A US Person Becoming a Non-Resident of the United States
So you have decided to live outside of the United States. Before you make your final plans, there are several financial factors that you should consider. Careful tax planning and a well-thought out exit plan will ensure that a lot more of your hard earned money stays in your pocket.
Leaving the US
Becoming a non-resident of US will generally not affect your citizenship status in the US. The US does not typically ask people who become non-residents to give up their citizenship. Furthermore, change in residency status will not significantly change the manner in which you are taxed by the US. US Persons (primarily citizens, green card holders)living outside of the US will not be subject to State tax but will continue to pay Federal taxes regardless of where they live.
Generally, a US Person is not subject to deemed disposition tax when ceasing to be a US resident.
In some cases, the US and your new country of residence could tax you on the same income. The tax treaty between the two countries (if one exists) could reduce or eliminate the double taxation. It is advisable to obtain professional advice in order to clarify how the US/Israeli tax treaty applies to your type of income.
What about your 401K/IRP if you emigrate ?
Typically, your 401K/IRP will continue to accrue passive income on a tax deferred basis. As a non-resident, you could be subject to a US withholding tax on all withdrawals from either type of account.
It is important to note that the funds received from a 410K/IRP are considered as pension payments. To help avoid the possibility of double taxation, professional advice is strongly advised.
When leaving the US, it is likely that the need for insurance on your estate will remain. Although the purpose of the policy may change over time, there is usually a role for life insurance in estate planning. And the good news with respect to life insurance policies is that leaving the US generally does not trigger a tax event.
Life insurance plays many roles in estate planning and is likely to be among the assets held when you leave the US. For example, life insurance could be purchased to fund:
- capital gains /estate tax
- estate equalization planning
- emergency expenses or for children/grandchildren
- pay for final expenses such as funeral costs
- a buy/sell agreement
- investments funds that grow on a tax-sheltered basis
There are many different types of life insurance policies available in the US. For example: Yearly Renewable Term, Whole Life and Universal Life policies. The latter two are often referred to as “Permanent Insurance” policies. The specific needs you have will determine the kind of insurance policy you require.
In the US, insurance proceeds received on the death of the life insured are generally not taxable but may be subject to US Estate Taxes. Careful planning before you emigrate is required to maximize the tax free nature of life insurance proceeds.
If at some point, either you or your spouse, or child(ren) are expecting to receive an inheritance, careful planning is required. In come cases, you could be subject to double taxation.
One simple example involves Estate Tax levied on assets other than cash. The US/Israeli tax treaty does not provide a step-up in the adjusted cost base to reflect amounts paid for US Estate Tax. In such a case, the beneficiary of an inheritance could be left with an amount net of US Estate Tax, and be further subject to Israeli capital gains tax (when the asset is disposed of) on the original cost (the cost base before the Estate tax was levied). This could significantly reduce the value of the inheritance.
There are many examples that could illustrate these types of issues and careful planning is a must if you are expecting to receive assets as part of an inheritance.