FPA Financial Planning Perspectives
FINANCIAL PLANNING FOR FOREIGN RESIDENTS IS TRICKY
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. Hence, the Canadian
citizen should consider a number of distribution planning options before
leaving Canada 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 no more than $110,000 in 2002 (indexed for
inflation) to a noncitizen spouse living in the United States. 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
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.
Clearly, this is a complex
area that requires advance planning and expert advice.
March 2002— This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Rich Chambers, CFP™, a local member in good standing of the FPA.
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