Tax residency and wealth structuring for new United States residents

The United States is one of only two OECD countries — Eritrea being the other — that taxes its residents on worldwide income regardless of domicile, and it offers no non-dom regime, no remittance basis, and no special tax status for new arrivals. A high-net-worth individual who becomes a US resident for tax purposes in 2026 will owe federal income tax on global earnings from day one, capital gains on every asset sale wherever the transaction occurs, and estate tax on worldwide assets above a USD 13.99 million exemption (indexed for 2026 under IRC Section 2010(c)(3)(C)). The decision to accept US tax residency is therefore not an immigration question; it is a portfolio-structuring question with a 40-year time horizon. The tax code does not distinguish between a newly arrived EB-1 extraordinary-ability visa holder and a US-born citizen once the substantial presence test under IRC Section 7701(b) is met. Pre-arrival planning — executed before the first day of physical presence — is the only window in which an individual can legally alter the tax basis of assets, exit certain entity structures, and lock in non-US situs treatment for estate tax purposes.

The residency trigger: how the IRS defines a US tax resident

The Internal Revenue Code establishes two independent paths to US tax residency: the green card test and the substantial presence test. Both are found in IRC Section 7701(b), and both are mechanical — there is no discretion, no administrative grace period, and no elective treatment for new arrivals.

The green card test under IRC Section 7701(b)(2)(A)

Any individual who holds lawful permanent resident status — a green card — becomes a US tax resident on the first day of the calendar year in which the green card is granted, regardless of whether they have set foot in the United States. The IRS has consistently held that the residency start date is the earliest date on which the individual is physically present in the US as a lawful permanent resident, but if no physical presence occurs in that year, the residency start date is the first day of the calendar year in which the green card is issued. This rule, codified in Treasury Regulation Section 301.7701(b)-4(a), means that a principal who receives an EB-1 visa approval and a green card on 15 December 2026 but does not travel to the US until January 2027 is nonetheless a US tax resident for the entirety of 2026. The practical consequence: any capital gain realised anywhere in the world between 1 January 2026 and the date of physical arrival is subject to US federal income tax.

The substantial presence test under IRC Section 7701(b)(1)(A)(ii)

For individuals who do not hold a green card, the substantial presence test applies. An individual is a US tax resident if they are physically present in the United States for at least 31 days during the current calendar year and 183 days during a three-year weighted period (current year days plus one-third of prior-year days plus one-sixth of the year before that). The IRS provides no exemption for short visits: a principal who spends 120 days in the US in 2026, 120 days in 2025, and 120 days in 2024 passes the 183-day test (120 + 40 + 20 = 180) and becomes a resident on the first day of physical presence in 2026 under Treasury Regulation Section 301.7701(b)-4(c). The only statutory escape is the closer-connection exception under IRC Section 7701(b)(3)(B), which requires fewer than 183 days of presence in the current year, a tax home in a foreign country, and a closer connection to that country — a standard that the IRS has interpreted narrowly in Revenue Procedure 2019-30.

The first-year election and its limitations

An individual who does not meet the substantial presence test but intends to become a US resident may make a first-year election under IRC Section 7701(b)(4). This election allows residency to begin on the first day of physical presence in the US, even if the 183-day test is not yet satisfied, provided the individual meets the substantial presence test in the following calendar year. The election is irrevocable and must be attached to the tax return for the election year. For high-net-worth individuals, the first-year election is rarely advantageous because it accelerates the start of worldwide taxation without offering any of the pre-arrival planning benefits that are available before residency begins.

The worldwide taxation rule and its practical effect on capital

Once US tax residency is established, IRC Section 61(a) requires the inclusion of all income from whatever source derived — wages, dividends, interest, rents, royalties, capital gains, and business profits — regardless of where the income is earned or where the assets are located. There is no remittance basis, no foreign-source exclusion for passive income, and no distinction between income earned inside and outside the United States.

Foreign-source income and the foreign tax credit

The US tax code does not exempt foreign-source income; it provides a foreign tax credit under IRC Sections 901-909 to mitigate double taxation. The credit is limited to the portion of US tax that is attributable to foreign-source income, calculated on a worldwide basis. For a principal with a blended foreign tax rate of 15% and a US top marginal rate of 37% (2026 rates under the Tax Cuts and Jobs Act as extended), the credit covers USD 0.15 of every dollar of foreign tax paid, leaving a residual US liability of USD 0.22 per dollar of foreign income. The foreign tax credit cannot be carried forward indefinitely — excess credits expire after ten years under IRC Section 904(c). For principals with substantial passive income in low-tax jurisdictions, the foreign tax credit provides little relief, and the effective tax rate on foreign income approaches the full US marginal rate.

