On Behalf of Abraham Benhayoun Immigration Law Offices
Quick Summary
The date someone moves to the United States can have consequences beyond immigration. U.S. tax residency may begin through the green card test or the substantial presence test, and once residency begins, worldwide income can become subject to U.S. taxation and foreign assets may create additional reporting obligations. A family that advances a move for school, spends more time in the United States before relocating, or enters after receiving an immigrant visa can therefore change its tax position without intending to make a tax decision.
Sometimes the Most Expensive Part of the Immigration Plan Is the Calendar
Families rarely choose a moving date based only on immigration law.
A business owner may want to arrive early enough to begin running a U.S. company. A spouse may need to start a new position. Children may need to be in the United States before the first day of school. The family may also make several extended trips before the permanent move to look at homes, visit schools, meet advisers, or prepare a business.
Those decisions can all be perfectly reasonable.
They can also affect U.S. tax residency.
For someone with businesses, investments, real estate, or financial accounts outside the United States, the difference between becoming a U.S. tax resident in one month rather than another can be significant. That is why pre-immigration tax planning should begin with the actual calendar the family intends to follow, not simply the date an immigration petition is approved.
U.S. Tax Residency Can Begin Before the Family Thinks It Has “Moved”
Immigration status and tax residency are related, but they are not the same thing.
One way a foreign national becomes a U.S. resident for federal tax purposes is through the substantial presence test. The test generally requires at least 31 days of physical presence during the current year and 183 weighted days over the current year and two preceding years. All current-year days count, along with one-third of the prior year’s days and one-sixth of the days from the year before that.
That can matter for people who spend substantial time in the United States before formally relocating.
Consider an entrepreneur who regularly travels to Miami for business meetings, stays for several weeks during the summer with the family, and then returns in August so the children can begin school. The family may think of August as the beginning of the move. The tax calculation, however, can take earlier U.S. travel into account.
The issue is not simply when the family shipped its furniture or changed its mailing address. Physical presence can matter.
A Green Card Creates a Different Starting Point
The green card test can also establish U.S. tax residency.
If a person receives permanent resident status and does not otherwise meet the substantial presence test, the IRS generally treats residency as beginning on the first day the individual is physically present in the United States as a lawful permanent resident. If the green card was received abroad, the starting date is generally the first day of physical presence in the United States after receiving it.
That can make the entry date important.
A family receiving immigrant visas late in the year may be eager to enter immediately. There may be good immigration or personal reasons to do so. But if substantial foreign income, a business transaction, a property sale, or another financial event is expected before year-end, the tax consequences of entering in December rather than January may deserve review before the travel date is fixed.
The answer will depend on the particular case. The important point is that the first entry is not always just a travel decision.
Why the Residency Starting Date Can Matter So Much
During the portion of a dual-status year in which an individual is treated as a U.S. resident, the United States generally taxes income from all sources, including foreign sources. During the nonresident portion, different rules apply, with U.S. taxation generally focused on U.S.-source income and income effectively connected with a U.S. trade or business.
That distinction can become important when a family has financial activity occurring close to the move.
A foreign business may be paying a distribution. An appreciated investment may be sold. A property transaction may be scheduled to close. A company may be paying a bonus. A family trust may be making a distribution.
Whether those events occur before or after U.S. tax residency begins can affect how they are treated.
This does not mean transactions should be accelerated or delayed simply to avoid U.S. taxation. It means the timing should be reviewed with qualified tax advisers while choices still exist.
School Calendars Can Move the Tax Calendar Too
For families with children, the school year often drives the moving date more than the immigration case does.
A family that originally intended to relocate in October may decide that August is more practical so the children can begin the school year on time. Another family may come to the United States in the spring to choose a school and remain through the summer rather than travel back and forth.
School enrollment itself does not generally determine the parent’s U.S. tax residency.
The additional days in the United States can.
That is an important distinction. A decision made for a child’s education can increase the number of days a parent spends in the United States and potentially affect the substantial presence calculation.
For families with significant foreign assets or business interests, the financial effect of those additional months may be considerably larger than the cost of changing travel plans.
Student Visa Status Has Its Own Tax Rules
The tax treatment can be different when the person in the United States is actually present in qualifying student status.
For purposes of the substantial presence test, certain students temporarily in the United States in F, J, M, or Q status can be treated as “exempt individuals,” meaning qualifying days are not counted toward substantial presence. The IRS generally limits the student exemption to five calendar years, subject to additional rules and exceptions. Certain immediate family members whose status is derived from the student’s status may also qualify.
The word “exempt” is easy to misunderstand. It does not necessarily mean the person is exempt from U.S. tax. It means certain days can be excluded when determining residency under the substantial presence test.
It also does not mean that having a child enrolled in a U.S. school excludes the parent’s days from the calculation. The exception depends on the individual’s immigration and tax circumstances.
