Our professionals have all worked in the international tax departments of Big Four firms — EY, PwC, and others. One thing we all had in common? Tax briefings.
Before foreign nationals relocated to the United States for work — whether for six months or several years — we sat down with them for a personalized tax briefing: What changes when you arrive? What do you need to report? What can get you in trouble later?
We’d like to share that briefing with you — for free. While no blog post can replace tailored advice, this guide reflects 2025 rules and combines official guidance with real-world experience. Let’s get started.
1. Will You Be a U.S. Tax Resident?
U.S. tax residency determines how much of your income is taxed — and how you file.
There are two ways to qualify as a resident alien:
Green Card Test
If you are a lawful permanent resident (Green Card holder) at any point during the year:
- If the Green Card is issued while you’re in the U.S., residency starts on that issue date.
- If issued while you’re abroad, residency starts on the first day you enter the U.S. after issuance.
- If you don’t enter the U.S. during that year, residency begins January 1 of the following year (assuming you still hold the card).
Substantial Presence Test (SPT)
Even without a Green Card, you may be considered a resident if:
- You’re physically present in the U.S. for at least 31 days in 2025, and
- The total of your U.S. days over three years meets the following formula:
- All U.S. days in 2025
- Plus 1/3 of your U.S. days in 2024
- Plus 1/6 of your U.S. days in 2023
Example:
2025: 75 days
2024: 321 days (⅓ = 107)
2023: 30 days (⅙ = 5)
Total: 75 + 107 + 5 = 187 days → You’re a U.S. tax resident for 2025.
2. When Does Residency Start?
If you weren’t a U.S. resident in the prior year and meet the SPT, you’re considered a dual-status alien for the current year. Your residency starts on the first day you’re physically present in the U.S. in 2025.
However, under the “de minimis” 10-day rule, short visits earlier in the year may be disregarded if:
- Your tax home remained in a foreign country during that time, and
- You maintained a closer connection to that country
Example:
You visited Feb 2–Feb 10 (9 days), then moved permanently June 1. If the requirements are met, your residency starts June 1 — not February 2.
3. Can You Avoid Residency Even If You Meet SPT?
Yes, in some cases.
Closer Connection Exception
You may still be treated as a nonresident if:
- You were in the U.S. for fewer than 183 days during 2025
- You maintained stronger ties to another country
- You file Form 8840 by the due date of your 1040-NR (including extensions)
Treaty Tie-Breaker
If both the U.S. and your home country claim you as a tax resident under domestic law, you may be able to use a tax treaty to claim U.S. nonresidency. You must:
- File Form 1040-NR
- Attach Form 8833 disclosing the treaty position
Note: You may still be subject to foreign account reporting (FBAR/FATCA) even if the IRS accepts your treaty claim.
4. Dual-Status Tax Year
If you become a resident partway through the year, you’re taxed as a nonresident for part of the year and a resident for the rest.
Key rules:
- You are taxed on worldwide income during the resident period
- You are taxed only on U.S.-source income during the nonresident period
- You cannot claim the standard deduction
- You cannot file jointly unless you make a special election
- You must paper file the return (dual-status returns cannot be e-filed)
5. Electing Full-Year Residency
You may be eligible for the First-Year Election under IRC § 7701(b)(4), which allows you to file as a resident for part of the arrival year — even if you don’t meet the SPT until the following year.
Eligibility:
- Present in the U.S. for at least 31 consecutive days in 2025
- Present for at least 75% of the days from that period through year-end
- Not a resident in 2024
- Will meet the SPT in 2026
This election may also enable full-year joint filing if both spouses elect residency under §6013(g) or §6013(h).
6. What Income Is Taxed?
| Status | Taxed On |
|---|---|
| Resident Alien | Worldwide income, from residency start onward |
| Nonresident Alien | U.S.-source income or income connected to a U.S. business |
Foreign Tax Credit
If you paid tax to a foreign country on foreign-source income earned and taxed during your U.S. resident period, you may claim a foreign tax credit to avoid double taxation. This applies only to income that is both:
- Included in your U.S. taxable income, and
- Taxed by a foreign government
7. Foreign Reporting Obligations
Once you become a U.S. tax resident, you are subject to foreign financial reporting requirements.