Capital gains and the mark-to-market trap for new residents

The US taxes capital gains as ordinary income, with a preferential rate for long-term gains (assets held more than one year) under IRC Section 1222. The top long-term capital gains rate is 20%, plus the 3.8% net investment income tax under IRC Section 1411, for a combined rate of 23.8%. For new residents, the critical issue is the cost basis of assets held at the time of residency commencement. The US does not provide a step-up in basis for assets acquired before residency — the basis is the original purchase price, not the fair market value on the date of arrival. This means that a principal who purchased shares in a private company for USD 5 million and holds them at a value of USD 20 million on the day they become a US resident will owe US capital gains tax on the full USD 15 million gain if the shares are sold after residency begins. The only exception is for assets that are subject to a deemed-sale election under IRC Section 877A for expatriates, which does not apply to inbound residents.

The controlled foreign corporation rules and passive foreign investment companies

Two anti-deferral regimes impose immediate US taxation on certain foreign entities owned by US residents. Under the controlled foreign corporation (CFC) rules of Subpart F (IRC Sections 951-965), a US shareholder who owns 10% or more of a foreign corporation that is more than 50% owned by US shareholders must include in income the corporation’s passive income and certain related-party sales and services income, even if no distribution is made. Under the passive foreign investment company (PFIC) rules of IRC Sections 1291-1298, any US resident who owns shares in a foreign investment company that earns 75% or more passive income faces punitive taxation: gains are taxed at the highest marginal rate plus an interest charge on deferred tax, calculated as if the gain had been realised ratably over the holding period. For a principal who holds a family investment vehicle incorporated in the Cayman Islands or Singapore, the PFIC rules can convert a 23.8% capital gain into an effective rate exceeding 50% after the interest charge is applied.

The absence of a non-dom regime and special resident status

The United States offers no statutory equivalent of the United Kingdom’s non-domiciled resident regime, Italy’s flat tax for new residents, or Switzerland’s lump-sum taxation for wealthy foreigners. Every US tax resident — regardless of visa category, length of stay, or intention to remain — is subject to the same worldwide taxation rules.

The E-2 treaty investor and O-1 extraordinary ability visa holders

The E-2 treaty investor classification, governed by 8 CFR 214.2(e), allows nationals of treaty countries to reside in the United States while managing a substantial investment in a US business. The O-1 visa, governed by 8 CFR 214.2(o), permits individuals with extraordinary ability in sciences, arts, education, business, or athletics to work temporarily in the US. Neither visa confers any tax advantage. Holders of E-2 or O-1 visas who meet the substantial presence test are US tax residents and are taxed on worldwide income exactly as green card holders are. The only distinction is that E-2 and O-1 visa holders who spend fewer than 183 days in the US in a given year and maintain a closer connection to a foreign country may qualify for the closer-connection exception, but this exception is unavailable to any individual who is present in the US for 183 days or more in the calendar year.

The EB-1 extraordinary ability green card

The EB-1 preference category, described in the USCIS Policy Manual Volume 6, Part F, covers three subcategories: aliens of extraordinary ability, outstanding professors and researchers, and multinational executives or managers. No labor certification is required. EB-1 visa holders become lawful permanent residents and are therefore subject to the green card test from the date of admission. There is no tax distinction between EB-1, EB-5, or family-based green card holders — all are worldwide taxpayers from day one.

State-level taxation and the absence of a territorial option

In addition to federal tax, new US residents must contend with state income tax in the states where they reside. California, New York, New Jersey, and Hawaii impose top marginal rates above 10%, and California taxes worldwide income of residents with no credit for state taxes paid to other states. A principal who relocates to Miami or Dallas avoids state income tax entirely (Florida and Texas have no individual income tax), but the federal worldwide taxation rule remains unchanged. The choice of state of residence is a material wealth-planning decision that can shift the effective tax rate by 10-13 percentage points, but it does not alter the federal obligation to report and pay tax on global income.

Pre-arrival planning: the window of opportunity

The period between the decision to move to the United States and the first day of physical presence is the only time during which an individual can take steps that are not subject to US tax rules. Once residency begins, the tax treatment of pre-arrival transactions is governed by the principle of realisation after residency — the IRS looks to the date of sale, not the date of acquisition, to determine taxability.

Asset basis planning and the deemed-sale strategy

The most consequential pre-arrival step is the sale of appreciated assets before residency begins. A principal who sells a privately held company, real estate, or a portfolio of securities while still a non-resident owes no US capital gains tax on the transaction, provided the sale closes before the first day of US physical presence. The proceeds can then be reinvested in US assets with a stepped-up cost basis equal to the purchase price. The same logic applies to the liquidation of foreign trusts, partnerships, and closely held entities. The IRS has confirmed in Revenue Ruling 84-17 that gain realised by a non-resident alien on the sale of assets outside the United States is not subject to US tax, regardless of the seller’s intent to become a resident.

Entity restructuring to avoid CFC and PFIC status

For a principal who owns a controlling interest in a foreign corporation, the pre-arrival period is the time to restructure ownership to avoid CFC and PFIC classification. Options include: reducing US ownership below 50% by transferring shares to family members who will not become US residents; liquidating the foreign corporation and distributing assets to shareholders before residency begins; or converting the entity into a transparent structure such as a foreign trust that is not treated as a corporation for US tax purposes. Each strategy has specific legal requirements under IRC Sections 331, 336, and 368, and the timing must be completed before the first day of the tax year in which residency starts.

