EB-5 Immigrants and Taxes
Life is busy for EB-5 immigrants newly settling in the U.S. Find a place to live, enroll children in school, and the investor and spouse may seek employment. As you get used to living in this new environment, there is something else EB-investors must keep in mind, and that’s the issue of taxes – both in their country of origin and the U.S. It is wise to determine your future tax status before moving to the U.S. and making plans accordingly.
Do Immigrants Pay Taxes in the United States?
The simple answer to whether immigrants pay taxes in the United States is “yes,” and they may prove higher than taxes in the EB-5 investor’s country of origin. If the EB-5 investor has already been living in the U.S. as a non-resident alien, he or she is subject to tax, both federal and state, on income derived from U.S. sources. Upon receiving EB-5 visas, their tax situation changes. Now they are taxed as U.S. residents, and the federal and state U.S. tax code requires them to pay taxes on all of their income, even if earned in another country or countries.
For many EB-5 investors, it makes sense to sell foreign assets held in their name before moving to the U.S. Failure to do so means the U.S. will tax any income from those assets. If the assets have appreciated significantly, you may have to pay a great deal of U.S. tax if these holdings are sold after your move to the U.S.
If you do not want to sell certain assets, speak with tax advisors to see if there is a way to trigger gains before you leave your country of origin. The U.S. tax basis for such assets is determined by your initial tax basis. The IRS adjusts the rules for the foreign country to its own regulations. If you can trigger gains before immigrating, the asset has a new fair market value for U.S. purposes.
Immigrants and Taxes
When it comes to taxes from the immigrant’s country of origin, much depends on the laws of the particular country. That’s why determining your tax obligation and residence status after moving to the U.S. is critical prior to relocating. In some countries, moving to the U.S. causes the EB-5 investor to become a tax non-resident in their nation of origin, and that may include a departure tax. Income from your country of origin may now have a different tax status there after your U.S. move.
The Substantial Presence Test
Under U.S. law, if you stay in this country more than 183 days – a period of just over six months – during the prior three years, by default, you become a tax resident as far as the U.S. is concerned. This is known as the “substantial presence” test. If you travel back and forth to the U.S. frequently, whether for work, house-hunting, vacations or college tours with your teens, you may inadvertently become a tax resident.
Work with your immigration attorney and keep careful records to ensure you do not accidentally stay too long in the U.S. before obtaining your EB-5 visa.
Forms Green Card Holders Must File
Once the EB-5 investor receives a conditional Green Card, they must file various tax forms with the Internal Revenue Service. These include:
- Form 1040 – report worldwide income.
- FinCEN Form 114, Report of Foreign Bank and Financial Accounts – filing this form is necessary if the overall value of foreign accounts exceeds $10,000 annually.
- Form 8938, Statement of Specified Foreign Financial Assets – if this form is necessary depends on whether the individual resides in the U.S. or abroad, as well as their marital status.
- Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations – file this form if you are the owner of a foreign controlled operation, or if you are a director or officer of a company and own 10 percent or more of total stock value. If you own 10 percent or more of total voting power of a stock, you must file Form 5471.
- Form 3520 – this form is required if you receive a foreign gift worth more than $100,000, whether from a foreign person or an estate.
If you do not file required forms, you may be subject to substantial financial penalties. In some cases, failure to file such forms may result in criminal prosecution. The latter may affect your ability to remain in the U.S. and eventually attain citizenship.
The U.S. Departure Tax
Not every EB-5 investor intends to become a U.S. citizen or live the rest of their lives in the United States. For that reason, be mindful of the U.S. departure tax, also known as the expatriation tax, and plan accordingly. The departure tax applies to Green Card holders who give up or lose their permanent residence status, if they have lived in the U.S. for at least eight of the past 15 years before giving up the Green Card. The departure tax does not apply to everyone, but it does apply to high net-worth individuals. In 2019, that means individuals with an average annual net income of $168,000 or more over the previous five years, or a person with a net worth exceeding $2 million. Failure to certify the meeting of all U.S. tax obligations over the past five years before expatriating will also trigger the departure tax.
Under U.S. tax law, the value of expatriate assets are considered sold the day before the expatriation, and that is the fair market value for tax purposes. Currently, there is an exemption amount of $725,000, which is adjusted annually. Gains over that amount are subject to tax.
While estate planning is essential, it can also be tricky. It may be that the EB-5 investor does not plan to spend the rest of his or her life in the United States. When a resident dies in the U.S., their estate is taxed based on their assets worldwide. However, a non-resident is taxed only on those assets located in the U.S. if these assets exceed $60,000.
For estate tax purposes, residence is not as important as domicile, a legal term referring to the person’s intent rather than the actual dwelling in which they lived in at the time of death. If the EB-5 investor’s domicile is in the U.S. at the time of death, their estate qualifies for U.S. estate tax exemptions, which as of 2019 is $11.4 million for an individual and $22.8 million for a married couple.
At Lightstone, we know taxes are a major consideration for the EB-5 investor. For more information about immigrants and taxes in the U.S., visit here.