US Tax Residency: Quick Guide For New US Immigrants

When you're moving to the United, understanding your tax obligations is crucial. If you're already living here and you're just starting to think about taxes, it's even more critical. The US tax year aligns with the calendar year, running from January 1 to December 31, and your tax obligations are determined based on this period.

As a US tax resident, you'll be subject to worldwide income taxation and extensive reporting requirements. This comprehensive guide breaks down what I've seen overlooked the most by expats and immigrants when it comes to first time US tax residency.

The Fundamental Shift: What Changes When You Become a US Tax Resident

The moment you become a US tax resident, your entire financial world changes. All of the sudden, you're taxed by the US on your worldwide income, there are extra reporting requirements that most accountants don't know about, and any businesses or assets can suddenly be reclassified by the IRS. You'll be required to:

• Report your worldwide income
• Disclose foreign financial assets
• File additional forms for foreign bank accounts and pension accounts
• Report ownership of foreign companies (with significant tax implications)

The Critical Context: This represents a fundamental departure from most tax systems globally. While your home country likely taxes only domestic or territorial income, the US extends its reach to your global financial footprint.

All of this can feel pretty overwhelming addition to the fact that everything else in your life is also changing. In addition, your domicile, or permanent home, is a critical factor in determining your tax residency and obligations in the US.

We see this with new clients constantly - even more so now with more and more businesses looking to invest in the US to avoid tariffs. This article is a quick guide to what I think are the most important things for new US Tax Residents to know. These are the questions you'll want to get answers for:

1. When exactly does your US tax residency begin, and when do you want it to begin?
2. How does this affect your home country's tax treatment?
3. Which foreign assets require restructuring before the residency date?
4. What elections must be made in advance?

The Three Paths to US Tax Residency

First, it's important to know if you're a US Tax Resident - and how that happens. For tax purposes, The United States recognizes three ways someone can become a tax resident:

1. US Citizenship: Persons who are US citizens are automatically considered tax residents, regardless of where they live.
2. Green Card Holder: Persons who are lawful permanent residents (green card holders) are considered tax residents.
3. Substantial Presence Test: The most common path for persons who are immigrants.

The Substantial Presence Test: More Complex Than You Think

Most people believe the 183-day rule is straightforward - spend more than 183 days in the US, and you're a tax resident. However, the IRS has added complexity to this rule. You must carefully calculate the total number of days you are present in the US over the three-year period to determine your residency status.

I know I said this is first thing that new US Tax Residents should know, but the real first thing to know is that the IRS usually makes things more complicated than they seem.

The Three-Year Formula

The IRS doesn't just count current-year days. Instead, they use a weighted formula of how many days you've spent in the United States over the past three years.

Yeah - you read that right. When The IRS is trying to decide if you spent more than half the year in the US, they look at three years.

• Current Year: All days inside the U.S. count
• Prior Year: One-third of days count
• Year Before That: One-sixth of days count

If this total exceeds 183 days, you become a tax resident from the first day you entered the US in the current year.

It is important that the days spent in the US each year are accurately reported to the IRS to ensure compliance with the substantial presence test. To help with that, we've launched a new Resources Page that has tracking templates & tools to help with these critical reporting requirements.

Example Calculation

If you moved to the US on July 17th 2024: That's 167 Days.

Most immigrants hear of the 183 day rule and think, okay I'm under. But what if you had a 6 week work trip and the end of 2023, and your family actually spent 18 days on vacation in 2022?

• 2024 (All days): 167 Days
• 2023 (1/3): 42 Days X 1/3 = 14 Days
• 2022 (1/6): 18 X 1/6 = 3 Days
• Total Days: 184 | US Tax Resident

If the total exceeds 183, your tax residency begins on the first day you entered the US in 2024.

Tax Filing Requirements: What Every New Immigrant Must Know

As a new immigrant, understanding your tax filing requirements is essential for income tax purposes and to ensure you receive all the benefits you’re eligible for. If you’ve been granted a green card or meet the substantial presence test, you’re considered a resident for tax purposes and must file a tax return (Form 1040) with the IRS. This means you are required to report your worldwide income, including earnings from foreign bank accounts and any business income, not just income earned in the US.

If you are a part year resident—meaning you became a US resident partway through the year—you’ll need to file a tax return for the period you were a resident, reporting only the income earned during that period as a resident. It’s important to determine your residency status and filing status before you file, as these affect your filing requirements and the way your income is taxed. Make sure to gather all relevant documents and report all sources of income to stay compliant and take advantage of any benefits available to you as a new resident.

Dual Status Returns: What You Need to Know

If you become a tax resident mid-year, you'll file a "dual status return" - part non-resident, part resident. Part year residents have specific filing requirements and must report income earned during their period of residency.

Important Limitations On Dual Status Returns

Here are a few critical considerations and concepts you must know.

