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The EB-5 visa is a program that provides a path to US permanent residency for foreigners who want to invest in the United States. Foreigners can make up to $1 million direct investment (or in a Regional Center) in a new or existing company that creates at least 10 US-person jobs in an urban area. If the business is in a Targeted Employment Area (TEA) which is a rural area with high unemployment, the amount is $500,000. Regional Centers are government-approved firms that manage investor funds.
The Congress created the EB-5 program in 1990 and it is a popular choice for foreign investors since this type of visa is potentially the fastest path to permanent US residency (or a Green Card). While there are benefits of holding the EB-5 visa, it comes with major tax consequences that catch some people by surprise. If you’re thinking about applying for the EB-5 visa, make sure you know about the tax implications.
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Main Consequence 1: The EB-5 Visa Makes You a US Resident Alien, and thus Subject To Taxes On Worldwide Income
An investor under an EB-5 visa automatically becomes a US resident alien for tax purposes. This means that income from the US and other parts of the world becomes subject to US taxes.
EB-5 visa applicants file the I-526 form Immigrant Petition by Alien Entrepreneur to USCIS. While waiting for approval for conditional residency, you have to file Form 1040NR U.S. Nonresident Alien Income Tax Return unless you are already in the US on another visa and qualify as a resident alien under the Substantial Presence Test. Once you receive your conditional residency, you would have to file Form 1040 - the income tax form for US citizens and residents.
Anyone who plans to apply for the EB-5 should also take note of the days they are physically present in the U.S. Learn about the Substantial Presence Test. The Substantial Presence Test determines whether you are a US tax resident based on your physical presence in the country.
It may also apply to your family members who may accompany you on your travel to the US. If you spent significant time traveling or conducting business in the US accompanied by a spouse or your children, your family might also qualify as tax residents. When this happens, they will also have to declare income earned in and out of the US. It’s important for you and your family to remain aware of your tax residency status. The difference between being taxed on your US-source and worldwide income can be huge for some individuals.
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There are also filing requirements. If you don’t file 1040 NR, it may affect your residency status. Moreover, if you continue to file 1040NR improperly when you have already received your conditional permanent residency, it can also affect the status of your permanent residency.
Main Consequence 2: Compliance with FBAR Reporting Requirements Can Be Onerous
If you are a U.S. person (i.e. US citizen or resident alien), you need to file a Foreign Bank and Financial Accounts (FBAR) report through FinCEN form 114 every year if the following things apply to you:
Your foreign financial assets exceed $10,000
You have an interest or a signature authority over a foreign financial asset
This is not an IRS requirement, but you have to comply and file the forms through the Financial Crimes Enforcement Network alongside your taxes.
Aside from FBAR, you also have to comply with the Foreign Account Tax Compliance Act (FATCA)if you meet the following (as of 2019):
Total value of your foreign financial holdings exceed $50,000 by year-end or exceed $75,000 at any point during the year if you are unmarried or married filing separately.
Total value of your foreign financial holdings exceed $100,000 by year-end or exceed $150,000 at any point during the year if you are married filing jointly.
To satisfy the FATCA reporting requirements, you need to file Form 8938 Statement of Specified Foreign Financial Assets together with your annual tax return. Failure to comply with these foreign asset reporting requirements may lead to interest, penalties and, in some cases, additional taxes.
While FBAR and FATCA aim to discourage tax evasion, complying with the reporting requirements can be burdensome. Between the two, FATCA requires more extensive reporting.
Related Article: When Do You Need To File Form 8938?
If you are a shareholder of a foreign corporation and serve as a director, officer, or own more than 10 percent of the total voting shares, you may also have to submit Form 5471.
If you received gifts from nonresident aliens exceeding $100,000 per year or received distributions from foreign partnerships and corporations exceeding $16,076 (in 2018) or you had certain transactions with foreign trusts, you may have to submit Form 3520.
These are just some of the possible additional reports you may have to comply with as a resident alien.
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Main Consequence 3: Relinquishing Your Permanent Residency At Any Point Means Paying the “Exit Tax”
If you immigrate with an EB-5 and then decide to terminate your U.S. residency, you have to let the IRS know by filing Form 8854. Failure to file this form comes with a hefty $10,000 penalty.
