Naming a beneficiary to receive proceeds from a life insurance policy or retirement account is a difficult decision that requires consideration of a range of factors. Because these selections supersede designations contained in one’s will, they are an important step in the estate-planning process that must be addresses with particular care and attention to details.
When selecting beneficiaries, account owners should be aware of state laws that require they name a spouse as a primary beneficiary or that entitle a surviving spouse to a certain percentage of the deceased spouse’s estate. For example, under Florida’s Elective Share or Election Against a Will, a surviving spouse who is not named as a beneficiary of his/her deceased spouse’s retirement accounts may make an election to claim 30 percent of the decedent’s estate. With a properly signed waiver by a spouse, one could transfer his or her retirement savings into a trust or directly to children and grand-children, which may be a preferable option in instances of second and third marriages.
Another important point to consider when naming a beneficiary is that such a selection may negatively affect government benefits provided to family members, such as special-needs children. As a result, the decision should be addressed with one’s entire estate plan and ongoing family needs in mind.
Naming Backup Beneficiaries
While insurance companies and retirement plans require owners/insureds to name one primary beneficiary to receive assets upon the owner’s death, it is recommended that owners name a secondary, contingent beneficiary to inherit assets when the primary beneficiary is not able to receive them. Account owners may select as many beneficiaries as they wish and may consider naming a trust as a beneficiary to protect assets from creditors. Additionally, one should consider having life insurance policies owned by and paid to a properly drafted insurance trust to avoid estate and gift taxes.
Relationships and circumstances evolve over time. For this reason, it is vital that individuals regularly review their estate plans and ensure their named beneficiaries are updated to reflect these changes. Doing so requires the simple tasks of requesting a beneficiary change form from an insurance company or retirement plan, completing and signing the document and returning it to the issuing company or completing the form online by logging in to one’s account. When electing to name a beneficiary other than one’s spouse, it is always prudent to speak with an advisor to understand the consequences of such a decision.
About the Author: Scott Montgomery, CLU, ChFC, is a registered representative with Raymond James Financial Services and a director with Provenance Wealth Advisors, an independent financial services firm affiliated with Berkowitz Pollack Brant Advisors and Accountants. For more information, call 800-737-8804 or email email@example.com.
Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.
Securities offered through Raymond James Financial Services, Inc., Members FINRA/SIPC. Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors and Accountants.
This material is being provided for information purposes only and is not a complete description,
nor is it a recommendation. Any opinions are those of PWA and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. You should discuss any tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
Posted on July 26, 2015 by
Astute exporters are no strangers to the tax-savings opportunities presented by Interest Charge-Domestic International Sales Corporations (IC-DISCs). However, few companies understand the benefits of this tax incentive, its reach outside of the exporting industry and the ease with which one can establish such an entity to reap substantial savings.
A closely held U.S. business that sells or leases qualified property or provides specific services overseas may create a separate, related entity, known as an Interest Charge-Domestic International Sales Corporation (IC-DISC), to act as its foreign sales agent. As a domestic paper entity that elects tax-exempt status, the IC-DISC receives from the existing U.S. business commission on sales that the business subsequently deducts from its ordinary income. As a tax-free entity, the IC-DISC pays no tax on the commission it receives. Rather it pays the commission back to shareholders as qualified dividends, which are generally taxed at a rate between 18.8 and 23.8 percent, a reduction that can equal 16 percentage points below the top income tax rate.
While it does not require an office, employees or tangible assets, an IC-DISC must comply with the following regulations:
- Be incorporated in one of the 50 states or the District of Columbia,
- File an election with and receive approval from the IRS to be treated as an IC-DISC for federal tax purposes,
- Maintain a bank account and accounting records separate from the parent company,
- Maintain a minimum capitalization of $2,500,
- Have a single class of stock, and
- Meet an annual qualified export receipts test and a qualified export assets test, for which at least 95 percent of an IC-DISC’s gross receipts and assets must be related to the export of property whose value is at least 50 percent attributable to US-produced content.
What Businesses Can Benefit from an IC-DISC?
Businesses that export domestically produced products can take advantage of IC-DISC structures, even if they do not manufacture the products themselves. Therefore, it is not restricted solely to export businesses. Rather, distributors of U.S.-manufactured products or their components, software companies and architects, engineers and contractors who provide services for certain overseas projects can also qualify for an IC-DISC election.
