In my previous blog I discussed potential income tax issues such as Federal tax, state tax and PFIC tax that arise upon becoming a U.S. resident. In this blog I would like to focus on informational reporting requirements as well as estate tax issues that arise upon becoming a U.S. person.
Reporting requirements for Israeli assets- Upon becoming a U.S. resident you must file a form 1040 to report and pay taxes to the U.S. on your worldwide income. However, for people on relocation to the U.S. from a foreign country such as Israel there are many important informational reporting obligations that the U.S. requires. These reporting requirements were originally intended to give the U.S. greater oversight on the foreign holdings of its citizens. However, they apply to residents of the U.S. that are on relocation as well. Please note, these are informational reporting requirements and I am not discussing any income tax aspects of these forms. I will list the main forms to be aware of below:
- Form 114- FBAR– ForeignBank Account Report– If you have more than $10,000 in non-U.S. bank accounts, investment accounts or financial assets you must report them annually to the U.S. treasury. If you have an Israeli bank account, pension or keren hishtalmut that have an aggregate value above $10,000 you must file this form annually. For more detailed information, see our FBAR page here.
- Form 8938– If you have non-U.S. financial assets above $50,000 (threshold depends on your filing status) you need to file this form as part of your individual tax return (Form1040).
- Form 5471– If you either own more than 50% of a foreign (non-U.S.) company or own 10% of a foreign company while other U.S. people that each own 10% or more in total control more than 50% of a foreign company, you must report its activity on this form.
- Form 8621– If you hold more than $25,000 in PFICs you need to report these holdings annually on this form. This is in addition to the income tax reporting of sales of PFICs.
- Form 926– If you invest more than $100,000 in a non-U.S. company or acquire a 10% or greater interest in a non-U.S. company you must report this investment/acquisition on this form.
- Form 8865– If you contribute more than $100,000 to a non-U.S. partnership or acquire a 10% or greater interest in a non-U.S. partnership you must report this investment/acquisition on this form.
- Form 3520– if you receive a gift or inheritance from a non-U.S. individual or estate of $100,000 or more or received a gift of $15,797 or more from a foreign corporation or partnership, you must report that gift on this form. Additionally if you receive a distribution from a foreign grantor or non-grantor (non-U.S.) trust you must report the distribution on this form.
- Form 3520-A – If you have ownership in a non-U.S. trust it is reported on this form and then the income is reported on form 3520.
Beware of estate tax-The definition of a U.S. person to be subject to estate tax is different than the definition used to be subject to income tax. In order to be subject to U.S. estate tax you must be considered permanently domiciled in the U.S. However, once you become a U.S. resident for estate tax purposes, then you have exposure to U.S. gift and estate tax on your worldwide assets. U.S. persons currently each have a gift and estate tax exemption of $11,200,000 so if your net worth is above this amount you need to consider a strategy to protect you from exposure to this tax. There is a lot of planning to be done to protect you from exposure to this tax before relocation. Additionally, if through gifts or inheritances, you foresee reaching a net worth in excess of this threshold then planning can be done to protect these assets from estate tax.
Beware of becoming a long term green card holder-Upon relocation to the U.S. you might start out with a work visa. However, as you become a lawful permanent resident of the U.S. you are typically issued an alien registration card also known as a Green Card. This allows you to reside in, as well as enter and exit the U.S. freely. However, it is important to pay careful attention to how many years you hold the green card. Once you are a green card holder for any part of at least 8 of the past 15 tax years, you are considered a long term green card holder. Once you attain the status of a long term green card holder you are subject to the U.S. rules of expatriation and exit tax upon surrender of your green card. This applies even if you have already returned to Israel. If you have retained the green card for at least 8 years and continue to file a form 1040 then you have exposure to expatriation tax like all other U.S. persons. Therefore, if you have moved back to Israel before having the green card for 8 years, it is important to consult with a professional about surrendering the green card. There is other planning that can be done for green card holders once they return to Israel. The key is to be aware of the issue so that proper planning can be done to avoid unnecessary tax complications.
These are some of the pitfalls of relocation that can be avoided with proper planning. Our experience has shown that with proper awareness of the issues and timely consultation with professionals, unnecessary complications can be avoided.
The writer, Fred Kahn, is a partner at Philip Stein & Associates and head of the Individual and Partnership Tax Department