While the EB-5 program offers a way to achieve resident status in the United States more rapidly than other immigration options, one downside is the taxes that investors become subject to. Relevant taxes include both income tax and transfer tax. It is important for investors to be aware of what these taxes entail prior to beginning the EB-5 program so they can take appropriate steps to reduce the amount of taxes they will need to pay.
Income Tax for U.S. Permanent Residents
In most cases, a U.S. permanent resident, i.e., someone who has obtained their “green card,” must pay income taxes like any U.S. citizen. Not only do they have to pay this on income received from within the United States, but taxes can also be assessed on income received from other countries (unless there is a tax treaty in place that prohibits this). In contrast, most other countries only assess taxes on income obtained within the country’s borders.
In addition to income tax on earned income, EB-5 investors who have obtained green cards also have to pay taxes on any gains from worldwide assets. For example, if an investor has a business in his or her country of origin and sells that business after receiving his or her green card, both federal and state capital gain taxes will be assessed on the total amount received in the sale.
If the investor cannot provide evidence of the purchase price of the asset, then taxes are assessed on the entire proceeds from the sale of the asset. The investor is required to provide documentation of what was originally paid for the asset if he or she wishes to deduct that amount from the total gains. Keep in mind that this only applies to assets sold after the green card has been received, but it does apply to all gain obtained outside the United States after a green card has been issued.
Preparation for Immigration
In order to reduce or eliminate the amount of taxes that end up being assessed, there are several steps that EB-5 investors can implement prior to beginning the EB-5 process. First, EB-5 investors should get rid of assets and monetary gain prior to applying for permanent resident status. One way this can be done is through gifts deposited in trust accounts. It is important to keep in mind that if trusts are foreign and the beneficiary applies for permanent resident status within five years of the trust’s formation, he or she will be taxed on the trust upon receiving resident status. To avoid taxation, trust assets can be deposited in an investment that is either non-taxable (like insurance policies) or minimally taxable (like certain tax-efficient investments).
Transfer Tax Assessment
If no tax treaty to the contrary has been established between the United States and the investor’s country of origin, any transfer of property that is located in the United States but owned by an individual who is not a U.S. citizen is subject to a transfer tax, i.e., gift tax, equal to 40% of the transfer amount if the total transfers are greater than $15,000 and transferred to someone who is not a spouse and $152,000 if the transfer is to a spouse who is not a U.S. citizen. Amounts above $60,000 that are still owned at death are again subject to a 40% estate tax.
In contrast to the tax requirements imposed on immigrants, U.S. citizens and legal residents are permitted through a unified credit to transfer up to $5 million to another individual without being taxed on it. In addition, gifts up to $14,000 each year are exempt from gift taxes. Once that $14,000 is surpassed, the unified credit kicks in. This also applies to assets located outside the United States.
To complicate things further, the definition of “residency” for tax purposes is different for transfer tax and income tax. For transfer tax, a “resident” is an individual living in the United States who has no intention of leaving at the time of transfer or death. Since EB-5 investors are required to declare their intent to stay in the United States, they are considered to be U.S. residents for the purpose of assessing transfer tax as soon as they begin residing in the United States.
If the immigrant investor has not yet qualified as a resident under transfer tax regulations, steps can be taken prior to moving to the United States to reduce or eliminate future transfer tax with the help of a tax professional. If assets are purchased through the correct structure, usually using a trust, that will eliminate any transfer taxes. However, the trust needs to be used from the initial purchase in order to qualify for this exception. Any property purchased in the investor’s name (other than the EB-5 investment, which is always in the investor’s own name) is much more likely to be subject to transfer tax assessment.
EB-5 immigrant investors come from many different countries and backgrounds, and their situations vary. While there isn’t any single best way to minimize or eliminate U.S. taxes for investors, it is important to plan ahead of time with the help of a tax professional who knows the ins and outs of U.S. tax laws. It is also important to be very clear about what the investor’s primary goals are regarding the ownership of assets.
As an example, if the investor intends on keeping the property or assets purchased, a trust structure like the above mentioned one would be the ideal way to eliminate any transfer taxes. If, however, the investor plans to sell the assets in the near future, income tax should also be taken into careful consideration. Again, the use of a trust would come into play, but the investor may also want to place ownership of the assets with a partnership or LLC through the trust.
Carefully planning must take place before EB-5 investors enter the EB-5 process and become residents of the United States for tax purposes. A qualified tax professional can assist with this process and help immigrant investors know what steps to take in order to eliminate or at the very least reduce U.S. taxes.