The USA as a Life Base: One Country, 50 Tax Systems – and a Decision with Consequences

The United States is difficult to compare with other emigration destinations.

Not because it is particularly complicated – although it certainly can be. Rather, because the very question of "the USA as a location" is already framed incorrectly.

Florida is not California. Texas is not New York. Wyoming is not Massachusetts.

Above everything sits a uniform body of federal law that governs the essential questions of immigration and taxation. Beneath it exist 50 states with their own tax systems, economic conditions and, in some cases, substantially different ways of life.

And yet the decisive question can be answered: what does it fundamentally mean to move one's centre of life to the United States?

Because before Florida is compared with Texas, or Wyoming with Nevada, there is a far more important level to consider.

The United States generally taxes its tax residents on their worldwide income. And entry into this system can occur earlier than many expect.

Anyone moving from Germany to Panama or Paraguay first decides on a country and only then on a city or region.

In the United States, this second decision carries considerably more weight.

At the federal level, immigration law in particular and substantial parts of taxation are regulated. At the same time, the states hold significant tax powers of their own.

As a result, two people with identical income, identical asset structures and the same residency status within the US can be subject to entirely different additional tax burdens.

On top of this come differences in property taxation, sales taxes, estate and inheritance taxes, and business levies.

For that reason, a blanket statement would already be methodologically wrong:

Federal income tax can be described.

The overall tax burden of a specific US location, by contrast, can only be described once the state is determined.

Which differences actually become relevant is something we address separately in a later comparison of selected states.

In the United States too, two levels must first be kept apart.

Immigration law answers the question of whether, and under what conditions, a person may live in the United States.

Tax law answers a different question:

What is notable, however, is that the two levels can be linked to one another.

For foreign nationals, US federal tax law generally recognises two central tests:

This means immigration status itself can trigger tax consequences.

Conversely, someone can become tax resident in the United States without ever having held a Green Card.

Anyone who becomes a Lawful Permanent Resident of the United States generally satisfies the Green Card Test.

The IRS generally treats a person as a resident alien for federal income tax purposes if they are a Lawful Permanent Resident during the calendar year; detailed rules and possible treaty scenarios apply to the start and end of tax residence.

That is a significant consequence.

Because the Green Card is thus not merely the right to live and work permanently in the United States.

It can, at the same time, mean entry into an entirely different tax system.

People without a Green Card can also become tax resident through their actual physical presence.

That is what the Substantial Presence Test is for.

The widespread idea that

is wrong.

The test generally considers three calendar years:

If the weighted total reaches at least 183 days, and the person was also present in the US for at least 31 days in the current year, the Substantial Presence Test may be met.

However, exceptions exist. Certain days of presence are not counted; in addition, a Closer Connection Exception may apply under certain conditions. Among other things, this requires fewer than 183 actual days of presence in the current year and a closer connection to a foreign country.

Once a person is a resident alien for federal income tax purposes, the next essential consequence follows.

The United States generally taxes resident aliens on their worldwide income under the same rules as US citizens.

This means that not only American income becomes relevant.

In principle, income from Germany, shareholdings in other countries, foreign investment income, rental income and other foreign sources of income can also enter the US tax world.

That does not automatically mean the same income is economically taxed twice.

Foreign tax credits, double taxation treaties and other rules can prevent or reduce a double burden.

But the underlying logic is clear:

Anyone who satisfies neither the Green Card Test nor the Substantial Presence Test, and is not otherwise treated as resident, is generally a nonresident alien.

This changes the tax framework considerably.

Nonresident aliens are generally subject to US federal income tax only on certain US-source income and income that is effectively connected with a US trade or business.

This shows how problematic the term "US tax liability" is without further qualification.

A German entrepreneur with an American investment, a German E-2 holder living in Florida, and a Green Card holder can find themselves in entirely different tax situations.

Covering every US visa category would go far beyond the scope of this article.

For entrepreneurs and high-net-worth individuals, however, two models are particularly well suited to illustrating a fundamental distinction.

The E-2 is a nonimmigrant visa.

It is generally available to nationals of qualifying treaty countries and requires a substantial investment in a real, operating US business. The business must generally hold the nationality of the relevant treaty country, which requires at least 50 percent of the business to be owned by nationals of that treaty country.

There is no fixed statutory investment amount along the lines of "an E-2 costs X dollars". What matters, among other things, is whether the investment is substantial in relation to the specific business.

The E-2, however, is not a Green Card.

The EB-5, by contrast, follows a different concept.

It is an immigrant investor programme under which qualifying investors and their families can obtain permanent residence, provided the statutory requirements are met.

The difference between E-2 and EB-5 is therefore not merely a matter of differing investment requirements.

The fundamental difference already lies in the objective:

Other residency and immigration routes naturally exist as well.

This article is deliberately not a US visa handbook.

Once US tax residence begins, federal income tax applies first.

But that is far from the end of the tax calculation.

Depending on the state, further individual income taxes may apply. Other states forgo a conventional individual income tax altogether.

This often leads to the simplified conclusion: "Then I'll just move to a state without income tax."

But that too falls short.

A state does not finance itself solely through income tax. Property taxes, sales taxes and other levies can produce an entirely different burden structure.