How do the Tax Benefits of IC-DISC Apply?
An IC-DISC is the last permanent tax-savings opportunity available to exporters and related entities that conduct their business overseas. The tax benefits on export sales are available only after the IC-DISC is established; businesses may not make a retroactive election to apply the benefits to prior years.
The exporting business pays to the IC-DISC a tax-deductible commission equal to the greater of 4 percent of the business’s gross receipts from qualified exports or 50 percent of its net income from qualified exports. The commission reduces the business’s taxable income and can be deductible against its ordinary income.
For pass-through businesses, such as partnerships, S Corporations, or LLCs, the IC-DISC may be formed as a subsidiary that accepts commissions and pays dividends to shareholders. For C Corporations, however, realizing the tax savings of an IC-DISC structure requires shareholders form a sister company, rather than a subsidiary, through which shareholders may benefit from a lower tax rate on dividends.
How to Maximize Savings Opportunities with IC-DISC
A business that holds $10 million of export sales in an IC-DISC and makes modest, annual interest payments to the IRS can defer federal taxes on the retained dividend income. Currently, interest charges, tied to Treasury Bills, are a fraction of 1 percent.
Additionally, an IC-DISC that performs services, such as promoting a company’s export activities or performing invoice factoring by purchasing company receivables at a discount, may enhance its tax-savings opportunities. More specifically, income from these services can be distributed to shareholders as qualified dividends, in the same manner as an IC-DISC distributes commissions.
Finally, a qualifying business may elect to make dividend payments to its employees, rather than to its shareholders, as a corporate benefit or estate-planning incentive. Caution should be taken in these situations to ensure shares of an existing IC-DISC are properly valued prior to transfer.
Despite the ease and minimal expense required to establish and operate an IC-DISC, these tax-beneficial structures are too often underutilized by qualifying businesses. Businesses that conduct sales or provide services overseas should consult with professional counsel to identify how they may take advantage of significant IC-DISC savings opportunities.
The accountants and advisors with Berkowitz Pollack Brant’s International Tax Services practice work closely with domestic and foreign businesses to maximize tax savings opportunities while complying with international laws and regulations.
About the Author: John T. Vides, CPA, is a senior manager with Berkowitz Pollack Brant’s International Tax practice, where he focuses on IC-DISC and other tax-advantaged business strategies, FATCA compliance and pre-immigration planning for Brazilian, Venezuelan and other Latin American nationals. He can be reached in the CPA firm’s Miami office at (305) 379-7000 or via email at firstname.lastname@example.org.
Investors from the Americas, Asia and Europe seeking to sustain and grow their wealth are increasingly turning to family offices to organize and manage both their global assets and personal affairs in a well-orchestrated and efficient manner.
Similar to CFOs for multi-national businesses, family offices serve as personal financial officers to multi-generation families seeking to preserve fortunes and minimize risks in complex economic and legal environments. They structure wealth to meet a family’s unique long-term financial goals, oversee investments, budgets, bill payments, estate and succession planning, philanthropy, tax management and compliance with laws that differ across international borders. They centralize under one roof all of the investment decisions, tax accounting and legal services associated with managing the assets of high-net worth individuals whose personal fortunes are tied closely with business interests and spread out among family members located across the globe.
More than a century ago, family offices were quietly established to handle the riches of the Rockefeller, Morgan and Carnegie dynasties. Today, while many family offices continue to cater to the ultra-rich with assets exceeding $50 million, a growing number are serving the needs of old money families and new wealth creators with $5 million or less. As they increasingly create access to new investment options and greater opportunities for asset protection and capital growth, family offices have moved out of the shadows and are expanding at a rapid pace along with the growth of global personal wealth, according to industry trade association, The Family Offices Group
Much of the appeal of a family office comes down to confidentiality, compliance and control over assets. New disclosure requirements including the Foreign Account Tax Compliance Act (FATCA), for which foreign financial institutions must report to the IRS the existence of accounts in which U.S. taxpayers hold beneficial ownership interest, limit individuals’ abilities to conceal their net worth, not only from taxing authorities but also from the general public, which can create broader privacy and security issues. With a family office, however, assets may be more easily shielded from public view and structured to meet compliance requirements while preserving capital, maximize returns and minimize tax consequences. Doing so requires understanding of ever-changing regulations and careful analysis of complicated ownership structures, for which a family member may be an executive, director or financial beneficiary of a publicly held company, and subsequently open to a wider net of reporting requirements. Moreover, it must be understood that the family office is considered a business, in and of itself, and will therefore have its own regulations to contend with, depending on the office location. For example, in the U.S., family offices must meet the stringent registration, reporting and oversight regulations of the Securities and Exchange Commission (SEC), unless they meet specific family office exemptions detailed in the Dodd-Frank Consumer Protection Act.
