What to do before you land, not after
The United States taxes residents on worldwide income from the first day they meet the residency test, using the original cost basis of assets they owned before arrival, and two critical planning windows close the moment that test is satisfied.
Two Separate Tests With Different Consequences
Federal tax residency and state domicile are not the same thing. The Internal Revenue Code establishes tax residency through the substantial presence test in IRC § 7701(b)(3). An individual meets this test by being present in the United States for at least 31 days during the current calendar year and at least 183 days during a three-year period calculated as 100 percent of days in the current year, plus one-third of days in the preceding year, plus one-sixth of days in the second preceding year. Treasury Regulations seem to show that all fractional days resulting from the computation will be rounded to the nearest whole number.
State domicile operates under entirely different rules. Domicile requires physical presence plus the intent to make a location your permanent home. A person can have only one domicile at a time but can simultaneously be a statutory resident of multiple states if they maintain a permanent place of abode and spend 183 or more days in each. The burden of proof to change domicile rests on the person claiming the change.
Florida establishes this framework clearly. Article VII, Section 5(a) of the Florida Constitution prohibits the state from imposing an income tax on natural persons in excess of amounts that may be credited against or deducted from similar federal taxes. Florida Statutes § 220.02 confirms that Florida's corporate income tax code is not intended to tax and shall not be construed to tax any natural person who engages in a trade, business or profession in the state. Florida has no minimum day requirement to establish domicile. The two requirements are physical presence and intent to make it the permanent home.
Florida Statutes § 222.17 allows filing a sworn Declaration of Domicile with the clerk of the circuit court to show intent to maintain a Florida residence as a permanent home. Filing is optional but creates dated proof of domicile. Filing the declaration does not by itself establish residency. Florida Statutes § 322.031 requires obtaining a Florida driver's license within 30 days after beginning employment or entering children to be educated in public schools in the state.
The substantial presence test uses a weighted three-year formula. State statutory residency typically uses unweighted actual days in a single year. You can meet the substantial presence test while spending under 183 actual days in the United States in the current year. The calculations are mechanically separate and produce different results.
When Tax Residency Actually Starts
Treasury Regulation § 301.7701(b)-4(a) sets the residency starting date for an individual who meets the substantial presence test as the first day during the calendar year on which the individual is present in the United States. For a green card holder, it is the first day during the calendar year the individual is physically present in the United States as a lawful permanent resident. If both tests are met, the residency starting date is the earlier of the two.
This creates a trap many people fall into. If you visit the United States for 10 days in February and then move permanently in September of the same year when you meet the 183-day threshold, your residency starting date is the first day of your February visit, not September. The regulation does not say the first day you consider yourself moved or the first day you intend to stay. It says the first day you are present during the calendar year in which you meet the test.
IRC § 7701(b)(4) provides a first-year election for individuals who do not meet the green card or substantial presence test for the current or prior year but will meet the substantial presence test in the following year. Requirements are presence in the United States for at least 31 consecutive days in the current year and presence for at least 75 percent of days from the start of that 31-day period through December 31. Up to 5 days of absence may be treated as presence days. The election requires attaching a statement to Form 1040 and makes the residency starting date the first day of the 31-day period. This creates a dual-status year. You are treated as a resident from the start of the 31-day period through December 31 but remain a nonresident for the earlier part of the year.
Certain individuals are exempt from day counting under IRC § 7701(b)(5) and Treasury Regulation § 301.7701(b)-3. Teachers or trainees on J or Q visas who substantially comply, students on F, J, M or Q visas who substantially comply, professional athletes competing in charitable sports events, foreign government-related individuals on A or G visas, and days an individual is unable to leave the United States due to a medical condition do not count. The student exception is limited if the individual was exempt as a student for any part of more than 5 calendar years. The medical condition exception does not apply if, when the condition arose, the individual was present for a definite purpose that could be accomplished without triggering the substantial presence test. Form 8843 must be filed to claim exempt days. If not filed timely, the individual cannot exclude the days unless they show by clear and convincing evidence of reasonable actions and steps to comply.
