Tax Planning Considerations

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.

—————————————————————————————————————————————————————————————————————

We hope you found this article about “Tax Planning Considerations” helpful.  If you have questions or need expert tax or family office advice that’s refreshingly objective (we never sell investments), please contact us or visit our Family office page  or our website at www.GROCO.com.  Unfortunately, we no longer give advice to other tax professionals gratis.

To receive our free newsletter, contact us here.

Subscribe our YouTube Channel for more updates.

Alan Olsen, is the Host of the American Dreams Show and the Managing Partner of GROCO.com.  GROCO is a premier family office and tax advisory firm located in the San Francisco Bay area serving clients all over the world.

Alan L. Olsen, CPA, Wikipedia Bio

GROCO.com is a proud sponsor of The American Dreams Show.

The American Dreams show was the brainchild of Alan Olsen, CPA, MBA. It was originally created to fill a specific need; often inexperienced entrepreneurs lacked basic information about raising capital and how to successfully start a business.

Alan sincerely wanted to respond to the many requests from aspiring entrepreneurs asking for the information and introductions they needed. But he had to find a way to help in which his venture capital clients and friends would not mind.

The American Dreams show became the solution, first as a radio show and now with YouTube videos as well. Always respectful of interview guest’s time, he’s able to give access to individuals information and inspiration previously inaccessible to the first-time entrepreneurs who need it most.

They can listen to venture capitalists and successful business people explain first-hand, how they got to where they are, how to start a company, how to overcome challenges, how they see the future evolving, opportunities, work-life balance and so much more..

MyPaths.com (Also sponsored by GROCO) provides free access to content and world-class entrepreneurs, influencers and thought leaders’ personal success stories. To help you find your path in life to true, sustainable success & happiness.  It’s mission statement:

In an increasingly complex and difficult world, we hope to help you find your personal path in life and build a strong foundation by learning how others found success and happiness. True and sustainable success and happiness are different for each one of us but possible, often despite significant challenges.

Our mission at MyPaths.com is to provide resources and firsthand accounts of how others found their paths in life, so you can do the same.