IT Professional Relocating to the US

US residents who are domiciled in the US, and citizens are all exposed to the US gift and estate tax regime in the same manner. Exposure to this regime, which is different than the Canadian system, requires the execution of tax planning strategies that can be achieved through careful estate planning.

One strategy involves planning for exposure to US gift tax. Gift tax applies at graduated rates of up to 40% on gifts of property with some exceptions for gifts made under a certain amount per year. There is also a lifetime gift tax exclusion amount that is adjusted for inflation each year. However, the unlimited gift tax exemption for gifts made between US citizen spouses does not apply to US domiciles and permanent residents, which necessitates planning prior to departure.

When US domiciliaries and US citizens pass away, federal estate tax is applied to their gross worldwide estate (including some life insurance proceeds) at the same rate as gift tax: up to 40%. (State-levied estate tax may also apply, depending on one’s state of residence.) The federal estate tax exemption is tied to the gift tax exemption such that depleting one’s gift tax exemption during life reduces the portion of a deceased’s gross estate that can be exempt from estate tax upon death.

If estate planning is done effectively, estate tax can be mitigated or even avoided by holding assets in certain vehicles. Rules surrounding the calculation of the value of a deceased’s worldwide estate can be complex, so establishing the correct structures in which to hold assets is important.

Moreover, the unlimited marital deduction that US citizen spouses enjoy, which effectively allows the tax-free transfer of assets from first-to-die to surviving spouse, is not available to non-US citizens. The need to counterbalance this lack of marital credit also necessitates sophisticated cross-border estate planning for high net worth Canadians moving to the US.

When we analyze our clients’ current estate plans, we recommend strategies that they can implement prior to departure. Our primary intention is to help clients protect their assets from estate tax on both the federal and state-wide levels so their estates will be as robust as possible for future generations inheriting wealth.

Unlike RRSP contributions, Canadian Pension Plan (“CPP”) contributions are mandatory payments that are made throughout one’s career in Canada. Our clients are sometimes concerned that they will not be eligible to collect CPP if they are living in the US at the time when they would like to begin receiving payments. Clients have similar concerns about their eligibility to receive Old Age Security (“OAS”) payments from the Canadian government after they become US residents.

Fortunately, non-residents of Canada typically remain eligible for CPP and OAS payments. (It should be noted, though, that in order to receive OAS payments, Canadians living in the US must have lived in Canada for at least 20 years after turning 18.)

Also, our US-resident clients can take comfort in two facts.

First, the IRS treats CPP income more favourably than the CRA does. US residents who receive CPP benefits get a tax break from the IRS: they are taxed on only 85% of the amount received at a lower federal rate than the CRA imposes on Canadian residents, who are taxed on 100% of their CPP income.

Second, Canadian IT professionals who move to the US and work for US companies may make US Social Security contributions; as such, once they retire, Canadian IT professionals may be eligible to receive Social Security payments from the US government.

There are, however, potential cross-border pension payment limitations that may affect Canadian IT professionals who move to the US to continue their careers south of the border. Due to the Windfall Elimination Provision, a US domestic law that allows the US government to claw back Social Security payments of US residents and citizens who earn CPP income, Canadians may not be able to collect the full amount of their US Social Security payments.

We work with our clients to balance the competing cross-border pension rules that may exist in Canada and the US and, moreover, to advise on planning opportunities.

Americans who work as employees typically have either a 401(k) retirement savings plan through their company, or a private Individual Retirement Account (“IRA”). US small business owners usually choose to establish other retirement plans that are more suitable for the size of their business and their individual needs.

For instance, many small business owners in the US establish the Simplified Employee Pension IRA (“SEP IRA”). Like the Canadian RRSP, SEP IRAs allow pre-tax contributions, provide tax deductions, and offer tax-free growth on income (tax is levied only upon withdrawal from the plan).

In addition to the above benefits, the SEP IRA has a higher yearly maximum contribution limit than the traditional IRA. In 2018, the maximum yearly contribution to the SEP IRA is $55,000, which is far more attractive than the maximum yearly contributions to the traditional IRA of $5,500 for those aged 49 or younger and $6,500 for those 50 and older.

If you have employees, yet another benefit of the SEP IRA is that it enables employers to contribute to retirement savings accounts for their employees.

Another popular retirement savings vehicle for US small business owners with employees is the Savings Incentive Match Plan for Employees IRA, commonly known as the SIMPLE IRA.

The Self-Employed 401(k) is also attractive for US small business owners as it allows for a high yearly maximum contribution level. However, this plan cannot cover employees (it only covers the employer/self-employed individual and that individual’s spouse employee).

We assist our clients in determining both their short and long-term health insurance needs.