And even the category "state without individual income tax" requires close scrutiny.

For that reason, we will deliberately not draw up a ranking of the best states for tax purposes here.

Florida, Texas, Wyoming, Nevada and other frequently cited locations must be compared against one another on the basis of the specific life and wealth model – and, where relevant, against states that tax income but offer advantages elsewhere.

The differences between selected states therefore deserve an article of their own.

Few topics in international structuring are as burdened with oversimplification as the American LLC.

The term "US LLC" itself already begins with an imprecision.

An LLC is not formed under a single, nationwide LLC statute.

It is created under the law of a specific state.

A Wyoming LLC, a Delaware LLC and a New Mexico LLC are therefore not simply the same product with three different addresses.

Questions concerning publicly visible ownership information, registered agents, ongoing state-level obligations and fees can also differ.

More importantly still:

And "privacy" is not the same as anonymity.

Which person appears in the public business register, what information the authorities receive, what data banks require under their KYC procedures, and what tax reporting obligations exist are all different questions.

For wealthy newcomers, the US tax system has a further peculiarity that should not be overlooked when deciding on a location.

Estate tax and gift tax do not simply follow the same definition of residence as income tax.

For these taxes, the key criterion for non-US citizens is essentially domicile.

The IRS expressly notes that a person can be a US resident for income tax purposes and still be treated as a nonresident for gift or estate tax purposes. Even a Green Card is not, on its own, decisive on the question of domicile.

This means that within a single country, we encounter two different concepts of tax affiliation.

This is not an academic nicety.

Given sufficient wealth, this distinction can have significant consequences.

American estate tax does not apply exclusively to people living in the United States.

Even a nonresident not a citizen can fall within its scope in relation to certain US-situated assets.

For such an estate, an obligation to file Form 706-NA can already arise once relevant US-situated assets exceed 60,000 US dollars.

The specific tax treatment can be affected, among other things, by applicable estate tax treaties.

For international investors in particular, this is worth noting.

One does not need to have emigrated to America to have to deal with American estate tax.

A complete treatment of the estate and gift tax rules would, however, require an article of its own.

A further peculiarity concerns people who live in the United States long-term and later leave the country again.

Anyone who was a Lawful Permanent Resident for at least 8 of the last 15 tax years can be treated as a long-term resident for tax purposes.

Certain years in which a foreign residence was claimed under a tax treaty are not counted, provided the statutory conditions are met.

When a long-term resident ends their status, the American expatriation rules can become relevant.

That does not mean:

That, too, would be wrong.

For the actual tax charge under IRC §877A, what matters in particular is whether the person qualifies as a covered expatriate.

Additional criteria apply for that, including in relation to net worth, average tax liability, and compliance with prior US tax obligations.

For purposes of a location decision, one insight suffices at this point:

The United States has double taxation treaties with numerous countries.

For an international newcomer, these treaties can be significant – for instance in allocating tax residence, in relation to withholding taxes, or in avoiding economic double taxation.

But here too the following applies:

US tax law, the domestic tax law of the other state, and the treaty itself must all be considered together.

Especially with more complex shareholdings, corporate structures, retirement provision, trusts or long-term wealth structures, looking at individual tax rates in isolation can miss the real problem entirely.

Up to this point, one might get the impression that the United States is primarily a tax minefield.

That would be just as one-sided as portraying it as a boundless tax haven.

The United States is one of the largest economies and capital markets in the world.

It offers access to an enormous domestic market, a pronounced entrepreneurial and investment culture, highly developed capital markets and – depending on the region – entirely different ways of life.

It is precisely this diversity that constitutes a locational advantage that smaller countries can barely offer.

Add to this something that is difficult to capture in a tax table:

For entrepreneurs, market size, access to capital, customers, networks and economic opportunity can be worth more than the lowest conceivable personal tax rate.

The United States can be particularly attractive for people who genuinely want to become part of the American economic and social space.

For entrepreneurs whose business benefits from the US market.

For investors whose economic interests already lie substantially within the United States.

For families who want to build a long-term life base there.

Or simply for people whose vision of their own life fits a particular American state better than it fits Europe, Latin America or Asia.

The USA is a less obvious choice, by contrast, for someone whose primary goal is to obtain a second residence as straightforwardly as possible and reduce their international tax burden as far as possible.

Simpler systems exist internationally for that purpose.

And anyone who already holds substantial international wealth, companies, trusts or complex shareholdings should analyse the tax consequences before establishing US tax residence.

Because after moving, structures that previously sat outside the American system can become tax-relevant.

Perhaps that is the most important difference from many countries that come up in international emigration and tax discussions.

The United States does not win people over with a simple promise.

No blanket territorial taxation.

No residence that can be boiled down to a small minimum deposit.

No single state whose tax rules apply across the whole country.

And no meaningful answer to the question:

For that, the United States is economically, geographically and socially as diverse as hardly any other possible life base.

Anyone choosing the USA is therefore really making two decisions.

The first is:

Only then does the second follow:

Florida can give a different answer to that than Texas. Wyoming a different one than California.

We look at this second decision separately.

Because with 50 states, the choice of location does not begin at the American border.