If you are not yet a U.S. tax resident but plan to be in the future, the are some tax strategies that can be used to minimize your U.S. tax burden.
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Accelerate Gains by Liquidating Assets
Stocks
If you own stock as a nonresident alien before your residency date and have gain, you may consider selling that stock and repurchasing it. This will allow you a higher basis in the stock. For example, if you own 100 shares in Acme Corp that you purchased for $500,000 and are now worth $1,000,000, you have a gain of $500,000. If you were to sell these shares prior to your residency start date, you would not be subject to tax on the gain in the US; but if sold after the residency start date, those gains would be subject to tax. If you were to sell the 100 shares in Acme for $1,000,000 and repurchase them for $1,000,000, you would have a basis of $1,000,000 should you decide to keep those shares after acquiring residency. Note that this does not apply to investments in REITs.
As a nonresident alien, you are only subject to tax on Effectively Connected Income (ECI) and FDAPI. ECI arises from operating a business in the US, gain on the sale of real property, or the sale of stock in a US corporation that invests in real estate. FDAP income is interest, dividends, rents, and royalties.
Foreign Corporations
A individual who owns a privately held foreign corporation can liquidate the corporation prior to US residency to avoid paying gain. Of course, that would only be an option if the individual is no longer interested in keeping the foreign corporation active.
Another option would be to force a deemed liquidation by making an election to treat the foreign corporation as a pass-through entity such as a partnership prior to the residency date. This has the same effect as if the company sold its assets, giving it up stepped up basis.
Other Assets
A nonresident owning other assets with potential gain can sell an asset to a trust or family members to obtain a stepped up basis in the asset. The asset can be sold for a promissory note.
Accelerating Income
If an individual has foreign-source income that can be accelerated, such as receivables, deferred compensation plans, life insurance, annuities, or any type of periodic payments, the individual should consider receiving an advance payment or accelerating receipt of the income prior to US residency. This can also be done by selling an interest in the asset via a promissory note.
Deferring Loss Recognition and Payment of Deductible Expenses
Many foreign investors may be carrying a loss in their investment portfolios. Capital losses are deductible to US residents, so it may make sense to delay selling these investments until the residency period.
Additionally, US residents are allowed various personal, investment, and business deductions that are not available to nonresidents. It can be an enormous tax benefit to withhold payment on particular expenses until after the residency date. For example, a nonresident has an expensive surgery costing $50,000. If the nonresident pays that bill, it is not deductible on the personal tax return. However, a resident would be allowed to claim that expense as a deduction if it exceeds certain limits.
Passive Foreign Investment Companies
If you own shares in a foreign corporation and 75% or more of that foreign corporation’s gross income is passive income or 50% or more of that corporation’s assets produce or could produce passive income, then you have an investment in a Passive Foreign Investment Company (PFIC). If you own shares in a foreign mutual fund, you likely have multiple PFIC investments within that fund. Residents with investments in PFICs face extremely burdensome tax and reporting requirements. From a U.S. tax perspective, it could be beneficial to liquidate any PFIC investments prior to becoming a U.S. tax resident.