• Married couples cannot file jointly on dual status returns
  Your spouse's residency status can affect your filing options and eligibility for certain credits.
• No standard deduction is available on dual status returns
  The rules for dependents also apply - if you are claimed as a dependent on another person's return, your standard deduction may be further limited, and being a dependent can impact your tax benefits.
• Non-resident period: Only US-source income is taxable
• Resident period: Worldwide income is taxable

Should You Choose Full-Year Resident Status anyway?

In some cases, if you meet certain criteria to qualify for the full-year resident election, electing to be treated as a full-year resident may benefit you:

Advantages of the Full-Year Election:

• Access to the standard deduction (over $20,000 for married couples)
• Ability to file jointly (effectively halving your marginal tax rate)
• Foreign tax credits may offset additional taxes on pre-immigration income

We run both scenarios with our clients to determine the most advantageous approach for their situation - sometimes it works out better to opt into more taxable income due to the deductions that become available.

State Tax Considerations: Don’t Overlook Your State Obligations

Federal taxes are only part of the picture - most new immigrants are also subject to state tax on their income. Each state has its own tax laws, rates, and filing requirements, so it’s important to understand your state tax obligations as soon as you establish residency. Some states may tax the same income as the federal government. In these cases, you may be eligible for a tax credit to help offset the impact of being taxed twice on the same income.

If you have multiple residences or own real property located in more than one state, you’ll need to consider how each state’s tax laws apply to your situation. This can affect how much tax you owe and which state you need to file with. Always check the specific rules for your new state and consult a tax professional if you have questions about your state tax obligations.

Managing Foreign Assets: Critical Planning Opportunities

Your foreign assets face significant changes once you become a US tax resident. Foreign assets such as dividends, interest, and other sources of gross income may be subject to new reporting and taxation requirements. Changes in residency can also have significant implications for estate planning and the taxation of your estate. Here are key considerations:

Foreign Companies

• Likely to be classified as Controlled Foreign Corporations (CFCs)
• Complex reporting requirements
• Potential for unfavorable tax treatment

Foreign Investment Accounts

• May trigger Passive Foreign Investment Company (PFIC) rules
• Additional reporting requirements

Foreign Trusts

• Subject to special US taxation rules
• Extensive reporting obligations

Tax Credits and Deductions: Opportunities for New Residents

As a new US resident, you may be eligible for a variety of tax credits and deductions that can lower your overall tax bill. Common tax credits include those for education expenses, child care costs, and home ownership. You may also be able to claim deductions for business expenses, medical expenses, or charitable donations, depending on your circumstances.

To take advantage of these opportunities, make sure to review the eligibility requirements for each credit and deduction, and claim them on your tax return (Form 1040). Properly claiming credits and deductions can significantly reduce the taxes you owe and help you maximize the benefits of your new residency status.

The Check-the-Box Election: A Powerful Planning Tool

One of the most valuable pre-immigration strategies is the "check-the-box" election for foreign companies. This election can impact how your foreign company's income is counted when it comes to your US tax obligations. Just because you have the "equivalent of an LLC" in another country, does not meet the IRS sees it that way without a little guidance and action on your part.

How It Works:

1. Elect to treat your foreign company as a flow-through entity
2. Time the election to coincide with your US residency start date
3. The IRS treats this as a "deemed sale" one day before you become a resident

The Benefits:

• No US tax on the deemed sale (you're still a foreign person)
• Step-up in basis for US tax purposes
• Significant capital gains tax savings on future sales

Example:

If your foreign company is worth $200,000 but you established it for $10,000:

• Without the election: Your US basis remains $10,000
• With the election: Your US basis becomes $200,000
• Tax savings on sale: Up to $40,000+ depending on applicable rates

Why Pre-Immigration Planning Matters

Once you've crossed the threshold into US tax residency, your planning options become limited. We shift from proactive tax optimization to defensive compliance.

Taxpayers who do not plan ahead may find themselves owing taxes or missing out on credits they are entitled to. We shift from proactive tax optimization to defensive compliance.

If your employer does not withhold sufficient taxes from your paycheck, you may need to pay tax directly to the IRS. Taxes must be paid on time to avoid interest and penalties. All taxpayers, including new residents, are responsible for ensuring their taxes are paid and reported accurately.

Key Planning Windows:

• Foreign asset restructuring
• Business entity elections
• Investment account consolidation
• Trust restructuring

All of these strategies must be implemented before your US tax residency begins.

Working with the Right Professionals

Immigration tax planning requires specialized expertise. Look for professionals who:

• Understand both US and foreign tax systems
• Have experience with pre-immigration planning
• Can coordinate with your immigration attorney
• Provide comprehensive global tax strategy

Need Help with Immigration Tax Planning?

Moving to the United States involves complex tax considerations that require careful planning. Missing out on pre-immigration opportunities can cost you thousands in unnecessary taxes.

At McGowin Tax LLC, we specialize in international tax planning for individuals and businesses. With experience helping clients navigate the transition to US tax residency, we ensure you don't miss valuable tax-saving opportunities.