At the heart of the family office is tax efficiency for individual family members and business interests to ensure the preservation of assets and future inheritances. A typical family may have dozens of members located in multiple countries, each with different shares in investments, trusts and partnerships that create equally divergent tax consequences in each jurisdiction.
Investments and other income-generating activities may be analyzed to identify tax exposure in multiple jurisdictions and carefully coordinated, adjusted and executed to reduce tax consequences while optimizing the family’s return from its portfolio of holdings. For example, properly planning the design of an ownership structure by taking advantage of available entity classification elections may significantly reduce the impact of taxation on one’s worldwide income. Similarly, a family office may optimize tax efficiency for individual family members by employing sound estate-planning strategies, such as U.S. and non-U.S. trusts, as a vehicle to achieve the desired level of asset growth and preservation for existing and future generations.
In addition to centralizing the management of a family’s financial assets as well as the related reporting and compliance activities, the family office also provides management of a family’s personal affairs. They may perform concierge services, such as booking vacations or hiring staff, and, more importantly, serve as intermediaries to resolve conflict and discord between family members through open dialogue and on-going education.
Managing a family office may be compared, in many ways, to managing a multi-national business. It requires diligent research and planning, selection and retention of experienced staff and the development and implementation of well-thought out tax planning and wealth management strategies that meet complex regulatory requirements.
The International Tax advisors and accountants with Berkowitz Pollack Brant understand the nuances of cross-border tax laws. We have deep experience working with entrepreneurial families in multiple jurisdictions to comply with regulations, minimize domestic and foreign tax liabilities as well as protect and preserve wealth.
About the Author: Tony Gutierrez, CPA, is an associate director with Berkowitz Pollack Brant’s International Tax Services practice, where he focuses on tax and estate planning for individuals, families and businesses with domestic and foreign interests. For more information, contact him at the CPA firm’s Miami office at 305-379-7000 or via email at email@example.com.
The lazy days of summer are an ideal time for individuals to start thinking about their 2015 taxes and planning appropriately to avoid an unwelcome surprise from Uncle Sam on April 15, 2016.
With half of the tax year behind them, individuals can take the time to assess where they currently stand and take action, if needed, to minimize liabilities and maintain tax efficiency for the balance of 2015. Following are just a few items to consider and begin planning for now to reap tax savings next year:
- Take inventory of tax records, including receipts for donations and business expenses, copies of estimated tax payments and confirmations of investments and stock sales. Keep them organized in a safe and easily accessible location. Documents that are scanned and stored electronically should be password-protected and backed up on external drives or in the cloud.
- Recognize when life events, such as changes to marital status, death of a spouse or birth of a child, can affect tax liabilities. Some of these events will require taxpayers to update records with the Social Security Administration and IRS and may trigger a change in the amount they withhold from their paychecks, which can be accomplished by filing an updated Form W-4 with their employers.
- Individuals and businesses should continuously monitor their compliance with the Affordable Care Act (ACA) and its stringent reporting requirements. Individual taxpayers without minimum essential health insurance may be subject to an Individual Responsibility Payment equal to the greater of $325 per adult / $162.50 per child or 2 percent of income per year. The total payment due is calculated by adding 1/12 of the maximum penalty for each month a person goes without coverage. Similarly, businesses with 100 or more full-time employees that fail to offer health insurance to 70 percent of their workforce risk exposure to the ACA’s Employer Shared Responsibility payment, which is equal to $2,000 for every full-time employee after the first 80.
- Plan to max out contributions to tax-deferred retirement plans.
