Do Permanent Residents Pay US Tax on Foreign Income?
Do Lawful Permanent Residents Pay US Tax on Foreign Income: When it comes to the IRS tax rules for international tax law, it can be unnecessarily complex for Taxpayers — just the terminology and phrases used to describe the tax rules are oftentimes nonsensical. For example, the general proposition is that the US follows a Citizen-Based Taxation model — which means that US citizens are taxed on their worldwide income with no regard for where they reside. To complicate matters further, the term US Citizen is a misnomer. That is because the rule of worldwide income actually applies to all US Persons — even non-permanent residents who meet the substantial presence test — unless some exception, exclusion or limitation applies. Let’s go through the basics of when Lawful Permanent Residents pay US tax on foreign Income.
US Income for Lawful Permanent Residents
For many permanent residents, it makes sense that they have to pay tax on their US sourced income. That is because they are a permanent resident of the United States — and earning income generated from the United States. Thus, it is understandable that for Lawful Permanent Residents who earn income from US sources — that they have to pay tax to the US government on that income.
Foreign Income and UST Tax for Permanent Residents
Here is where it gets more complicated, as there are many scenarios in which a Lawful Permanent Resident could (reasonably and logically) presume that they would not have to pay US tax on the income generated overseas — but unfortunately, oftentimes that presumption is incorrect and US income taxes are due.
Let’s go through some of the basic misconceptions about permanent residents, US Tax, and foreign income:
Tax Exempt Income Abroad
Just because the income that is generated overseas may be tax-exempt in the other country that it is being generated in (such as passive income in many Asian countries) — from a US tax standpoint, it is still taxable in United States.
Foreign Income Not Repatriated to the US by Permanent Residents
Another common misconception is that just because the income was never brought from the foreign country into United States means that United States cannot tax that income — but unfortunately, that is also incorrect. The income does not have to technically he brought into the United States to be taxable by the US government.
Overseas Income that was Taxed Already
This is also unnecessarily complicated. When a Lawful Permanent Resident earns income abroad — and pays tax overseas on the income — they may be able to claim a foreign tax credit in the United States — but not always — and taxes are still due in the US. Based on the amount of foreign taxes they paid, a Taxpayer may qualify for full or partial foreign tax credit. If they pay more overseas than they would have paid in the United States — they can generally carry the credit forward in subsequent tax years.
Lawful Permanent Resident US Tax Rules are Complex
Just because a Lawful Permanent Resident may reside overseas and/or generate foreign income does not mean they can escape tax in the United States on the foreign income. The general rule is that all income is taxable to US persons, which includes Lawful Permanent Residents. This is why pre-immigration tax planning and post-immigration tax analysis is crucial for Lawful Permanent Residents worldwide.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm for assistance.