The closer connection exception allows individuals who meet the substantial presence test but were present fewer than 183 actual days in the current year to maintain nonresident status if their tax home is in a foreign country and they demonstrate a closer connection to that country than to the United States. Form 8840 must be filed by the due date of the tax return including extensions. For those with wages subject to withholding, the deadline is April 15. For those without such wages, June 15. If no return is required, mail Form 8840 to IRS Austin, TX 73301-0215 by the same deadline. Untimely filing generally causes loss of the exception unless the taxpayer shows by clear and convincing evidence that they took reasonable actions to learn about and comply with the requirement. If you were present 183 or more actual days in the current year, the closer connection exception is legally unavailable regardless of foreign ties under IRC § 7701(b)(3)(B) and Treasury Regulation § 301.7701(b)-2.
The Built-In Gain Problem
The United States taxes capital gains based on historical cost basis. If you bought foreign stock for 2 million dollars that is now worth 20 million dollars, the Internal Revenue Service sees 18 million dollars in taxable gain when you sell, even though all appreciation occurred before you arrived. Nonresident aliens generally are not taxed on capital gains from non-U.S. sources under IRC § 871. Once you become a U.S. resident, this protection ends and the entire gain becomes taxable.
Pre-immigration planning allows triggering a realization event while still a nonresident. This can be an actual sale, a deemed sale through entity liquidation, or a similar transaction. The event steps up the basis to current fair market value. After arriving, only appreciation occurring after the step-up is subject to U.S. tax.
The planning must happen before your residency starting date under IRC § 7701(b). Not before you think of yourself as moved, but before the first day you are present in the United States during the calendar year in which you meet the substantial presence test.
Check-the-Box Elections and the Section 367 Wall
Form 8832 allows certain foreign entities to elect their U.S. tax classification. Treasury Regulation § 301.7701-3(a) establishes the eligible entity requirement. Not all entity types qualify. Certain per se corporations listed in the regulations are ineligible. The regulation also requires that the U.S. tax system be relevant to the entity. Relevance exists when the entity derives U.S.-sourced income, is required to file a U.S. income tax return, or an owner becomes a U.S. tax resident.
Form 8832 can have an effective date up to 75 days before the filing date and up to 12 months after. The form must be filed by paper to the IRS service center in Kansas City or Ogden depending on location. Treasury Regulation § 301.7701-3(g)(3)(i) states that when a check-the-box election changes classification, the election is treated as occurring at the start of the day for which it is effective. A deemed liquidation occurs at one second before midnight on the day before the effective date.
If the election is effective January 1 when you become a U.S. resident, the deemed liquidation occurs December 31 when you are still a nonresident. Gain recognition happens before U.S. residency begins and is not subject to U.S. tax. This planning works only before you become a U.S. person.
26 USC § 367(a)(1) overrides Section 351 nonrecognition for outbound transfers. The statute states that if, in connection with any exchange described in section 332, 351, 354, 356, or 361, a United States person transfers property to a foreign corporation, such foreign corporation shall not be treated as a corporation for purposes of determining the extent to which gain shall be recognized on such transfer. Once you become a U.S. person by meeting the green card or substantial presence test, IRC § 367(a) applies to outbound transfers to foreign corporations and blocks tax-free treatment. The deemed liquidation from a check-the-box election would trigger immediate gain recognition.
IRC § 367(a)(3) provides an active trade or business exception. Property transferred to a foreign corporation for use in the active conduct of a trade or business outside the United States may qualify. The exception does not extend to copyrights, inventory, accounts receivable, foreign currency or intangible property under IRC § 936(h)(3)(B). For stock transfers, gain can be deferred by filing a Gain Recognition Agreement under Treasury Regulation § 1.367(a)-8 agreeing to recognize gain if triggering events occur within the 5-year term following the tax year of transfer. IRC § 367(d) governs outbound transfers of intangible property such as software and patents. The transferor is generally treated as receiving annual deemed contingent payments based on income potential rather than a one-time deemed sale.
