Yes, there are income tax and transfer tax (gift, estate, and generation‐skipping transfer) consequences to obtaining U.S. Citizenship (or Permanent U.S. Resident Status). Careful consideration should be given prior to making the decision to become a U.S. Citizen or Permanent U.S. Resident.
Once an immigrant obtains a green card, he or she faces immediate and profound income and transfer tax issues that should be planned for to avoid the most commonly suffered income and transfer tax pitfalls.
Income Taxes. A permanent resident is deemed to be an income tax resident of the United States for as long as the green card is issued, even prior to one’s actual presence in the United States. Effectively, what this means is that all of the permanent resident’s worldwide income becomes subject to U.S. income tax—even on assets earned and held entirely outside the U.S. prior to immigrating to the U.S.
This is a surprising result for many individuals seeking to immigrate to the United States. Because the foreign national is usually a citizen of one or more other countries, he or she may become subject to double or triple taxation. However, the certain treatise and U.S. Foreign Tax Credit (discussed in detail in another Q&A) help to alleviate this burden. Even so, advanced tax planning should be employed to minimize these effects of immigration.
Transfer Taxes. Much less intuitive and often surprising to the permanent resident is the applicability of U.S. transfer taxes. These are the taxes that occur upon one’s death, or upon one’s transfer of assets by gift to beneficiaries (gift tax) or to, for example, grandchildren (generation-skipping tax).
Once deemed to be domiciled in the U.S., the foreign national becomes subject to this transfer tax system. Essentially, he or she will face taxes upon the gratuitous transfer of assets to their spouse, children, grandchildren and others. Generally speaking, the same rates of taxation, exemptions, and deductions as a U.S. citizen will apply. Importantly, the unlimited martial deduction, which allows one to transfer an unlimited number of assets to one’s spouse tax free, does not apply if the transferee spouse is a non-U.S. citizen. However, an estate planner may be able to help structure things so to preclude taxation upon those transfers if the transferee spouse is a non-U.S. citizen.