- Retired taxpayers older than 70 ½ should plan to take the required minimum distributions from their IRAs and employer-sponsored plans, such as 401(k)s, 403(b)s and 457s, by December 31, 2015.
- Consider itemizing deductions rather than claiming the standard deduction to lower taxes.
About the Author: Joseph l. Saka, CPA/PFS, is director-in-charge of Berkowitz Pollack Brant’s Tax Services practice, where he provides income and estate planning, tax consulting and compliance services, business advisory and financial planning services to entrepreneurs, high-net-worth families and business executives in the US and abroad. For more information, contact him in the accounting firm’s Miami office at (305) 379-7000 or at firstname.lastname@example.org.
College interns provide much needed help to businesses during the summer months. However, the decision of whether or not to pay those temporary workers gaining on-the-job training comes down to a matter of law. In most instances, for-profit business are required to pay interns unless they meet the following exceptions as outlined by the Department of Labor:
- The internship is similar to training that students would receive in an educational environment, even though the work is performed in the business’s offices.
- The internship experience is for the benefit of the intern
- The intern does not displace regular employees but works under the close supervision of existing staff
- The business that provides the internship derives no immediate advantage from the activities of the intern, and, on occasion, the employer’s operations may actually be impeded
- The intern is not necessarily entitled to a job at the completion of the internship
- The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.
Under these guidelines, for-profit business will find few situations for which they will not be required to pay interns. The advisors with Berkowitz Pollack Brant’s Tax Planning and Consulting practices work closely with businesses of all sizes to examine their employment needs and comply with federal and state labor laws.
About the Author: Joanie B. Stein, CPA, is a senior manager in Berkowitz Pollack Brant’s Tax Services practice, where she works with individuals and closely held businesses to establish tax-compliant and tax-efficient strategies. She can be reached at the CPA firm’s Fort Lauderdale office at 305-379-7000 or via email at email@example.com.
Due to recent revisions to Florida’s Corporate Income Tax Code, Florida-based corporations and/or partnerships that have a corporate partner may be required to amend their 2014 returns to reflect a modified, often higher, taxable income.
Under the bill, signed into law by Governor Rick Scott on May 14, 2015, Florida retroactively decoupled, or disassociated, from Federal bonus depreciation and expense reduction guidelines for assets placed in service during the 2014 tax year.
More specifically, the state requires affected corporations that took a bonus depreciation on equipment it purchased, financed or leased during the 2014 tax year to add back to their taxable income “an amount equal to 100 percent of any amount deducted for federal income tax purposes as bonus depreciation.” To claim the depreciation, companies will subtract one-seventh of depreciation over a seven-year period.
About the Author: Karen A. Lake, CPA, is associate director of Tax Services with Berkowitz Pollack Brant, where she helps businesses and individual navigate complex federal, state and local taxes, credits and incentives. She can be reached at the Miami CPA firm’s office at (305) 379-7000 or via email firstname.lastname@example.org.
The growth of international and digital commerce has been a boon to both individuals seeking new sources of income and to local taxing authorities looking to bolster their economies. Despite these shared benefits, the goals of both parties are ultimately at odds. Governments aim to increase tax revenues while multinationals strive to lessen their effective tax rates.
Tax treaties have helped to improve this imbalance by allowing residents (not necessarily citizens) of foreign countries to avoid double taxation and be taxed at a reduced rate or to be exempt from taxes on certain items of income they receive. However, because such tax relief can be abused by taxpayers who engage in “treaty shopping” for the best tax outcome, the U.S. has implemented limitation of benefits (LOB) clauses to identify whether taxpayers have a legitimate and sufficient connection with a country to substantiate claims of treaty benefits.
Such provisions are often so complex and varied across the more than 60 countries with which the U.S. has a treaty that they may ultimately restrict genuine applications of treaty benefits when no treaty shopping exists. As a result, multinationals must carefully analyze international treaties and prepare and plan for cross-border activities with a keen eye to maximize tax-savings opportunities.
Prior to the establishment of anti-abuse and anti-tax avoidance LOB clauses, a U.S. company could establish a subsidiary in a foreign country with which he U.S. has a tax treaty, receive income through that subsidiary and take advantage of that country’s lower tax treatment of income. Often, the subsidiary had no other purpose than minimizing tax exposure for the business and its owners.
