Tax Planning Considerations
First Year Tax Issues Upon Becoming a US Resident
If a married taxpayer wishes to file a joint return, both spouses must be residents
at the end of the year and elect to be treated as U.S. residents for the entire
year. If the taxpayer is taxed as a U.S. resident for the whole year, he may be
able to take advantage of foreign tax credits on double taxed income, especially
if his home country has higher tax rates than the U.S.
In community property states, such as California, it may be advantageous for the
husband and wife to split their income and file separate returns for the part of
the year that they are U.S. residents. If they file separately and forego the election
to file jointly, they will not be taxed as U.S. residents for the entire year and
may avoid double U.S. taxation on their foreign source income.
Planning Opportunities Before Becoming a Resident
Although real property income is generally considered FDPI income and taxed at a
flat rate of 30%, an election can be made to treat it as U.S. business income. If
the election is made, all the rental expenses such as depreciation, mortgage interest
and repair expenses can be deducted and the net rental income will be taxed at the
graduated rates. It usually saves taxes than paying 30% of any gross rental income.
Such election can be made by attaching a statement to Form 1040NR for the year.
The election remains effective for the subsequent years unless revoked with consent
of a commissioner. (BNA 907-A-27)
If the foreign country from which the taxpayer is coming has lower tax rates than
the U.S., he may want to accelerate income before becoming a U.S. resident. Examples
would be the receipt of dividends from the controlled corporation, the recognition
of capital gains, distributions of current and accumulated income from a foreign
trust, or the recognition of U.S. source FDPI type income before becoming a US resident.
If, however, the foreign country from which the taxpayer is coming has higher tax
rates than the U.S., or he has huge capital loss rather than capital gains, he may
want to defer income until becoming a U.S. resident alien.
If the taxpayer sells his foreign personal residence and the transaction closes
after he is a resident alien, the entire gain could be taxable in the U.S. unless
he rolls over the gain by purchasing a home in the U.S. Alternatively, the taxpayer
could rent his foreign personal residence and take advantage of U.S. rules allowing
rental losses to offset other income in many situations.
The same considerations should be made regarding the timing of deductions and the
completion of gifts.
There are numerous income, gift and estate tax planning opportunities before investing
or becoming a U.S. resident. It is important to discuss the specific facts and circumstances
with experts and investing any major transactions.