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U.S Tax Consequences of Immigrating to the United States from Mexico

U.S.Tax Consequences of Immigrating

to theUnited States from Mexico

By Julie Flanders

Tax consequences of traveling to the United States depend on whether the person will be considered a “resident" or a “nonresident alien" for tax purposes. It is important to understand that “resident" does not mean the same thing in tax law as it does in immigration law. Throughout this article, “resident" and “nonresident alien" will refer to residency for tax law purposes only. Whether a person will be considered a resident for income or estate tax purposes is complicated, and an attorney should be consulted. One general rule, however, is that all immigrant visa holders will be considered tax residents. Nonimmigrant visa holders may or not be able to avoid resident status for tax purposes.

A tax resident is subject to the same tax laws that United States Citizens are subject to. In other words, an immigrant to the United States will be treated the same as a United States Citizen for tax purposes. In most cases, any negative tax consequences are balanced out by the benefits of receiving immigrant status (and eventually, citizenship). However, if your purpose in coming to the United States is to stay temporarily, you may consider avoiding tax residency by coming to the United States on a nonimmigrant visa. The following chart gives examples of the ability to choose between a nonimmigrant and an immigrant visa in some cases:

Purpose of Travel

Nonimmigrant Visa

Immigrant Visa

Trade and Investment

E or TN visa

EB5

Professional Employment

H or O visa

EB1, 2, or 3

Management of International Company

L1 visa

EB1-3

If your purpose in coming to the United States is to invest, be employed, or manage a company, a nonimmigrant E, H, O, or L visa will be sufficient. However, if you intend to stay in the United States long-term, you will need an immigrant visa. In this case, you will also be choosing to be treated in the same manner a United States Citizen is treated for estate, gift, and income tax purposes.

Benefits and Consequences of U.S. Tax Residency\*

As discussed above, an immigrant visa holder is treated as a resident for tax purposes. A nonimmigrant visa holder may have a choice to be treated as a resident or a Nonresident Alien. A summary of the positive and negative consequences of tax residency are as follows:

Negative:

  • Worldwide income is taxed.
  • Worldwide assets are subject to estate tax.
  • Nonresident aliens may avoid income tax for personal services if they spend less than 183 days inside the United States within a 12 month period, and do not maintain a fixed base in the United States. See the United States - Mexico Income Tax Convention, Articles 14 and 15.

Positive:

  • Eligibility for U.S. tax credit for income tax paid to Mexico.
  • Deductibility of foreign source losses against U.S. source income.
  • Ability to file “Married Filing Jointly" on income taxes.
  • Eligibility to take the standard deduction for filing status, dependency exemptions, and the Earned Income Tax Credit.
  • If you immigrate in the middle of the year, you may elect to be treated as a resident for the entire year. You may also elect to have your entire family treated as residents for that entire year, even if they do not live in the United States.
  • Estate tax exemption is same as for U.S. Citizens ($3,500,000 in 2009); only $60,000 for nonresident aliens in 2009.

*These guidelines are very general, and are intended to provide an overview of the factors that will influence the choice to become a United States immigrant. This article is not intended to give actual tax advice. Each individual should seek personal advice from a United States tax attorney based on the unique circumstances of your case.

Taxation of Nonresident Aliens

The main benefit to maintaining nonresident alien status is to avoid the taxation of worldwide income and worldwide assets for estate tax purposes. However, nonresident aliens are still subject to some U.S. taxes. For example, for estate tax purposes, they are taxed on all assets situated in the United States. For income tax purposes, nonresident aliens are taxed only on their U.S. source income and income effectively connected to their U.S. trade or business. The United States - Mexico Income Tax Convention provides relief in limited circumstances from tax on U.S. source income. For example, as mentioned above, a nonresident alien who is present in the United States less than 183 days out of a 12 month period may not have to pay tax on personal services.

In order to take advantage of nonresident status, a nonimmigrant visa must be used. However, nonimmigrant visa holders may also be considered resident aliens for tax purposes if certain precautions are not taken. The laws for determining whether a non-immigrant is a resident alien are complex. The general rule is that a nonimmigrant is a resident alien IF 1) for estate and gift tax purposes, they have no present plans of leaving the U.S., and 2) for income tax purposes, he or she has spent more than a certain number of days in the United States (known as the Substantial Presence Test). The formulas of the Substantial Presence test are too complex to be outlined here; you should consult an immigration attorney with knowledge of the tax laws to determine whether you may be considered a resident alien for tax purposes, despite the lack of an immigrant visa.

Summary

Tax residency may be the preferred status for an individual who intends to permanently reside in the United States. Although worldwide income will be taxed, the foreign tax credit and the ability to take certain deductions will alleviate this problem. If you are considering immigration to the United States, make sure to discuss all of your hopes and ambitions for life in the United States with an immigration attorney. Also consult a tax attorney to make sure you fully understand the tax consequences of your immigration choices.

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