Understand the Financial Mechanisms and Take Action before you Pack
Plan before you disembark
Before becoming a US resident, it is a good idea to get your finances in good shape. This includes exercising options, selling or swapping stock, and even requesting an early bonus. This could save you paying considerable amounts in Federal taxes. Especially if you are moving across the pond with less than six months of the current tax year to go.
Choose the Residency Options which Yield Less Payable Tax
As a general rule it is best to select the residency option which means you pay less tax. As such it is a good idea to look into the options carefully, factoring in how long you are going to be in the states. Alternatively, call upon a tax expert to help you out.
Arrange Malta QPROPS before you Leave Britain
There are some basic rules which apply to QPROPS and pensions which you need to be aware of. If you are planning to transfer a QPROPS, you should do this before you take residence in the US, and preferably use a Malta QPROPS as growth in pensions are not taxable. If you arrange the QPROPS once you are a US resident, you will pay tax to the Federal Government. You will have to disclose your QPROPS via Form 3520-A.
Pension contributions are taxable in the US if you currently hold a UK pension. As part of the existing tax treaty, growth in your UK pension is tax deferred until contributions begin. This holds true, even if you transfer funds between UK pension plans.
If you have been in living in the US for greater than 183 days in a tax year, sometimes less if you have been in and out of the country over the last three years, you have to declare all bank accounts and income sources you have from around the world. This includes rents, dividends, capital gains, and interest. These should be declared to the Inland Revenue Service and the U.S. Department of Treasury.
Once your combined incomes total or exceed $10,000 you are liable to pay tax. If you fail to disclose a bank account you can be hit with $10,000 fines. If you pay tax in other countries due to your income sources you can apply for a foreign tax credit.
Following on from tax, employee tax is worked out a little differently than in the UK. Unlike Britain, in America you tell your employer how much to withhold. It is important to get this right. Too little and you’ll have to make up the difference at the end of the tax year, and too much and you’re giving the US government an interest free loan.
Generally tell your employer:
- You will Claim 0 if you want to be extremely conservative
- Claim 1 if you’re single
- Claim 2 if you’re married
- For each dependent claim an additional withholding.
Sort out Your Corporate Affairs
If you own a UK based corporation, declare your dividends before making the journey stateside. They are tax free if you are basic rate tax payer but incur a 20% tax in America. That said, there are complex UK rules concerning tax and dividends which tie in to how long you have been living in the States. Also, you have to declare your company ownership to US authorities on Form 5471.
Get your Estate in Order before you Leave
There is a lot of merit in getting your estate in order before you live in America. You can avoid a lot of estate taxes by gifting your foreign assets to trusts and companies. Also, consider making the “check box” election in relation to foreign companies and investment assets. This could result in not paying out so much Capital Gains tax should the assets step up.
Keep an eye on the strict reporting requirements of securities, pensions, real estate and mutual funds. Their highest values have to be declared and unrealised gains could result in taxes being due.
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Source: Wall Street Journal Blog