LOBs, however, attempt to eliminate subjective measures of identifying tax treaty benefits by establishing clearly defined, objective tests that taxpayers must satisfy. Such criteria for demonstrating proof of rights to tax benefits include having “beneficial ownership interest” in a company owned by a “qualified resident,” establishing a “substantial operation” and having a strong nexus, or minimum connection to, the tax treaty country.
Applying the Limitation of Benefits Clause
In the United State, the withholding tax on U.S. source income, including interest dividends and royalties, is 30 percent. Conversely, qualified residents of other countries can realize significantly reduced withholding rates of 15 percent, 5 percent and even 0 percent. Consider a Latin American company that receives interest income from the U.S. The payment would be subject to 30 percent withholding tax. However, the company could establish a subsidiary in a third country with a reduced withholding rate to accept the payments and ultimately increase the gross amount it receives. To take full advantage of this tax treaty benefit, the company would need to meet the LOB requirements proving entitlement to the third country’s more favorable tax rates.
Another strategy taxpayers employ to minimize withholding and capital gains tax is establishing subsidiaries or structuring investments in one of several countries that lack limitation of benefits provisions. For these taxpayers, their efforts will continue to avoid scrutiny as the ratification of U.S. tax treaties remain at its current standstill. Subsequently, U.S. taxpayers still have an opportunity to benefit from existing treaties with countries that include Chile, Luxembourg, Switzerland and Hungary, before LOB provisions are addressed.
Tax Treaty Disclosures and Penalties
Dual-residency citizens and other taxpayers seeking treaty benefits contrary to U.S. tax laws must substantiate their claims by filing with the IRS Form 8833, Treaty-Based Return Position Disclosure for each purported claim. Failure to disclose these positions may result in penalties of $1,000 per claim, or up to $10,000 for C corporations, unless they meet the following exemptions:
- Claims of reduced rate of withholding tax under a treaty on interest, dividends, rent, royalties, or other fixed or determinable annual or periodic income ordinarily subject to the 30% rate;
- Claims of a treaty exemption that reduces or modifies the taxation of income from dependent personal services, pensions, annuities, social security and other public pensions, or income of artists, athletes, students, trainees or teachers;
- Claims of a reduction or modification of taxation of income under an International Social Security Agreement or a Diplomatic or Consular Agreement;
- Claims made by a participant in a partnership or a beneficiary of an estate or trust that reports the required disclosure on its tax return;
- Claims for which the payments or income total no more than $10,000.
Tax treaties between the U.S. and other countries promote cross border trade and investment while helping citizens avoid double taxation. However, the ease with which abuses of these agreements can occur has led to increased scrutiny and concerted efforts to minimize losses owed to taxing authorities. With these constraints, taxpayers must assess a wide-range of structuring strategies to reduce their worldwide effective tax rate. Doing so requires the guidance of experienced advisors well-versed in international tax laws and individual taxpayers’ long-term financial goals and personal objectives.
About the Author: James W. Spencer, CPA, is a director with Berkowitz Pollack Brant’s International Tax Services practice, where he focuses on a wide range of pre-immigration, IC-DISC, transfer pricing and international tax consulting issues for individuals and businesses. He can be reached at the CPA firm’s Miami office at 305-379-7000 or via email at email@example.com.
As college graduates prepare to embark on their professional careers, there are several strategies they should consider to establish a savings plan to prepare for a sound financial future.
While retirement may seem like a long way off for a recent college grad, initial entry into the workforce is an ideal time to take advantage of compounding interest and the fact that the earlier one starts saving, the more gains he or she will realize in the future. Even with a modest first-year salary, recent grads should not forgo the opportunity and ease with which they may begin savings through an employer-sponsored 401(k) plan. Through these plans, workers elect to defer a portion of their salaries automatically toward retirement savings. Contributions (limited to $18,000 in 2015) are made with pre-tax dollars and are often supplemented with an employer “match,” which can be likened to free money. For example, a worker that contributes 3 percent of his or her salary to a 401(k) and receives a 3 percent company match will ultimate yield 6 percent of savings for the future.
