Following on from our previous article covering tax tips when moving from the US to NZ, we’ll cover this week some of the key tax considerations when making the reverse move, from New Zealand to the US.
Whilst we in the US tax field are seeing a large number new US migrants to New Zealand, I personally am also fielding an unprecedented amount of new enquiries from Kiwis planning a move to the US.
Given the differences in the US and NZ tax system, alternative considerations need to be made.
One key difference is the absence of any transitional residency period. Many of the tax tips in my previous article meant that many tax decisions can wait until after a US person has moved to NZ, however when moving from NZ to the US, no transitional residency period applies and as a result, advice should be sought before leaving New Zealand.
Here’s five top tax tips for any new Kiwi migrant to the USA.
1. US Tax Residency
As above, when moving to the US, it is very important to obtain US tax advice before arriving in the country.
When an individual becomes a US tax resident, then their worldwide income and assets immediately become taxable in the USA. Why this can be an issue, is that tax residency usually begins on the first day of arrival in the USA.
The US uses a number of tests to determine if an individual is US tax resident, the most common being the green card test, and the substantial presence test.
The green card test is fairly straight forward, in that any day an individual holds a green card (which has been activated), they are generally treated as a US tax resident.
The substantial presence test on the other hand, is measured by days spent in the country. This is calculated based on 183 days present in the US, over a three year period. However, for an individual who moves to the US and meets the substantial presence test the same year, the tax residency is backdated to the first day of arrival.
In summary, this can mean being treated as a US tax resident and worldwide income being reportable to the IRS, from the first day of arrival.
This means, should certain investments need to be disposed of, trusts closed, companies closed, houses sold etc, this does usually need to happen before arriving in the US to prevent these transactions falling into the US tax net.
2. KiwiSaver
KiwiSaver does come with complex US tax implications. Whilst these are manageable with the right tax planning, its important to ensure as a new migrant to the US, that your KiwiSaver is considered before arriving into the country.
This could mean advice such as consolidating into just one or two funds before departure (from New Zealand), or even making a withdrawal.
Its important also to be aware that any KiwiSaver withdrawal once an individual has become US tax resident, will likely be taxable in the US. This usually includes the gains made in the account since inception, regardless of when a person became a US tax resident.
A person usually needs to be absent from NZ for at least one year before being able to close a KiwiSaver.
3. 401k and IRA Plans
Opening a US based retirement plan is usually a wise financial investment for those who intend to stay in the US permanently. However, if the move is only temporary, or there is a future likelihood of moving back to NZ, then the type of retirement account to invest in needs to be picked wisely.
Whilst almost all US based retirement schemes will be taxable in NZ if withdrawn whilst NZ tax resident (in most cases), certain accounts can result in double taxation by both the US and NZ. One example is Roth accounts, whereby contributions are made from post tax income (meaning an individual is taxed on their contributions to the account), but the account can then also be taxable upon withdrawal in NZ.
As a result of quirks in the system like this, it can pay to seek US and NZ tax advice prior to starting a US based retirement plan.
4. New Zealand Home Ownership
As mentioned above, once an individual becomes US tax resident, their worldwide income must now be reported to the IRS each year (and potentially taxed).
This also includes any capital gains made worldwide.
The sale of an NZ home once an individual has become US tax resident, can result in taxable capital gains in the US tax return. Unfortunately, the “basis”, which is best described as the line in the sand for determining the amount of gain made on the sale, is usually the original purchase price. Whilst many might agree that the fair value to use to determine the gain, should be the value on the date a person became US tax resident, unfortunately this isn’t the case.
Advice should be sought before moving to the US if a house sale is planned.
5. New Zealand Family Trusts
Being a beneficiary, trustee, settlor or grantor of an NZ trust can inadvertently bring the trust into the US tax net once US tax residency has begun. This of course is a very complex area, but if an individual has any relationship with an NZ trust, advice should absolutely be sought before beginning the move to the US.
Summary
Moving from New Zealand to the US can bring with it excellent work opportunities, different lifestyles and many other benefits. However, to ensure that tax is the least of concerns on an exciting life change, it is crucially important to obtain advice before moving.
At the US Tax Team New Zealand, we work with a wealth of other professionals in areas such as NZ immigration, US law, US immigration law and NZ tax law amongst many other fields including wealth managers. By maintaining a strong network with our peers, we’re able to ensure our clients obtain the advice and assistance they need.
If you’re considering a move to the US and looking to better understand the US tax implications, reach out today – info@usatax.nz.