Aside from filing this form, you may also be liable for so-called exit taxes and subject to the rules set in IRC 877A. This tax covers US citizens and long-term residents who have been in the country for 8 out of the 15 taxable years ending with the year you filed for expatriation.
The exit tax works like this: this tax computes the net capital gains on all your worldwide assets as if you sold them prior to expatriation. You will be subject to this tax if you meet any of these:
For the past five years prior to expatriation, your net income tax liability is more than the expatriation threshold ($157,000 for 2014, $160,000 for 2015, $161,000 for 2016, $162,000 for 2017, and $165,000 for 2018)
On your expatriation date or termination of residency, your net worth is at least $2,000,000
You did not certify compliance with all U.S. tax obligations for the five years prior to expatriation or termination of residency on Form 8854
Only the last test will apply to expatriates who are below 18½ years and dual citizens who acquired a U.S. citizenship but had different citizenship at birth.
If you are a covered expatriate, your exit tax computation would be computed as if you sold all your properties before your date of expatriation. The applicable exit tax rate is the same as long term capital gains tax rate. For exit tax purposes, you compute gain or loss based on the difference of the historical cost of the asset and the fair market value.
The highest rate for long term capital gains tax is 20% which applies if your taxable income is $425.8K (single) or $479K (joint filers). On top of that, you will be liable for the Net Investment Income Tax (NIIT) of 3.8% if your Adjusted Gross Income is $200K (single) of $250K (joint filers). Accounting for both taxes, you can pay up to a 23.8% exit tax based on the net capital gains on your properties worldwide.
Three assets are exempted from this rule, namely:
Deferred compensation items such as pensions subject to 30% withholding tax
Interest in a grantor trust subject to 30% withholding tax
Specified tax-deferred accounts such as Traditional and Roth IRAs taxed as a lump sum distribution on the day before expatriation
Upon exit, all capital gains are not taxable - just those over a certain amount. In 2018, the threshold or exemption was $713,000. You only have to pay capital gains tax when you exceed this threshold.
As an EB-5 investor, you might at some point change your mind about maintaining a permanent resident status in the US. Again, you have to set long-term goals. Have a strategy in place to minimize taxes if you decide to be an expatriate.
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How to Manage Taxes If You’re Considering an EB-5 Visa
The tax burden of being a resident alien can be a big hurdle to many immigrants. Fortunately, there are ways to minimize the impact of these taxes.
Strategy 1: Have a tax strategy before you file for conditional residency through EB-5.
If you’re planning to be a permanent resident in the US, think ahead. The best time to start planning is before you become a tax resident.
You might choose to dispose of some of your assets abroad before you become subject to US taxes. Funding a foreign trust might also be beneficial, though you may still have to comply with US filing requirements. You might also opt to dispose of some or all of your foreign properties to reduce your tax liability and you might also opt to accelerate or delay income recognition.
Strategy 2: Know your state’s income tax laws.
The IRS oversees federal taxes, but your US state could also levy income tax. Of the 50 states in the US, only 41 states impose income taxes. 2 states: New Hampshire and Tennessee tax dividends and interest income. 7 states: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming don’t impose any state income tax.
If you reside in a high tax state like California, New York or New Jersey the tax burden can be quite large. Where possible, you might be strategic about what state you settle down in. If you have no choice but to live in a certain state, knowing this will at least prepare you for what to expect.
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Strategy 3: Consider an E-2 Visa instead
The EB-5 green card visa is not the only option for investors looking to expand in the U.S. The E-2 work visa has a shorter processing time and the investment is around $200,000 – far lower than the requirement to qualify for EB-5.
E-2 is for those from countries that have a treaty with the United States. E-2 visa holders don’t need to maintain a U.S. domicile and you can maintain a non-resident status.
Unlike EB-5, the E-2 is a non-immigrant visa. Hence, it will not lead directly to U.S. citizenship. E-2 visa holders need to be employed in the U.S. and it has to be renewed every five years - shorter than the ten-year validity of the EB-5.
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Make Pre-Immigration Planning a Habit
Applying for an EB-5 is a pathway to enjoying the benefits of being a U.S. resident - free public school tuition for kids, access to healthcare, among others. However, there is a trade-off when it comes to taxes. In most cases, the U.S. imposes higher taxes which could come as a big surprise to you.
If you’re planning to be a tax resident, consult an expert to help you assess all the possibilities and to prepare for the tax burden not just for you but also for your family.
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