Considering Immigrating to the U.S.?
Tax considerations are often overlooked by those seeking lawful entry into the United States, as well as the immigration attorneys who represent them. In the context of non-residents with substantial offshore holdings, or those with an interest in a foreign business who anticipate continuing to receive income from the foreign entity, becoming a permanent legal resident or a U.S. citizen can have serious unintended income tax consequences and may impose the additional burden of financial reporting.
The U.S. income tax system is based upon the concepts of “tax residency” and “source income.” Closely related to the concept of residency and source income is “Jurisdiction.” In order to impose an income tax, the United States must have Jurisdiction over the individual. Residency is one method for establishing jurisdiction. The source concept can also be used for establishing jurisdiction over a non-resident alien who receives income from U.S. sources or income effectively connected with a trade or business in the U.S.
Both U.S. citizens and permanent legal residents are considered to be U.S. residents for federal income tax purposes. In addition, a non-resident may be considered a U.S. resident for U.S. income tax purposes if the individual is physically present in the United State for the requisite number of days. The significance of residency for U.S. tax purposes is that tax residency provides as basis for jurisdiction. The United States is one of the few countries in the world that taxes an individual considered to be a U.S. tax resident on his or her worldwide income. Thus,an individualwho secures permanent legal status or citizenship in the U.S. will be subject to income tax on income earned within the United States, and will also be subject to U.S. income tax on any foreign income received from sources outside of the United States, including wages, self-employment income, income from a Controlled Foreign Corporation or a Passive Foreign Investment Company, interest, dividends, rental income and gains or losses from the sale of stocks and bonds.
In addition to being subject to U.S. income tax, an individual may be required to file certain forms and financial reports, including, but not limited to, FinCen Form 114 (FBAR), Form 8938, Form 5471, Form 3520, etc. in order to comply with the Bank Secrecy Act and the Foreign Asset Tax Compliance Act.
Nonresidents who are actively pursuing U.S. permanent legal status or those currently involved in the naturalization process may not be aware of the pitfalls associated with the failure to comply with the U.S. tax laws and financial reporting requirements. Failure to properly report foreign financial assets or foreign income can serve as a basis for denial of permanent legal status or rejection in the naturalization process. Individuals may also be subject to severe civil penalties, criminal prosecution and ultimately deportation.
Anyone considering permanent resident status or those already here, who are being considered for naturalization, should seriously seek the advice of a tax attorney before proceeding further.