Notice 2014-58 warns that where assets are transferred to an intermediary employed solely for tax benefits whose actions were unnecessary for a non-tax objective, the economic substance doctrine may apply to disallow the tax benefit. The planning must be completed and the election must be effective before your residency starting date. You cannot wait until you decide your exact move date. You cannot do it in January 2027 even if you have not yet met the substantial presence test, because once you are present any day in 2027 and will meet the test that year, your residency starting date is that first day of presence.
S Corporation Elections and the Nonresident Alien Disqualification
Form 2553 elects S corporation status. The standard deadline is 2 months and 15 days after the start of the tax year you want the election to take effect. For calendar-year entities electing S status for 2026, the deadline is March 15, 2026, or the next business day if that date falls on a weekend or holiday. Missing the deadline means C corporation taxation for the entire year unless you qualify for late-election relief under Revenue Procedure 2013-30, which requires reasonable cause.
IRC § 1361 establishes S corporation shareholder requirements. No more than 100 shareholders. Only one class of stock. Shareholders must be U.S. citizens, resident aliens, certain trusts, estates or exempt organizations. Nonresident aliens cannot be S corporation shareholders. This is an absolute disqualification. If even one shareholder becomes a nonresident alien mid-year, the S election terminates automatically.
Many international structures fail because of this rule. A foreign investor who owns shares directly and moves to the United States can elect S status once they become a resident alien. A U.S. citizen or resident who owns shares and moves abroad loses eligibility the day they become a nonresident alien. The corporation reverts to C corporation status. Planning must account for the citizenship and residency status of every shareholder at every point in time.
PFIC Elections That Cannot Wait
A passive foreign investment company under the Internal Revenue Code is a foreign corporation in which 75 percent or more of gross income is passive income or 50 percent or more of assets produce passive income or are held for the production of passive income. Many foreign mutual funds, unit trusts and pooled investment vehicles meet this definition. Form 8621 is required if you receive certain distributions from a PFIC, recognize gain on disposition of PFIC stock, report a Qualified Electing Fund or mark-to-market election, make an election in Part II of the form, or are required to file an annual report under section 1298(f).
Section 1298(f) has de minimis exceptions. If the aggregate value of all PFIC holdings is under 25,000 dollars for unmarried or separate filers or under 50,000 dollars for joint filers, no annual report is required. Above those thresholds, the default regime under Section 1291 applies if no election is made. Gain or an excess distribution is allocated across the entire holding period. Each year's allocation is taxed at the highest marginal rate for that year. An interest charge is imposed on the deferred tax from prior years. This cannot be undone retroactively.
A Qualified Electing Fund election allows current taxation of your share of the fund's earnings and profits each year at ordinary income and capital gain rates. A mark-to-market election allows annual recognition of gain or loss based on year-end fair market value. Both elections generally must be made in the first tax year you hold the fund as a U.S. tax resident. Missing this window closes the most favorable options.
The mark-to-market election is only available for marketable stock. The stock must be regularly traded on a qualified exchange or readily tradable. The Qualified Electing Fund election requires the PFIC to provide an annual information statement showing earnings and profits. Many foreign funds, particularly in India and Latin America, do not provide this, making the Qualified Electing Fund election unavailable. IRC § 1291 allows a purging election when making a late Qualified Electing Fund election. You may need to recognize all built-in gain under Section 1291 rules first to purge the taint. Treasury Regulation § 1.1295-3 governs this election and requires reasonable cause.
The Section 965 Transition Tax Window
IRC § 965 imposed a one-time transition tax on deferred foreign earnings of certain foreign corporations. The inclusion period ended with the tax year ending in November 2019. No new IRC § 965 inclusions can be made after the tax year ending in November 2019. A U.S. shareholder under IRC § 958 is defined as owning 10 percent or more of a foreign corporation's stock. Tax rates were approximately 15.5 percent effective rate on cash and cash equivalents and approximately 8 percent effective rate on non-cash assets through a deduction under IRC § 965(c).
