Many individuals have relatives who are not citizens of the United States.  From time-to-time those relatives choose to come to the United States.  As a result, those relatives become citizens of the United States either by spending enough time in the United States or by obtaining a green card.

Once an individual becomes a resident of the United States that individual becomes subject to United States tax law.  United States tax law may differ significantly from foreign tax law.

For example, many countries allow the tax deferred accumulation of income in pension plans.  Many countries also do not tax employer contributions to a pension plan.  Employee contributions may also be deductible.

The United States does the same but only for United States pension plans.  The same rule may not apply for foreign pension plans.  One exception is if there are special provisions in a tax treaty or in the tax law.  Canada and the United Kingdom are two examples of such exceptions.

Therefore, a foreign individual who comes to the United States may have to pay tax on earnings in, and contributions to, a foreign pension plan.  It may be possible, with planning, to avoid this harsh result.  It may be possible to move a pension plan with a multinational corporation to a US plan.  Alternatively, it may be possible to move the pension plan to country which has a favorable tax treaty with the United States.

Another example is in the taxation of mutual funds.  Many United States citizens have invested in mutual funds.  They know that the mutual funds are required to make distributions of earnings and gains during the year.  The mutual fund owners have to report those distributions as income.  Often, those distributions are then reinvested in the fund, thereby increasing the owner’s basis.

Foreign mutual funds may not be subject to the same rules.  Foreign mutual funds may not be required to make distributions and may simply reinvest earnings without making distributions to owners. 

The United States government is not in favor of this type of arrangement.  To discourage this, the United States government has set up a Passive Foreign Investment Company (PFIC) regime.  Under this regime, owners of foreign mutual funds have extra reporting and tax requirements.  

If taxpayers make a certain election, they can report earnings as if the mutual fund followed United States tax rules.  The taxpayers then avoid some of the harsh results of the PFIC regime.

However, the mutual fund must provide the necessary information as to income and distributions.  Some mutual funds, especially with many investors who file United States tax returns, will do this as a courtesy.  Others may not.

To avoid, or minimize, these reporting requirements, an individual who owns foreign mutual funds, can adjust his/her portfolio before coming to the United States.  All funds can be sold, and other investments selected.

Alternatively, mutual funds can be sold and funds that provide PFIC information can be purchased.

These are just two examples of the effects of United States tax law.  They illustrate how necessary and beneficial it can be to do pre-immigration planning.

If you have any questions, please reach out to the SobelCo tax professionals for more information.

About the Author

Jim Lynch is the Tax Director at SobelCo who is charged with preparing many of the firm's more complex personal, partnership, corporation, estate, fiduciary and returns with international components. In addition, he is significantly involved in research and planning, particularly in the partnership, estate and international tax area. ...