Individual Retirement Savings
When an employer does not offer a retirement-savings plan, college grads may consider establishing, on their own, an Individual Retirement Account (IRA) that enables them to make pre-tax contributions, up to $5,500 in 2015, and defer taxes on earnings, including income and gains. Withdrawals at retirement would be taxed as ordinary income. Alternatively, young investors may instead consider contributing to a Roth IRA, in which contributions are made after taxes, but withdrawals may be taken free of taxes when the account owner is 59.5 or older and when the funds were contributed at least five years prior.
For many recent graduates, consideration should be given to combine the benefits of a 401(k) and IRA to maximize their savings.
To help individuals manage the rising costs of health care, many employers offer their workers access to Flexible Spending Accounts (FSAs). Using pre-tax dollars, FSA enable employees to save money (up to $2,500 in 2015) to pay for certain out-of-pocket health care costs not covered by health insurance, including copayments and deductibles. Ultimately, FSAs enable workers to reduce their taxable income while receiving reimbursement for eligible health care-related expenses. The one caveat is that any money unused in an FSA at the end of the year may become forfeited. For this reason, it is important to budget appropriately at the start of each year.
About the Author: Stefan Pastor is a registered representative with Raymond James Financial Services and a financial planner with Provenance Wealth Advisors, an independent financial services firm affiliated with Berkowitz Pollack Brant Advisors and Accountants. He can be reached at 800-737-8804 or email firstname.lastname@example.org.
Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.
Securities offered through Raymond James Financial Services, Inc., Members FINRA/SIPC. Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors and Accountants
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of PWA and not necessarily those of Raymond James. You should discuss any tax and legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.
On June 25, the U.S. Supreme Court upheld a key provision of the Patient Protection and Affordable Care Act (ACA) and extended tax credits to applicable individuals who purchase health insurance on the federal exchange at healthcare.gov.
At issue in King v. Burwell was how the ACA worded the provision that an “applicable taxpayer” with a household income between 100 percent and 400 percent of the federal poverty line “shall be allowed” to receive tax credits if he or she enrolls in an insurance plan through “an Exchange established by the State.” In the court’s majority decision, Chief Justice Roberts wrote that the premium tax credit should be interpreted and consistent with the intent of the law “to improve health insurance markets” and to “make insurance more affordable…“Those credits are necessary for the Federal Exchanges to function like their State Exchange counterparts and to avoid the type of calamitous result that Congress plainly meant to avoid.” As a result, qualifying individuals may receive tax subsidies to cover the costs of purchasing insurance whether they do so on one of the state-run exchanges or on the federal exchange.
With the court’s decision, employers in the more than 30 states that have not established their own health insurance exchanges can be reassured that their employees will not lose coverage, and their businesses will not risk exposure to the Employer Shared Responsibility provisions of the ACA. To remain compliant, businesses must track and report full-time employees and their access to affordable and adequate health coverage or risk penalties. More specifically, as of January 1, 2015, businesses with 100 or more full-time employees must offer health insurance to 70 percent of its workforce and their dependents; Businesses with 50 to 99 full-time employees will have an additional year to comply with the employer shared responsibility provisions, which go into effect in 2016. Businesses that fail to offer health insurance to their full-time employees and their dependents may be subject to an Employer Shared Responsibility payment equal to $2,000 for every full-time employee after the first 80. In 2016, the penalty will apply to every uncovered employee after the first 30.
About the Author: Adam Cohen, CPA, is an associate director with Berkowitz Pollack Brant’s Tax Services practice, where he provides tax planning and compliance services to businesses and non-profit organizations. He can be reached at the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via e-mail at email@example.com.
For more than two decades, the EB-5 immigrant investor program has helped foreign citizens expedite U.S. residency while stimulating job creation and the development of large projects stateside. In 2014, more than 10,000 EB-5 investments totaling nearly $2 billion were made in the U.S. with the majority coming from Chinese investors, according to industry trade association Invest in the USA. However, with the success and growth of the program has come increased competition and a range of challenges that participating foreign investors should consider in their pre-immigration planning strategies.
