Last week we wrote about our happy Valentine fellow blissfully leaving the Rock and heading to America to be with the perfect lady in the land of opportunity with its fabled streets of gold and bluer skies.

Destiny is so full of promise, but it is also leading him across the pond to a tax regime country of confusion, complexity and unexpected financial consequences.

In the euphoria of true love the optimistic thought is: “We can solve everything financially now that we are together.” However, the reality can be something different.

Crossing borders into a whole new society needs expert planning, not solving things together.

Do yourself a favour. You absolutely need to work with internationally experienced US CPAs, US internationally-experienced tax attorneys and possibly US immigration lawyers.

Your local professional, both in Bermuda or the US, may be well intentioned but still get it wrong; the analogy being, you would not go to a dentist to deal with your appendicitis attack, nor would you expect your doctor to perform a root canal.

You might decide to handle the transition yourself. Yes, it may seem like it will cost you less, but beware, because it could end up costing a great deal more if you have to spend time correcting mistakes with the Internal Revenue Service.

Readers, I write this caution from many years of experience in seeing bad, incomplete and very wrong US tax and immigration planning.

The magic formula of misunderstandings:

1. The US view of foreign financial structures.

2. The significant differences in how the IRS and US Customs and Immigration Services define visiting and staying the US.

Bermuda residents consider their Bermuda finances local and applicable for the environment: insurance, investments, bank accounts, retirement pensions and annuities, estates, trusts, companies, partnerships, and so on.

The US views all foreign financial structures through the prism of US tax law. In plain English, what works in Bermuda does not work in the US.

Currently, the defining factors for planning that our lovebird-in-transition has to face in marrying into a US family are these:

1. Where is he resident?

Your residency — and possibly domicile — determines where you are subject to tax on your income, with the exception of US citizens. As a foreign national, you may be considered US resident in two areas; either by submitting an application for, and holding a green card that will lawfully make you a US lawful permanent resident but not a US citizen or alternatively by meeting the substantial presence test, such as ‘overstaying’ in the country, to become a US tax resident.

The IRS defines a US tax resident who overstays as an individual who has breached the 183-day rule. However, there is a large grey area where the individual is also considered a US tax resident by staying more than 120 days, but less than 183 days and not asserting a closer connection to a foreign country.

US Immigration, in general, provides a six-month stay visa with no correlation, it appears, to the IRS position.

2. Where is he domiciled?

Your domicile determines whether your estate will be taxed. You may not be considered a resident of the US, but might meet the US domicile test and vice versa.

3. What citizenship(s) does he possess?

No US citizenship, but UK citizenship and a Bermuda passport.

4. Is he connected to the US in any other way, i.e. business, investment property, previous work experience, etc?

He has never lived, worked or invested in the US.

These factors relative to residency, that is to say the overstay and the green card application process, are intertwined with day-counting under the substantial presence test. The timing results can mean the difference between being able to plan for your foreign assets in an efficient manner, pre-immigration or not.

Let’s imagine that our composite case Valentine is unable to pre-immigration plan and is now considered a US tax resident or a US green card holder. Looking at his list of foreign asset activities from last week from the US tax law perspective:

• Cash accounts. Interest is taxable. Account balances are reportable under FATCA by your Bermuda banks and in an FBAR FIN114 electronic platform to US Treasury by you.

• Investments. Dividends and capital gains and losses on single securities are taxable.

• Mutual funds and other investment vehicles face possible treatment as passive foreign-investment accounts. This can be a complex reporting, taxable process not amenable to US reporting. And it is reportable under FATCA.

• Selling an investment property is taxable, subject to a low-cost basis.

• Cashing in a pension plan is taxable in part, and possibly all, and reportable under FATCA.

• If you are employed in Bermuda your wages and benefits are taxable.

• Gifts of assets are possibly taxable.

• Settling a Bermuda estate is possibly taxable above a threshold.

• Transferring assets into a foreign trust, settling a trust, receiving distributions, or guaranteeing a mortgage are generally taxable and possibly reportable under FATCA.

• Owning foreign life insurance. Not tax compliant, possibly taxable.

• What about owning a Bermuda company? Distributions are taxable and subject to complex US-controlled foreign-corporation tax law and FATCA reporting.

• If you are a partner in a foreign partnership, or a sole trader, that is also a taxable situation, subject to US social security tax.

• And there is more. This is an incomplete sampling.

Reading all this feels like exasperation personified. Why should anyone bother? How could anyone possibly find out?

Every border crossing has consequences. Tracking in and out between US and Canada started a couple of years ago, with extensions to be forthcoming with other countries. Additionally, Bermuda financial institutions are required by Bermuda law, under the US-Bermuda Model 2 Intergovernmental Agreement, to report accounts, and transaction activities of US residents/citizens to the IRS.

Next week we will look at some efficient cross border planning for Bermuda residents who have not breached the US resident definition.

Caution and warning: The information in this article is not personal advice. The information provided is a general overview of the issues encompassed within pre-immigration planning to another country. Certain details and references have been deliberately omitted. You cannot and should not rely upon this information for your personal Brexit (Bermuda island exit) cross-border financial plan.

Martha Harris Myron CPA PFS JSM, Masters of Law: International Tax and Financial Services. Appointed to the Professional Tax Advisory Council, American Citizens Abroad, https://americansabroad.org/. The Pondstraddler* Life™ Consultancy providing financial planning, publications, presentations for Bermuda residents, their multinational families and connections. Contact: martha@pondstraddler.com