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Every year, millions of immigrants enter the U.S. for myriad reasons. Some immigrants come to work here temporarily while others hope to be granted the right to stay permanently and pursue their versions of the American dreams. There’s one thing that unites them–the hope of a better life for themselves and their children.
Whatever the reason one may have immigrated to the U.S., many immigrants maintain financial ties to their country of origin. Some have accumulated significant wealth before even entering the U.S. For many immigrants, there is a misconception that the wealth they accumulated before emigrating to the U.S. is not subject to tax in the U.S. at all or that it is not subject to tax in the U.S. until money is brought into the U.S. However, these misconceptions are not correct and can be costly to correct after one has already entered the U.S.
The U.S. has arguably the most complex system in the world. New immigrants may be surprised to learn that U.S. residency is not synonymous with U.S. immigration status. Individuals who become U.S. residents for tax purposes are subject to income tax on income earned anywhere in the world without regard to whether an asset is acquired before the status is obtained. Worse yet, certain income earned from foreign assets are subject to special rules which create a higher tax burden than income earned from U.S. assets. There are also many reporting requirements relating to foreign assets and transactions which could lead to substantial penalties if there is noncompliance.
The U.S. also taxes the transfer of wealth after a certain exemption amount during one’s lifetime or upon one’s death. If an immigrant has accumulated significant wealth prior to coming to the U.S., the U.S. estate and gift tax may severely impact the ability to pass such wealth to the next generation. The exemption amount may not be sufficient. A portion of the wealth could be subject to a gift or estate tax of up to 40%.
Whether it is the U.S. income, estate or gift tax, advance planning is key to minimizing the taxes due. The window of opportunity for the most flexibility and planning options is before one enters the U.S. Once one enters the U.S., the range of options will be limited.