About the EB-5 Program
Administered by U.S. Citizenship and Immigration Services (USCIS), the EB-5 program provides U.S. developers with access to low-interest financing for new, commercial projects without the stringent lending requirements of banks. In exchange for an investment of between $500,000 and $1 million in projects that create or preserve a minimum of 10 full-time jobs, foreign investors receive temporary visas, which, after two, they may convert for themselves and immediate family members into permanent U.S. residency status. The amount of investment required depends on the area where the project is located. Specifically, projects in rural or targeted employment areas marked by high unemployment rates require lesser outlays in investment dollars.
Managing the process of marketing development projects, matching them with foreign investors and coordinating receipt of funds and visa applications is often handled by a regional center run by the government or private businesses. Each center must apply for and gain approval through USCIS to operate under the program and accept immigrants’ investments.
Despite the win-win-win it creates for developers, local economies and immigrants, the EB-5 program does not come without risks. Foreign investors, in particular, should understand these issues and budget appropriate time in their pre-immigration planning to address them with the aid of experienced legal and financial counsel.
EB-5 Program Risks
While the EB-5 program provides a quick path to U.S. citizenship for foreign investors and their families, there is no guarantee that their investments in EB-5 projects will yield desired outcomes. Chief among the program’s risks are loss of investment dollars and deportation of investors and their family members. Since its early days, the EB-5 program has received criticism from various sources for poor oversight and fraud. Projects have evaporated, along with investors dollars.
EB-5 investors also face the risk of significant tax liabilities in their quest for U.S. citizenship. The U.S. has a complex tax system, under which citizens and resident aliens must report and pay taxes on their worldwide income. Applying for a green card and/or spending a specific number of days in the U.S. can trigger a range of income, estate and gift taxes on the federal, state and local levels. However, with proper pre-immigration planning under the guidance of experienced legal and tax accounting professionals, investors may take steps to minimize their U.S. tax liabilities. One misstep in the pre-planning process can result in a significant tax bill.
Minimize Risks through Advanced Planning
Pre-immigration planning is a lengthy process that should be commenced at least one year prior to a foreign national’s application for temporary residency. Initial steps in the process include a review of the immigrant’s unique situation, including his or her current and previous country of residency and citizenship, reasons for U.S. immigration, age, current and previous marital status and familiar relationships. Conforming to U.S. tax laws will also require a thorough inventory of the investor’s existing trusts, wills and estate plans as well as sources of his or her worldwide income, including ownership interest in businesses, real estate, bank and investment accounts, controlled foreign companies (CFCs), passive foreign investment companies (PFICs) and assets held in one’s home country.
One of the keys to efficient tax management for the EB-5 investor is timing. Specifically, foreign investors should accelerate income and defer losses on non-U.S. assets prior to becoming a resident alien of the United States. Examples of income acceleration include selling or gifting appreciated assets, disposing of stock in passive income investments, distributing accumulated earnings and accelerating receipt of dividends, interest, royalties and rental income prior to applying for U.S. citizenship.
Assets sold prior to one’s move to the U.S. may be repurchased after he or she becomes a U.S. income tax resident and benefit from a step-up in cost basis that reduces the assets taxable appreciation value.
On the pre-immigration planning timeline, future U.S. immigrants should also consider employing the strategy of delaying recognition of losses and deductible expenses until after they gain U.S. tax residency. Doing so will help to offset gains and reduce taxable income.
Another planning consideration for EB-5 investors is exposure to U.S. estate and gift taxes, which, unlike resident alien tests, is based on a subjective test on one’s intent to remain in the U.S. Reducing one’s U.S. estate taxes can be achieved by gifting tangible assets to family members prior to a move to the states or creating a trust to shield those assets from the U.S. tax system. However, trusts come with their own set of rules and limitations that future immigrants should consider. For example, a pre-immigrant who transfers assets to a trust within five years of becoming a U.S. citizen will be liable for income taxes on those assets. Additionally, changes in the laws of foreign countries may eliminate the traditional tax-savings benefits of a trust, as is the case in Russia.
Tax planning is an essential component of any immigration plan. When the plan involves EB-5 visas, foreign citizens should take extra care to develop proactive plans that align with their goals and minimize their tax burdens and investment risks.
About the Author: Andrew J. Leonard, CPA, is a senior manager in the International Tax Services practice of Berkowitz Pollack Brant. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at firstname.lastname@example.org