ordinary investment rather than an individual retirement account. The Australian Super Annuation Fund is taxed on the growth each year. Hence, foreign nationals should consider a number of distribution planning options before leaving their home country in order to minimize the potential tax bite.

A Mexican citizen moving to the United States may want to sell assets with large capital gains before the move. That’s because Mexico, like many other countries, has no capital gains tax, while the United States does. Furthermore, unlike most countries, the United States doesn’t allow you to step-up an asset’s basis when you arrive. Should you sell the asset while living here, all the gains most likely will be taxed, not merely the gains earned since your arrival on American soil.
Health care is another area that needs advance planning. Someone coming from Canada or England, for example, where there is national health care, will need to find private health care coverage here. Legal aliens may eventually qualify for Medicare, but not until after at least five years of consecutive residence in the United States.

Once you arrive in the United States to live, whether temporarily or permanently, residency status continues to be critical. For example, nonresident aliens are subject to U.S. income tax only on the income they earn in the United States. They also pay no capital gains taxes, except from the sale of real estate located in the United States.

Foreign nationals who receive a green card or live in the United States long enough to meet the “substantial presence” test (usually more than 183 days in a single year) become a resident alien. At that point, all income they earn worldwide, including capital gains, is subject to U.S. income tax. Thus, a foreign national expecting compensation for services outside of the United States should try to receive that compensation before receiving resident alien status.

Foreign nationals returning home should be aware that they may qualify for U.S. Social Security benefits, and they need to take care in rolling over qualified retirement plan accounts before leaving the United States.

Taxes on investment income can be especially complicated, depending on where you earned the income. It’s not uncommon for foreign citizens to end up being taxed twice, in the United States and in their homeland, for income from the same investment. There often are tax credits available, depending on the tax treaties, so working with a tax expert in this area is crucial.

Estate planning is another crucial area for foreign citizens. For example, American couples can transfer unlimited assets between each other free of estate and gift taxes. But a U.S. citizen can transfer tax-free a non-citizen spouse of up to $134,000 per year in 2011. This gift tax marital deduction for non-citizen spouses is indexed for inflation. In addition, each year gifts of up to the annual exclusion amount ($13,000 for 2011, as indexed for inflation) can be made to a non-citizen spouse without gift tax. If the U.S. citizen dies, the estate, instead of being transferred to the noncitizen spouse tax free, must be taxed within nine months. Again, it may be wise to transfer some assets before the foreign national becomes a resident. It also may be advantageous to establish separate savings and investment accounts, or a qualified domestic trust, which can defer estate taxes until the second death.
Becoming a U.S. citizen, especially if you also retain your homeland’s citizenship, again changes the planning needs. One area it dramatically changes is the tax-free transfer of assets between spouses. It’s also important to be sure that all insurance policies, wills and legal contracts are valid in both countries.

Another area of concern involves persons living here who hold dual citizenship in this country and their homeland. Should they decide to permanently move back to their homeland, it can save a lot of tax money in some cases to maintain their U.S. Residency.
Transferring your investment accounts to the U.S. can be very beneficial depending on the tax structure of your resident country. APM can assist in establishing U.S. brokerage accounts and manage your investments to protect your retirement and reduce income taxes.

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