Tax Questions from EB-5 Investors

As I begin the EB-5 process, will I have to pay taxes on everything I own now?

No, you will only pay taxes on income you make after you become a U.S. permanent resident or meet the requirements for the Substantial Presence Test.  Your current assets and income will not be subject to U.S. taxes.  However, if you sell assets that you own now after becoming a U.S. permanent resident, you may be subject to taxes on the income from that sale.  There are ways to avoid this burden with pre-immigration tax planning.

When will I have to start paying U.S. taxes?

Once you obtain your Green Card, the U.S. considers you a tax resident, and will require you to pay taxes.  Prior to that, if you are physically located in the U.S. you can be required to pay taxes if you meet the requirements for the Substantial Presence Test.

What is the Substantial Presence Test?

The Substantial Presence Test is a formula whereby the U.S. federal government considers a foreigner to be a legal U.S. tax resident once they are physically present in the U.S. for a certain number of days.  The formula tracks the days over the current year and preceding two years (one-sixth of the days two years ago, one-third of the days one year ago, 100 percent of the days in the current tax year). If the total is 183 days or more over the three-year period, the individual is considered a resident, and must meet all the U.S. tax obligations that a U.S. permanent resident or citizen would.  Students on “F”, “J”, “M”, or “Q” visas are exempt from the Substantial Presence Test.

Will I have to pay taxes on money I make outside of America?

Yes. The EB-5 visa turns the applicant into a U.S. resident, subject to U.S. federal and state income taxes on all worldwide income, no matter where earned.  This includes sources of income in the United States and sources of income outside the United States.  As a U.S. permanent resident, you will have to report all of your earnings, from all sources, inside and outside of the U.S.  However, foreign tax credit & exclusions may be available on income that is taxed outside the United States if the US has an income tax treaty with an investor’s home country. Certain countries do not have income tax treaties with the US.

Other than worldwide income, what else is taxed?

In addition to income, your worldwide assets will be subject to federal gift and estate taxes.  Separately, capital gains taxes of 15% are paid on the sale or exchange of an asset such as a stock or property that is categorized as a capital asset.  If the capital asset is held for less than a year before sale, it is taxed at your regular income tax rate.

What will my income tax rate be?

Your income tax percentage is variable based on your specific tax bracket, which is dependent on how much income you make throughout the calendar year.  Tax brackets are also variable based on whether you file taxes as an individual or jointly with a spouse.  For 2015, the income tax percentages were between 10 and 39.6% of a person’s yearly income, depending on how much he actually takes home as earnings.

What is the difference between State and Federal Tax?

In the U.S., the federal government imposes income taxes and the states may individually impose an income tax as well.    There are seven states that do not impose an income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.  The rest of the states impose some form of income tax.  (Tennessee and New Hampshire do not tax income earned from wages but do tax income earned from dividends and interest.)

What else changes when I get my Green Card?

Once your application is accepted and you receive your Green Card, a complex series of tax obligations comes into play.  You must file:

  • Individual tax return Form 1040, reporting all worldwide income

  • FinCEN Form 114, Report of Foreign Bank and Financial Accounts, if the aggregate value of foreign financial accounts exceeds $10,000 at any time during the calendar year

  • Form 8938, “Statement of Specified Foreign Financial Assets,” for foreign financial assets (reporting thresholds vary based on whether the taxpayer is living in the U.S. or abroad and on marital status)

  • Form 5471, “Information Return of U.S. Persons with Respect to Certain Foreign Corporations,” if the investor owns a controlled foreign corporation (CFC); or is an officer or director of the company and owns 10 percent or more of the total value of the stock, or owns 10 percent or more of the total voting power of the stock

  • Form 3520, reporting a foreign gift received in excess of $100,000 from a foreign individual or estate

How can I minimize my taxes?

Before you become a resident, you can reduce or eliminate some of the income, gift and estate tax consequences that will be applicable to you once you become a taxpayer.  It is important that you start tax planning with a tax attorney and accountant before you immigrate.  The optimum time to commence the pre-immigration tax planning would be when an I-526 Petition (the “application”) is approved, since then you have the assurance that you can immigrate to the U.S. under the EB-5 program. Common ways of reducing tax obligations are the transfer of assets to other parties and the sale of assets in order to recognize gain prior to immigrating.  Assets can be sold and immediately repurchased with cash proceeds. This steps up the cost basis in the assets so you are not taxed on appreciation from when you first purchased it.  Or, you may want to dispose entirely of overseas property held in your name – if you don’t, income on that property will be taxable in the U.S.  Finally you can establish trusts that may defer or avoid income and/or estate tax in the United States.