The Complexities of US Taxation for Relocating Investors

Moving to the USA remains the dream for many people around the world. But for taxpayers and their advisors, that word is rarely used, as the USA has the most complex tax code of any country. Migrating millionaires are sometimes shocked — not necessarily at the level of taxation, but at the number of forms that need to be filled.

Relocating and investing internationally can have significant tax implications that are often overlooked. With complicated cross-border tax rules and regulations, ensuring compliance and minimizing liability is critical yet challenging.

Navigating the nuances

The US tax system is unique among major economies in that it is the only one that taxes on the basis of citizenship rather than residence. It also taxes citizens on their worldwide income, wherever it has been generated. The combination of these two things means that those that have business interests around the world can suddenly find that they are liable to provide all kinds of informational reporting about their interests elsewhere.

Another major element of America’s tax system that adds complexity is the existence of separate state tax rules in each of the fifty states. In forty-one states, state income taxes apply to earnings of individuals, with a further two states taxing savings income. Where someone works across several states, the apportionment of income between state tax systems can become involved. Of the fifty states, six have their own inheritance taxes too, adding further demands.

The USA has historically produced a large number of successful businesspeople, along with many companies with foreign operations. This record of success is the main driver of complexity in the tax system because it led to the USA needing to prevent wealth being secreted offshore much earlier than other countries. This means that whether it is ‘Controlled Foreign Corporation’ rules or ‘Passive Foreign Investment Company’ rules, the Internal Revenue Service (or IRS) will delve further into the depths of a corporate structure than many countries, as it attempts to ensure that tax evasion does not take place.

The US tax code also differs from many others in having a culture of rewarding philanthropic and charitable contributions with generous tax breaks, which much of the rest of the world does not.

Immigrants to the USA

The USA is a magnet for individuals — businesspeople in particular — from around the world. But the complexities of its tax system make it especially important for those considering relocating to the country to pause and investigate before making a move. This is because the significant benefits of having US residence come with the obligation to be taxed on worldwide income. Where wealth is held across a family but only one member is moving to the USA, time invested in reviewing ownership structures before the move to ensure that those who will not be moving to the USA are not inadvertently caught up in the US tax system is generally time well spent.

In addition, immigrants should ensure that they complete the key step of ceasing tax residence in the other country at the same time as they establish their position as US taxpayers. Fortunately, the USA has a very extensive network of double tax agreements to resolve situations where both countries could view a taxpayer as being tax resident.

For those with significant wealth, the USA has an estate tax as well, which can be a surprise for those coming from countries without estate or inheritance taxes, or with significant exemptions for the direct line of succession. However, the USA’s high estate tax exemption (USD 13.61 million in 2024) should help all but ultra-high-net-worth individuals. Even for those beyond that ceiling, the widespread availability of trust structures or charitable foundations can ensure that wealth is protected across generations where required.

Americans abroad

Once an individual has become a US citizen, they will continue to be required to file a US tax return regardless of how long they may be outside the USA. Even the act of holding a bank account in the country you live in requires a Foreign Bank Account Report to be completed for the IRS. 

For the vast majority of US citizens, income earned and taxed abroad may be covered by the Foreign Earned Income Exclusion (FEIE). Any other taxes paid on savings or investment income would be available as tax credits in the USA if income has already been taxed elsewhere. However, the maximum amount of the FEIE (USD 126,500 in 2024) means that it may be of limited value to high-net-worth individuals.

In some cases, a mismatch may arise if an individual has tax-efficient savings accounts and pension plans in other countries since the USA only recognizes the tax effectiveness of plans that are similar to US schemes whereas another country may have its own approach to such vehicles that might differ. In addition, capital gains on a taxpayer’s primary private residence may be tax exempt in another country, but there is a cap on the US exemption, which can yield a nasty surprise if not taken into account before investing in a new home.

Tax cuts expiring end 2025

Elections in the USA tend not to be strongly contested on the basis of specific tax changes, but that may shift in the short to medium term. Tax cuts passed in 2018 expire at the end of 2025, so some changes must be expected post-election, whether to extend the cuts, to revert to the previous system, or, more likely, to pass a new package of cuts to meet the current priorities. As with many issues in a US election year such as 2024, it is difficult to second-guess what will happen so far in advance, especially as tax cuts may be caught up in broader reforms.

An established wealth management industry

The number of existing domestic high-net-worth individuals in the country means that the USA has a clear system for taxing those arriving from abroad, and millionaires and billionaires will find a wealth management industry ready to help them through the complexities of the US system to find the most tax-effective solutions.

If tax residence is fully moved to the USA, it is a place where obtaining tax advice and clarity in all but the most complex transactions is straightforward. The tax authorities are used to seeing the tax returns for some of the richest people in the world, so regular centi-millionaires and billionaires can be absorbed into the tax net relatively smoothly.