Pre immigration tax planning: what to do before the green card lands

There is a single date that determines more about your US tax life than any decision you will make afterwards. It is your residency start date, and on that day the United States begins taxing your worldwide income and treating your foreign assets as reportable.

Most of what can reduce that exposure is available only before it. Not most in the sense of “it’s easier beforehand”, most in the sense that afterwards the option no longer legally exists.

This is the planning that people find out about eighteen months late, from an accountant explaining why they owe money on gain they earned in another country a decade before they ever considered moving.

Here is the fact that surprises almost everyone: the United States does not step up the basis of your assets when you become a resident.

Many countries do. When you arrive and become taxable there, your assets are treated as though acquired at their current value, so only future growth is taxed. The US does not work this way.

You bought an apartment in Madrid in 2009 for €200,000. It is now worth €600,000. You become a US tax resident in March, and you sell in September. The US taxes you on the full €400,000 of gain, including the fourteen years before you had any connection to the country at all.

Sold in February, the US taxes none of it.

That one difference is the reason pre immigration planning exists, and the reason its value is measured in the hundreds of thousands rather than in filing fees.

The date is not the day you land, and it is not the same for everyone.

If you get a green card, residency generally starts on the first day you are physically present in the US as a lawful permanent resident. Approval abroad does not start the clock; entry does.

If you become resident through the substantial presence test, you meet it by being present at least 31 days in the current year, and 183 days on a weighted three year count, all of this year’s days, one third of last year’s, one sixth of the year before. Residency generally starts on the first day of presence in the year you meet it.

A treaty may move it. Where the US has an income tax treaty with your country and you are resident in both under domestic law, the treaty’s tiebreaker can, in some circumstances, keep you treated as a resident of the other country. This is technical, it requires disclosure, and it is not available to everyone, but where it applies it can effectively extend the planning window.

The practical point: the date is often more movable than people assume, and the difference between arriving in December and arriving in January can be an entire tax year of worldwide income.

1. Fix the date, then work backwards. Nothing below can be sequenced until you know when residency starts. Get the date right first, including whether it can be shifted, and build the plan against it.

2. Deal with appreciated assets. The core move. Assets carrying large unrealized gain, securities, property, a stake in a business, can be sold before residency, with the gain falling entirely outside the US system. Where you want to keep the asset, selling and repurchasing resets your cost basis to current value at the cost of whatever tax your home country charges on the sale.

That trade is the whole calculation: pay your home country’s rate now on a gain the US would otherwise tax later at up to 23.8% including the net investment income tax. Frequently it is worth doing. Sometimes it is not. It depends on your local rate, the size of the gain, and whether you intend to sell at all.

Watch for two things. Your home country may have its own anti avoidance rules on sales followed by repurchase. And foreign real estate carries a second problem covered below.

3. Address the company you own. If you hold a controlling interest in a company outside the United States, that company becomes a US reporting obligation the year you arrive, Form 5471, annually, per company, with a $10,000 penalty for missing it.

Worse than the reporting is the tax. Under the GILTI rules, profits your company retains can be taxed to you personally, in the year they are earned, at individual rates reaching 37%, whether or not you take a single distribution. A profitable operating company you were planning to leave alone can generate a US tax bill from money you never touched.

There are answers, a section 962 election taxing the inclusion at corporate rates with credit for foreign tax paid, a check the box election changing how the entity is treated, distributing accumulated earnings before residency begins, or restructuring the ownership entirely. All of them are straightforward before your start date. Afterwards, most are taxable events.

4. Review every trust. Foreign trusts and US beneficiaries interact badly. Once a US person is a beneficiary, the reporting obligations are substantial, Forms 3520 and 3520-A, and the tax treatment of accumulated income can be punitive, with a throwback regime and an interest charge that compounds.

A family trust set up by your parents in your home country, which you have never thought about as your asset, can become one of the most expensive items on your return. Review it before you arrive, while restructuring is still available.

5. Check your pensions and retirement accounts. Foreign retirement plans rarely get the treatment people expect. Depending on the plan and the country, annual growth may be currently taxable to you, employer contributions may be current income, and the plan may be reportable on the FBAR, on Form 8938, or as a foreign trust. A treaty sometimes helps. Often it does not, or it helps only for specific plan types.

6. Understand the currency problem on foreign property. Two traps, both invisible.

• Gain on foreign real estate is computed in dollars. Currency movement alone can create a US taxable gain on a property that fell in local currency value.
• A foreign currency mortgage that is paid off or refinanced can produce a separate taxable gain under section 988, entirely independent of the property itself.
• If your currency weakened against the dollar since you borrowed, you are repaying a debt that costs fewer dollars than you received, and that difference is income.

7. Get the reporting infrastructure ready. From year one you will report foreign accounts on the FBAR and on Form 8938. Know what you hold, know the balances, and understand that the FBAR threshold is measured on the aggregate of all accounts, not per account. Closing dormant accounts before arrival is simpler than reporting them for a decade.

Less survives than people hope, and more than they fear.

The first year return is where much of it is decided, whether you file dual status or full year resident, and whether elections available in that first year are made or missed. Reporting on foreign accounts and entities begins immediately, and if the first year has already passed unfiled, there are procedures for catching up without penalties in most nonwillful cases.

What is gone is the basis reset on assets already held, and the ability to restructure a foreign company without triggering tax. Those had a deadline and the deadline passed.

Pre immigration planning is the highest return tax work most people will ever have access to, and almost nobody does it, because at the moment it is available they are thinking about visas, schools, and shipping containers, not about the cost basis of an apartment they bought fifteen years ago.

If your move is more than three months away, you still have time to do this properly. If it is closer than that, some of it is still available. If you have already landed, the first year return is the last real decision point.

If you have a date, bring it to a consultation. Everything above gets sequenced against it.

This article is general information, not tax or legal advice. Rules, rates, and elections change, and whether any of this applies depends on your specific facts and your home country’s tax system.