- FBAR (FinCEN Form 114): If total value of foreign accounts exceeds $10,000 at any time
- FATCA (Form 8938): If specified foreign financial assets exceed $50,000 (single) or $100,000 (married filing jointly)
Even if you claim nonresidency under a treaty, these rules may still apply.
8. Forms You May Need
| Scenario | Form(s) |
|---|---|
| Worldwide income (residents) | Form 1040 |
| U.S.-source income only | Form 1040-NR |
| Closer connection exception | Form 8840 |
| First-Year Election | IRC §7701(b)(4) statement with Form 1040 |
| Treaty-based return position | Form 8833 |
| Foreign bank account reporting | FinCEN Form 114 (FBAR) |
| Foreign financial assets (FATCA) | Form 8938 |
| Large foreign gifts / trusts | Form 3520 / 3520-A |
9. Do You Own Foreign Companies or Investments? Additional Reporting May Apply
Once you become a U.S. tax resident, you may be subject to complex international reporting rules — even if your foreign investments generate no income. These rules are separate from FBAR and FATCA and carry significant penalties for noncompliance.
Passive Foreign Investment Companies (PFICs)
If you own shares in a foreign mutual fund, ETF, or certain private companies that generate mostly passive income (interest, dividends, capital gains), you may be holding a PFIC.
- U.S. tax treatment is punitive unless special elections are made
- You must file Form 8621 for each PFIC annually
- Income may be taxed at the highest marginal rate, with interest charges on deferral
Form 5471 – Foreign Corporations
If you are a U.S. tax resident and:
- Own 10% or more of a foreign corporation, or
- Are an officer or director in a foreign corporation with significant U.S. shareholders
You may need to file Form 5471, which requires detailed financial and ownership disclosures.
Form 8865 – Foreign Partnerships
If you own an interest in a foreign partnership, you may need to file Form 8865, especially if:
- You control the partnership
- You contributed assets
- You own 10% or more and the partnership has U.S. partners
Form 8858 – Foreign Disregarded Entities
If you own a foreign single-member entity (like a foreign LLC or sole proprietorship), you may need to file Form 8858 to report its activity and structure.
Important: These forms are informational, but failure to file them can result in penalties of $10,000 or more per form, per year. They are often required even if the entity had no income or activity.
If you have any ownership in foreign companies, funds, or partnerships — or if you’re unsure — it is critical to consult a tax advisor with experience in international compliance. We’d be happy to help. And if your company is covering the cost of tax preparation, be sure to confirm whether their policy includes the additional fees associated with Forms 8621, 5471, 8865, 8858, and similar reports. These filings are often considered supplemental and may not be included — potentially leaving you with an unexpected out-of-pocket expense.
10. Pre-Arrival Planning
The period before your U.S. tax residency begins can present major planning opportunities — and major risks if overlooked. If you own foreign investments, businesses, or bank accounts, here’s what to consider before crossing the tax residency line.
Income and Timing
- Accelerate compensation: Receive bonuses, deferred income, or commissions before your U.S. residency start date so that they are not U.S.-taxable.
- Recognize capital gains now: If you hold appreciated stock or investments, consider selling them before your move — otherwise, the full gain may be taxed in the U.S., even if it accrued pre-arrival.
- Defer deductions: Delay deductible expenses (mortgage interest, charitable contributions) until you become a U.S. resident — so the benefits are available on your U.S. return.
Foreign Entities and Investment Structures
- Review foreign mutual funds or ETFs: These may be classified as PFICs under U.S. tax law — and are subject to punitive tax and complex reporting on Form 8621. Consider selling or restructuring them before moving.
- Analyze foreign corporations: If you own 10% or more of a foreign company, Form 5471 may be required once you’re a resident — even if the company is inactive. You may also face Subpart F or GILTI tax exposure. Pre-residency restructuring may mitigate this.
- Evaluate foreign partnerships: Owning an interest in a non-U.S. partnership could trigger Form 8865 filing requirements. Understand the filing thresholds and how U.S. tax rules will apply to income allocations.
