Immigrating to the United States is a major life milestone—but it also brings one of the world’s most complex tax systems into your life. Once you become a U.S. tax resident, you are generally taxed on your worldwide income. That shift can be dramatic for newcomers from territorial or remittance‑based tax systems.
If you’re planning a move to the U.S., understanding the tax landscape—and taking steps before you arrive—can save you significant money, stress, and compliance headaches.
When Do You Become a US Tax Resident?
Most immigrants become U.S. tax residents under the Substantial Presence Test (SPT). You are considered a resident if:
- You spend 183 days in the U.S. during the current year, or
- You meet a weighted formula based on days spent in the U.S. over a three‑year period.
Once you meet the test, you are taxed like a U.S. citizen: worldwide income, worldwide reporting, and extensive disclosure obligations.
Some individuals in the U.S.—such as new green card holders—become residents immediately upon receiving their immigration status.
What US Tax Residency Means for You
1. Worldwide Income Taxation
As a U.S. tax resident, aside from taxation with respect to your U.S. income, you must report and pay tax on:
- Foreign salary and self‑employment income
- Foreign investment income (interest, dividends, capital gains)
- Foreign rental income
- Foreign pensions and retirement plans
- Foreign business income
Foreign tax credits can help, but they may not eliminate all double taxation.
Like U.S. citizens, U.S. tax residents are subject to certain anti-deferral regimes that are designed to prevent U.S. taxpayers from deferring payment of U.S. tax through the use of foreign companies.
The Internal Revenue Code contains two principal anti-deferral regimes that may impose tax on a U.S. taxpayer on a current basis when its foreign subsidiaries generate income. The two regimes are the:
- Controlled Foreign Corporation (“CFC”) regime; and
- Passive Foreign Investment Company (“PFIC”) regime
In additional to U.S. federal taxes, resident aliens can be subject to income taxation as residents of a particular U.S. state.
Residency rules vary by U.S. state and are not necessarily the same as the federal income tax rules described above. Careful consideration should be taken to determine one’s residency for state and local tax purposes for someone immigrating to the U.S.
Some U.S. states do not have an income tax, although the majority of states do. The highest personal income tax rate of any state currently is California at the rate of 13.3%.
2. Extensive Foreign Asset Reporting
The U.S. requires disclosure of foreign financial assets even when they produce no income. Key forms include:
- FBAR (FinCEN Form 114) - Required if you have more than $10,000 in foreign accounts in aggregate across your accounts at any time during the year.
- FATCA Form 8938 - Required if your foreign assets exceed thresholds (starting at $50,000 for single filers, higher for married filers).
Other common reporting obligations include:
- Form 3520/3520‑A for foreign trusts, foreign gifts, and foreign inheritance
- Form 8621 for PFICs (foreign mutual funds, ETFs, and certain investment structures)
- Form 5471 for ownership in foreign corporations
- Form 8865 for foreign partnerships
Penalties for non‑compliance can be severe, even when no tax is due.
3. Foreign Retirement Plans Are Not Automatically Tax‑Deferred
Many immigrants assume their foreign pensions receive the same tax‑deferred treatment in the U.S. as in their home country.
Unfortunately, that’s often not true.
- Employer contributions may be taxable in the U.S.
- Growth inside the plan may be taxable annually.
- Withdrawals may be taxed differently than at home.
Treaty relief may exist, but it varies widely by country.
Pre‑Immigration Tax Planning
There are a number of different tax planning methods available to U.S. immigrants in order to help minimize the impact of transitioning to the U.S. system of worldwide taxation.
Below is a very brief description of some of the more common methods:
1. Acceleration of Income
This involves the realization of income, to the extent possible, prior to immigration, so that such income will not be subject to U.S. federal income taxation. Generally, this involves collecting outstanding amounts that may be due for personal or other services. Also, if the individual owns a profitable company, he could have the company distribute its accumulated earnings prior to the immigration year.
2. “Basis Step Up” For Appreciated Assets
This involves reducing or eliminating the difference between the individual’s tax basis and fair market value in each of his assets prior to immigration, so that, among other things, the sale of such assets will not result in a taxable gain for U.S. tax purposes. Methods used to accomplish this include the sale and repurchase of foreign property and the actual or deemed liquidation of foreign companies.
3. Gifts to family members
Similar to a sale, another method of minimizing the effects of the U.S. system of worldwide taxation would be to gift any non-U.S. assets to other people prior to moving to the United States. The form of consideration could be either a cash or a note.
4. CFC/PFIC planning
Individuals should consider reducing or otherwise restructuring their interests in foreign corporations so as not to run afoul of the CFC (Subpart F or NCTI) anti-avoidance provisions. They should also consider selling their interests in PFICs, unless certain U.S. tax elections are available, to avoid the onerous default PFIC rules.
Please keep in mind that the above brief list does not nearly include all of the different options available when it comes to pre-immigration tax planning.
If you are interested in immigrating to the United States and would like to manage your tax planning, please contact Expat Tax Professionals and we will be happy to assist you and review your situation.
The key is timing: The most valuable tax strategies must be implemented before you become a U.S. tax resident.
After You Arrive: Build a US‑Compliant Financial Life
Once you’re in the U.S., consider:
- Moving investment accounts to U.S. institutions
- Avoiding foreign mutual funds
- Keeping clear records of pre‑immigration asset values
- Reviewing your estate plan (U.S. estate tax rules differ dramatically)
- Working with a cross‑border tax advisor
The first U.S. tax year sets the foundation for your long‑term compliance.
The U.S. tax system is complex, but with the right planning, immigrants can avoid unnecessary tax costs and compliance pitfalls.
