Tax Tip Tuesday: Pre-Immigration Tax Planning - 8 Signals You Need a Plan Before You Move to the U.S.

May Sung

10 minutes ago

5 min read

Most people start thinking about U.S. taxes after they arrive. By then, the most valuable planning opportunities are already gone.

The day you become a U.S. tax resident, the IRS starts taxing your worldwide income and gains, including gains that quietly built up for years before you ever set foot here. Pre-immigration tax planning is the short window to get your house in order while the U.S. still treats you as a nonresident.

Here's how to tell whether you need it, and what to do about it.

First: When Does Your U.S. Tax Residency Actually Start?

Your residency start date is the deadline for almost everything in this post. You generally become a U.S. tax resident under one of two tests:

• Green card test: You become a resident on the first day you are physically in the U.S. as a lawful permanent resident.

• Substantial presence test: You're present at least 31 days this year and at least 183 days over three years, counting all days this year, 1/3 of last year's days, and 1/6 of the days from two years ago. Residency generally starts on the first day you were present that year.

Visa holders (H-1B, L-1, E-2, and others) usually hit the substantial presence test without realizing it. Count your days early, because some short trips before the move can be disregarded and others cannot.

8 Signals You Need Pre-Immigration Tax Planning

1. You own investments with big unrealized gains

The U.S. does not give new residents a "fresh start" on cost basis. If you sell after you arrive, the U.S. taxes the entire gain, including the part that grew while you lived abroad.

Example

Wei lives in Hong Kong and owns shares she bought for $200,000. They're now worth $1,000,000.

• Sells after moving to the U.S.: $800,000 gain. At the 20% federal rate plus the 3.8% Net Investment Income Tax, that's up to $190,400 in federal tax, plus California tax at rates up to 13.3%.

• Sells and buys back before her residency start date: Hong Kong has no capital gains tax, and her new U.S. basis is $1,000,000. A later sale at that price produces zero U.S. gain.

The wash sale rule only disallows losses, so selling at a gain and repurchasing right away does not cause a problem.

Before doing this, confirm the tax cost in your home country. A pre-move sale only helps if the home-country tax is lower than the U.S. tax it avoids.

2. You're sitting on investment losses

This is the reverse of Signal 1. If an investment is down, consider holding it until after you become a U.S. resident. A loss realized after arrival can offset your future U.S. gains. A loss realized before arrival does nothing for your U.S. return.

3. You own foreign mutual funds, ETFs, or investment-linked insurance

Once you're a U.S. person, most non-U.S. pooled funds are treated as Passive Foreign Investment Companies (PFICs). PFICs carry harsh tax rules, an interest charge, and an annual Form 8621 for each fund.

Your options are cleaner before you arrive: sell the funds and move into U.S.-friendly investments, or plan from day one to use a QEF or mark-to-market election where available.

4. You own 10% or more of a foreign company

After you move, your company may become a Controlled Foreign Corporation (CFC). That triggers Form 5471 and can cause certain company income to be taxed to you each year, even if nothing is paid out.

Paying out accumulated earnings as a dividend before you arrive, or restructuring the company, can reduce what the U.S. taxes later. This one needs analysis, not a rule of thumb.

5. You've funded, or plan to fund, a foreign trust

A special rule catches people who transfer assets to a foreign trust and then become U.S. residents within five years. The IRS treats you as the trust's owner, so its income is taxed to you, and Forms 3520 and 3520-A apply. Setting up a family trust abroad shortly before moving can backfire without careful planning.

6. A big payment is coming

Bonuses, deferred compensation, a business sale, or real estate closings are generally better received before your residency start date, when the U.S. only taxes U.S.-source income. Stock options and RSUs that vest across the move may be partly taxable in the U.S., so map out the timing before you sign anything.

7. You plan to make large gifts to family

Before you become a U.S. resident for gift tax purposes, gifts of foreign property and intangibles like stock generally fall outside U.S. gift tax. After the move, U.S. rules apply:

• $19,000 annual exclusion per recipient (2026)

• $194,000 annual exclusion for gifts to a spouse who is not a U.S. citizen (2026)

• Larger gifts use your lifetime exemption ($15 million in 2026) and require Form 709

If you plan to help children or parents with a large gift, doing it before the move is often simpler.

8. You're moving to California

California has its own residency rules and does not follow U.S. tax treaties. Once you're a California resident, the state taxes your worldwide income, with no special break for gains that built up before you arrived. If you're landing in Los Angeles or the San Gabriel Valley, plan for both federal and state tax.

Reporting That Starts on Day One

Even if you owe no extra tax, these filings can apply from your first U.S. tax year:

• FBAR (FinCEN 114): foreign accounts totaling more than $10,000 at any time

• Form 8938: specified foreign financial assets above the filing threshold

• Form 8621: each PFIC you own

• Form 5471 / 8865: interests in foreign corporations or partnerships

• Form 3520 / 3520-A: foreign trusts, and gifts from foreign persons over $100,000

Penalties for missing these forms can be steep, often $10,000 or more per form, even when no tax is owed.

Pre-immigration tax planning is one of the few areas of tax where timing does almost all the work. The same transaction can cost nothing the week before you become a U.S. resident and six figures the week after.

1. Pin down your residency start date. Count your days and know which test applies.

2. Inventory everything. List each asset with its original cost and current value.

3. Sort winners and losers. Consider selling appreciated assets before you arrive, and holding losses until after.

4. Clean up foreign funds and companies. Address PFICs, CFCs, and foreign trusts before they become U.S. problems.

5. Time your income and gifts. Move bonuses, sales, and large gifts ahead of your start date where it makes sense.

6. Calendar your reporting. Set up FBAR and other foreign reporting from your first U.S. tax year.

Ideal timing: start 6 to 12 months before your move. Many of these steps can't be undone once you're a resident.

MKHS Tax Group helps new arrivals and their families plan before residency starts, so there are no surprises on the first U.S. return. Email us at info@mkhstaxgroup.com to schedule a pre-immigration tax planning consultation.