Getting a green card is a dream come true for many. But without suitable tax planning before entering the US, you might find yourself in an unfavourable US tax position without even realising it. Let’s explain why…
In most cases, you would be a US tax resident (for US federal income tax purposes) once you have been issued with your green card and have entered the US with your green card. This technically means that you must pay tax in the US on your worldwide income and gains, however this does not automatically mean you are no longer a SA tax resident. If you have not formally ceased to be an SA tax resident by no longer being regarded as ‘ordinarily resident’ in SA or no longer meeting the physical presence test, you will also be liable for tax on a worldwide basis in SA.
It may be tempting to claim treaty relief in terms of the double taxation agreement concluded between SA and the US, but formal advice must be obtained from US immigration specialists, since claiming treaty relief may have an impact on your US immigration status.
If you are a beneficiary of a trust, domestically or offshore, as a green card holder it would be pivotal to obtain US tax advice to ensure that the trustees have taken your facts and circumstances into account. Distributions from trusts that are not set up with US planning specifically in mind are usually taxed aggressively from a US perspective and may be coupled with penalties and interest. This could result in up to 100% of a distribution made to a US person being wiped out by tax, penalties and interest!
In the same breath, whether a distribution is made or not, being a beneficiary of a trust with certain investments or with underlying companies can also result in tax obligations and reporting requirements, so it is also pivotal to have your affairs assessed by suitably qualified US tax advisers.
Investments held personally:
As an SA tax resident who is a green card holder, your investment lens must consider both jurisdictions from a tax perspective.
For example, certain foreign (non-US) mutual funds, ETFs, unit trusts or collective investment schemes could be regarded as Passive Foreign Investment Corporations, also known as “PFIC” investments. PFICs are taxed quite punitively from a US perspective, potentially at the highest income brackets, and again, may be subject to penalties and interest. The high tax rates are accompanied by onerous reporting requirements as well.
With certain investment policies such as endowment policies and wrappers, there is a potential for the policy to be taxable in SA (by the relevant insurance house) and again in the US in the green card holders’ hands. This could result in double taxation as there is a mismatch in taxpayers.
When it comes to SA retirement funds, lump sum payments from SA retirement products are generally taxable at the withdrawal benefit table rate or the retirement lump sum benefit table rate. These tables generally provide a preferential tax rate in comparison to your marginal income tax rates. The US may in certain circumstances treat the payment as ordinary income subject to income tax rates in the US.
Ensuring that you file your US tax returns timeously and correctly is but one of the items to tick off to ensure compliance in the US. If you hold a green card or are about to obtain a green card, beware of the adverse US tax and compliance consequences that follow. It is always recommended to obtain specific US tax, compliance and immigration advice, where applicable.
Receive Focus insights straight to your inbox
Although information has been obtained from sources believed to be reliable, Investec Wealth & Investment International (Pty) Ltd or its affiliates and/or subsidiaries (collectively “W&I”) does not warrant its completeness or accuracy. Opinions and estimates represent W&I’s view at the time of going to print and are subject to change without notice. Investments in general and, derivatives, in particular, involve numerous risks, including, among others, market risk, counterparty default risk and liquidity risk. The information contained herein is for information purposes only and readers should not rely on such information as advice in relation to a specific issue without taking financial, banking, investment or other professional advice. W&I and/or its employees may hold a position in any securities or financial instruments mentioned herein. The information contained in this document does not constitute an offer or solicitation of investment, financial or banking services by W&I . W&I accepts no liability for any loss or damage of whatsoever nature including, but not limited to, loss of profits, goodwill or any type of financial or other pecuniary or direct or special indirect or consequential loss howsoever arising whether in negligence or for breach of contract or other duty as a result of use of the or reliance on the information contained in this document, whether authorised or not. W&I does not make representation that the information provided is appropriate for use in all jurisdictions or by all investors or other potential clients who are therefore responsible for compliance with their applicable local laws and regulations. This document may not be reproduced in whole or in part or copies circulated without the prior written consent of W&I.
Investec Wealth & Investment International (Pty) Ltd, registration number 1972/008905/07. A member of the JSE Equity, Equity Derivatives, Currency Derivatives, Bond Derivatives and Interest Rate Derivatives Markets. An authorised financial services provider, license number 15886. A registered credit provider, registration number NCRCP262.