Frequent Pre-Move Travel Can Create an Unexpected Problem
Executives and entrepreneurs often spend considerable time in the United States before formally immigrating.
They may be negotiating an acquisition, opening a U.S. office, meeting customers, touring homes, or preparing for the family’s relocation. Viewed individually, none of those trips may seem especially long.
The substantial presence test looks at them together.
It also looks backward. Because portions of the preceding two years’ U.S. presence are included in the calculation, someone who has been traveling regularly to the United States may reach the threshold sooner than expected during the year of the move.
This is one reason a pre-immigration tax review should include a travel history rather than simply asking for the anticipated move date.
Becoming a Tax Resident Can Bring Foreign Accounts Into the U.S. Reporting System
The cost of mistimed residency is not limited to income tax.
Once a person becomes a U.S. person for relevant reporting purposes, foreign financial accounts and assets may create additional filing obligations.
For example, an FBAR is generally required when a U.S. person has a financial interest in or signature authority over foreign financial accounts whose aggregate value exceeds $10,000 at any point during the calendar year. Form 8938 is a separate reporting regime for certain specified foreign financial assets, with thresholds that vary based on filing status and whether the taxpayer lives in or outside the United States.
For an international entrepreneur, those rules can reach far beyond a personal savings account.
Foreign brokerage accounts, corporate accounts over which the individual has signature authority, and other financial interests may need to be reviewed. Other foreign-company, partnership, or trust reporting requirements may also apply depending on the structure.
The administrative burden can therefore change significantly when U.S. residency begins.
A Short First Year Can Still Be Complicated
Moving late in the year does not necessarily mean the first U.S. tax year will be simple.
Someone who is a nonresident for part of the year and a resident for another part may have a dual-status tax year. The IRS applies different rules to the resident and nonresident portions, and dual-status returns also have filing restrictions that do not apply to an ordinary full-year resident return.
There are also limited circumstances in which someone who does not otherwise qualify as a resident in the current year may make a first-year choice to be treated as a resident for part of that year if specific presence requirements are met and the person satisfies the substantial presence test in the following year.
These rules are technical, but they reinforce a practical point: December 31 does not erase the importance of what happened during the months leading up to the move.
The “Closer Connection” Exception Is Not Available to Everyone
Some individuals who would otherwise meet the substantial presence test may qualify for a closer-connection exception if they were present in the United States for fewer than 183 days during the current year, maintained a foreign tax home, and had a closer connection to a foreign country.
Immigration planning can affect that analysis.
The IRS states that the general closer-connection exception is unavailable when the individual has taken certain steps toward lawful permanent residence or has a pending application for adjustment to permanent resident status.
That is a good example of why immigration and tax planning cannot always be handled independently. A step that makes sense in the immigration case may change which tax-residency exceptions remain available.
The immigration decision may still be the right one. The tax effect simply needs to be understood.
The Expensive Mistake Is Usually Not the Visa
For internationally mobile families, the larger financial issue is often not the government filing fee or the cost of the airline tickets.
It is making an immigration or travel decision without knowing that it changes the tax calendar.
Moving a few months earlier so children can begin school may mean additional U.S. days. Entering shortly after an immigrant visa is issued may establish a residency starting date. Spending extended periods preparing a U.S. business can contribute to substantial presence. Once residency begins, foreign income, investments, accounts, and business interests may enter a different U.S. tax and reporting framework.
None of those consequences necessarily mean the family should change its immigration plan.
They mean the family should know the consequences before the date is fixed.
Pre-Immigration Tax Planning Should Start With the Actual Move
A useful pre-immigration tax review should not begin with an abstract question about when someone “plans to immigrate.”
It should begin with the real timeline.
When will the person travel to the United States? How much time has already been spent here during the prior two years? When will permanent resident status become effective? Is the family planning to move early for school? Are significant foreign transactions expected around the same time? What foreign businesses, investment accounts, trusts, or other assets will still exist after the move?
Those facts allow immigration counsel and international tax advisers to work from the same calendar.
For a family with a straightforward financial life, the timing may make little practical difference. For an entrepreneur or investor with substantial assets outside the United States, it can make a great deal of difference.
Coordinate the Immigration and Tax Timelines Before the Move
Immigration planning determines when a person can live and work in the United States. Tax law determines when that person becomes subject to a different set of financial rules.
The two timelines frequently overlap, but they are not identical.
Abraham Benhayoun Immigration Law Offices works with international entrepreneurs, executives, investors, and families whose immigration plans involve businesses, assets, and financial interests in more than one country. When a move may have significant tax consequences, immigration planning should be coordinated with qualified international tax counsel before the family’s travel and relocation dates are finalized.
Call Abraham Benhayoun Immigration Law Offices at (305) 380-2037 to discuss the immigration timeline for a planned move to the United States.