- Assess single-owner entities: If you operate through a foreign sole proprietorship or single-member LLC, you may need to file Form 8858 to disclose activity post-residency. Consider whether to close, convert, or reposition such entities before the move.
- Consider exit options: If you can disassociate from certain structures entirely before residency, it may reduce both reporting burdens and potential U.S. tax exposure.
Additional Tips
- Document your arrival date: Keep tickets, passport stamps, and travel logs — your residency start date will drive tax timing.
- Confirm your Green Card timeline: Tax residency may begin before your assignment officially starts, depending on your physical presence or visa status.
- Align with your employer: If your company provides tax preparation, verify that their coverage includes international forms like 8621, 5471, 8865, and 8858 — otherwise, you may face unexpected out-of-pocket costs.
11. When You Leave the U.S.
You will need to file a final U.S. tax return. You may also be required to obtain a “sailing permit” (Form 1040-C or 2063), which certifies that you’ve settled your U.S. tax obligations before departure. In reality:
- It’s rarely requested
- No penalty applies for not obtaining it
- Many people qualify for exemptions
Exit Tax Considerations
If you are a long-term Green Card holder (held Green Card at least 8 of the past 15 years) or U.S. citizen giving up status, you may be subject to exit tax:
- Mark-to-market tax on worldwide assets (exemption: ~$866,000 in 2025)
- Tax on deferred compensation and retirement accounts
- Immediate taxation of certain tax-deferred accounts
- Required filings: Form 8854 and possibly Form W-8CE
12. Don’t Forget About State Income Tax — It’s Not Just Federal
While most tax briefings focus on U.S. federal income tax, foreign nationals often overlook state-level taxes, which can significantly affect your total liability.
What to Know:
- 41 states and D.C. impose income taxes — only 9 states (like Florida and Texas) do not
- State residency rules differ from federal — it’s possible to be a nonresident for federal purposes but still taxed as a resident by a state
- State returns may be required even if you’re in the U.S. temporarily or your income is sourced to that state
- Short-term assignment allowances (housing, travel reimbursements) are often state-taxable, unless structured under an accountable plan
Planning Tips:
- Confirm your assignment location and research that state’s residency and sourcing rules
- Track your U.S. days, especially if you’re working in more than one state
- Coordinate with your employer to ensure their tax support includes state-level filings
- Sever ties intentionally if leaving a prior U.S. state — like updating your mailing address, driver’s license, or voter registration
13. What If You’re Tax Equalized?
If your assignment is company-sponsored, your employer may implement a tax equalization or tax protection policy to shield you from paying significantly more — or less — tax due to the assignment.
Under a tax equalization policy:
- You pay a “hypothetical” tax based on what you would have owed had you remained in your home country.
- Your actual tax returns (U.S. and home country) are prepared, and the results are compared to your hypothetical liability.
- If your actual combined tax liability is more than your hypothetical tax, the employer reimburses the difference.
- If your actual tax is less, the employer recoups the savings.
This keeps you “tax neutral” — not better or worse off because of the assignment.
Under a tax protection policy:
- You’re reimbursed only if you pay more tax due to the assignment.
- But if you pay less tax, you keep the savings.
While more favorable to employees, this is less common in corporate assignments.
Why It Matters for U.S. Tax
Even if you’re tax equalized:
- You still need to meet all U.S. tax filing obligations — including Form 1040 or 1040-NR, and any required FBAR, FATCA or foreign asset filings.
- The company will likely engage a global mobility tax provider to prepare your returns and manage the reimbursement calculations.
- Assignment-related income (housing, travel, tax reimbursements, etc.) is often U.S.-taxable unless properly structured.
If your employer is covering your U.S. taxes, review your assignment letter and tax policy carefully — and keep records of all reimbursements and hypothetical tax calculations.
Final Thoughts
The U.S. tax system rewards early awareness. With the right planning, you can reduce your exposure, avoid compliance issues, and take full advantage of available elections and credits.
This blog simulates the tax briefings we’ve delivered to hundreds of globally mobile professionals. If you’d like help planning your U.S. arrival or departure, we’d love to hear from you. Get in touch!