Planning prior to moving to the US
Although the US is often portrayed as a low tax jurisdiction the reality is anything but. The combined Federal, State and social security taxes which an individual may face in the US can often be significantly in excess of those applying in the UK for instance.
To mitigate any adverse US tax consequences it is highly recommended that individuals take steps to mitigate their tax exposures prior to moving to the US. Such planning might have several forms;
- Timing the arrival date, the signing of property lease or purchase of property and limiting presence in the US might all help to delay the onset of residency under Federal and/or State tax rules. With planning it can sometime be possible to delay Federal residency by over 6 months and State residence by up to 11 months.
- In contrast to the above in some cases an individual may want to begin residency earlier to benefit from ‘foreign tax credits’ paid prior to their move. Planning might involve ensuring that as much foreign tax as possible is paid in the calendar year of the move.
- Ensuring that capital assets owned when moving to the US are treated as being acquired at their Fair market value at the time of the move i.e. achieving an uplift in basis. This can be achieved through various means e.g. sale and repurchase or in respect to certain assets by making certain elections. With planning this uplift can often be achieved without there being any non- US tax issues.
- A rebalancing of investment portfolio away from assets which have an adverse tax treatment in the US (e.g. passive foreign investment companies).
- A review of financial interests in companies/partnerships to determine if the tax treatment will be as expected in the US. Certain elections may be required.
- A review of property holdings and mortgages. Surprisingly repayment of non US dollar denominated mortgages can give rise to income recognition. To mitigate this one could consider, rebasing the mortgage debt, repaying the debt prior to moving to the US or redenominating the mortgage in dollars. For principle residences the US exemption is often much less generous than in the UK so if it is intended to sell the main home it is often beneficial to so prior to the start of US residency.
- Deferring payment of items such as Charity payments until after US residency begins (if the individual wants to fund a UK charity then one could consider a Dual registered donor advised fund).
- Review of trusts to determine tax status and planning re timing of distributions.
- Where AN individual is identified as owning assets which are treated as PFIC’s and they cannot be disposed of then as for trusts, planning involving the timing of distributions may help mitigate taxes.
- Finally someone moving to the US might consider more complex holding vehicles – e.g. insurance products / ‘drop off trusts’ which can help shield income/assets (although there may be non US tax issues to consider).
There is much planning which can done. The impact of this planning can significantly lesson the burden of US taxes. Ideally Deloitte would recommend that the planning process begin at least 6 months prior to any move to the US. As the issues are complex this planning should only be implemented following the advice of a US tax expert.