In the short term, Canadian IT professionals who move to the US to work for American companies are in the fortunate position of being able to join the health insurance plan offered by their employer. However, in order to position themselves to be eligible for Medicare, Canadian IT professionals hoping to move to the US on a permanent basis need to do some long-term planning centering around immigration.

Eligibility for Medicare begins at age 65 for US citizens and permanent residents/Green Card holders who have been living in the US for at least five years. Canadians who initially move to the US under a TN or H-1B visa, two typical pathways to the US for Canadian IT professionals, are not automatically eligible to become permanent residents. It is therefore important for Canadian IT professionals who move to the US under a temporary work visa like the TN or H-1B to embark on the path to permanent residency as soon as possible. Setting out on this path will ensure that Canadian IT professionals moving to the US are eligible for Medicare upon retirement.

Medicare is important because it provides a cost-effective solution to health insurance coverage later in life. If Medicare-eligible US residents have also earned enough credits to be eligible for US Social Security payments (typically achieved by working in the US for 10 years or by being married to a spouse who has earned enough credits), then they will not have to pay premiums for Part A Medicare benefits, which cover inpatient care at hospitals.

There are also Part B and Part D Medicare premiums. Part B premiums cover outpatient care, such as doctor visits and lab tests, and Part D premiums cover prescription costs. Medigap coverage is also available to supplement Part A coverage. Medigap can be used to cover Medicare deductibles and co-payments and to purchase coverage in addition to Medicare, such as travel insurance.

Canadian IT professionals who move to the US to start their own business are in the fortunate position of being able to create their own group health insurance plan. However, in some cases, it may be more advantageous to purchase private health insurance on an individual basis. There are a variety of pros and cons to consider when making the decision to either set up a company plan or to enroll in a private health insurance plan.

As always, tax is a primary consideration. There are many tax benefits available to small business owners who set up their own group insurance plan. For example, certain small businesses that provide employees with a health care plan through the Small Business Health Options Program Marketplace can take advantage of the small business health care tax credit.

In addition, small business owners can deduct health insurance expenses from income tax owing; for instance, the portion that an employer pays for their employees’ monthly health care premiums are typically classified as business expenses and eligible for tax deductions. Note that tax benefits of group health insurance plans can vary depending on the type of business entity you establish in the US, so it’s best to weigh the pros and cons of establishing a group plan once you are clear on the type of structure your US business will have.

Health Savings Accounts (“HSAs”) are also important tools to consider. You can establish an HSA if you choose a high-deductible health insurance plan. Contributions to HSAs are tax-deductible, and the interest earned inside such accounts grows on a tax-deferred basis. Moreover, all HSA withdrawals (including interest earnings) that are used for health care costs are withdrawn on a tax-free basis. Note that HSA contributions can be made only up to a certain annual limit.

Canadian IT professionals operating their own businesses in the US must be aware of the American legal landscape, which is far more litigious than the Canadian one. Lawsuits can be lucrative, with businesses subject to paying crippling amounts of money should they be sued. In certain circumstances, business owners may also be personally liable for business-related liabilities. Business owners in the US therefore need a strategy to protect both their business and personal assets.

Creating a business structure such as an LLC, S corporation, or C corporation is one way to protect your personal assets from becoming embroiled in a lawsuit. However, these structures don’t offer total protection from personal liability; for instance, if your personal actions or negligence cause injury to a customer, the corporate veil will not protect you. Purchasing professional liability insurance, or errors & omissions insurance, can be a helpful strategy for increasing your liability protection even when you operate your business within a corporate structure.

General liability insurance is also an important option to consider for US business owners. This type of insurance protects business assets in case a lawsuit arises as a result of the regular operations of the business, such as an employee getting injured at work.

Since most Canadians have life insurance policies in place before they move to the US, it is important for us to review such policies prior to departure to confirm that they reflect our clients’ current, desired beneficiaries and to ensure that they will not create any cross-border tax traps.

One of the most common cross-border tax traps associated with life insurance policies is that certain Canadian whole life and universal life policies may not be tax-exempt in the US as they are in Canada. This issue can lead to Canadians having to pay tax to the IRS on income earned inside the investment component of Canadian policies. Another issue is these policies’ potential for triggering the egregious Passive Foreign Investment Company (“PFIC”) rules.

We advise our clients on the potential tax liability of their Canadian life insurance policies, and we suggest tax-advantageous ways of surrendering these policies prior to moving stateside, if necessary.

We also advise clients on the tax filing requirements associated with retaining these policies as US residents, should they choose to keep them, particularly the Foreign Account Tax Compliance Act (“FATCA”) requirements, which is the legislation that governs US persons’ reporting requirements for foreign accounts and other financial assets located outside the US.

For US life insurance policies purchased after moving stateside, we highlight potential estate tax liabilities and recommend estate planning solutions that can mitigate tax exposure, such as the irrevocable life insurance trust (ILIT).