Estate tax planning and the situs of assets

The US estate tax applies to the worldwide assets of US residents at death, with a USD 13.99 million exemption (2026) and a top rate of 40% under IRC Section 2001. For a new resident, the situs of assets determines whether they are subject to US estate tax. Real estate and tangible personal property located in the US are always US-situs assets. Shares in US corporations are US-situs assets, while shares in non-US corporations are not, regardless of where the shareholder resides. A principal who holds US real estate through a non-US corporation can avoid US estate tax on that real estate because the asset is classified as a non-US situs asset (the shares in the foreign corporation, not the underlying property, are the taxable asset). This structure must be established before residency begins, because after residency, the IRS will look through the corporate form under the anti-abuse rules of Treasury Regulation Section 20.2105-1.

The five-year rule for foreign trusts and the grantor trust rules

A foreign trust created by a non-resident alien is not subject to US grantor trust rules under IRC Sections 671-679 unless the trust has a US beneficiary. If a principal creates an irrevocable foreign trust before becoming a US resident and names only non-US beneficiaries, the trust will not be treated as a grantor trust after the principal becomes a resident, and the trust’s income will not be attributed to the principal. This strategy requires careful drafting to ensure that the principal retains no power to revoke, amend, or control the trust, because any such power would trigger grantor trust treatment under IRC Section 674. The trust must also avoid having any US beneficiary, directly or indirectly, for the duration of the principal’s US residency.

The exit tax: a permanent cost of US residency

The decision to become a US resident carries a permanent cost that cannot be undone by leaving. Under IRC Section 877A, any individual who gives up US citizenship or terminates long-term residency (holding a green card for 8 of the preceding 15 years) is subject to an exit tax on the unrealised gain of their worldwide assets, calculated as if the assets were sold on the day before expatriation. The exemption is USD 866,000 (indexed for 2026), and the tax applies to gains above that threshold at the capital gains rate of 23.8%. For a principal with a net worth of USD 50 million, the exit tax liability can exceed USD 10 million, even if no assets are sold. There is no way to avoid the exit tax by renouncing citizenship before the assets are sold — the tax is triggered by the act of expatriation itself.

Actionable takeaways for principals and their advisors

• The date of first physical presence in the United States is the single most important tax-planning variable for a new resident; every asset sale, entity liquidation, and trust creation must be completed before that date to avoid US taxation on pre-existing gains.
• The foreign tax credit provides only partial relief for foreign-source income, and excess credits expire after ten years; principals with significant passive income in low-tax jurisdictions should expect to pay the full US marginal rate on that income.
• The PFIC rules impose an effective tax rate above 50% on gains from foreign investment funds; any family investment vehicle held before residency must be restructured or liquidated before arrival to avoid punitive taxation.
• US real estate held through a non-US corporation is not a US-situs asset for estate tax purposes, but the structure must be established before residency begins to avoid the IRS’s anti-abuse rules.
• The exit tax under IRC Section 877A applies to any individual who gives up US citizenship or terminates long-term residency after eight years; the tax on unrealised gains can exceed USD 10 million for a principal with a net worth of USD 50 million, and there is no statutory avoidance mechanism.
• State income tax is a material cost that varies from 0% to 13.3%; the choice of state of residence is a wealth-planning decision that should be made before the first lease or property purchase is signed.

Sources

• IRC Section 7701(b) — Definition of resident alien and nonresident alien: https://www.law.cornell.edu/uscode/text/26/7701
• Treasury Regulation Section 301.7701(b)-4 — Residence time periods: https://www.ecfr.gov/current/title-26/chapter-I/subchapter-F/part-301/subject-group-ECFR9f0b8e7f4f6c7f6/section-301.7701(b)-4
• USCIS Policy Manual, Volume 6, Part F — EB-1 Extraordinary Ability: https://www.uscis.gov/working-in-the-united-states/permanent-workers/employment-based-immigration-first-preference-eb-1
• USCIS Policy Manual, Volume 2, Part M — O-1 Nonimmigrant Classification: https://www.uscis.gov/working-in-the-united-states/temporary-workers/o-1-visa-individuals-with-extraordinary-ability-or-achievement
• 8 CFR 214.2(e) — E-2 Treaty Investors: https://www.uscis.gov/working-in-the-united-states/temporary-workers/e-2-treaty-investors
• IRC Section 877A — Expatriation tax: https://www.law.cornell.edu/uscode/text/26/877A
• IRC Section 1291-1298 — Passive Foreign Investment Companies: https://www.law.cornell.edu/uscode/text/26/1291
• Revenue Procedure 2019-30 — Closer connection exception: https://www.irs.gov/pub/irs-drop/rp-19-30.pdf
• IRC Section 2010(c)(3)(C) — Estate tax exemption indexing: https://www.law.cornell.edu/uscode/text/26/2010