Payment options included full payment with the return or an 8-year installment election under IRC § 965(h). S corporation shareholders could elect indefinite deferral under IRC § 965(i) until a triggering event. This tax applied to individuals who were U.S. shareholders during the inclusion period. Someone who moved to the United States after the tax year ending in November 2019 and became a U.S. person for the first time after that date did not have a Section 965 inclusion. Someone who was a U.S. person during the inclusion period and owned 10 percent or more of a foreign corporation had the inclusion regardless of when they filed or when they discovered the requirement.
The Exit Tax for Those Who Leave
IRC § 877A imposes an exit tax on covered expatriates. A covered expatriate is a U.S. citizen renouncing citizenship or a long-term green card holder who held a green card in 8 of the prior 15 years and meets one of three tests. The first test is net worth of 2 million dollars or more. The second test is average annual net income tax for the five preceding years exceeding a threshold indexed annually. The third test is failure to certify compliance with all federal tax obligations for the preceding five years.
All property is deemed sold at fair market value the day before the expatriation date. Net gain above an exclusion amount is taxable. The mark-to-market exclusion amount was 866,000 dollars in 2024 and 890,000 dollars in 2025. The exit tax is a separate concern from pre-immigration planning but operates on the same principle. The Internal Revenue Service taxes based on fair market value at a snapshot date and uses that value to measure future gain or loss.
What Must Happen Before the Residency Starting Date
An individual must determine their residency starting date first. Count every day you will be present in the United States during the calendar year. Apply the substantial presence test formula. Identify the first day you will be present in that year. That is your residency starting date if you meet the test.
To plan effectively, one would need to obtain independent qualified appraisals of appreciated assets well before the residency starting date. Document the business purpose for any transactions. If a check-the-box election will be used to step up basis, file Form 8832 with an effective date before the residency starting date. The deemed liquidation must occur while still a nonresident alien. If interests in foreign investment funds will be held, determine whether they are PFICs and whether a Qualified Electing Fund or mark-to-market election is available and advisable. Make that election in the first year as a U.S. resident.
If shares in an entity that could elect S corporation status will be held, verify that all shareholders are and will remain U.S. citizens or resident aliens. File Form 2553 no later than 2 months and 15 days after the start of the tax year the election should take effect. If Florida domicile will be established, one would need to obtain a Florida driver's license within the statutory 30-day period after beginning employment or entering children in public schools, register to vote, register vehicles, file for homestead exemption if property is owned, and update financial account addresses. A Declaration of Domicile may be filed to create dated evidence of intent. Ties with the former state of domicile must be systematically severed.
If an individual may qualify for the closer connection exception and will be present fewer than 183 actual days in the current year, file Form 8840 by the return deadline including extensions. If present fewer than 183 days but more than the weighted threshold over three years, the closer connection exception can preserve nonresident status for that year. If present 183 or more actual days, the closer connection exception is not available.
Bottom Line
Federal tax residency starts the first day you are present in the United States during the calendar year you meet the substantial presence test, not the day you consider yourself moved. State domicile is a separate test based on presence and intent. The United States taxes residents on worldwide income using historical cost basis, so appreciated assets carry built-in U.S. tax liability unless basis is stepped up before the residency starting date. Check-the-box elections to create deemed sales work only before you become a U.S. person because IRC § 367 blocks the strategy afterward. S corporation elections have absolute deadlines and disqualify nonresident aliens. PFIC elections must generally be made in the first year you hold the fund as a U.S. resident and cannot be corrected later without paying tax and interest on built-in gain. Every one of these planning opportunities closes at your residency starting date. After that date, the law measures gain from your original basis and taxes it when you sell.
This article describes how the Internal Revenue Code, Treasury Regulations and Florida statutes are written. It is not advice about any person's specific situation. An immigration attorney should review any visa application or green card timing. An international certified public accountant should review the tax consequences of asset sales, entity elections, and the calculation of your residency starting date before you take any action. Written to the law as it stood in December 2024.